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Levon Akopyan et al v. Wells Fargo Home Mortgage

April 4, 2013


(Los Angeles County Super. Ct. No. BC441783) (Los Angeles County Super. Ct. No. BC455579) APPEALS from judgments of the Superior Court of Los Angeles County, Jane Johnson, Judge.

The opinion of the court was delivered by: Epstein, P. J.



These consolidated appeals, each from a judgment of dismissal of a class action complaint after a sustained demurrer, raise two questions. The first is whether the limitation on late payment charges in Business and Professions Code section 10242.5, subdivision (b)*fn1 applies to home mortgage loans negotiated by mortgage loan brokers, regardless of the exempt status under section 10133.1 of entities that funded and serviced the loans. We conclude the statutory limitation on late fees applies to these loans.

The second question is whether an action lies by appellant borrowers against the federally regulated entities that serviced the loans for breach of contract, on the theory that the payment application requirement in section 10242.5, subdivision (b) was implicitly incorporated into each loan by operation of law, and the servicers misapplied payments and charged late fees in violation of that implied term. We conclude that appellants' contract claims are preempted by the National Bank Act (12 U.S.C. § 1 et seq.) (NBA) and the Home Owners Loan Act (12 U.S.C. § 1461 et seq.) (HOLA) respectively.

Both judgments are affirmed.


According to the operative first amended complaint in case No. B236455, appellants Levon and Tagouhi Akopyan entered into a home mortgage loan with Aames Funding Corporation in 2003. The note contained a late payment provision, allowing the holder to impose a late fee after a 10-day grace period and setting the late fee at six percent of the overdue payment. In 2005, appellant Armenui Karapogosyan entered into a home mortgage loan with WMC Mortgage Corporation. The note set a 15-day grace period for payments and a late fee of five percent for the overdue payment. Each of these notes permitted that late fees be applied only once to an overdue payment. The complaint alleges the loans were negotiated by a licensed mortgage loan broker.

At some point, Wells Fargo Home Mortgage, Inc.,*fn2 began servicing the loans. Payments were due on the first day of each month. The Akopyans did not make the payment due on December 1, 2007, and were assessed a late fee on December 17, 2007. The payment they made on December 31, 2007, was applied to the past due December installment, resulting in their failure to pay the January 2008 installment. They were assessed another late fee on January 16, 2008. Similarly, Karapogosyan, who did not make the payment due on March 1, 2007, but made a payment on March 30, 2007, was assessed late fees in both March and April 2007.

The complaint in case No. B236456 alleges that, in 2007, appellants Nasser Jawher and Miguel Martinez entered into home mortgage loans with American Home Equity Corporation and American Brokers Conduit respectively. The late payment provisions in their notes were similar to the provisions in Karapogosyan's note. The complaint also alleges these loans were negotiated by licensed mortgage brokers. At some point respondent Aurora Loan Services, LLC (Aurora) began servicing the loans. In 2008 and 2009, Jawher was assessed late fees eight times because his payments were applied to past due installments. In 2009, Martinez was charged three late fees for the same reason.

On all these loans, respondents applied appellants' payments to installments in the order they became due, resulting in successive late payments and fees. Appellants sued respondents for breach of contract on the theory that, since the loans were made in California, each incorporated the requirement in section 10242.5, subdivision (b), that a payment made within 10 days of the due date of an installment must be applied to that installment. By applying payments made within 10 days of scheduled installments to past due installments, respondents allegedly breached the terms of the loans they serviced. The complaints also included causes of action for unfair business practices under the Unfair Competition Law (§ 17200 et seq.), for unjust enrichment, and for declaratory relief.

The trial court sustained respondents' demurrers on two alternative grounds: that section 10133.1 exempted Wells Fargo and Aurora from section 10242.5, and that the breach of contract claims were preempted by federal law. The court ruled that the unfair business practices claims and the requests for declaratory relief failed for the same reasons. The court also ruled that the existence of an express contract precluded relief for unjust enrichment. Both cases were dismissed.

We consolidated the timely appeals.



