Mortgage stakeholders in California say they have few options to contest a new state law regarding zombie seconds, after a federal judge quashed their legal challenge this month.
The California Mortgage Association led a coalition of lenders and other mortgage businesses last October in
Under AB130, a current servicer must certify that neither it nor previous lienholders engaged in prohibited activities before initiating a foreclosure. That prohibited activity ranges across failures to communicate with the borrower.
The CMA sued California Attorney General Rob Bonta in an effort to stop him from enforcing the law, suggesting the new restrictions could chill secondary lending and increase costs.
In a 17-page order earlier this month, U.S. District Judge Dale Drozd granted Bonta's motion to dismiss the case, and denied CMA an opportunity to amend its complaint. The judge explained that the law is enforced by borrowers, and that Bonta lacks any connection to enforce the statute.
CMA General Counsel Robert Finlay slammed Drozd's ruling in a post last week, writing that the judge "took the easy way out" in tossing the case on jurisdictional grounds.
"Essentially, the court ruled that industry groups and impacted parties like our plaintiffs have no way to challenge the constitutionality of a law," he wrote.
Although the CMA is mulling an appeal, it may not have the financial resources to do so, Finlay also wrote. The trade group said it can continue the fight via a pending California bankruptcy case, although an individual lender may not want to foot the bill for the constitutional challenge.
Further, the group said it would discuss legislative options, but any fixes would come next year.
A representative for Bonta's office did not respond to a request for comment Tuesday.
Arguments
Plaintiffs argued that it would be difficult for lienholders to certify under oath to borrowers that any unlawful practices hadn't previously occurred. Those actions include:
- Failing to communicate with a borrower for 3 years;
- Not sending monthly mortgage statements as required by law;
- Omitting notices of ownership or servicing transfer;
- Issuing a tax document that suggests the loan has been written off or exonerated.
Although the law allows borrowers to petition for relief during the foreclosure process, it doesn't require them to do so, nor guarantee them success.
The mortgage industry plaintiffs argued that the new law was unreasonably broad, as there were notices of default for subordinate liens for only 0.04% of the over 1.2 million such mortgages in California. The trade group insisted that the law would diminish the value of investors' secured interests, and therefore destabilize the larger mortgage market.
Judge Drozd did not mull those points in his opinion. Rather, he doubled down on the sovereign immunity defense for the AG, and found that Bonta also had no authority via the state's Department of Financial Protection and innovation as AB130 has no criminal penalties.
Finlay told National Mortgage News Tuesday that the CMA is still weighing whether it would file an appeal.
State regulators in recent years have
