Mortgage-related claim survives preemption, for now

Gabali v. OneWest Bank, FSB, 2013 WL 1320770 (N.D.Cal.)

Gabali bought property in 2006.  IndyMac was the servicer.  OneWest eventually purchased the note after IndyMac failed.  Gabali began to experience financial difficulties in 2009, due to a reduction in salary and an increase in her mortgage payments from $3,845.68 to $6,900.00 per month.  She tried to get a loan modification from OneWest, but IndyMac denied the modification because she’d been able to continue making payments. OneWest allegedly indicated that it either never reviewed her loan or didn’t receive any documents from her. Gabali called OneWest but was told that OneWest couldn’t help because she wasn’t in default; a representative allegedly told her that she had to fall behind in her payments before OneWest would review her case.

So she did. OneWest charged her a late fee for each month and reported her to credit agencies, harming her credit and her ability to refinance with another lender. OneWest then sent her letters identifying mitigation options, including repayment, loan modification, pre-foreclosure sale, and deed in lieu of foreclosure.  Letters also invited her to contact OneWest’s partner, Hope Now’s Project Lifeline, and to explore eligibility for the Home Affordable Modification Program (HAMP).

OneWest recorded a notice of default in December 2009 and a notice of trustee’s sale in March 2010.  In April, Gabali received a forbearance plan requiring her to make installment payments to cure the default.  She sued, attempting to represent nationwide classes for violations of the UCL and FAL, along with unjust enrichment.

OneWest argued that she failed to plead her claims with particularity; the court disagreed.  She provided specific allegations, including documentation (though presumably documents aren’t actually required at the pleading stage).  OneWest’s objection that she didn’t identify the names of the individuals to whom she spoke was insufficient; that could be determined in discovery.

OneWest argued that Gabali failed to state a claim for violation of the FAL because there wasn’t “advertising.”  But the FAL “can potentially apply to a wide universe of statements,” including statements made to individuals about their loans.  Advertising wasn’t merely “widespread promotional activities directed to the public at large,” a definition taken from insurance disputes about “advertising injury” coverage. By alleging that OneWest had a common practice of denying loan modification requests without regard to hardship, and of commonly telling borrowers that they couldn’t get a modification without defaulting, plus that OneWest sent out standard form letters that falsely stated HAMP’s requirements, Gabali alleged conduct that could fall under the FAL.

She also alleged misleadingness as to the availability and requirements of loan modification programs. OneWest argued that nothing it said was false, but only truth or statements of law.  Nothing about the alleged statements suggested that they were recitations of law, and true statements can be misleading.

OneWest then challenged Gabali’s standing, arguing that she couldn’t show a causal relationship between the alleged misrepresentations and her eventual default.  The court disagreed, because Gabali specifically alleged that she relied on a letter and statements by OneWest’s representatives when she defaulted, and continued to rely on additional misrepresentations.

Naturally, the UCL claims also survived.  The properly alleged FAL violations satisfied the “unlawful” prong.  However, she couldn’t rely on a violation of California’s Rosenthal Fair Debt Collections Practices Act to show unlawfulness, since a loan servicer wasn’t a debt collector under that law.  She adequately alleged “unfairness,” which in a consumer action requires alleging that “the consumer injury is substantial, is not outweighed by any countervailing benefit to consumers or to competition, and is not an injury the consumers themselves could reasonably have avoided.” Gabali’s injuries were late fees and expenses, negative actions against property, and negative actions against credit. There were no countervailing policies or other consumer benefits which outweigh these injuries. In addition, under the facts as alleged, she could not have avoided the injury since there appeared no other way to qualify for a loan modification than to voluntarily default.

Gabali’s separate claim for unjust enrichment was dismissed as not constituting an independent cause of action.

OneWest argued that the claims were preempted by the Home Owners' Loan Act (HOLA), which preempts state laws governing servicing and disclosure.  HOLA’s implementing regulations list broad categories of state laws that are expressly preempted, including laws governing adjustments to loans, loan-related fees, and disclosure and advertising laws.  However, laws that only incidentally affect lending operations of federal savings associations are not preempted.  Here, the UCL and FAL are laws of general applicability, but may be preempted on a case by case basis—for example where used to challenge a pending or completed foreclosure.  Alleged misrepresentations about inadequate disclosure of fees, interests rates, or other loan terms directly affect lending and are preempted, whereas common-law type allegations that rely on the general duty not to misrepresent material facts are not preempted.

Here, the court could read Gabali’s allegations two ways, one preempted and one not.  If she alleged that OneWest was required to offer a loan modification or required to make disclosures to her, that was preempted. However, if she alleged only a general duty to not engage in fraud during business dealings, that only incidentally affects lending and was not preempted. At this stage in the case, the court found the FAL/UCL claims not preempted to the extent they relied on general allegations of misrepresentation.