The Court of Appeal of the State of California, Third Appellate District, recently held that a mortgage servicer violated California’s Homeowner Bill of Rights (HBOR), Civ. Code § 2923.6(d), when it sent a borrower a loan modification denial letter stating that the homeowner had only 15 days to appeal the denial.

In so ruling, the Appellate Court held that the servicer’s denial letter was a material violation of section 2923.6, and therefore the homeowner alleged a valid cause of action for injunctive relief under section 2924.12.

A copy of the opinion in Berman v. HSBC Bank USA, N.A is available at: Link to Opinion.

The borrower defaulted on his home mortgage and a notice of default was recorded. The borrower submitted a complete application for a loan modification to the mortgage servicer and asserted a significant change in financial conditions. The servicer denied the borrower’s request for a loan modification. The servicer’s denial letter stated that the borrower had 15 days to file an appeal of the decision.

As you may recall, section 2923.6(d) provides:

If the borrower’s application for a first lien loan modification is denied, the borrower shall have at least 30 days from the date of the written denial to appeal the denial and to provide evidence that the mortgage servicer’s determination was in error.

Section 2923.6(f)(1) states, in relevant part:

Following the denial of a first lien loan modification application, the mortgage servicer shall send a written notice to the borrower identifying the reasons for denial, including the following … The amount of time from the date of the denial letter in which the borrower may request an appeal of the denial of the first lien loan modification and instructions regarding how to appeal the denial.

The borrower filed this action seeking injunctive relief. In his complaint, the borrower alleged that the servicer’s denial letter was a material violation of section 2923.6(d), because it gave him only 15 days to appeal the denial, instead of 30 days, and therefore the trustee’s sale could not legally proceed.

As you may recall, section 2924.12 allows for injunctive relief if there is a “material violation” of any of various statutes, including section 2923.6. Thus, the borrower’s complaint must allege a material violation of section 2923.6 to obtain injunctive relief.

The servicer demurred to the complaint, arguing among other things that section 2923.6 prohibited the recording of a notice of default or notice of sale, or conducting a sale, unless certain requirements are met. Because the servicer did not actually conduct the sale within the appeal period, it argued that its denial letter did not violate section 2923.6. The trial court sustained the servicer’s demurrer without leave to amend.

On appeal, the borrower argued that by sending a denial letter that purported to give him only 15 days to file an appeal, the servicer committed a material violation of section 2923.6, because subdivision (f) of that section provides that such a denial letter must include “[t]he amount of time from the date of the denial in which the borrower may request an appeal,” and subdivision (d) of that section specifies that “the borrower shall have at least 30 days from the date of the written denial to appeal the denial.”

Essentially, the borrower argued that a denial letter that provides a period of time that is less than the 30-day minimum the law requires violates section 2923.6 and is ineffective. Therefore, the borrower argued, an injunction can issue under section 2924.12 to enjoin any trustee’s sale until that violation is corrected by the issuance of a new denial letter that set forth a legally adequate period for appeal.

The borrower also argued that he was not obligated to file his notice of appeal to the denial of the loan modification until the servicer provided a denial letter that fully complies in all material aspects with the mandates of section 2923.6.

The servicer argued that it did not violate section 2923.6(f) because that subdivision requires only that the denial letter include “[t]he amount of time from the date of the denial letter in which the borrower may request an appeal,” and the denial letter here did so – even if the amount of time specified in the letter was less than the minimum amount of time allowed by section 2923.6(d).

The servicer further argued that it did not violate section 2923.6 because a trustee’s sale was not held within the 30-day appeal period provided by subdivision (d), prohibited by both subdivision (c) of the statute – which applies while a “complete first lien loan modification application is pending” – and subdivision (e) of the statute – which applies once “the borrower’s application for a first lien loan modification is denied.”

Additionally, the servicer argued that the borrower did not file an appeal in the 30-day statutory period, and thus, even if the denial letter was deficient, the borrower was not prejudiced by the letter.

The Appellate Court rejected the servicer’s arguments, and held that section 2923.6 required the servicer to advise the borrower in the denial letter how much time the borrower had to appeal. And, the Court held, HBOR required the servicer to give the borrower at least 30 days to appeal. Thus, the Court held, to comply with the law, the denial letter must inform the borrower of an appeal period that is at least 30 days in length.

In this case, the servicer’s denial letter did not comply with the law because it advised the borrower he had only 15 days to appeal. Because the denial letter did not give the borrower the full amount of time to appeal provided by law, the Appellate Court held that the borrower’s right to appeal was effectively diminished as a result. Thus, the Court held, the servicer’s denial letter was a material violation of section 2923.6.

Moreover, the Appellate Court held that the borrower’s failure to allege that the servicer conducted a trial sale within the 30-day appeal period established only that the borrower did not allege a violation of section 2923.6(c) or (e). But here, according to the Appellate Court, it was enough that the borrower alleged a violation of the 30-day appeal provisions of section 2923.6(d) and (f).

Relatedly, because the Appellate Court concluded that the servicer’s denial letter was a material violation of section 2923.6, the borrower was entitled to relief under section 2924.12.

As you may recall, section 2924.12(a) provides that “[i]f a trustee’s deed upon sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin a material violation of Section … 2923.6” and “[a]ny injunction shall remain in place and any trustee’s sale shall be enjoined until the court determines that the mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent has corrected and remedied the violation or violations giving rise to the action for injunctive relief.”

Thus, according to the Appellate Court, the borrower’s failure to file an appeal from denial of his application did not invalidate his claim. The Court held that nothing in the statutory scheme denied the borrower the right to relief under section 2924.12 because he did not file an appeal sooner. Therefore, the Court held, the borrower’s failure to file an appeal was irrelevant.

Accordingly, the Appellate Court reversed and remanded the case with instruction to vacate the trial court’s order sustaining the servicer’s demurrer, and to enter a new order denying the demurrer.