BILL ANALYSIS
SENATE COMMITTEE ON BANKING, FINANCE,
AND INSURANCE
Senator Ronald Calderon, Chair
SB 306 (Calderon) Hearing Date: April 1, 2009
As Introduced February 25, 2009
Fiscal: No
Urgency: No
SUMMARY Would enact technical and clarifying changes to the
Escrow Law and clean up certain provisions of SB 1137 (Chapter
69, Statutes of 2008).
DIGEST
Existing law
1. Provides rules by which an entitled person, as defined, may
request a payoff demand statement in connection with a mortgage
or deed of trust, and defines a payoff demand statement as a
written demand made by an entitled person or authorized agent,
setting forth the amounts required as of the date of preparation
by the beneficiary (generally, the lender), to fully satisfy all
obligations secured by the loan that is the subject of the
payoff demand statement (Civil Code Section 2943). Also
requires the following in connection with a payoff demand
statement:
a. The statement must include information reasonably
necessary to calculate the payoff amount on a per diem basis
for the period of time, not to exceed 30 days, during which
the per diem amount is not changed by the terms of the note;
b. The beneficiary or his or her authorized agent must
prepare and deliver the payoff demand statement to the
entitled person within 21 days of receiving the demand for
it;
c. However, if the loan is subject to a recorded notice of
default (NOD) or a filed complaint commencing a judicial
foreclosure, the beneficiary is under no obligation to
prepare and deliver a payoff demand statement, unless the
written demand for the statement is received prior to the
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first publication of a notice of sale, or the notice of the
first date of sale established by a court;
2. Defines an exchange facilitator (EF), as specified; requires
EFs doing business in California to meet specified financial
criteria and comply with specified requirements related to their
custodianship of money and property involved in Section 1031
real property exchanges; and establishes specified prohibitions
which apply to EFs doing business in California (Financial Code
Section 51000 et seq.);
3. Establishes the Escrow Agents' Fidelity Corporation (EAFC) to
provide fidelity coverage to escrow agents, as specified, and
requires each person licensed under the Escrow Law, who is
engaged in the business of receiving specified types of escrows
within California, to participate as a member in EAFC (Financial
Code Sections Section 17312 and 17314);
4. Regulates the non-judicial foreclosure process pursuant to
the power of sale contained within a mortgage contract or
deed of trust, and provides that in order to commence the
non-judicial foreclosure process, a trustee, mortgagee, or
beneficiary must record a NOD and allow three months to
lapse before setting a date for sale of the property (Civil
Code Section 2924). Further requires the following, in
connection with the filing of an NOD:
a. Prior to recording an NOD, a mortgagee, trustee,
beneficiary, or authorized agent is required to make a
due diligence effort, as defined, to contact a borrower,
for purposes of assessing the borrower's financial
situation and exploring options for avoiding foreclosure;
b. That mortgagee, trustee, beneficiary, or authorized
agent is required to wait at least 30 days after making
contact with a borrower or upon exhausting its due
diligence efforts to contact the borrower, before
recording an NOD;
c. The aforementioned 30-day period in which a due
diligence effort must be made to contact the borrower
does not apply if the borrower has surrendered the
property to the mortgagee, trustee, beneficiary, or
authorized agent; the borrower has contracted with an
organization, person, or entity whose primary business is
advising people who have decided to leave their homes on
SB 306 (Calderon), Page 3
how to extend the foreclosure process; or the borrower
has filed for bankruptcy, and the proceedings have not
yet been finalized.
This bill
Payoff Demand Changes
1. Would establish a minimum period of time that a payoff
demand statement must be valid, as the lesser of: a) ten
days from the date of preparation by the beneficiary, or b)
the number of days from the date of preparation by the
beneficiary until the terms of the note result in a change
in the per diem amount;
2. Would define a short-pay agreement as an agreement, in
writing, in which the beneficiary agrees to release its lien
on a property in return for payment of an amount less than
the secured obligation;
3. Would define a short-pay demand statement as a written
agreement, conditioned on the existence of a short-pay
agreement, which is prepared in response to a written demand
made by an entitled person or an authorized agent, setting
forth an amount less than the outstanding debt, together
with any terms and conditions, under which the beneficiary
will execute and deliver a reconveyance of the deed of trust
securing the note that is the subject of the short-pay
demand statement;
4. Would provide that a short-pay demand statement shall be
valid for the same length of time as a payoff demand
statement (i.e., a period of time that is no greater than 30
days from the date of preparation by the beneficiary and no
less than the lesser of: a) ten days from the date of
preparation by the beneficiary, or b) the number of days
from the date of preparation by the beneficiary until the
terms of the note result in a change in the per diem
amount);
5. Would require a beneficiary or his or her authorized agent
to provide a short-pay demand statement to an entitled
person or his or her authorized agent within 21 days of
receiving a demand for the statement from the entitled
person or his or her agent, but would provide that if a
beneficiary or his or her authorized agent elects not to
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proceed with the short-sale transaction, he or she is not