We review de novo the judgment (order of dismissal) entered after a demurrer is sustained to determine whether the complaint alleges facts sufficient to state a cause of action on any legal theory. (Committee for Green Foothills v. Santa Clara County Bd. of Supervisors (2010) 48 Cal.4th 32, 42.) We assume well-pleaded factual allegations to be true, but also consider matters that properly have been judicially noticed. (Ibid.)

Appellants' breach of contract claims are based on the theory that section 10242.5 was incorporated into the loans by operation of law. The trial court ruled that section does not apply to the loans because Wells Fargo and Aurora are exempt under section 10133.1. It did not reach respondents' alternative argument that section 10133.1 also exempts the lenders that initially funded the loans. We agree with appellants that, while section 10133.1 exempts certain entities from the licensing requirements applicable to mortgage loan brokers, it does not exempt loans negotiated by brokers with exempt entities.

A. The Statutory Scheme

To determine the legislative intent of statutory provisions and effectuate their purpose, we examine their language """with reference to the entire scheme of law of which [they are a] part so that the whole may be harmonized and retain effectiveness.""" (State Farm Mutual Automobile Ins. Co. v. Garamendi (2004) 32 Cal.4th 1029, 1043.)

Sections 10133.1 and 10242.5 are among the licensing provisions in part 1, chapter 3, articles 1 and 7, respectively, of the Real Estate Law (§10000 et seq.). The purpose of the licensing requirements is to protect the public from incompetent or untrustworthy practitioners. (All Points Traders, Inc. v. Barrington Associates (1989) 211 Cal.App.3d 723, 729.) To that end, all real estate brokers in California must be licensed. (§ 10130.) In relevant part, section 10131, subdivision (d) defines a real estate broker as a person who, for compensation or expectation of compensation, "[s]olicits borrowers or lenders for or negotiates loans or collects payments or performs services for borrowers or lenders or note owners in connection with loans secured directly or collaterally by liens on real property or on a business opportunity." These activities describe the business of a mortgage loan broker. (Winnett v. Roberts (1986) 179 Cal.App.3d 909, 919, citing Wyatt v. Union Mortgage Co. (1979) 24 Cal.3d 773, 782.)

Loans made or negotiated by mortgage loan brokers are subject to article 7, section 10240 et seq. (§ 10248.3.) Most provisions of this article apply only to certain small residential mortgage loans, with a principal amount less than $30,000 if secured by a first deed of trust or less than $20,000 if secured by a junior deed of trust. (§§ 10240.1, 10240.2, 10245.) A few provisions, including section 10242.5, apply to bona fide loans without a limitation on their principal amount. (§ 10245.) Section 10242.5 limits the charge for a late payment to 10 percent of the installment due or a minimum of $5, and provides for a 10-day grace period. It also provides that a late payment fee may be charged only once for the same late installment, and that a payment made within 10 days of a scheduled installment's due date must be applied to that installment. (§ 10242.5, subd. (a), (b).)

Section 10133.1, subdivision (a) exempts from section 10131, subdivision (d) and article 7 "(1) [a]ny person or employee thereof doing business under any law of this state, any other state, or the United States relating to banks, trust companies, savings and loan associations, industrial loan companies, pension trusts, credit unions, or insurance companies. . . . [¶] (6) Any person licensed as a finance lender when acting under the authority of that license. . . . [¶] (10) Any person licensed as a residential mortgage lender or servicer when acting under the authority of that license." Respondents argue that section 10133.1, subdivision (a)(1) makes article 7, including section 10242.5, inapplicable to them as banks, and that the original lenders also were exempt under subdivision (a)(6) and (10).*fn3

Exceptions to the general provisions of a statute are narrowly construed and only apply to "those circumstances that are within the words and reason of the exception . . . [Citation.]" (Haas v. Meisner (2002) 103 Cal.App.4th 580, 586.) Narrowly construed, section 10133.1, subdivision (a) excludes various entities from the definition of a mortgage loan broker in section 10131, subdivision (d), and therefore from the licensing requirements applicable to such brokers. Exempt entities do not need a real estate license to engage in the activities of a mortgage loan broker. (See §§ 10130; 10131, subd. (d); 10133.1; 10240, subd. (b).)

