BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
SB 306
Senator Calderon
As Introduced
Hearing Date: April 14, 2009
Civil Code; Financial Code
BCP:jd
SUBJECT
Real Property Transactions
DESCRIPTION
This bill would enact three separate provisions relating to real
property transactions. Specifically, this bill would:
enact technical and clarifying changes to SB 1137 (Perata,
Corbett, Machado, Chapter 69, Statutes of 2008), which
required, among other things, that a lender or servicer
contact a borrower at least 30 days prior to filing a Notice
of Default (the first step in the non-judicial foreclosure
process), and that tenants receive notice that their rental
property is in foreclosure;
establish a minimum time period in which a payoff demand
statement must be valid, create a short-pay demand agreement;
and
clarify the coverage of the Escrow Agents' Fidelity
Corporation.
BACKGROUND
Foreclosures in California are generally non-judicial, meaning
that they are accomplished without court involvement. The first
step in the foreclosure process is the filing of a Notice of
Default, which generally occurs after three or more months of
delinquency. The foreclosing entity must then wait at least
three months before noticing the sale of the property, which
must be posted at least 20 days before the date of sale. In an
effort to help those for whom foreclosure may be avoided, the
Legislature passed, and the Governor signed, SB 1137 (Perata,
Corbett, Machado).
(more)
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That urgency bill sought to increase protections for both
borrowers and tenants in the foreclosure process by requiring,
among other things: (1) contact prior to the filing of a notice
of default; (2) allowing a borrower to designate a HUD-certified
housing counseling agency to discuss options, on their behalf,
to avoid foreclosure; and (3) mailing of a notice that informs
tenants that their rental property is in foreclosure, as
specified. The first portion of this bill, sponsored by the
United Trustees Association, seeks to enact clarifying changes
to those provisions.
The remaining sections of this bill would establish a minimum
time period in which a payoff demand statement must be valid,
create a short-pay demand agreement, and exempt specified real
property escrows from coverage by the Escrow Agents' Fidelity
Corporation. Those provisions are sponsored by the California
Escrow Association and the Escrow Agents Fidelity Corporation,
respectively.
The provisions of this bill were approved by the Senate
Committee on Banking, Finance and Insurance on April 1, 2009.
CHANGES TO EXISTING LAW
1. Existing law regulates the non-judicial foreclosure of
properties pursuant to the power of sale contained within a
mortgage contract. To commence the process, existing state
law requires the trustee, mortgagee, or beneficiary to record
a Notice of Default and allow three months to lapse before
setting a date for sale of the property. (Civ. Code Secs.
2924, 2924f.)
Existing law prohibits a mortgagee, trustee, or authorized
agent from filing a notice of default until 30 days after
contact is made, as specified. That notice of default must
include a declaration that the mortgagee, beneficiary, or
authorized agent has contacted the borrower, tried with due
diligence to contact the borrower, or the borrower has
surrendered the property, as specified. (Civ. Code Sec.
2923.5 (a), (b).)
Existing law allows a borrower to designate a HUD-certified
housing counseling agency, attorney, or other advisor to
discuss with the mortgagee, beneficiary, or authorized agent,
on the borrower's behalf, options to avoid foreclosure. (Civ.
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Code Sec. 2923.5 (f).)
Existing law provides that the above requirements relating to
contact do not apply in various circumstances, including where
the borrower has filed for bankruptcy and the proceedings have
not been finalized. Existing law further limits the contact
requirements to loans made between January 1, 2003 and
December 31, 2007 that are secured by residential real
property and are for owner-occupied residences, as defined.
(Civ. Code Sec. 2923.5 (h), (i).)
