BILL ANALYSIS �
SENATE BANKING & FINANCIAL INSTITUTIONS COMMITTEE
Senator Juan Vargas, Chair
SB 412 (Vargas) Hearing Date: April 6,
2011
As Amended: March 21, 2011
Fiscal: No
Urgency: No
SUMMARY Would clarify the scope of a measure enacted last year
(SB 931, Ducheny, Chapter 701, Statutes of 2010).
DESCRIPTION
1. Would make technical changes to some of the terms used in
last year's SB 931, to more properly reflect the intent of
that bill, and would restate a portion of last year's bill,
to ensure that the bill's provisions are triggered only if
both of the following circumstances are met:
a. There is a voluntary transfer of title to a buyer by
grant deed or other document of conveyance, which is
recorded in the county in which all or part of the real
property is located;
b. The mortgagee or beneficiary or its agent (i.e., the
lender) receives the proceeds of the sale, in accordance
with an agreement reached by that mortgagee or
beneficiary (lender) with the mortgagor or trustor (i.e.,
the borrower).
2. Would restate another portion of last year's bill to ensure
that a short sale has the same impact on the lender, the
borrower, and any guarantor as a nonjudicial foreclosure
sale for the same sales price would have had on these
parties.
3. Would clarify that the bill does not apply if the borrower
is a corporation, limited liability company, limited
partnership, or political subdivision of the state.
4. Would expressly state that any purported waiver of the
provisions of the bill is void.
SB 412 (Vargas), Page 2
EXISTING LAW
5. Pursuant to SB 931, Ducheny, Chapter 701, Statutes of 201,
provides all of the following:
a. A lender that agrees in writing to a short sale on a
dwelling of not more than four units cannot subsequently
pursue the borrower for a deficiency. The lender must
accept the proceeds of the short sale as full payment, and
must fully discharge any remaining amount of debt.
(Stated more precisely, no judgment shall be rendered for
any deficiency under a note secured by a first deed of
trust or first mortgage for a dwelling of not more than
four units, if the trustor or mortgagor sells the dwelling
for less than the remaining amount of the indebtedness due
at the time of sale, with the written consent of the
holder of the first deed of trust or first mortgage.
Written consent of the holder of the first deed of trust
or first mortgage obligates that lender to accept the sale
proceeds as full payment, and to fully discharge the
remaining amount of indebtedness on the first deed of
trust or first mortgage).
b. The provisions of the bill do not apply, if the
borrower commits fraud with respect to the sale of, or
waste with respect to the property, nor do the provisions
of the bill apply if the borrower is a corporation or
political subdivision of the state.
COMMENTS
1. Background and Discussion: A short sale is a real estate
transaction in which a lender allows a borrower to sell his
or her home for less than the full amount the borrower owes
on their mortgage. For example: John owes his mortgage
lender $275,000. John's mortgage lender agrees to let John
sell his house for $200,000, with the understanding that the
lender receives the proceeds from the house sale, net the
selling costs. John avoids foreclosure. John's lender
loses out on approximately $75,000 in principal to which it
was entitled under the provisions of John's mortgage, but
the lender avoids the costs of foreclosure, and has one less
bank-owned property on its hands. It is also likely, given
SB 412 (Vargas), Page 3
the current housing environment, that John's lender nets a
greater return through a short sale of the property than the
lender would have received, if it had taken back the
property through nonjudicial foreclosure and subsequently
sold it to a third party.
Short sales have begun to increase in popularity among both
lenders and borrowers, since California's mortgage troubles
first became apparent in early 2007. According to the
California Association of Realtors, there were approximately
110,000 short sales in California during 2010, up from
approximately 90,000 during 2009, a few thousand in 2008,
and a negligible amount in 2007.
SB 931: Last year's SB 931 was intended to ensure that no
homeowner ended up owing more money to their mortgage lender
after a short sale than they would have owed that lender if
they had lost their home through nonjudicial foreclosure.
This illogical result (owing more money after a short sale
than after a nonjudicial foreclosure) could have occurred
prior to enactment of SB 931, through the interaction of
several provisions of California law and case law. A
complete description of the different scenarios under which
a borrower could have owed more money to his or her lender
following a short sale, compared to a nonjudicial
foreclosure, is contained in the Senate Banking, Finance &
Insurance Committee analysis of SB 931. For purposes of the
analysis of SB 412, one need only understand that SB 931
prevented this result in connection with residential real
property, as of January 1, 2011. Thus, as of January 1,
2011, homeowners cannot find themselves in a situation where
they owe their mortgage lender more money after a short sale
than after a nonjudicial foreclosure.
