Extracted from Law360.
On April 30, 2019, in Taniguchi v. Restoration Homes,[1] a California state appeals court resolved a question of first impression: Whether a borrower in California has the right to reinstate a mortgage loan that has been modified by paying only the amount in default under the loan modification agreement or can the lender accelerate all deferred amounts under the original, pre-modified loan terms.
This ruling is significant for all mortgage lenders and servicers who do business in California, and its sweeping impact will doubtless affect many thousands of mortgagors in the state. The court of appeal’s ruling favors California borrowers who seek to reinstate their mortgage loans after a default under a loan modification agreement by holding that a borrower’s statutory right of reinstatement must be honored under California Civil Code Section 2924c.[2]
The court held that in order to cure a default, borrowers need only pay the default amount under the loan modification agreement, and mortgage lenders and servicers cannot require borrowers to also pay all accelerated or deferred amounts under the original, premodified loan. This ruling is further notable because it effectively modifies a form contract provision, commonly used by many mortgage lenders and servicers, that permits the lender or servicer to accelerate the payment of all sums of principal and interest upon default.
In Taniguchi, the Court of Appeal, State of California, First Appellate District, Division Two, vacated and remanded the decision by a San Mateo County superior court judge granting summary adjudication in the lender’s favor. The borrowers asserted that the lender’s demand to pay sums that had previously been deferred under a loan modification in order to reinstate their loan violated Section 2924c. In granting summary adjudication for the lender, Restoration Homes, the trial court agreed that the borrowers could only reinstate their home loan by paying the missed payments under the modified loan agreement and associated fees in addition to the amounts previously deferred under the modified loan agreement.
The state appeals court reversed, holding that “[w]hen principal comes due as the result of a default, section 2924c allows a borrower to cure that precipitating default and reinstate his or her loan by paying the amount of the default, plus fees and expenses. Here, the default is the failure to make payments on the modified loan.” The lender’s requirement that the borrowers pay all deferred amounts under the original loan deprived them of their statutory right to reinstate the loan under Section 2924c.
In 2006, plaintiffs Charles and Marie Louise Taniguchi obtained a home loan of $510,500, secured by a deed of trust. Three years later, in 2009, they entered into a loan modification with the mortgagee that adjusted the principal amount, reduced the interest rate and monthly payments, and deferred approximately $116,000 of indebtedness until the loan maturity date.
The modification provided that any further missed payments would constitute an event of default, which would nullify and void the modification at the lender’s option, giving the lender the right to enforce the loan according to its original terms. The acceleration clauses of the original loan documents, authorizing the lender to require full and immediate payment of all amounts owing and to invoke the power of sale, were unchanged by the modification.
The Taniguchis eventually defaulted on the loan. The subsequently assigned mortgagee, Restoration Homes, required the Taniguchis to pay not only the four missed monthly payments and late charges under the modified loan — around $15,500 — but also the sums that had previously been deferred under the loan modification — now totaling over $120,000. As a result, the Taniguchis sued Restoration Homes for violating Section 2924c by demanding excessive amounts to reinstate the loan, along with three companion claims for breach of contract, breach of the implied covenant of good faith and fair dealing and violation of the Unfair Competition Law.[3]
The appeals court reasoned that, while in the event of a default it is usually the lender’s right to accelerate the payment of all sums of principal and interest owing under the loan, Section 2924c will operate to void any provision of a loan agreement that conditions the reinstatement of a loan on payment of amounts deferred in a loan modification. The statutory right to reinstate under Section 2924c cannot be waived. The public policy purpose of the right of reinstatement is to protect borrowers’ equity in their homes, “in many instances built up through years of monthly payments.” The court explained that although Section 2924c of the Civil Code was first enacted in 1933, the protection it gives to borrowers is just as important now as it was during the Great Depression.
Restoration Homes’ argument that the loan modification gave it the contractual option to enforce the original loan terms in the event of a default under the loan modification could properly be required as a condition of reinstatement under Section 2924c was unavailing. The court held that if the Taniguchis had not defaulted on their monthly payments, then Restoration Homes could not have claimed the deferred amounts until the end of the loan, so those “amounts were not currently due and owing” and could not be included in the amount required to cure the default and reinstate the loan.
The court agreed with the Taniguchis that requiring them to pay almost eight times the amount of their missed modified payments plus costs “essentially requires them to waive their right of reinstatement with respect to the modified loan.” The default was under the modified loan and the Taniguchis could not be penalized for their default by having to provide immediate payment of all deferred amounts because that “would have the effect of depriving the Taniguchis of any opportunity to cure the precipitating default and reinstate the modified loan.”
The court’s decision is also significant because of its recognition that a violation of Section 2924c wrongly denying borrowers the right to reinstate their loans can constitute a basis for a companion claim under California’s expansive Unfair Competition Law. The court reasoned that the UCL is “broad in scope” and any conduct by the lender that is inconsistent with Section 2924c can be used as a predicate for a UCL claim. This decision gives borrowers further ammunition to use in their suits against mortgagees and servicers for violations of Section 2924c and further reinforces California’s borrower-friendly laws and policies.
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[1] Taniguchi v. Restoration Homes LLC, 34 Cal App 5th 1028 [2019].
[2] Section 2924c(a)(1) provides that, when a mortgage loan is accelerated because of a default, the borrower can cure the default and reinstate the loan by paying the amount of the default, including fees and costs resulting from the default, rather than the entire accelerated balance.
[3] Cal. Bus. & Prof. Code § 17200 et seq.