This bill would revise the above provisions by:
clarifying that the 30-day time period ends 30 days
after initial contact;
clarifying that the declaration requirement does not
apply if the borrower has surrendered the property,
contracted with an organization that advises people on how
to avoid their obligations, or filed for bankruptcy, as
specified;
defining "borrower" as a natural person or persons who
are original signators to a note or other obligation
secured by a mortgage or deed of trust on a residence, as
specified;
requiring a borrower's designation of a HUD-certified
housing counseling agency to be in writing;
clarifying that the bankruptcy exemption applies if a
case has been filed under Chapter 7, 11, 12 or 13 of Title
11 of the United States Code and the bankruptcy court has
not entered an order closing or dismissing the case, or
granting relief from a stay of foreclosure;
limiting the application of the contact requirement to
residential owner-occupied residences containing no more
than four dwelling units;
defining "owner-occupied" as the principal residence of
the borrower as indicated to the lender in loan documents;
providing that the contact requirements apply to
mortgages or deeds of trust recorded from January 1, 2003
to December 31, 2007; and
other technical, clarifying changes.
2. Existing law states that the Legislature finds and declares
that any duty servicers may have to maximize net present value
under their pooling and servicing agreements is owed to all
parties in a loan pool, not to any particular parties, and
that a servicer acts in the best interests of all parties if
it agrees to or implements a loan modification or workout if:
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(1) the loan is in default or default is reasonably
foreseeable; and (2) anticipated recovery under the loan
modification or workout plan exceeds anticipated recovery
through foreclosure on a net present value basis. (Civ. Code
Sec. 2923.6.)
This bill would revise the above finding and declaration by
additionally referring to investors under a pooling and
servicing agreement.
3. Existing law requires a trustee or authorized agent, upon
posting a notice of sale, to also post, and mail, a statutory
notice informing tenants that they are the resident of a
property subject to a foreclosure sale. (Civ. Code Sec.
2924.8.)
This bill would clarify that the statutory notice shall,
concurrently with the mailing of the notice of sale, be sent
by first-class mail.
4. Existing law provides rules by which an entitled person, as
defined, may request a payoff demand statement in connection
with a mortgage or deed of trust, and defines a payoff demand
statement as a written demand made by an entitled person or
authorized agent, setting forth the amounts required as of the
date of preparation by the beneficiary (generally, the
lender), to fully satisfy all obligations secured by the loan
that is the subject of the payoff demand statement. (Civ.
Code Sec. 2943.)
Existing law further requires the following in connection with
a payoff demand statement: (1) the statement must include
information reasonably necessary to calculate the payoff
amount on a per diem basis for the period of time, not to
exceed 30 days, during which the per diem amount is not
changed by the terms of the note; (2) the beneficiary or his
or her authorized agent must prepare and deliver the payoff
demand statement to the entitled person within 21 days of
receiving the demand for it. If the loan is subject to a
recorded notice of default (NOD) or a filed complaint
commencing a judicial foreclosure, the beneficiary is under no
obligation to prepare and deliver a payoff demand statement,
unless the written demand for the statement is received prior
to the first publication of a notice of sale, or the notice of
the first date of sale established by a court. (Civ. Code
Sec. 2943.)
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This bill would establish a minimum period of time that a
payoff demand statement must be valid, as the lesser of: (1)
ten days from the date of preparation by the beneficiary; or
(2) the number of days from the date of preparation by the
beneficiary until the terms of the note result in a change in
the per diem amount.
This bill would define a "short-pay agreement" as an
agreement, in writing, in which the beneficiary agrees to
release its lien on a property in return for payment of any
amount less than the secured obligation.
This bill would define a "short-pay demand statement" as a
written agreement, conditioned on the existence of a short-pay
agreement, that is prepared in response to a written demand
made by an entitled person or an authorized agent, setting
forth an amount less than the outstanding debt, together with
any terms and conditions, under which the beneficiary will
execute and deliver a reconveyance of the deed of trust
securing the note that is the subject of the short-pay demand
statement. This bill would provide that a short-pay demand
statement shall be valid for the same length of time as the
payoff demand statement described above.
