BILL ANALYSIS Ó
SB 426
Page 1
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