BILL ANALYSIS Ó
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2013-2014 Regular Session
SB 426 (Corbett)
As Amended April 1, 2013
Hearing Date: April 23, 2013
Fiscal: No
Urgency: No
BCP
SUBJECT
Civil Procedure: deficiency judgments
DESCRIPTION
Existing law includes several anti-deficiency statutes that
prohibit a deficiency judgment against a homeowner after a
non-judicial foreclosure, as specified, or for loans that are
considered "purchase money." This bill would expand those
statutes by additionally providing that any deficiency shall not
be owed or collected under those circumstances.
BACKGROUND
California has several anti-deficiency statutes that seek to
protect individuals from a "deficiency judgment" when their home
is sold for less than is owed on their loan. Absent those
statutes, a lender who suffers a loss as the result of the sale
(in other words, selling the property for less than the balance
of the loan) could potentially bring an action seeking recovery
of the amount lost, the "deficiency," as the result of the sale.
To protect homeowners, one section bars a lender from seeking a
judgment for any deficiency following a non-judicial
foreclosure. That protection is limited to the specific note
that was foreclosed upon. (Code Civ. Proc. Sec. 580d.)
Another section prohibits a deficiency judgment for loans that
were used to "pay all or part of the purchase price." (Those
loans are often referred to as "purchase money.") That
protection, which applies after sale of the property, is limited
to loans securing owner-occupied dwellings of not more than four
families. (Code Civ. Proc. Sec. 580b.) Last year, SB 1069
(more)
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(Corbett, Chapter 64, Statutes of 2012) amended that provision
to provide that a "purchase money" loan does not lose its
anti-deficiency protection when refinanced. That additional
protection applies only to refinances occurring after January 1,
2013 and does not apply to any additional principal pulled out
in the refinance.
This bill, sponsored by Housing and Economic Rights Advocates
and the California Reinvestment Coalition, would expand the
above protections by providing that no deficiency is owed or
collected after the sale of the home.
CHANGES TO EXISTING LAW
Existing law provides for procedures by which a money judgment
(a "deficiency judgment") can be sought for the balance due on
an obligation for the payment for which a deed of trust or
mortgage was given as security. A court may render judgment for
not more than the amount by which the entire amount of
indebtedness due at the time of sale exceeded the fair market
value of the real property or interest therein sold at the time
of sale, with interest from the date of sale, as specified.
(Code Civ. Proc. Sec. 580a.)
Existing law prohibits a deficiency judgment in either of the
following circumstances: (1) after a sale of real property or an
estate for years therein for failure of the purchaser to
complete his or her contract of sale; or (2) under a deed of
trust or mortgage given to the vendor to secure payment of the
balance of the purchase price of the real property or estate for
years. (Code Civ. Proc. Sec. 580b.)
Existing law additionally prohibits a deficiency judgment after
the sale of real property under a deed of trust or mortgage on a
dwelling for not more than four families. That provision
applies to "purchase money" loans that were used to pay all or a
part of the purchase price of the dwelling that was occupied by
the purchaser. (Code Civ. Proc. Sec. 580b.)
Existing law prohibits a deficiency judgment on any loan,
refinance, or other credit transaction that is used to refinance
a purchase money loan, or subsequently refinances a purchase
money loan, except to the extent that the lender or creditor
advances new principal, as specified. (Code Civ. Proc. Sec.
580b.)
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Existing law prohibits a deficiency judgment on a note secured
by a deed of trust or mortgage in any case in which the property
has been sold by the mortgagee or trustee (lender) under a power
of sale contained in the mortgage or deed of trust. (Code Civ.
Proc. Sec. 580d.)
This bill would, in each of the above situations where a
deficiency judgment is prohibited, additionally prohibit a
deficiency from being owed or collected.
COMMENT
1. Stated need for the bill
According to author:
Anti-deficiency protection for residential borrowers is a
longstanding policy in California. California law protects
borrowers against deficiency judgments in specified
situations, including after short sales and non-judicial
foreclosures and when a loan was used to purchase the
property. However, two important anti-deficiency provisions
do not include explicit language regarding the status of the
debts following foreclosure. Some creditors and debt
collectors continue to contact and even harass borrowers
after foreclosure in order to collect the debts by
non-judicial means, maintaining that the anti-deficiency
statutes leave the debt due and owing even if it cannot be
collected in court. These creditors and debt collectors
also continue to report the debts as delinquent on
borrowers' credit reports, making it more difficult for
borrowers to rebuild their credit after a foreclosure.
