CA Appellate Court Reverses Summary Judgment in Loan Modification Reinstatement Case
The Court of Appeal of the State of California for the First Appellate District held that a trial court erred in granting summary judgment in favor of a mortgage loan assignee in a case where the borrowers challenged the assignee’s ability to require payment—of 1) the missed modified monthly payments causing a second default and 2) the amount of an earlier default on the original loan, which was deferred under a loan modification—to reinstate a mortgage loan under California Civil Code section 2924c (section 2924c).
Section 2924c provides the borrower a right to cure the default and reinstate a loan when a mortgage loan is accelerated as a result of a borrower’s default by paying the amount of the default, including fees and costs resulting from the default, instead of the entire accelerated balance. The right to reinstate cannot be waived, and any agreement provision made or entered by a borrower whereby the borrower agrees to waive his or her reinstitution right will be void and have no effect.
In this case, the borrowers obtained a home secured by a deed of trust. The borrowers defaulted on this first loan and then agreed to a loan modification that adjusted the principal amount, reduced the interest rate and monthly payments, and deferred until maturity of the loan approximately $116,000 of indebtedness, including accrued and unpaid interest and principal, fees, and foreclosure expenses from the original loan. The modification provided that failure to make modified payments as scheduled would be an event of default and the modification would then be null and void at the lender’s option. The lender would then have the right to enforce the loan and associated agreements according to the original loan. Certain provisions of the original loan documents, like the acceleration clause authorizing the lender to require a defaulting borrower to immediately pay the full amount of the principal not yet paid and all interest owed on that amount, were left unchanged.
The borrowers defaulted on the modified loan, having missed four of the modified monthly payments. The borrowers were informed that to reinstate their loan and avoid foreclosure, they had to pay approximately $135,500 from their four missed monthly payments, the associated late charges, foreclosure fees and costs, plus all the sums that had previously been deferred under the loan modification. The borrowers filed a total of four suits (all later consolidated) against the assignee to the mortgage, in which, among other things, the borrowers alleged that the assignee violated California’s reinstitution law because it demanded excessive amounts to reinstate the loan. The assignee sought and was granted summary judgement by the trial court.
On appeal, the borrowers argued that under Section 2924c, the assignee could not lawfully condition reinstatement of their loan on the payment of the deferred amount under the loan modification, and not simply the missed modified payments plus cost, because this essentially requires them to waive their reinstatement right. The assignee argued that the loan modification gave it the option to enforce the original terms of the loan if the borrowers defaulted, and under the original terms they could properly require payment of the deferred amount. Further, the assignee contended that the deferred amount had been due and owing since the borrowers’ original default, which preceded the loan modification, and therefore, the deferred amounts are simply part of what must be paid to reinstate the loan, and not an impermissible acceleration of amounts not then due.
The appellate court held that the assignee failed to demonstrate that the borrowers could not prevail on their claim that the assignee violated section 2924c, and as a result, the trial court had erred in granting summary judgment in favor of the assignee. The case was consequently remanded for further proceedings consistent with the appellate court’s opinion. The court indicated that the default in this case was the failure to pay the modified monthly payments, and therefore, the borrowers have a right to cure the default by paying the missed modified monthly payments and the associated late charges and fees in order to avoid the acceleration of the loan. Further, the court also indicated that the assignee’s position would effectively deprive the borrowers of the opportunity to cure the precipitating default and reinstate the modified loan, and nothing in the loan modification documents suggest that the borrowers had forfeited such right, nor does anything in section 2924c suggest that such a forfeiture would be enforceable.
On May 22, 2019, the assignee was granted a petition for rehearing before the appellate court.
