Kirk v. Source One Mortgage Services Corp.

Opinion

Source One Mortgage Services Corporation (Source One) appeals from a jury verdict awarding compensatory and punitive damages to Charles R. B. Kirk for breach of his rights regarding an impound account created under the terms of Civil Code section 2954,^[1] together with his claims for breach of contract, libel, and interference with contract. In the published portion of this opinion, we hold section 2954 requires that voluntary mortgage impound accounts created under its terms be terminable at the request of the borrower. Thus, the trial court properly directed a verdict for Kirk on his claim that Source One violated section 2954 when it required him to sign a waiver form containing terms inconsistent with the statute before it would terminate his account. In the unpublished portion of this opinion, we address Source One’s other claims of error, as well as Kirk’s arguments on cross-appeal. We reverse and remand for retrial on the claims of libel, injunctive relief, and damages.

Factual and Procedural Background

In January 1987, Kirk refinanced his single-family residence with IMCO Realty Services, Inc. (IMCO). He agreed to maintain an impound account. Under the agreement, Kirk would make monthly payments to the lender to cover both property tax and hazard insurance premiums on the property, which were then paid by the lender when they became due. Such an account

In June 1990, after receiving a notice from Source One that his insurance impound payment would be increased because of an increase in policy premiums, Kirk decided to shop for less expensive insurance and made a written request to Source One to cancel only the insurance payment to the impound account. A six-month dispute followed, during which Source One sent Kirk various preforeclosure collection notices. In January 1991, Source One’s insurance department advised Kirk that a review of his file indicated he did not have an insurance impound account, and his monthly payment was therefore reduced.

In March 1991, Kirk decided to cancel the tax payment to the impound account on his mortgage and so advised Source One in writing. Source One responded that it would grant his request for an escrow waiver,^[3] provided that he reimburse a small negative balance in the account and sign an “escrow agreement form letter.” This form letter stated that in consideration of Source One’s waiver of its normal requirement of impound accounts, the undersigned promises to pay his own property taxes and insurance premiums. It further provided that Source One retained the right to reinstate an impound if Kirk failed to pay his taxes, insurance premiums, or monthly mortgage payments when due.^[4]

In August 1991, Source One informed Kirk that his monthly payments would be increased by $20.74 to cover anticipated tax payments. Kirk continued to pay the former amount, and Source One again began sending him notices of late charges, delinquency, and mortgage default. Source One initially held his payments “in trust” while awaiting the additional $20.74, then began returning his monthly payments with notices that the loan was in default and subject to foreclosure. In February 1992, Kirk wrote Source One a lengthy letter, reviewing in detail the dispute over the impound account and advising that he had the right to terminate his impound account at any time under section 2954. Source One did not respond to this letter but continued to send default notices and return his payments.^[6] Source One also reported the loan as delinquent to three national credit bureaus^[7] and recorded a notice of default on the property. Kirk then retained a lawyer and reinstated his loan. Kirk made the full requested monthly payments under protest.

In November 1992, Kirk filed a complaint against Source One, asserting claims for violation of section 2954, breach of contract, unfair business practices, libel, and interference with contract. Source One cancelled Kirk’s tax impound account in June 1993 and issued him a check for the surplus in the account.

At trial, Source One sought to introduce a sample of the “Impound Account Authorization” form (authorization form) that it argued had been

Discussion

1. Civil Code Section 2954

Section 2954, subdivision (a) restricts the circumstances under which a mortgage lender may require an impound account as a condition of a secured loan for a single-family, owner-occupied dwelling. It allows a lender to require such an account only under specifically delineated circumstances.^[8] The evidence is undisputed that Kirk’s loan was not subject to a mandatory account under any of the five criteria enumerated in the statute.