Since article 7 regulates loans made or negotiated by mortgage loan brokers, entities exempt under section 10133.1 are not subject to article 7 to the extent that they are outside the definition of a mortgage loan broker. But when a transaction involves both a mortgage loan broker and an exempt entity, excluding the entire transaction from article 7 would effectively relieve the mortgage loan broker from the requirements of that article as well. We are not persuaded the Legislature intended to categorically exclude broker-negotiated loans with exempt lenders from article 7 and thus impliedly exempt brokers from the requirements of that article.*fn4

Rather, article 7 itself provides that its requirements variously apply to broker-negotiated loans depending on the type of collateral and principal amount. (§§ 10240.1, 10240.2, 10245.) Thus, the home loans at issue in this case (for amounts ranging from over $300,000 to over $500,000) are partially exempt from article 7 by virtue of section 10245, not section 10133.1. But they are not exempt from the late fee limitations of section 10242.5 since the Legislature has stated that section applies to broker-negotiated loans regardless of their amount. (§ 10245.)

B. Statutory History

Although they do not purport to rely on legislative history on appeal, respondents nevertheless contend that article 7 was intended to apply to a different kind of loans than those at issue in this case. Specifically, respondents contend article 7 was intended to apply to loans made by mortgage loan brokers themselves or negotiated by them with non-exempt lenders, such as private individuals, because such loans were in high demand in the 1950's and much of the next three decades. Respondents conclude that article 7's "singular application remains unchanged" even though such loans may be less prevalent today. Respondents are incorrect.

The real estate loan statute of 1955, former Civil Code sections 3081.1-3081.93, was intended to stop the collection of excessive brokerage fees and other undesirable practices by mortgage loan brokers. (Sedia v. Elkins (1962) 201 Cal.App.2d 440, 449.) In 1961, parts of the statute were added to the Real Estate Law, as article 7, section 10240 et seq., at the same time as the exemption now included in section 10133.1, subdivision (a)(1). Between 1961 and 1992, section 10240, which requires mortgage loan brokers to make certain disclosures to borrowers, excluded from this disclosure requirement broker-negotiated loans for lenders exempt under section 10133.1, subdivision (a), but only if the commission the broker charged the borrower was 2 percent or less. (See Legis. Com. com., Deering's Ann. Bus. & Prof. Code, (2007 ed.) foll. §§ 10133.1, 10240, pp. 86, 271; Stats. 1961 ch. 886, §§ 11, 24, pp. 2326, 2338.) This exclusion indicates that, when the Legislature intended to relieve mortgage loan brokers of certain requirements in transactions with exempt lenders, it did so expressly. It also shows that article 7 was intended to reach undesirable practices by mortgage loan brokers in transactions with exempt lenders.*fn5

Added to article 7 in 1973, section 10242.5 appears to be the first statutory limitation on late fees in California. (See generally, Note, Late-Payment Charges: Meeting the Requirements of Liquidated Damages (1975) 27 Stan. L.Rev. 1133 (hereafter Note).) At the time, section 10245 limited the application of article 7 to loans in amounts up to $16,000 on first deeds of trust, and $8,000 on second deeds of trust. (Id. at p. 1144.) There is no indication that broker-negotiated loans in these amounts were meant to be excluded from section 10242.5 if the lender that made them was exempt under section 10133.1.

Late fees charged on broker-negotiated loans were a recognized problem in 1973, and so were late fees charged by lenders exempt under section 10133.1. (See Garrett v. Coast & Southern Fed. Sav. & Loan Assn. (1973) 9 Cal.3d 731, 735 [savings and loan association charged late fee as percentage of remaining principal]; Clermont v. Secured Investment Corp. (1972) 25 Cal.App.3d 766, 768 [lender charged late fee equal to one percent of original amount of note on broker-negotiated loans]; see generally Note, supra, 27 Stan. L.Rev. at p. 1133, fn. 2.)

