Walker v. Countrywide Home Loans, Inc., 2002 WL 1068266 (Cal.App. 2 Dist.)

Statement of Facts:
The Walkers borrowed $290,000 from Bayside First Mortgage, Inc. to purchase their residence evidenced by a note and deed of trust which were assigned to Countrywide Home Loans, Inc. ("Countrywide"). The deed of trust provided that the lender "may do and pay for whatever is necessary to protect the value of the Property and the Lender's rights in the Property. Lender's actions may include . . . entering on the Property to make Repairs. . . . Any amount disbursed by Lender under this paragraph 7 shall become additional debt of Borrower secured by this Security Instrument." The deed of trust also provided that "Lender or its agent may make reasonable entries upon and inspections of the Property. Lender shall give Borrower notice at the time of or prior to an inspection specifying reasonable cause for the inspection." The Walkers defaulted on their loan in November 1996. Countrywide ordered inspections of the Walkers' property beginning in January 1997 and approximately every thirty days thereafter through February 1998 when Countrywide noticed a foreclosure sale of the Walkers' property. In February 1998, the Walkers paid off the loan and the $118 charge for 13 property inspections. In March 1999, the Walkers filed suit seeking declaratory relief, injunctive relief and damages, alleging that the inspection fee imposed by Countrywide was a disguised late fee. Countrywide filed a motion for summary judgment, which the trial court granted, rejecting the Walkers' argument that the inspection fees were unlawful, unfair or deceptive.

Argument and Holding¹:
Civil Code section 2954.4 limits the amount that may be charged as a late fee on a delinquent home loan. The court held that property inspection fees are not late fees as they are do not serve the same purposes as late fees, namely, to encourage timely payment or to compensate a lender for loss of interest on the late payment. Instead, the court found that the property inspection fees reflect the actual cost the lender incurs to protect its security interest in the property, they are not triggered merely by the event of default but upon several criteria such loan type and the length of default.

Civil Code sections 2924c and 2924d limit the fees that may be charged if a loan is reinstated or redeemed. The court found that these sections do not prohibit property inspection fees being charged to a delinquent borrower because they regulate the costs that may be charged to the borrower only after the notice of default and sale have been recorded. The notice of sale informs the borrower and other interested parties of the specific amount required to cure the default and after the notice is recorded, the borrower is only responsible for the amounts stated in the notice and those costs and fees delineated by statute. The Walkers did not claim on appeal that any property inspection fees charged by Countrywide were incurred after recordation of the notice of default.

Financial Code section 50130 prohibits regulated mortgage servicers from charging amounts in excess of those permitted by law. The court found there was no specific provision prohibiting Countrywide from charging defaulted borrowers property inspection fees incurred prior to the recordation of the notice of default. Accordingly, there was no violation of law by Countrywide that would give rise to a cause of action under the unfair competition law.

Finally, the Walkers argued that the property inspection fee was unfair because: (1) the harm to the borrowers outweighs the utility of the inspection fees and the inspection fees are unethical; (2) the Walkers' deed of trust did not permit the inspection fees to be charged; (3) the inspection fees were performed by Countrywide's affiliated company; and (4) the fees are not authorized by federal servicing guidelines.

The court found that the utility of the inspections far outweighed their cost noting that the total amount charged to the borrowers for the 13 inspections was only $118, evidence was submitted indicating that ten percent of defaulted loans became vacant and those were further protected by change of locks, lawn maintenance and other securing measures. Further, the financial stability of a borrower whose loan is in default is uncertain and such a borrower may conceivably be unable to maintain the property and less likely to occupy the property than a borrower whose loan is current.

In reviewing the deed of trust, the court found it did permit the inspection charges to be assessed. Specifically, the court found sufficient the language stating that if the borrower is in default then the "Lender may do and pay for whatever is necessary to protect the value of the Property and the Lender's rights in the Property. Lender's actions may include . . . entering on the Property to make repairs. . . . Any amounts disbursed by Lender under this paragraph 7 shall become additional debt of Borrower secured by this Security Instrument." Paragraph 9 of the deed of trust specifically permitted the lender to make reasonable inspections of the property. The court held that the deed of trust unequivocally permitted Countrywide to charge the cost of the property inspections to the Walkers if notice was provided that the inspections would occur. The court found nothing inherently unfair about the deed of trust provisions, noting that inspecting a property after a default is an action the may be reasonably required to protect a lender's security interest.

The court summarily determined that Countrywide's affiliated company performing the property inspections did not render the practice of charging inspection fees to the borrower in default unfair. The court merely noted there was no evidence that the use of an affiliated company to perform the inspections was unfair or unethical or that Countrywide disregarded separate corporate identities or charged for inspections that were not performed.

Under the federal agency servicing guidelines, Countrywide was not required to charge the costs of inspections to the borrower. However, the court found that the servicing guidelines reinforced the utilitiy of the inspections and that "It is not unfair to transfer a necessary, reasonable, and actual expense to the delinquent borrower."

¹This summary discusses only those issues relative to the charging of property inspection fees and does not include, although the case does discuss, other issues such as the denial of award of attorney fees and the admissibility of evidence.