BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 127
Senator Calderon
As Introduced
Hearing Date: May 12, 2009
Civil Code
BCP:jd
SUBJECT
Mortgages
DESCRIPTION
Existing law governs both the non-judicial foreclosure process
and the trustee's sale at which foreclosed properties are sold.
To provide greater information to prospective bidders about
properties sold at a trustee's sale, this bill would require a
mortgagee or trustee to make specified disclosures on an
Internet Web site or in a 24-hour telephone recording at least
one week before the scheduled sale of a property. This bill
would additionally:
require a beneficiary to provide an opening bid to a trustee
at least one week prior to the first scheduled sale date; and
require a trustee to provide a list of liens and encumbrances
on a foreclosed property and to charge a reasonable fee for
that information, as specified.
This bill would also expand the trustee's current exemption from
liability for good faith errors, as specified, and create a new
immunity for title and escrow companies, as specified.
BACKGROUND
In California, the nonjudicial foreclosure process begins with
the filing of a Notice of Default and concludes with a trustee's
sale where the property is sold to the highest bidder. If there
are no bids over and above the opening bid, the property reverts
back to the lender or servicer who placed that opening bid
(thus, becoming a bank-owned property). Those lenders are then
left with an abundance of properties that may then be sold or
(more)
SB 127 (Calderon)
Page 2 of ?
auctioned off at a later date. Until their later sale, those
foreclosed homes are generally unoccupied and risk becoming a
nuisance to surrounding properties or subject to vandalism or
theft.
This bill seeks to address the above issues by providing
additional information to prospective bidders prior to the
trustee's sale at which the property is initially sold. If
those properties are directly purchased by individual bidders
(instead of reverting back to the lender), the above issues
relating to bank-owned properties may be mitigated.
Specifically, this bill would require the posting of information
at least one week before a scheduled sale date, and would allow
a person to request a list of liens and encumbrances on the
property. This bill would also expand the current immunity for
trustees in the nonjudicial foreclosure process, and create a
new immunity for title and escrow companies, as specified.
CHANGES TO EXISTING LAW
1. Existing law regulates the non-judicial foreclosure of
properties pursuant to the power of sale contained within a
mortgage contract. To commence the process, existing state
law requires the trustee, mortgagee, or beneficiary to record
a Notice of Default and allow three months to lapse before
setting a date for sale of the property. (Civ. Code Secs.
2924, 2924f.) Existing law governs the issuance of the Notice
of Sale, and requires that notice to be recorded at least 14
days prior to the date of sale. (Civ. Code Sec. 2924f.)
Existing law requires a mortgagee, trustee, or other person
authorized to record the Notice of Default or Notice of Sale
to make specified disclosures after the recording of those
notices and prior to the sale of the property. (Civ. Code
Sec. 2924b.)
This bill would additionally require the mortgagee, trustee,
or other person authorized to record the notice of sale to
make information available about each property at least one
week before sale.
This bill would require that information to be posted on an
Internet Web site or in a telephone recording that is
accessible 24 hours a day, at least one week before the
scheduled sale of property. The information shall include:
(1) a contact name and phone number; (2) the identifying
SB 127 (Calderon)
Page 3 of ?
number for the sale of the property; (3) the date, time, and
location of the sale; (4) the estimated total amount of debt;
(5) the minimum opening bid, if any; (6) the outcome of the
auction, as specified; and (6) a statement that any interested
bidder may request information about liens and encumbrances
for a reasonable fee. Any errors must be corrected as soon as
practicable after identifying the error or being informed of
the error.
This bill would, upon oral, written, or electronic request by
a person, and if known by the trustee, require the trustee to
provide a list of the liens and encumbrances on a property as
of a date certain. The trustee may charge a reasonable fee
not to exceed $30, per property, for providing that
information.
This bill would require each beneficiary (i.e., the lender) to
provide an opening bid on property to the trustee at least one
week prior to the first scheduled sale date. The beneficiary
may update that bid at any time prior to sale, and the trustee
shall update its information regarding the sale on its phone
recording or Internet Web site as soon as practicable after
receiving the revised opening bid. A beneficiary who provides
an opening bid to a trustee may accept a higher bid on the
property.
This bill would also extend the time during which the notice
of sale must be recorded from 14 to 20 days.
