BILL ANALYSIS                                                                                                                                                                                                    



                                                                 SB 426
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         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). 









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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


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