BILL ANALYSIS Ó
SB 426
Page 1
SENATE THIRD READING
SB 426 (Corbett)
As Amended June 11, 2013
Majority vote
SENATE VOTE :23-11
JUDICIARY 9-0
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|Ayes:|Wieckowski, Wagner, | | |
| |Alejo, Chau, Dickinson, | | |
| |Garcia, Maienschein, | | |
| |Muratsuchi, Stone | | |
|-----+--------------------------+-----+--------------------------|
| | | | |
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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).
SB 426
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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
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)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.
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.
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
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and other specified conditions are met.
FISCAL EFFECT : None
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 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
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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 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.
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
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does not theoretically extinguish the debt, the debt is
practically extinguished if the creditor has no power to collect
it.
This bill addresses this problem in a straight-forward manner and
is 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 deficiency
shall be owed or collected." By its own terms, however, this
will not affect the liability of a third party guarantor or
surety, nor will affect the status of any other collateral that
may have pledged secure the obligation.
Supporters argue that the bill 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. Supporters also hope that
by clarifying that "no debt is owed" after non-judicial
foreclosure or after a purchase money foreclosure, that reporting
a deficiency as a debt would violate the law against reporting
incomplete or inaccurate information.
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334
FN: 0001227