2. Existing law generally regulates the conduct of trustees in
the above process, and their actions at the resulting
trustee's sale. (Civ. Code Sec. 2924h.) Existing law also
exempts a trustee from liability for any good faith error
resulting from reliance on information provided in good faith
by the beneficiary regarding the nature and the amount of the
default. (Civ. Code Sec. 2924(b).)
This bill would, instead, exempt a trustee from liability for
any good faith error resulting from reliance on information
provided in good faith by the beneficiary, or resulting from
any clerical error the trustee makes, despite adherence to
procedures intended to prevent the error.
This bill would additionally exempt a trustee from liability
for any good faith error resulting from reliance on
SB 127 (Calderon)
Page 4 of ?
information provided in good faith by third parties who
perform title and records searches. That immunity would apply
only when the trustee, as required by this bill, provides a
list of liens and encumbrances in response to a request.
This bill would exempt a title insurance company, underwritten
title company, or controlled escrow company from liability
with respect to the validity of information the company
provides in good faith to a trustee, and which is subsequently
requested of the trustee by a third party.
3. Existing law limits the costs and expenses that may be
charged in the nonjudicial foreclosure process to, among other
things, the costs incurred for the recording, mailing,
publishing, and posting of notices. (Civ. Code Sec.
2924c(c).)
This bill would include the cost of posting information on an
Internet Web site or making that information available on a
24-hour telephone recording.
COMMENT
1. Stated need for the bill
According to the author:
California's housing market is currently suffering from
historically high rates of default and foreclosure. Nearly
250,000 properties were sold through non-judicial
foreclosure in California during 2008, and nearly all of
those properties (96.4%) reverted to the lender, after no
bid was received on the property from a third party.
Lenders are trying to draw bids from third parties by
discounting properties sharply, but are still failing to
attract bidders. In December 2008, 40% of the properties up
for auction on the courthouse steps were discounted by at
least 50%.
When lenders take back properties through non-judicial
SB 127 (Calderon)
Page 5 of ?
foreclosure, the properties often remain unoccupied and
unsold for months. Financial institutions are overwhelmed
by the vast number of properties they have taken back onto
their books, and are selling these properties any way they
can - often at deep discounts. These vacant, deeply
discounted properties are depressing property values in the
neighborhoods in which they are located, harming
hard-working, neighboring homeowners who are watching their
own home values plummet through no fault of their own.
Decreasing the number of properties that revert to financial
institutions on the courthouse steps by increasing the
number of people who bid at non-judicial foreclosure sales
will help reverse harmful housing trends in several ways.
First, the properties will spend less time vacant, which, in
turn, will reduce levels of blight and other problems, like
theft and vandalism, which frequently characterize vacant,
foreclosed properties. Second, housing values will begin to
stabilize at levels higher than those at which the banks are
currently selling their bank-owned inventory. Third,
reducing the number of bank-owned properties will help free
financial institutions to focus on helping borrowers before
they enter foreclosure.
2. Immunity provisions
By requiring the posting of information relating to foreclosure
sales, this bill would require trustees to provide borrowers
with essential information about a foreclosed property with the
intended result of increasing the number of individuals who do
bid (and as a result purchase properties) at trustee's sales.
To provide liability protection for the entities who would
provide information regarding foreclosed properties, this bill
would expand an existing immunity for trustees, and create a new
immunity for a title insurance, title, or escrow company.
a) Expanded immunity for trustees
In the nonjudicial foreclosure process, trustees are the
individuals who are enlisted to file the notice of default,
notify necessary parties, and conduct the sale of the property
in accordance with statute. Those trustees currently have no
liability under existing law for good faith errors that result
from their reliance on specified information provided in good
faith by the beneficiary (the lender or servicer). This bill
would revise that immunity to cover good faith errors
SB 127 (Calderon)
Page 6 of ?
involving any information provided in good faith by the
beneficiary, or resulting from any clerical error the trustee
makes despite adherence to procedures intended to prevent the
error.
The author's staff notes that the revised immunity is intended
to ensure that trustees are not held liable for complying with
their proposed statutory duties. Although a trustee arguably
should not be liable when performing statutorily required
actions in good faith (posting provided information on a
Internet Web site or telephone hotline), the bill should be
amended to narrow the proposed immunity by clarifying that:
(1) the good faith requirement also applies to the immunity
regarding clerical errors; and (2) the new immunity for
clerical errors only applies with regards to information
posted on their Internet Web site or phone recording.
