Lenders are raising a host of arguments to halt California's new zombie seconds law, which they say will freeze the secondary mortgage market.
The California Mortgage Association and other lender plaintiffs asked a federal judge this week to impose a preliminary injunction
In a lengthy filing Monday, plaintiffs said recorded notices of default exist for around 525 potentially "zombie" loans, or just 0.04% of the 1.2 million affected subordinate liens statewide, pointing to a need for more borrower communication requirements and other consumer protections.
The law affects subordinate liens that may come into play in situations involving refinances, reverse mortgages, home equity lines of credit, downpayment assistance and other types of loans. Lenders say its implementation would impede their operations.
"This overreach chills legitimate lending, increases costs, and reduces access to critical credit tools that support homeownership, disaster recovery, and housing development," wrote attorneys for plaintiffs.
The California attorney general, named as the defendant in the case, simultaneously filed a motion to dismiss Monday defending the law. Among other arguments, attorneys said it's the affected borrower, rather than the AG, who chooses whether to enforce the law.
"The statute only restricts, not eliminates, nonjudicial foreclosures — which is considerably more lax than the rest of the country, as approximately half of U.S. states do not permit nonjudicial foreclosures at all," wrote attorneys in the California AG's office.
The sides when reached for comment this week shared statements referring to their filings. Robert S. McWhorter of Buchalter, representing the dozen plaintiffs, said his side's motion is asking the court to preserve the status quo while it considers constitutional and federal law questions.
Lenders argue the law has wide-ranging implications
AB 130 forces a servicer to certify under oath that no "unlawful" practices have occurred prior to the action. The list of practices includes failing to communicate with the borrower for three years, not sending periodic notices or omitting servicing transfer notices.
Lenders this week contested the law's retroactive restrictions on junior lienholders, suggesting it's difficult for them to attest that none of the unlawful practices occurred in the past. They also suggest there are instances where the law clashes with federal lending laws, such as in cases where periodic notices to borrowers aren't required.
"The statute forces servicers into an impossible choice: either certify facts that may be unknowable or incorrect (risking perjury, civil liability, and statutory penalties) or refuse certification and thereby lose the right to foreclose non-judicially," the motion for a preliminary injunction read.
Further, the implied restrictions on subordinate financing options will destabilize the greater mortgage market, lenders repeated.
California defends the zombie seconds law
California AG Rob Bonta, in the motion to dismiss, clarified that the statute doesn't bar certain foreclosures outright but rather permits the borrower to temporarily halt the nonjudicial foreclosure process and seek a judicial review for unlawful practices.
AB 130 also doesn't require borrowers to petition for relief, nor does it guarantee them any will be granted. The AG's office also said the Truth in Lending Act and the Real Estate Settlement Procedures Act don't preempt state laws that protect consumers.
In another debate, the defendants argued the law advances a legitimate public purpose, in preserving existing housing and mitigating increased prices, a factor which has contributed to growth in the market for second liens.
A federal judge will hear the case in February.
Consumer litigation around zombie seconds has risen in recent years, and lenders today are contesting several