required to provide a short-pay demand statement; instead,
the beneficiary or his or her authorized agent is required
to provide a written statement regarding its decision not to
proceed with the transaction, within 21 days of receiving
the demand for the short-pay demand statement;
6. Would further provide that if the terms and conditions of
the short-pay agreement require approval by the beneficiary
of a closing statement or similar document prepared by the
escrow holder, approval or disapproval must be provided no
more than four days after the beneficiary receives the
closing statement, except as specified;
EAFC Coverage Clarification
7. Would explicitly exempt money or property held by or
deposited with a person acting as an EF from real property
escrows for which EAFC is required to provide fidelity
coverage;
SB 1137 Cleanup
8. Would clarify that the 30-day period during which a
mortgagee, trustee, beneficiary, or authorized agent must
contact a borrower or make due diligence efforts in that
regard expires 30 days after initial contact is made;
9. Would shorten the declaration that a mortgagee,
beneficiary, trustee, or authorized agent is required to
make when it records an NOD by eliminating the requirement
to identify whether a borrower has surrendered his or her
property;
10. Would redefine a borrower as a natural person or persons
who are original signators to a note or other obligation
secured by a mortgage or deed of trust;
11. Would redefine a pending bankruptcy case as one in which
a case has been filed by the borrower under Chapter 7, 11,
12, or 13 of Title 11 of the United States Code and in which
the bankruptcy court has not entered an order closing or
dismissing the bankruptcy case, or granting relief from a
stay of foreclosure;
12. Would tighten the definition of mortgages or deeds of
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trust to which SB 1137 applies, by clarifying that the bill
applies to mortgages or deeds of trust recorded from January
1, 2003 through December 31, 2007, secured by residential
real property containing no more than four dwelling units,
which includes the principal residence of the borrower, as
indicated by the borrower to the lender in loan documents;
13. Would restate legislative findings and declarations
regarding the obligations of servicers to maximize the net
present value of an asset pursuant to a pooling and
servicing agreement;
14. Would clarify the procedures that must be followed when a
mortgagee, trustee, beneficiary, or authorized agent mails a
specified notice to the resident of a property on which
foreclosure proceedings have begun, by requiring the notice
to be sent via first-class mail, concurrently with the
notice of sale, which is already required to be mailed to
the trustor, mortgagor, and other entitled parties pursuant
to Civil Code Section 2924b;
15. Would make other minor and technical clarifying changes.
COMMENTS
1. Purpose of the bill To enact three separate proposals.
The first proposal is intended to ensure that escrow agents
receive payoff statements from lenders that are valid
through the close of real estate transactions, thus allowing
the escrow agents to disburse funds in accordance with
valid, rather than expired, payoff statements, and allowing
property titles to transfer cleanly. The second proposal
clarifies that EAFC is not required to cover escrow account
fidelity losses, once an exchange facilitator has control
over escrowed money or property involved in a 1031 exchange.
The third proposal enacts technical changes intended to
clarify the operation of several provisions of SB 1137
(Chapter 69, Statutes of 2008).
2. Background Each of the three provisions of this bill is
described separately, below.
Payoff Demand Changes: Escrow agents hold funds for others
during real estate transactions, and disburse those funds to
parties involved in real estate transactions, in accordance
with escrow instructions. Because nearly all real property
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transactions involve mortgages, escrow agents rely on
lenders to provide the payoff statements needed to calculate
how much money to disburse to each party involved in the
transaction. Some lenders have begun providing payoff
statements to escrow agents that expire before the escrow
agent is able to disburse funds. Valid (unexpired) payoff
statements are required, to ensure that the title to a
property can be properly conveyed to the purchaser. Escrow
agents are seeking a change in the law to ensure that the
payoff statements they receive from lenders are valid for a
long enough period of time to allow them to disburse funds
in accordance with valid payoff statements, which, in turn,
allows property title to transfer cleanly.
Existing law specifies a maximum length of time that payoff
statements must be valid, but does not specify a minimum.
This bill would provide that minimum, by requiring payoff
statements to be valid for no lesser than the lesser of ten
days from date of preparation or the number of days from the
date of preparation by the beneficiary until the terms of
the note result in a change in the per diem amount. For
example, on a mortgage that is scheduled to reset on the
first of the month: Under the provisions of the bill, a
payoff demand statement prepared on the 16th of the month
would have to be valid for ten days. A payoff statement
prepared on the 25th of the month would have to be valid
until the end of the month.
SB 306 also creates a new type of payoff demand statement,
called a short-pay demand statement. As the number of short
sales has increased in the current housing downturn, escrow
agents have had trouble securing the valid payoff statements
they need from lenders during short sale transactions. The
changes contained in this bill are intended to allow escrow
agents to obtain valid payoff statements during short-sale
transactions.
