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California Court Holds That Borrowers May Enjoin A Foreclosure If A Lender Fails To Meet Servicing Guidelines

In Pfeiffer v. Countrywide Home Loans, --- Cal.Rptr.3d ----, 2012 WL 6216039 (Dec. 13, 2012), mortgage borrowers filed a damages claim against a trustee for violating the federal Fair Debt Collection Practices Act (“FDCPA”) and an injunction claim against a lender to halt a foreclosure they claimed was wrongful. The trial court sustained the defendants’ demurrer to both claims without leave to amend. The California Court of Appeal affirmed as to the first claim, but reversed as to the second. 

As to the first claim, the California Court joined others in holding that foreclosure activities are not “debt collection” within the meaning of the FCDPA. In particular, the issuance of foreclosure sales notices in compliance with California non-judicial closure law did not constitute debt collection. Thus, the borrowers could not state an FDCPA claim even if the foreclosure was otherwise allegedly wrongful.

As to the second claim, the Court held that the lender could be enjoined from foreclosing. The loan here was insured by the Federal Housing Administration. Thus, the foreclosure was subject to servicing regulations of the U.S. Department of Housing and Urban Development (“HUD”). These regulations required the lender to conduct a face-to-face interview prior to initiating foreclosure. The borrowers alleged this never happened. The Court held that even though the HUD regulations did not create a private right of action, failure to follow the regulations could nevertheless support an injunction based on a common law claim of wrongful foreclosure. Because the borrowers were seeking to halt the foreclosure before it concluded, rather than unwind or set aside a foreclosure that had already occurred, the Court held that the borrowers need not tender the loan proceeds to obtain the injunction.

Of course, nothing would prevent the lender from conducting the face-to-face interview and then starting the foreclosure process all over again.

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