This bill would require a beneficiary, or his or her
authorized agent to provide a short-pay demand statement to an
entitled person or his or her authorized agent within 21 days
of receiving a demand for the statement from the entitled
person or his or her agent, but would provide that if a
beneficiary or his or her authorized agent elects not to
proceed with the short-sale transaction, he or she is not
required to provide a short-pay demand statement, within 21
days of receiving the demand for the short-pay demand
statement. This bill would further provide that if the terms
and conditions of the short-pay agreement require approval by
the beneficiary of a closing statement or similar document
prepared by the escrow holder, approval or disapproval must be
provided no more than four days after the beneficiary receives
the closing statement, except as specified.
5. Existing law defines an exchange facilitator (EF), and
requires EFs doing business in California to meet specified
financial criteria and comply with specified requirements
related to their custodianship of money and property involved
in Section 1031 real property exchanges; and establishes
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specified prohibitions which apply to EFs doing business in
California. (Fin. Code Sec. 51000 et seq.)
Existing law establishes the Escrow Agents' Fidelity
Corporation (EAFC) to provide fidelity coverage to escrow
agents, as specified, and requires each person licensed under
the Escrow Law, who is engaged in the business of receiving
specified types of escrows within California, to participate
as a member in EAFC. (Fin. Code Secs. 17312, 17314.)
This bill would explicitly exempt money or property held by or
deposited with a person acting as an EF from real property
escrows for which EAFC is required to provide fidelity
coverage.
COMMENT
1. Stated need for the bill
The provisions of this bill are co-sponsored by the United
Trustees Association (UTA), the California Escrow Association
(CEA), and the Escrow Agents' Fidelity Corporation (EAFC).
The UTA, sponsor of Sections 1 through 3, states that those
Sections are intended to clarify ambiguities in SB 1137 to avoid
unnecessary confusion and potential litigation. The CEA,
sponsor of Section 4, notes that that Section proposes technical
changes to payoff demand statements under existing law, and
creates a "short-pay demand statement" for use in short sales of
real estate. Finally, the EAFC, sponsor of Section 5, states
that this bill is intended to clarify an ambiguity under
existing law regarding EAFC coverage of "exchanges."
2. Clarifying changes to SB 1137 (Perata, Corbett, Machado)
In response to the unprecedented threat to the state and local
economies as a result of skyrocketing residential property
foreclosure rates in California, the Legislature enacted, and
the Governor signed, SB 1137, an urgency bill that was chaptered
on July 8, 2008. This bill seeks to "clean-up" various
provisions of SB 1137 in order to provide clarity to the
lenders, servicers, and trustees who must comply with its
requirements.
a. Declaration regarding contact
In order to facilitate communication between all parties, SB
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1137 required a lender or servicer to contact a delinquent
borrower at least 30 days prior to filing a Notice of Default
on their property. To provide an affirmation of the steps
taken to comply with that requirement, SB 1137 required a
declaration to be included in the Notice of Default that the
borrower was contacted, due diligence efforts were taken to
contact the borrower, or that the borrower surrendered the
property. That requirement raises two issues: (1) under
existing law, the borrower's surrender of the property is only
one of the three reasons why the contact requirements would
not otherwise apply; and (2) it discloses, in the public
record, that the borrower surrendered the property.
This bill addresses those issues by, instead, requiring a
declaration only if the borrower was contacted, or if due
diligence was exercised to contact the borrower. While that
resolves the privacy concerns, it would create some confusion
for those who examine the public record and are expecting to
see a declaration as part of the Notice of Default, but,
instead, see no such declaration. To resolve those issues,
the following suggested amendments would, instead, require a
declaration that states either: (1) the borrower was
contacted; (2) due diligence efforts were made to contact the
borrower; or (3) that one of the three exceptions under
existing law (bankruptcy, surrender of property, or
contracting to extend the foreclosure process) applied. The
sponsor of this section, the United Trustees, states that they
have no objection to these amendments:
Suggested amendments :
1) On page 4, strike out lines 6 through 8, inclusive, and
insert:
authorized agent has contacted the borrower, has tried with
due diligence to contact the borrower as required by this
section, or that no contact was required pursuant to
subdivision (h).