The late fee limitation on loans for single-family owner-occupied dwellings in Civil Code section 2954.4 was added in 1975. (See Legis. Com. com., Deering's Ann. Civ. Code (2007 ed.) foll. § 2954.4, p. 542.) It explicitly excluded loans made or negotiated by a mortgage loan broker subject to article 7. (Civ. Code, § 2954.4, subd. (e).) Then, in 1989, the Legislature exempted section 10242.5 from the loan amount limitation in section 10245. (See Legis. Com. com., Deering's Ann. Bus. & Prof. Code (2007 ed.) foll. § 10245, p. 284.) Thus, the relative scope of the late fee provisions in Civil Code section 2954.4 and section 10242.5 changed over the years.

This statutory history does not support respondents' assumption that article 7 was intended to cover mortgage loan broker transactions involving only non-exempt lenders or that its application has remained unchanged. Rather, it shows that the Legislature controls the application of article 7 to transactions involving mortgage loan brokers from within, not from without, that article.

Accepting as true the allegations in the complaints that the loans were negotiated by licensed mortgage loan brokers, we conclude they are subject to the late fee limitations of section 10242.5.

C. Implied Incorporation

Appellants' breach of contract claims are premised on the general rule that "'"all applicable laws in existence when an agreement is made, which laws the parties are presumed to know and to have had in mind, necessarily enter into the contract and form a part of it, without any stipulation to that effect, as if they were expressly referred to and incorporated."' [Citation.]" (Swenson v. File (1970) 3 Cal.3d 389, 393.) For the first time on appeal, respondents argue this rule may not be applied to vary the express terms of a contract. They point out that the deeds of trust, attached to the complaints and incorporated by reference, all provide that "payments shall be applied to each Periodic Payment in the order in which it became due." This provision is contrary to section 10242.5, subdivision (b), which states in relevant part that "a payment or tender of payment made within 10 days of a scheduled installment due date shall be deemed to have been made or tendered for payment of that installment."

Respondents' assumption that express contract terms may not be varied by operation of law is not correct. "[A] law established for a public reason cannot be contravened by a private agreement." (Civ. Code, § 3513.) A contractual provision that contravenes public policy is illegal and either void or unenforceable. (Swenson v. File, supra, 3 Cal.3d at pp. 393-394 [limiting enforcement of express non-compete clause to extent allowed by statute]; see also Civ. Code, § 1667 [defining as unlawful contracts that are contrary to "an express provision of law" or to "the policy of express law, though not expressly prohibited"].) Instead, the statutory terms "become a part of the contract with full binding effect upon each party." (Interinsurance Exchange v. Ohio Cas. Ins. Co. (1962) 58 Cal.2d 142, 148 [invalidating contractual exclusionary provision and applying statutory coverage to automobile liability insurance policy].)

Public policy may be expressed in a statute or implied from its language. (Cariveau v. Halferty (2000) 83 Cal.App.4th 126, 132.) The Real Estate Law, of which article 7 is part, was designed to protect the consuming public in real estate transactions, as was article 7 itself. (Montoya v. McLeod (1985) 176 Cal.App.3d 57, 63; Realty Projects, Inc. v. Smith (1973) 32 Cal.App.3d 204, 211, fn. 11.) Section 10248.1 of article 7 expressly prohibits a mortgage loan broker from negotiating late fees other than those specified in section 10242.5. Borrowers may recover excessive charges from the person who took or received them and are entitled to treble damages except in cases of bona fide error. (§ 10246.) Or they may proceed against the broker. (§ 10248.2.) Their rights and remedies under article 7 are not waivable. (§ 10248.2, subd. (a).) Because they are established for a public purpose, the limitations on late fees in section 10242.5 may not be contravened by private agreement.

We conclude that the payment application requirement of section 10242.5 may be implied into the loans despite the loans' express terms. We consider next whether appellants' breach of contract claims, based on the implied incorporation of this requirement, are preempted by federal law.


The trial court ruled that appellants' breach of contract claim against Wells Fargo*fn6 was preempted by the NBA and its implementing regulations, and that the same claim against Aurora*fn7 was preempted under the HOLA and its regulations. Appellants rely on the savings clauses in two preemption regulations, regarding real estate lending by national banks and federal savings associations. (12 C.F.R. §§ 34.4(b)(1) (2009), 560.2(c) (1997).)*fn8 The differences between the two regulatory schemes bear on the preemption analysis, if not on the result, and we therefore discuss preemption under the NBA and the ...

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