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Private Right of Action is Good News for Loan Modification in California

In 2008, the State of California enacted legislation that was meant to address the growing number of mortgage foreclosures in that state.  The legislation is called the Perata Mortgage Relief Act and includes within its body California Civil Code section 2923.5 which requires, in laymen’s terms, lenders to contact borrowers in person or by phone in order to assess the borrower’s financial situation and to explorer the options that the borrower has in order to avoid foreclosure before the lender files a Notice of Foreclosure on the property, effectively initiating the foreclosure process.

Before it is explained how this piece of legislation affects borrowers seeking a loan modification in California, it is important to discuss the case of Mabry v. Superior Court, presented before the California Court of Appeals in the Fourth District on June 2, 2010.  The court ruled that failure of a lender to comply with section 2923.5 of the California Civil Code allowed borrowers to sue the lender by establishing the borrower’s private right of action.

It would make sense for a borrower to be able to sue their lender for violations of state law that directly affect them, but it apparently did not make sense to the original trial court, which is why the case was sent to the Court of Appeals for review.  The original trial court believed that since the law did not specifically state a person’s private right of action in the event they are made a victim by the lender’s deeds, that a private person would have no legal recourse in the event the lender broke California’s law.  Upon review of the law by the Court of Appeals, it was determined that the law actually provided no clear distinction on a person’s right of action, meaning a person’s right of action was neither granted nor prevented.  The Court of Appeals also determined that, based on the language and structure of the law, its actual purpose was to force lenders to communicate with borrowers before taking such an action as drastic as foreclosure.  By upholding the original decision of the lower court, the Court of Appeals would have allowed consumers the right to communicate with their borrowers but with no legal means to enforce that right.

What does this all mean for borrowers facing foreclosure and seeking a loan modification in California?  It means that lenders must try, with due diligence, to contact the borrower before the filing of a notice of default and must make an honest attempt to offer options to the borrower before initiating a foreclosure.  It means that a borrower may not file a notice of foreclosure in the State of California without assessing the borrower’s options with the borrower.  Failure to follow California’s laws would allow a borrower to sue their lenders, but (and this is important), the law does not guarantee a loan modification.

Should the lender fail to make an effort to contact the borrower, the borrower may sue their lender and have their foreclosure postponed until the lender discusses the borrower’s options in person or over the phone.  A borrower’s success in court will not guarantee a loan modification, but it will force the lender to offer clear and fair options before initiating a foreclosure.  Also, the law only applies to foreclosures that have yet to be finalized, so the owner of a home that has already been foreclosed on, re-sold, and/or auctioned away has no legal remedy under section 2923.5 of California law.

All in all, this law is generally a good law for consumers seeking a loan modification in California because if modification is in fact a viable option for the borrower, the lender must surrender this fact to the borrower and allow the borrower a chance to apply for a modification before the foreclosure process can begin.

As always, any borrower reading this article should understand that the law is a complex thing and should not take the word of any Internet source over that of an experienced attorney.  The borrower should contact a local real estate or foreclosure attorney for advice specific to their situation and for assistance in pursuing a lawsuit if their lender is actually in violation of the California law.