2) On page 6, line 9, strike out "(b),"
b. Change to definition of borrower
While SB 1137 required a borrower to be contacted prior to the
filing of a Notice of Default, that bill did not specify what
should be done if there are multiple borrowers on note. In
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order to partially address the issue of which borrowers must
be contacted, SB 306 would, instead, define borrower as a
"natural person or persons who are original signators to a
note or other obligation secured by a mortgage or deed of
trust on a residence . . ." Even with that revised definition,
it is unclear how many individuals must be contacted if
multiple individuals appear on the note, and raises an
additional policy question about whether contact should be
limited to original signators. The sponsor has agreed to
strike the provision and to continue working with committee
staff and interested parties to resolve the issue:
Suggested amendment:
On page 4, strike out lines 24 through 28, inclusive, and
insert:
(e) For purposes of this section, a "borrower" shall include a
mortgagor or trustor.
c. Restricting application to real property containing no
more than 4 units, and defining "owner-occupied"
The contact requirements imposed by SB 1137 were restricted to
those loans that appeared to be the most problematic - those
made between January 1, 2003 and December 31, 2007. As the
intent of the legislation was to preserve home ownership, not
reward speculators, the language of the bill further limited
the contact requirement to owner-occupied residences, defined
as the principal residence of the borrower.
This bill would make three substantive changes to those
provisions. First, the type of residences would be limited to
those that are residential with one to four dwelling units.
The sponsor notes that this amendment is intended to address
the situation where an owner of a large apartment complex
moves into one of the units, thereby technically triggering
the contact requirements. The sponsor further maintains that
condominiums would not be excluded by this restriction as they
are considered a single dwelling unit.
Second, SB 306 would define "owner-occupied" as the residence
that is the principal residence of the borrower as indicated
to the lender in the loan documents. The sponsor maintains
that this change would provide a bright-line rule for those
seeking to determine whether the contact requirements apply
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with respect to a particular loan. It should be noted that
while an indication of "owner-occupied" in loan documents does
not necessarily mean that the property is currently, or was
ever, owner-occupied, the amended definition may cover more
properties than the definition in existing law. Despite that
arguably broader coverage, this definition is different from
other definitions of "owner-occupied" currently in the code.
(For example, SBx2 7 (Corbett, 2009) applies if the "borrower
occupied the property as the borrower's principal residence at
the time the loan became delinquent.")
This bill would also revise the loans subject to SB 1137's
contact requirements by including only those mortgages or
deeds of trust that were recorded between January 1, 2003 and
December 31, 2007 (existing law applies the requirements to
loans made between those dates). That proposed clarification
seeks to use the public record to provide clarity with regard
to the loans for which the contact requirement applies.
d. Written consent to designation of HUD-certified housing
counseling agency
SB 1137 additionally required that a borrower be provided with
the toll-free telephone number to find a HUD-certified housing
counseling agency. SB 1137 further allowed the borrower to
also designate a HUD-certified housing counseling agency, or
other advisor, to discuss, on the borrower's behalf, options
to avoid foreclosure. This bill would revise that language
by, instead, requiring a borrower's written consent to that
designation, and adding that the HUD-certified housing
counseling agency, or other advisor, may discuss the
borrower's financial situation.
e. Reference to all investors under a pooling and servicing
agreement
This bill would additionally revise SB 1137's findings and
declarations regarding pooling and servicing agreements by
adding references to investors under a pooling and servicing
agreement (existing law only references parties in a loan
pool). The sponsor, UTA, contends that this change is purely
technical and intended to reflect the difference between a
true security and a pool of private loans.
f. Remaining changes are technical and clarifying
The remaining changes would, among other things, clarify that
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the 30-day time period runs from the time of initial contact,
clarify the bankruptcy exception, and clarify the mailing of
the notice to tenants.
3. Changes relating to escrow
SB 306 would also amend provisions relating to payoff-demand
statements and clarify the coverage of the Escrow Agents'
Fidelity Corporation. Those changes, as well as the above
amendments to SB 1137, were approved by the Senate Committee on
Banking, Finance and Insurance on April 1, 2009.
a. Payoff-demand statements
Existing law allows an entitled person, as defined, to request
a payoff demand statement that contains specified information,
including the amounts required as of the date of preparation
by the beneficiary, to fully satisfy all obligations secured
by the loan that is the subject of the payoff demand
statement. While existing law provides that those statements
must be valid for no more than 30 days, there is no minimum
time period in which the statement must remain valid.
