BILL ANALYSIS                                                                                                                                                                                                    






                             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  
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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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