California State Court Holds HOLA Does Not Preempt California Statute Pertaining to the Obligations of Lenders Prior to Issuing a Notice of Default

On June 2, the California Court of Appeal held that Cal. Civil Code Section 2923.5, which is known as the Perata Mortgage Relief Act (PMRA) and prescribes the procedures that a lender must follow prior to filing a notice of default, provides for a limited private right of action and that the Home Owners’ Loan Act (HOLA) and Office of Thrift Supervision (OTS) regulations do not preempt the PMRA. Mabry v. Sup. Ct. of Orange Cty., G042911, 2010 WL 2180530 (Cal. Ct. App. June 2, 2010). In Mabry, the plaintiff borrower obtained a restraining order against the defendants (including the lender, a subsidiary of a federal thrift) to prevent the foreclosure of the borrower’s home. The trial court subsequently vacated the restraining order and held that (i) HOLA and OTS regulations preempted the PMRA, (ii) the PMRA does not provide a private right of action, and (iii) tender was required to enjoin the foreclosure proceedings.

After the borrower filed a writ proceeding, the Court of Appeal stayed the foreclosure and scheduled an order to show cause. The appellate court first held that the PMRA provides a limited private right of action for a borrower to obtain postponement of an impending foreclosure (i.e., until a lender complies with the requirements of the PMRA) and that a borrower is not required to tender to exercise this right. The appellate court next held that HOLA and OTS regulations do not preempt the PMRA. The court stated that the burden on federal thrifts to assess a borrower’s financial condition and to explore alternatives to foreclosure “might arguably push the [PMRA] out of the permissible category of state foreclosure law and into the federally preempted category of loan servicing or loan making,” but that there must be evidence of such a burden for a court to make that finding. On the limited record of this case, the court determined that HOLA did not preempt the PMRA.