Suggested amendment :
1) On page 3, line 27 after "any" insert:
good faith
2) On page 3, line 28 after "makes" insert:
when complying with the requirements of subdivision (g) of
Section 2924b
b) Immunities relating to liens and encumbrances
In addition to posting information, this bill would require a
trustee, upon request, to provide a list of liens and
encumbrances on a foreclosed property, and allow the trustee
to charge a reasonable fee for that information. (See Comment
4.) The author notes that the trustee's source of information
regarding those liens and encumbrances would be a trustee sale
guarantee (TSG) or similar product. (A TSG provides a trustee
with necessary information about a property in foreclosure,
including individuals who must receive notice, owners of the
property, lien information, and publication requirements, and
includes a limited guarantee against losses as a result of
incorrect information.) It should be noted that those
products are provided to trustees so that they have the
information necessary to fulfill their current duties
(including notice to subordinate lienholders, publication
requirements, and distribution of proceeds). Those products
SB 127 (Calderon)
Page 7 of ?
are not currently provided with the intent that the included
information be subsequently relayed to a third party.
Accordingly, this bill would not impose liability on a title
or escrow company with respect to any information that is
provided to a trustee, in good faith, and which is
subsequently requested by a third party. The author notes
that this immunity is intended to protect those companies from
liability to third parties who may receive that information
from the trustee. In response to concerns about the breadth
of the proposed immunity, the author has agreed to remove the
proposed immunity with the understanding that the author's
staff will continue to work with committee staff to craft an
immunity that is appropriate to the circumstances.
Amendment:
On page 5, strike out lines 1 through 5, inclusive.
The bill would also grant a similar immunity for trustees when
they provide information, in good faith, regarding liens and
encumbrances on a foreclosed property. The author has also
agreed to strike this provision with the understanding that
the author's staff will continue to work with committee staff
to craft an immunity that is narrowly tailored to the
circumstances in which the trustee provides that information
(which, in itself, is generated by a third party).
Amendment:
On page 4, strike out lines 36 through 39, inclusive.
From a public policy standpoint, the consequences of granting
both those immunities should be balanced against the benefit
to prospective bidders (and the public at large) as a result
of the disclosure of that information. The rationale for
providing escrow and title companies with a narrow immunity is
that their products are not intended for use by a party other
than the trustee. Similarly, the trustees should be granted a
narrow immunity from inaccuracies in the data they provide to
prospective bidders because they are statutorily required to
act as the conduit between those companies and the borrower.
That immunity should not extend beyond the ministerial tasks
that the trustees are required to perform pursuant to this
bill.
SB 127 (Calderon)
Page 8 of ?
3. Benefits of posting information
As noted above, nearly all of the properties sold through
non-judicial foreclosure in California reverted back to the
lender after receiving no bids. Those bank-owned properties
often remain unoccupied for months, raise the issue of
maintenance (required pursuant to SB 1137 (Perata, Corbett,
Machado)), and are at risk of other serious problems, such as
vandalism and blight, that affect the surrounding community.
This bill is intended to address the above issues by
facilitating the sale of properties at the trustee's sale -
thus, encouraging properties to be transferred directly from a
defaulting borrower to a new homeowner (instead of reverting to
the lender). To accomplish that goal, this bill would require a
mortgagee, trustee, or beneficiary to post specified information
about a property on an Internet Web site or a 24-hour telephone
recording at least one week prior to the sale date of the
property. This bill would also require a beneficiary (the
lender) to provide an opening bid to the trustee at least one
week prior to the first scheduled sale date, and require the
trustee to place that minimum bid on their Internet Web site or
phone recording.
The author notes that much of the information is not currently
available to bidders, and that it is currently difficult for
potential bidders to find out where and when to go, as well as
the minimum opening bid, if any.
4. Ability to request liens and encumbrances
As a general rule, a bidder who purchases a property at a
trustee's sale receives title that is free of all claims
subordinate to the mortgage or deed of trust under which the
sale was made. Subordinate claims are generally those that were
recorded after the mortgage or deed of trust that was foreclosed
on (unless there is a subordination agreement). The purchased
property does remain subject to all senior liens, including
liens for property taxes, and the bidder must satisfy those
liens or risk foreclosure by the holder of those interests.
