BILL ANALYSIS �
AB 1745
Page 1
Date of Hearing: May 8, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
AB 1745 (Torres) - As Amended: May 3, 2012
SUBJECT : Mortgages: Notice of Sale
KEY ISSUE : Should a lender be prohibited from filing a "notice
of sale," one of the final steps in the foreclosure process, if
the lender has already approved a short sale?
FISCAL EFFECT : As currently in print this bill is keyed
non-fiscal.
SYNOPSIS
Among the many foreclosure-related problems highlighted in the
recent National Mortgage Settlement is the phenomenon of "dual
tracking" - that is, the practice of lenders simultaneously
pursuing foreclosure proceedings against homeowners who have
requested modification of the loan. This bill seeks to address
a related, if less common, version of that problem: the practice
of pursuing foreclosure against a borrower for whom the lender
has already approved a short sale. Under a short sale, a lender
effectively releases a lien on the secured property and approves
the property to be sold for less than is owed on the loan. Both
lenders and borrowers can benefit from a short sale: the lender
avoids the cost of carrying out a foreclosure to its conclusion
and the possibility that a foreclosure sale might bring even
less than a short sale; the borrower avoids the stigma of
foreclosure and damage to his or her credit. This bill would
prohibit a lender from filing a notice of sale if it has already
approved a short sale. The bill would permit the lender to
withdraw approval of the short sale if the terms of the short
sale agreement have changed. As with the related dual-track
reform measure sponsored by the Attorney General, this bill
would simply require the lender to provide the borrower with
written notice of the reasons for the bank's decision Indeed,
this provision is very similar to one small piece of the
Attorney General's dual track prohibition bill. This notice
must be provided to the seller at least three days prior to the
withdrawal of approval. This bill is sponsored by the
California Association of Realtors. There is no registered
opposition to the bill. The bill recently passed out of the
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Assembly Committee on Banking & Finance by an 11-0 vote.
SUMMARY : Prohibits a mortgagee, trustee, beneficiary, or
authorized agent from recording a notice of a foreclosure sale
after providing written approval of a short sale, except as
specified. Specifically, this bill :
1)Prohibits a mortgagee, trustee, beneficiary, or authorized
agent from recording a notice of a foreclosure sale after
providing written approval of a short sale, as defined.
2)Provides that approval of a short sale may be withdrawn by the
mortgagee, trustee, beneficiary, or authorized agent at any
time if the terms of the short sale agreement have changed.
Specifies that not less than three days prior to the
withdrawal of approval, written notice shall be provided to
the short sale seller and shall include an explanation of the
change of condition that caused the withdrawal.
3)Defines "short sale" to mean a transfer in which the trustor
or mortgagor sells a property for a price less than the
remaining amount of the indebtedness secured by the property
at the time of sale.
EXISTING LAW :
1)Sets forth the process for bringing a non-judicial foreclosure
in California, from the filing of a Notice of Default (NOD)
through the trustee's sale and distribution of proceeds and
the allocation of costs and expenses. (Civil Code Sections
2924 through 2924k.)
2)Provides that where a mortgage or deed of trust confers a
power of sale upon a mortgagee, trustee, or any other person,
and which is to be exercised after a breach of the obligation
for which the mortgage is security, the power of sale shall
not be exercised until all of the following apply:
a) The trustee, mortgagee, or beneficiary, or any of their
authorized agents, shall first file, in the office of the
recorder in each county where the mortgaged property or
some part thereof is situated, a NOD which contains
specified information, including a statement identifying
the mortgage or deed of trust and a statement that a breach
of obligation has occurred.
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b) Not less than three months has elapsed since the filing
of the NOD.
c) After the lapse of three months, as noted above, the
mortgagee, trustee, or other person authorized to make the
sale shall file a Notice of Sale (NOS) stating the time and
place thereof, in the manner prescribed. (Civil Code
Section 2924 (a).)
COMMENTS : Among the many foreclosure-related problems
highlighted in the recent National Mortgage Settlement is the
phenomenon of "dual tracking" - that is, the practice of lenders
simultaneously pursuing foreclosure proceedings against
homeowners who have requested modification of the loan. This
bill seeks to address a related, if less common, version of that
problem: the practice of pursuing foreclosure against a borrower
for whom the lender has already approved a short sale. Under a
short sale, a lender effectively releases a lien on the secured
property and approves the property to be sold for less than is
owed on the loan. Both lenders and borrowers can benefit from a
short sale: the lender avoids the cost of carrying out a
foreclosure to its conclusion and the possibility that a
foreclosure sale might bring even less than a short sale; the
borrower avoids the stigma of foreclosure and damage to his or
her credit.
