BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 426
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          Date of Hearing:   June 18, 2013

                           ASSEMBLY COMMITTEE ON JUDICIARY
                                Bob Wieckowski, Chair
                     SB 426 (Corbett) - As Amended: June 11, 2013

           SENATE VOTE  :  23-11
           
          SUBJECT  :  Civil Procedure: Deficiency Judgments 

           KEY ISSUE  :  Should the existing statute that prohibits  
          deficiency judgments after certain judicial and non-judicial  
          foreclosures be amended to clarify that after foreclosure the  
          deficiency shall no longer be owed or collected? 
           
          FISCAL EFFECT  :  As currently in print this bill is keyed  
          non-fiscal. 

                                      SYNOPSIS
           
           This bill seeks to clarify existing law relating to the status  
          of any remaining deficiency after a foreclosure sale.  Existing  
          law prohibits deficiency judgments after a non-judicial  
          foreclosure and in any foreclosure (judicial or non-judicial) if  
          the loan was used only to pay the purchase price of a  
          residential property (so-called "purchase money" loans).   
          Despite these borrower protections, however, the author contends  
          that some debt collectors are attempting to collect deficiencies  
          even after a borrower's home has been foreclosed upon.  It is  
          unclear whether collectors do this fraudulently (i.e. knowing  
          that they have no right to collect and hoping to take advantage  
          of the borrower's lack of knowledge) or if they genuinely  
          believe that the loans that they hold are not covered by the  
          anti-deficiency statutes.  This bill seeks to clarify that where  
          a statute prohibits a deficiency judgment, the underlying debt  
          is effectively extinguished and, as such, is no longer owed and  
          cannot be collected.  Arguably, existing law and basic logic  
          already presume this; that is, if the court cannot award a  
          deficiency judgment, there is no longer any debt that can be  
          collected.  But some creditors allegedly exploit the technical  
          difference between failure to obtain a judgment, on the one  
          hand, and the existence of an underlying debt, on the other, in  
          order to convince borrowers that they still must pay the  
          deficiency.  This bill seeks to address this problem by clearly  
          stating that no debt is owed after certain kinds of foreclosure,  








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          even if the foreclosure sale leaves a deficiency.  Where the  
          existing anti-deficiency statutes state that "no deficiency  
          judgment shall lie [or be rendered]" after certain kinds of  
          foreclosures, this bill would add that "no deficiency shall be  
          owed or collected."   This bill was recently amended to specify  
          that its provisions do not affect the liability of a third-party  
          guarantor or other surety, nor any other collateral pledged to  
          secure a loan.  This amendment has apparently removed all  
          opposition to the bill.  This bill passed off the Senate Floor  
          on 23-11 vote. 

           SUMMARY  :  Prohibits a deficiency from being owed or collected  
          after a judicial or non-judicial foreclosure, as specified.   
          Specifically,  this bill  :   

          1)Prohibits a deficiency from being owed or collected for any of  
            the following:

             a)   After a sale of real property or estate for years  
               therein for failure of the purchaser to complete his or her  
               contract of sale.
             b)   Under a deed of trust or mortgage given to the vendor to  
               secure payment of the balance of the purchase price of that  
               real property or estate for years therein.
             c)   Under a deed of trust or mortgage on a dwelling for not  
               more than four families given to the lender to secure  
               repayment of a purchase money loan that was used to pay all  
               or part of the purchase price of that dwelling, occupied  
               entirely or in part by the purchaser. 

          2)Prohibits a deficiency from being owed or collected for  
            deficiency on a note secured by a deed of trust or mortgage on  
            real property if the property has been sold under the power of  
            sale provision of the mortgage or deed of trust (i.e. a  
            non-judicial foreclosure.) 

          3)Specifies that the provisions of this bill do not impact  
            existing law regarding the liability of a guarantor, pledgor,  
            or other surety with respect to the deficiency, nor does it  
            impact existing law regarding other collateral pledged to  
            secure an obligation that is the subject of a deficiency. 

           EXISTING LAW  : 

          1)Provides that no deficiency judgment shall lie for any of the  








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            following:

             a)   After a sale of real property or estate for years  
               therein for failure of the purchaser to complete his or her  
               contract of sale.
             b)   Under a deed of trust or mortgage given to the vendor to  
               secure payment of the balance of the purchase price of that  
               real property or estate for years therein.
             c)   Under a deed of trust or mortgage on a dwelling for not  
               more than four families given to the lender to secure  
               repayment of a purchase money loan that was used to pay all  
               or part of the purchase price of that dwelling, occupied  
               entirely or in part by the purchaser.  (Code of Civil  
               Procedure Section 580b (a) (1)-(3).) 

          2)Provides that no deficiency judgment shall lie on a loan,  
            refinance, or other credit transaction that is used to  
            refinance a purchase money loan unless, as part of the credit  
            transaction the lender advances new principal that is not  
            applied to the obligation owed under the purchase money loan.   
            (Code of Civil Procedure Section 580b (b).) 