Section 2954, subdivision (a) also provides, however, that “Nothing contained in this section shall preclude establishment of such an account on terms mutually agreeable to the parties to the loan, if, prior to the execution of the loan . . . the . . . lender has furnished to the . . . borrower a statement in writing ... to the effect that the establishment of such an account shall not be required as a condition to the execution of the loan . . . and further, stating whether or not interest will be paid on the funds in such an account.” Source One maintains that the missing authorization form contained the disclosures required by section 2954 and that Kirk agreed to a mandatory, permanent impound account, terminable only with Source One’s permission.^[9]

Under the heading “Impound Account Authorization,” the form provided, in pertinent part, as follows: “The establishment of an impound account is optional. . . . [] Lender, if authorized by this form, will collect

The evidence was in conflict whether Kirk ever signed such an authorization form. Kirk testified he had agreed orally to a voluntary, terminable impound account. The IMCO employee who closed the loan testified that she would not have done so without confirming that the form was in the file and that a checklist from Kirk’s file showed it contained such a form. The trial court admitted the employee’s testimony and the checklist, but excluded the form because it was not properly authenticated and the proffered document itself had never been in Kirk’s file.

Even assuming, arguendo, that Source One’s proffered form contained the necessary disclosures and that Kirk had signed such a form, the form itself makes no reference to the duration of the account or method of termination.^[10] Having examined the language and legislative history of section 2954, as well as evidence of Source One’s own practices and those of the California lending industry, we conclude that voluntary impound accounts created under section 2954 must be terminable at the request of the borrower when the parties have not specifically agreed otherwise.^[11]

Section 2954, subdivision (a) states clearly that “No impound ... account . . . shall be required . . .” unless one of the listed criteria is met. Merely because a borrower initially agrees to an impound account does not empower the lender to require its continuation without the borrower’s

This court has held that remedial legislation intended to protect consumers should be construed liberally to implement its purpose. (Kwan v. Mercedes-Benz of North America, Inc. (1994) 23 Cal.App.4th 174 , 184 [ 28 Cal.Rptr.2d 371 ].) Although neither section 2954 nor its legislative history makes specific reference to the closing of an impound account, the clear intent of the statute to protect borrowers from mandatory impound accounts compels the conclusion that a voluntary account must remain voluntary and can be closed when the borrower so chooses, unless it has become mandatory under the criteria set out in section 2954. In order to hold to the contrary, we would have to conclude the Legislature took pains to give consumers a right to refuse at the outset but made their decision irrevocable. Under this interpretation, borrowers are given the right to withhold consent, but once consent is given, they are deprived of the right to change their mind. There is nothing in the legislative history to support such a conclusion.^[14]

Our conclusion that voluntary impound accounts must remain voluntary, except as noted above, is bolstered by Kirk’s expert, Professor Hetland, who testified that Source One’s handling of Kirk’s request to terminate the impound account varied from standards generally prevailing among California lenders. Based on that testimony, the trial court found that the prevailing practice permitted borrowers to terminate voluntary impound accounts on request.^[15] Moreover, Source One’s own office memo to its escrow processing representatives stated that “In California, it is a state requirement that on all Conventional Loans, if the Loan to Value (LTV) is equal to 90% or less, we are required to grant the customer’s request for an escrow waiver.” Such an “escrow waiver” would allow a borrower the option to terminate an impound account.^[16] Thus, our reading of the statute conforms with the evidence of industry standards and Source One’s own apparent interpretation of the legal principles expressed in section 2954.

Disposition

The judgment against Source One on the claims for breach of contract and violation of Civil Code section 2954 is affirmed. The jury verdicts holding Source One liable for interference with contract and libel are reversed. The denial of injunctive relief and judgment for Source One on the unfair business practices claim is reversed. The case is remanded for retrial on the claims of libel, injunctive relief, and damages. Each party is to bear its own costs on appeal.

Parrilli, J., and McGuiness, J.,^[18] concurred.

A petition for a rehearing was denied July 15, 1996, and the petition of appellant Charles R. B. Kirk for review by the Supreme Court was denied October 2, 1996.