SB 426 makes . . . simple amendments to . . . clarify that
deficiencies on subject loans shall not be owed or
collected.
2. Expanding anti-deficiency provisions to include a ban on
collection
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Under existing law, when an individual takes out a loan to
purchase a home, that loan is protected from a deficiency
judgment under Code of Civil Procedure Section 580b. Since
there can be no deficiency judgment following a "sale" of the
property, the loan is considered to be "non-recourse" and the
borrower cannot be subject to a deficiency judgment following
the sale of the property. On the other hand, if the borrower
subsequently takes out a home equity loan, or another loan that
is not used to purchase the property, that loan is considered
"recourse" because the borrower could potentially have personal
liability following the sale. Similarly, under existing law, if
a lender sells a home under the power of sale clause contained
in a mortgage or deed of trust (in other words, non-judicial
foreclosure), the borrower cannot be subject to a deficiency
judgment.
This bill seeks to additionally provide that where a deficiency
judgment is prohibited in the above situations, the deficiency
is no longer owed and cannot be collected. The Center for
Responsible Lending, in support, asserts that:
Some creditors and debt collectors continue to contact and
even harass borrowers after foreclosure in order to attempt
to collect the debt, maintaining that the anti-deficiency
statutes leave the debt due and owing even if it cannot be
pursued through the courts. Borrowers are not likely to
understand the nuanced legal distinction between debts that
are or are not subject to deficiency judgments, and may be
convinced by collectors to make payments even though debts
cannot be legally enforced. Creditors and debt collectors
also continue to report debts as delinquent on borrowers'
credit reports, making it more difficult for borrowers to
rebuild their credit after foreclosure.
Staff notes that the debts covered by this bill are already
protected from a deficiency judgment, and, as a result, arguably
would have little to no value to debt buyers. In response to
Committee staff's inquiry regarding the problem faced by
foreclosed homeowners, the author's office provided the
following examples:
Borrower purchases house in Napa, CA, with two loans and
never refinances. Borrower goes into default, and the first
lender forecloses on 6/30/10. On 9/14/12, borrower receives
a collections letter from a debt collector (LCS Financial
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Services) on behalf of the second lender (Sun Trust) that
states that borrower "owes" over $100,000 on the second
loan. []
Borrower purchases a house in Hercules, CA, with two loans
and never refinances. Borrower goes into default, and the
first lender forecloses on 9/16/11. After the foreclosure,
borrower receives several collections calls seeking payment
of the second loan. On 10/30/12, borrower receives a
collections/debt validation letter from NSM Recovery
Services on behalf of Citi Mortgage regarding an
"outstanding balance" of over $41,000 on the second loan.
Borrower learns that Citi Mortgage also continues to report
the second loan as delinquent on her credit report.
Borrower purchases a house in Hercules, CA, with two loans
and never refinances. Borrower goes into default, and the
first lender forecloses in 2007. After the foreclosure,
second lender attempts to collect on the purchase-money
second loan and reports the borrower delinquent on that
loan. The negative credit reporting is making it very
difficult for her to rent an apartment.
As a result, the issue appears to be with what are usually
called "sold out junior lienholders," in other words, the
holders of junior mortgages who lost their secured interest in
the home as a result of the non-judicial foreclosure. In each
of the above circumstances, the first lien was foreclosed upon
and, as a result, the second lien was wiped out. Although
borrowers may have liability if a second loan is not purchase
money, the author asserts that the loans in the above
circumstances are purchase money "non-recourse" loans. Thus,
the policy question raised by this bill is whether the holder of
a mortgage or deed of trust who is prohibited by law from
seeking a deficiency judgment should also be prohibited, in that
circumstance, from attempting to collect that deficiency.
Staff notes that, as a matter of public policy, restricting the
ability of lenders to collect on deficiencies after a
foreclosure would appear to further enable foreclosed homeowners
to move on with their lives. Furthermore, since it is not
possible for those same lenders to seek a deficiency judgment,
it is unclear why a lender would attempt to aggressively collect
on a deficiency when there is no ability to seek a legally
binding judgment. As a result, this bill could potentially have
the effect of preventing confusing calls on the part of a sold
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out junior lienholder to foreclosed homeowners who are, as a
practical matter, unable to pay the requested amount.