          3)Provides that no judgment shall be rendered for a deficiency  
            on a note secured by a deed of trust or mortgage upon real  
            property or estate in years therein in any case in which the  
            real property or estate has been sold by the mortgagee or  
            trustee under the power of sale contained in the mortgage or  
            deed of trust.  (Code of Civil Procedure Section 580d (a).) 

          4)Provides that no deficiency shall be owed or collected, and no  
            deficiency judgment shall be requested or rendered for a  
            deficiency upon a note secured solely by a deed of trust or  
            mortgage for a dwelling of not more than four units, if the  
            mortgagor sells the dwelling for a sale price less than the  
            amount owed on the mortgage at the time of sale (i.e. a "short  
            sale") with the written consent of the holder of the mortgage  
            and other specified conditions are met.  (Code of Civil  
            Procedure Section 580e.) 

           COMMENTS  :  Under California law, if a borrower defaults on a  
          loan secured by a deed of trust containing a power of sale  
          clause, the lender may initiate a "non-judicial" foreclosure by  
          filing a Notice of Default (NOD) with the county recorder.  If  
          the default is not cured within a prescribed period of time, the  
          trustee may sell the subject property at auction without the  








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          involvement of the court.  A non-judicial foreclosure is subject  
          to an anti-deficiency statute, which prevents the foreclosing  
          lender from obtaining a judgment for any deficiency if the  
          proceeds of the foreclosure sale turn out to be less than the  
          amount remaining on the debt.  The rationale for this statute is  
          that if the lender opts to pursue foreclosure through a  
          non-judicial process - and thereby avoid the cost, time, and  
          overview of a judicial procedure - the lender accepts that the  
          amount obtained at the sale will satisfy the debt, even if that  
          amount is less than the debt.  In short, the lender makes a  
          trade-off:  in exchange for the easier and less expensive  
          non-judicial procedure, the lender agrees to absorb any loss  
          attributed to the difference between the amount of the debt and  
          the amount obtained at the foreclosure sale. 

          In addition, California prohibits the rendering of a deficiency  
          judgment after any foreclosure - judicial or non-judicial - on a  
          so-called "purchase money loan" that is used to pay the purchase  
          price of a residential property of four units or less.  As most  
          recently amended, these anti-deficiency provisions also apply to  
          any refinancing of the original purchase money loan, so long as  
          the lender does not advance any new principal to the borrower.   
          According to the courts, prohibiting deficiency judgments after  
          foreclosure on a purchase money loan serves two purposes.   
          First, it discourages a seller or lender from over-valuing the  
          price of the home as means of hedging against loss in the event  
          of a default.  (DeBernard Properties v. Lim (1999) 20 Cal 4th  
          659, 664.)  Second, in a period of declining property values, it  
          "prevents the aggravation of the downturn that would result if  
          defaulting purchasers were burdened with large personal  
          liability."  (Roseleaf Corporation v. Chierighino (1963) 59 Cal  
          2d 35, 43.) 

          Finally, since 2011, California law has prohibited deficiency  
          judgments in a short sale, so long as the lender agrees to the  
          sale.  The intent of this legislation was to provide an  
          alternative to a foreclosure where a short sale would be  
          mutually beneficial to both the lender and the borrower.   
          Although the overall purpose of the anti-deficiency statute for  
          short sales was effectively the same as the anti-deficiency  
          statutes for foreclosures - to relieve the borrower of lingering  
          debt - the language of the short-sale statute is slightly  
          different than the language in the older foreclosure statutes.   
          Specifically, the statute prohibiting deficiency judgments in  
          short sales expressly states that "no deficiency shall be owed  








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          or collected, and no deficiency judgment may be requested or  
          rendered."  Unfortunately, the older statutes relating to  
          foreclosures simply stated that "no judgment shall lie" (in the  
          case the purchase money statute) or that "no judgment shall be  
          rendered" (in the case of the non-judicial foreclosure statute.)  
           The latter statutes do not expressly state that "no debt shall  
          be owed or collected."  Despite the different language, the  
          intended effect of all three statutes was apparently the same:  
          that the borrower would not be responsible for any deficiency. 

           Some Lenders Allegedly Exploiting Ambiguity of Post-Foreclosure  
          Debt  :  This bill seeks to clarify existing law relating to the  
          status of deficiency after foreclosure.  The author contends  
          that some lenders are attempting to collect deficiencies even  
          after foreclosure, notwithstanding the fact that the purpose of  
          the anti-deficiency statutes is to relieve the borrower who has  
          been foreclosed upon from any remaining debt.  It is unclear  
          whether these lenders are doing this fraudulently (i.e. knowing  
          that they have no right to collect and hoping to take advantage  
          of the borrower's lack of knowledge) or if these lenders  
          genuinely believe that their loans are not covered by the  
          anti-deficiency statutes.  Alternatively, it may be that some  
          creditors believe that the anti-deficiency statute simply means  
          that the creditor is unable to obtain a judgment from the court,  
          but it does not mean that the underlying debt is extinguished.   
          This bill seeks to clarify that where a statute prohibits a  
          deficiency judgment, the underlying debt is effectively  
          extinguished and, as such, is no longer owed and cannot be  
          collected.  Arguably, existing law and basic logic already  
          presume this - if the court cannot award a deficiency judgment,  
          there is no longer any debt that can be collected.  But some  
          lenders have allegedly been exploiting a formalistic distinction  
          between failure to obtain a judgment, on the one hand, and the  
          existence of an underlying debt, on the other, in order to  
          convince borrowers that they still owe the deficiency.  Even if  
          the failure to obtain a deficiency judgment does not  
          theoretically extinguish the debt, the debt is practically  
          extinguished if the creditor has no power to collect it.  