Sponsored by the California Association of Realtors (CAR), this
bill would prohibit a lender from filing the NOS if it has
already provided a written approval of a short sale. The bill
would permit the lender to withdraw approval of the short sale
if the terms of the short sale agreement have changed, but it
would also require the lender to provide the short sale seller
with written notice that includes an explanation of the change
that caused the withdrawal of approval. The bill would require
that this notice be provided to the seller at least three days
prior to the withdrawal of approval. It should be stressed that
this bill would not prevent a lender from withdrawing approval
of a short sale; it would, however, if a short sale had been
approved, prevent the lender from filing the NOS until it
withdrawals approval and has sent advance notice to the borrower
explaining why approval was withdrawn. The purpose of the bill,
therefore, is to make sure that borrowers who think that they
have worked out a short sale agreement with their lender do not
suddenly find themselves facing a foreclosure sale. This is the
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same principle underlying AB 1602 (Eng and Feuer), the Attorney
General's bill to put an end to dual tracking in all its forms,
from short sale to loan modification.
According to the author, the "purpose of this bill is to give
borrowers greater certainty by prohibiting a servicer from
recording a notice of sale if there is an approved short sale in
writing." The author notes that the "bill allows a servicer to
withdraw approval of a short sale if the servicer tells the
seller what circumstances of the sale have changed, and gives
the seller three days advance notice of the effective date of
the withdrawal."
CAR argues that this measure will create a rule that is
"straight forward and fair - If the bank has already approved
for a short sale, it cannot pull the rug out from the under the
sale." Unfortunately, according to CAR, "this situation
occasionally occurs and the 'left hand' of the foreclosure
department forecloses on a property that the 'right hand' of the
short sale department has already approved for a short sale."
CAR notes that the "bank always has the ultimate decision on
whether or not to approve a short sale notification," and it is
free with withdraw that approval so long as it "gives the
homeowner a reason and three days' notice before restarting the
foreclosure sale."
The "Notice of Sale" in California's Non-Judicial Foreclosure
Process : In California the vast majority of foreclosures are
"non-judicial" - meaning they are authorized through a "power of
sale" clause in the mortgage or deed of trust. This
power-of-sale authorization permits the initiation of the
foreclosure process and the final foreclosure sale without any
review by the courts or any other neutral party. When a
borrower falls behind in his or her payments, existing law
permits the lender or loan servicer to begin the non-judicial
foreclosure process by first filing a Notice of Default (NOD)
with the county recorder's office and providing notice of the
same to the borrower. If the default is not cured within 30
days of the NOD filing, the lender or servicer must mail a
notice to the borrower warning the borrower that the property
may be sold at public sale. After three months have elapsed
from the NOD filing, the lender or servicer may file a Notice of
Sale (NOS) with the county recorder. The NOS must contain a
statement of the total amount of the unpaid balance. In
addition, at least 20 days prior to date of the sale the lender
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or servicer must publish the NOS (usually in a newspaper). A
copy of the NOS must also be mailed to the borrower and a copy
posted on the front door of a residential property 20 days prior
to the date of sale.
Because the NOS can only be filed three months after filing the
NOD, this bill would apply only in situations where the borrower
has already defaulted on payments and the NOD has already been
filed with the county recorder. The bill would not, it appears,
prevent a lender or loan servicer from filing an NOD (as opposed
to an NOS), even if a short sale has been approved. Therefore,
this bill would only apply to a situation in which an NOD has
already been filed, the lender and borrower have worked out a
short sale agreement, and the lender has approved the short sale
in writing.
Relationship to the "California Homeowner Bill of Rights" : As
noted above, in an effort to implement key features of the
National Mortgage Settlement, California Attorney General Kamala
Harris has sponsored a package of foreclosure-related bills -
known collectively as the "California Homeowner Bill of Rights"
- in both the Assembly and the Senate. Those issues are
currently the subject of a joint conference committee. While
the bill under consideration today is not a part of that
package, it is animated by similar concerns and overlaps with
one of those bills. Specifically, AB 1602, which contains the
dual tracking provisions of the Attorney General's package,
includes among its reforms a provision that would prohibit a
lender from filing the NOS if it has already approved a short
sale. Apart from the more-inclusive scope of AB 1602, the
substantial difference between the bill under consideration
today and AB 1602 is that the latter does not address the
question whether a lender could withdraw approval of a short
sale, or what would happen if it did. (Nothing in existing law
apparently prevents a lender from withdrawing approval of a
short sale at any time, with or without notice to the borrower,
or indeed from foreclosing on a homeowner despite having
approved a short sale.) This question is one of many expected
to be addressed in the conference report. When the report is
issued, it may be appropriate for this measure to be made
contingent upon passage of that legislation to avoid any
potential conflicts.
REGISTERED SUPPORT / OPPOSITION :
AB 1745
Page 6
Support
California Association of Realtors (sponsor)
Opposition
None on file
Analysis Prepared by : Thomas Clark / JUD. / (916) 319-2334