3. Prohibiting an amount from being owed
In addition to prohibiting the collection of a deficiency after
a foreclosure, this bill would additionally state that no
deficiency shall be "owed" in those same circumstances. The
Center for Responsible Lending (CRL), in support, notes that
"[c]reditors and debt collectors [] continue to report the debts
as delinquent on borrowers' credit reports, making it more
difficult for borrowers to rebuild their credit after a
foreclosure." Staff notes that saying an amount is no longer
owed is different than stating that you cannot attempt to
collect the amount - in one circumstance, the debt still exists
but the creditor lacks the ability to seek recovery, in the
other circumstance, the debt technically no longer exists so
there is nothing to collect (or report to a credit bureau).
Regarding the ability of the Legislature to, by statute, remove
a debt; supporters note that Section 580e of the Code of Civil
Procedure (which provides deficiency judgment protection after a
short sale) already contains language similar to that proposed
by this bill, including the express statement that no deficiency
is owed following a short sale. Furthermore, because existing
law already prohibits deficiency judgments in the situations
covered by this bill, the parties holding the loans in question
arguably do not expect to be able to recover any amounts from
the foreclosed homeowner.
Housing and Economic Rights Advocates, co-sponsor, further
asserts that including "owed" in this legislation is essential
to preventing adverse reporting to credit bureaus after
foreclosure - in other words, as noted in one of the examples
above, the inclusion of the word "owed" is intended to prevent a
lender from continuing to report a loan as delinquent after
foreclosure by eliminating the underlying debt itself.
4. Underlying purpose of anti-deficiency statutes
The anti-deficiency statutes amended by this bill each serve
unique policy goals. With respect to Section 580b of the Code
of Civil Procedure (anti-deficiency protection for purchase
money loans), the California Supreme Court previously stated:
Historically we have discerned two reasons for the
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Legislature's decision to protect purchasers in purchase
money secured land transactions. First, section 580b is a
transaction-specific stabilization measure: it stabilizes
purchase money secured land sales by keeping the vendor from
overvaluing the property and by suggesting to the purchaser
its true value. Second, it is a macroeconomic stabilization
measure: if property values drop and the land is foreclosed
upon, the purchaser's loss is limited to the land that he or
she used as security in the transaction, purchasers as a
class are harmed less than they might otherwise be during a
time of economic decline, and the economy benefits.
(DeBerard Properties v. Lim (1999) 20 Cal.4th 659, 663.)
Similarly, California's Court of Appeal, Third Appellate
District, noted with respect to Section 580d of the Code of
Civil Procedure (anti-deficiency protection for the loan that
was subject to non-judicial foreclosure):
The purpose of section 580d is to put judicial foreclosure
on parity with private foreclosure. When a creditor
judicially forecloses, the debtor retains the right to
redeem the property and this right has the effect of
insuring that the security will satisfy a realistic share of
the debt. In a nonjudicial foreclosure there is no right to
redeem, but the proscription against a deficiency judgment
has a comparable effect of making the security satisfy a
realistic share of the debt. Thus, the creditor may elect a
nonjudicial foreclosure, in which case the sale transfers
nonredeemable title but no deficiency judgment may be
sought, or he may proceed with a judicial sale in which he
can obtain a deficiency judgment but title is redeemable.
(Passanisi v. Merit-McBride Realtors, Inc. (1987) 190
Cal.App.3d 1496, 1507-1508; citations omitted.)
Staff notes that given the above-stated historical purposes for
the existing anti-deficiency protection, the additional
prohibitions proposed by this bill appear to be consistent with
the underlying rationale for the existing anti-deficiency
protections.
Support : California Association of Realtors; Center for
Responsible Lending
Opposition : None Known
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HISTORY
Source : California Reinvestment Coalition; Housing and Economic
Rights Advocates
Related Pending Legislation : None Known
Prior Legislation :
SB 1069 (Corbett, Chapter 64, Statutes of 2012) See Background.
SB 458 (Corbett, Chapter 82, Statutes of 2011), expanded
anti-deficiency protection for short sales.
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