          SB 426 will address this problem in a straight-forward manner  
          and consistent with language used in recently enacted  
          legislation prohibiting deficiency judgments in short sales.   
          Where the existing anti-deficiency statutes state that "no  
          deficiency judgment shall lie [or be rendered]" after certain  
          kinds of foreclosures, this bill would expressly add that "no  








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          deficiency shall be owed or collected."   

          As recently amended, the bill would specify that its provisions  
          do not affect the liability of a third-party guarantor or other  
          surety, nor other collateral pledged to secure a loan.  This  
          amendment has apparently removed all former opposition to the  
          bill.  In particular, the California Bankers Association  
          expressed concern that the bill might be construed to eliminate  
          the obligations of third-party guarantors, or that it might  
          affect situations where multiple forms of collateral have been  
          used to secure a debt.  The recent amendments address this  
          concern, and the California Bankers Association has informed the  
          author that it is now taking a neutral position on the bill.  

           Recent Case Law and Credit Reporting Issue:   In addition to  
          sending dunning letters to persons who have been foreclosed  
          upon, some creditors have been reporting the deficiency as a  
          debt to credit reporting agencies - or threatening to do so -  
          even though the borrower is no longer obligated to pay anything.  
           A federal district court recently held that the anti-deficiency  
          statute for non-judicial foreclosures (Code of Civil Procedure  
          Section 580d) does not preclude the reporting of a deficiency to  
          credit reporting agencies following a non-judicial foreclosure  
          sale.  Therefore, the court upheld a creditor's motion for  
          summary judgment to dismiss a borrower's claim that reporting  
          the deficiency to the credit reporting agency violated the  
          anti-deficiency statute.  (Abdelfattah v. Carrington Mortgage  
          Services (2013) 2013 U.S. Dist. LEXIS 17517.)  However, the  
          court went on to hold that, while the anti-deficiency statute  
          does not prohibit reporting a deficiency to a credit reporting  
          agency, a plaintiff could allege that reporting a deficiency  
          subject to an anti-deficiency statute to a credit reporting  
          agency might violate the California's Consumer Credit Reporting  
          Agencies Act (CRAA).  Specifically, Civil Code Section  
          1785.25(a) states that a person "shall not furnish information  
          on a specific transaction or experience to any consumer credit  
          reporting agency if the person knows or should know the  
          information is incomplete or inaccurate."  The court reasoned  
          that reporting a deficiency that had been satisfied by a  
          non-judicial foreclosure sale is arguably reporting information  
          that is "incomplete or inaccurate," and as such the court denied  
          the lender's motion for summary judgment on this question.  

          The author and sponsor hope that by clarifying that "no debt is  
          owed" after non-judicial foreclosure or after a purchase money  








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          foreclosure, that reporting a deficiency as a debt would violate  
          the law against reporting incomplete or inaccurate information. 

           ARGUMENTS IN SUPPORT  :  The bill is co-sponsored by the Housing  
          and Economic Rights Advocates (HERA) and the California  
          Reinvestment Coalition (CRC), and it is supported by the Center  
          for Responsible Lending (CRL).  Supporters persuasively argue  
          that this bill is consistent with "the spirit of the  
          anti-deficiency laws," the obvious purpose of which is to  
          prohibit the collection of the any deficiency after certain  
          kinds of foreclosure proceedings.  Unfortunately, CRL observes,  
          the two anti-deficiency provisions dealing with purchase money  
          mortgages and non-judicial foreclosures do not include explicit  
          language regarding the status of the debts following  
          foreclosure, unlike the more recently enacted statute  
          prohibiting anti-deficiency judgments in short sales.  Because  
          of the lack of express language extinguishing the "debt owed,"  
          CRL reports 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 subject to  
          collection efforts even [if] collectors cannot pursue the debt  
          through the courts."  CRL believes that 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 the debts  
          cannot be legally enforced." 

          In addition, supporters claim that creditors 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.  Borrowers need certainty after  
          foreclosure to move forward in their economic lives."  

          Finally, supporters argue that SB 426 will bring consistency to  
          the anti-deficiency statutes by amending Civil Code Sections  
          580b (purchase money mortgages) and 580d (non-judicial  
          foreclosures) so that they are consistent with Section 580e  
          (short sales).  The purpose of all three statutes, after all, is  
          the same: to provide that where a deficiency judgment cannot be  
          rendered, the debt is no longer owed and cannot be collected. 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 








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          California Reinvestment Coalition (co-sponsor)
          Housing and Economic Rights Advocates (co-sponsor) 
          Center for Responsible Lending
           
            Opposition 
           
          None on file 

           Analysis Prepared by  :   Thomas Clark / JUD. / (916) 319-2334