The California Escrow Association, sponsor of this section,
maintains that some lenders have begun providing payoff
statements to escrow agents that expire before the escrow
agent is able to disburse funds. Escrow agents use those
statements to calculate how much money to disperse to each
party in real estate transactions involving mortgages. To
address the issue, this bill would require payoff demand
statements to be valid for no less than the lesser of: (1) ten
days from date of preparation; or (2) the number of days from
the date of preparation until the terms of the note result in
a change in the per diem amount. The sponsor states that
those changes "will give escrow officers the chance to close
transactions based upon the information in the demand
statements."
This bill would also create a new payoff demand statement, the
"short-pay demand statement," which is intended to allow
escrow agents to obtain valid payoff statements during
short-sale transactions. CEA notes that they have worked with
lender groups to provide this notification mechanism from
lenders, so that escrow agents know when they are authorized
to close transactions. Those transactions have become
increasingly common as housing prices continue to fall as a
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result of the foreclosure and economic crisis.
b. Escrow Agents' Fidelity Corporation
Created in 1982, the Escrow Agents' Fidelity Corporation
serves to indemnify escrow agents that are members of the
corporation against certain losses. EAFC membership is
required for each person licensed under the Escrow Law who
engages in the business of receiving escrows for deposit or
delivery in specified transactions, including real property
escrows. This bill would exempt money or property held by or
deposited with a person acting as an exchange facilitator from
real property escrows for which EAFC is required to provide
coverage.
Those facilitators facilitate, for a fee, an exchange of
like-kind property in accordance with Internal Revenue Code
Section 1031. The Internal Revenue Service's fact sheet on
like-kind exchanges notes while a taxpayer generally has to
pay tax on a gain at the time of sale, "Section 1031 provides
an exception and allows [a taxpayer] to postpone paying tax on
the gain if you reinvest the proceeds in similar property as
part of a qualifying like-kind exchange." In order for those
transactions to qualify for tax-preferred treatment, the
seller cannot have control over sales proceeds and must,
instead, transfer the proceeds to an individual (an exchange
facilitator) who holds them until the close of the 1031
exchange.
The sponsor of this section, the EAFC, maintains that this
provision clarifies its belief that its coverage extends to
concurrent exchanges of real estate, not delayed exchanges,
such as Section 1031 exchanges. The EAFC further notes that
persons handling delayed exchanges are separately regulated
under SB 1007 (Machado, Chapter 708, Statutes of 2008).
Support : None Known
Opposition : None Known
HISTORY
Source : California Escrow Association; Escrow Agents Fidelity
Corporation; United Trustees Association
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Related Pending Legislation : None Known
Prior Legislation :
SB 1137 (Perata, Corbett, Machado, Chapter 69, Statutes of
2008), enacted changes to the procedures that must be followed
before the holder of a mortgage may issue a notice of default or
notice of trustee sale, requires the holder of a mortgage to
mail a specified notice to the tenant(s) of a property on which
foreclosure proceedings have begun, and imposes penalties on
property owners who fail to adequately maintain foreclosed
properties, as specified.
SB 1007 (Machado, Chapter 708, Statutes of 2008), defined the
term exchange facilitator (EF), in connection with Section 1031
exchanges, enacted specified rules for EFs doing business in
California, and enacted specific prohibitions against certain
acts by EFs doing business in California.
SBX2 7 (Corbett, Chapter 4, Statutes of 2009), provided that a
servicer of residential mortgage loans may not proceed with
foreclosure proceedings for 90 days under specified conditions,
unless the servicer has a comprehensive loan modification
program.
Prior Vote :
Senate Committee on Banking, Finance, and Insurance (Ayes 9,
Noes 0)
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