EAFC Coverage Clarification: The Escrow Agents' Fidelity
Corporation (EAFC) was created to provide California's
licensed escrow agents with affordable fidelity coverage,
which they are required to hold as a condition of their
licensure. Fidelity coverage protects money, which is held
by escrow agents on behalf of others, against fraud in real
estate transactions. Section 1031 real property exchanges
(also known as tax-deferred exchanges, delayed exchanges,
non-simultaneous exchanges, like-kind exchanges, or Starker
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exchanges) allow taxpayers to sell one or more investment or
business properties and purchase one or more like-kind
replacement properties without having to pay capital gains
taxes on the transaction. In order for these transactions
to qualify for tax-preferred treatment, the seller cannot
have control over the sales proceeds; instead, the proceeds
transfer to an individual called an exchange facilitator,
who holds them until the close of the 1031 exchange.
EAFC believes that its coverage extends to concurrent exchanges
of real estate, and not delayed exchanges, such as Section
1031 exchanges. Thus, EAFC is seeking a statutory
clarification that it is not required to cover fidelity
losses from escrow accounts during the period of time that
an exchange facilitator has control over escrowed money or
property involved in a 1031 exchange.
SB 1137 Cleanup: SB 1137 (Perata, Chapter 69, Statutes of
2008) enacted changes intended to decrease residential
foreclosures, protect renters whose residences fall into
foreclosure, and give local governments more tools with
which to combat blighted, vacant foreclosed properties.
Enacted on an urgency basis, the measure included language
which has proved ambiguous in places. Trustees, the persons
who physically facilitate non-judicial foreclosures, have
requested language to clarify the operation of several of
the bill's provisions relating to nonjudicial foreclosure.
Justification for some of the more significant changes in
the bill follows:
Clarifying that initial contact starts the 30 day clock
will ensure that each subsequent contact with a borrower
does not continue to push back the start of the 30-day
period.
Shortening the declaration that a mortgagee, beneficiary,
trustee, or authorized agent is required to make conforms
the requirements of the declaration to a later section of
SB 1137, which lists multiple reasons why a lender might
not be required to contact a borrower pursuant to the
bill. At present, the law requires a declaration to be
included in the NOD regarding whether failure to contact
a borrower was a result of one of the permissible reasons
(but not the others). Under this bill, this provision is
changed to require the NOD to include a declaration that
the contact requirements were satisfied; if no contact is
SB 306 (Calderon), Page 8
made, the bill does not require the beneficiary to list
exactly why.
Redefining a borrower as a natural person is intended to
ensure that only individuals must be notified, not
corporations or other legal "persons" who might purchase
property. This change also clarifies that only original
signatories to the loan must be notified; beneficiaries
will not be required to notify individuals to whom a loan
may have been assigned, because this information is not
always known to the beneficiary.
Amending the definition of owner-occupied, residential
real property in the section of SB 1137 related to
borrower contact requirements is intended to clarify that
a borrower's representation is sufficient to determine
whether a property is an owner-occupied, principal
residence. This amendment is also intended to avoid the
possibility that the owner of a large apartment complex
could move into one of its units, and in doing so,
trigger SB 1137 borrower contact reporting requirements.
Redefining the meaning of pending bankruptcy proceedings
is intended to clarify a provision that has created
questions as to its meaning through its legal
imprecision.
Clarifying the delivery procedures to be followed
regarding one of the notices required to be sent is
necessary to reflect the fact that existing law imposes a
requirement on trustees that is sometimes impossible to
meet. As currently drafted, the law requires trustees to
mail this notice "at the same time" that the property is
posted with a notice of foreclosure sale. Trustees are
often unaware of the exact date a property is posted,
because they use a third party posting and publishing
company to physically post the notice. This bill directs
the trustee to mail the notice at a time certain that is
known to them (when they mail the notice of foreclosure
sale to the borrower and other specified parties listed
in existing law).
3. Support . The California Escrow Association is sponsoring
the provisions of this bill relating to payoff demand
statements; EAFC is sponsoring the provisions of this bill
related to EAFC coverage of escrowed money or property
SB 306 (Calderon), Page 9
involved in 1031 exchange transactions; and, the United
Trustees Association is sponsoring the SB 1137 clean-up
provisions of this bill.
4. Opposition None received.
5. Prior Legislation
a. SB 1007 (Machado), Chapter 708, Statutes of
2008: Defined the term exchange facilitator (EF), in
connection with Section 1031 exchanges, enacted
specified rules for EFs doing business in California,
and enacted specific prohibitions against certain acts
by EFs doing business in California.
b. SB 1137 (Perata et al.), Chapter 69, Statutes
of 2008: Sunsets January 1, 2013. Required
beneficiaries and their agents to attempt to contact
borrowers to discuss options for avoiding foreclosure
before recording an NOD on certain mortgages and deeds
of trust; required beneficiaries and their agents to
notify residents of properties on which foreclosure
proceedings have been initiated about their rights, in
English and specified foreign languages; gave tenants
renting property on which a beneficiary forecloses up
to 60 days to vacate the property; and authorized
local governments to impose specified fines on the
owners of vacant, residential properties acquired
through foreclosure, when these owners fail to
maintain that property.
POSITIONS
Support
California Escrow Association (co-sponsor)
Escrow Agents Fidelity Corporation (co-sponsor)
United Trustees Association (co-sponsor)
Oppose
None received
Consultant: Eileen Newhall (916) 651-4102