The author states that the unknown nature of these liens "can
make bidding a risky proposition, because the winning bidder
must satisfy all outstanding [senior] liens and encumbrances on
a property, before taking possession of it." That situation
arises when the bidder bids on a junior lien, but later
discovers there are senior liens on the property that must be
SB 127 (Calderon)
Page 9 of ?
satisfied. To address that issue, this bill would allow any
person to request information about liens and encumbrances from
the trustee, and allow the trustee to charge a reasonable fee,
not to exceed $30, for that information. The author notes that
this provision is based on an Arizona statute - that statute
allows the trustee to recover between $30 and $100 for similar
information. (A.R.S. Sec. 33-809.) The author notes that this
information is not readily available to bidders because many
title and escrow companies do not currently offer title searches
on foreclosed properties.
While the bill does not specify how a trustee will know
information about liens and encumbrances on the property, the
author's staff notes that the trustee may receive that
information from a TSG, title search, or other product that
would have been purchased to aid the trustee in the foreclosure.
(See Comment 2(b).) Depending on the type of products
purchased, that product may, or may not, disclose all liens,
including government tax liens which take priority.
Additionally, the bill's definition of liens and encumbrances
would exclude taxes or assessments, reservations in patents,
easements, rights-of-way, reservation of mineral rights,
covenants, conditions, or restrictions.
Given the potentially incomplete information, the bill should be
amended to require the trustee to notify consumers that the
information provided may not contain all outstanding liens and
encumbrances, and of the exemptions to the definitions of liens
and encumbrances.
Suggested amendments:
1) On page 4, line 32 after the period, insert:
That list shall include a statement that the provided
information may not disclose all liens and encumbrances, and,
that the information does not include any information
regarding taxes or assessments, reservations in patents,
easements, rights-of-way, reservation of mineral rights,
covenants, conditions or restrictions.
2) On page 11, line 9 after the period, insert:
The statement shall also notify the borrower that the
information may not disclose all liens and encumbrances, and
that the provided list of liens and encumbrances will not
include any information regarding taxes or assessments,
SB 127 (Calderon)
Page 10 of ?
reservations in patents, easements, rights-of-way, reservation
of mineral rights, covenants, conditions or restrictions.
5. Trustees able to recoup costs incurred in posting
information
Under existing law, trustees may only be reimbursed for costs
and expenses that are authorized by statute. Those costs and
fees are currently limited to the costs incurred in recording,
mailing, publishing, posting specified notices, a fee not to
exceed $50 for postponement, and the purchase of a trustee's
sale guarantee. This bill would additionally allow a trustee to
be reimbursed for the cost of posting information on an Internet
Web site or making that information available on a 24-hour phone
recording, as required by this bill.
Consistent with the $50 cap on the fee that may be charged for a
postponement, and the requirement that a trustee sale's
guarantee must be at a rate meeting specified standards, the
Committee should consider whether the bill should be amended to
include a specific cap (such as $50) on the amount that may be
charged for the posting of information on the Internet Web site
or phone recording. Those costs and fees are recovered by the
trustee upon the sale of the property from the sale proceeds.
(Civ. Code Sec. 2924k.)
Suggested Amendment:
On page 15, line 32 after 2924b insert:
not to exceed fifty dollars ($50)
Support : None Known
Opposition : None Known
HISTORY
Source : Author
Related Pending Legislation :
SB 109 (Calderon), would delete the exemption for sales of real
property under the Auction law, thereby bringing specified real
property auctions within those restrictions. This bill is
currently in the Senate Committee on Appropriations.
SB 127 (Calderon)
Page 11 of ?
Prior Legislation :
SB 1137 (Perata, Corbett, Machado, Chapter 69, Statutes of
2008), enacted changes to the procedures that must be followed
before the holder of a mortgage may issue a notice of default or
notice of trustee sale, requires the holder of a mortgage to
mail a specified notice to the tenant(s) of a property on which
foreclosure proceedings have begun, and imposes penalties on
property owners who fail to adequately maintain foreclosed
properties, as specified.
**************