SB 412 does not change this result. Instead, SB 412 was
introduced, to ensure that SB 931 does not result in
unintended, negative consequences, which could lead certain
types of lenders to foreclose in lieu of approving a short
sale.
What types of negative consequences could result if SB 931 is
not clarified ? SB 931 was intended to apply to first
mortgages secured by single parcels of real property
containing one- to four-family unit homes; it was not
intended to apply to commercial mortgage loans, nor to
mortgage loans secured by multiple collateral, nor to
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mortgage loans on which a third party serves as a guarantor.
Commercial lenders commonly require borrowers to provide
multiple items of collateral to secure a business-purpose
(i.e., commercial) loan. Often, some of the collateral
securing a business-purpose loan is residential real estate.
If the wording of SB 931 is read literally, SB 931 could be
construed to mean that a short sale of one item of
residential real estate pledged as part of a
multi-collateral commercial loan would preclude the
commercial lender from collecting any of the additional
collateral that backed the commercial loan. Even if the
lender and borrower agree that it is preferable to short
sell some of the residential real estate pledged as
collateral for a commercial loan, and both the lender and
borrower agree that the lender should retain its rights
against the other collateral pledged by the borrower, a
strict reading of SB 931 could preclude that desired
endpoint. Some commercial lenders will opt to foreclose on
a borrower rather than agreeing to a short sale of a single
piece of residential real property securing a commercial
loan, simply to avoid this unintended consequence. By
clarifying the intent and scope of SB 931, SB 412 will
minimize the likelihood that such foreclosures will occur.
SB 412 is consistent with last year's letter to the Senate
Daily Journal: In response to a request from the California
Bankers Association to clarify the intended coverage of her
bill, Senator Ducheny submitted a letter to the October 8th,
2010 Senate Daily Journal. As stated in that letter, the
purpose of SB 931 "is to protect distressed homeowners who
have non-purchase money recourse loans on residential
property (1-4 units), when the fair market value of the
subject property is less than the balance of the first deed
of trust. The legislation will make sure that these
homeowners do not incur a higher dollar amount of liability
after a short sale than they would otherwise have after a
foreclosure sale.
The measure applies to a note secured by a first deed of trust
or first mortgage on a single parcel of real property
consisting of a dwelling for not more than four families.
As drafted, the term 'a dwelling' is intended to apply to
one parcel of residential property consisting of no more
SB 412 (Vargas), Page 5
than one to four living units, and should not be construed
to apply to additional, multiple parcels of property that
are collectively secured by one first deed of trust or first
mortgage.
Further, Senate Bill 931 is meant to apply to loan
transactions with individuals and is therefore not intended
to apply to commercial loan transactions with legal entities
which were not created as part of an individual's estate
planning. As such, the bill is not intended to apply to
residential subdivision loans and other commercial loans to
legal entities where a single note is secured by multiple
collateral, such as multiple residential 1-4 unit
properties, or a residential 1-4 unit property and a
commercial property, or a residential 1-4 unit property and
a parcel of vacant land. As such, the bill is not intended
to extinguish that portion of the debt obligation that is
secured by another residential, commercial, or vacant land
property, or other personal property related to or used in
connection with the property."
The California Bankers Association (sponsor of this bill) is
now seeking to codify the original intent of SB 931, as
described in the October 8, 2010 letter to the Journal.
2. Summary of Arguments in Support: The sponsor's logic in
supporting this measure is described immediately above.
3. Summary of Arguments in Opposition: The Center for
Responsible Lending (CRL) and Housing and Economic Rights
Advocates (HERA) are opposed to SB 412, unless it is
amended. In their joint letter, CRL and HERA refer to
language in SB 931, which obligated a lender that agreed in
writing to a short sale "to accept the sale proceeds as full
payment and to fully discharge the remaining amount of the
indebtedness on the first deed of trust or first mortgage."
According to CRL and HERA, this language makes it clear that
no collection efforts may be made with respect to that debt
following the short sale.
CRL and HERA are concerned that the March 21st amendments to
SB 412 remove the "proceeds as full payment" language
referenced above, and, in doing so, remove substantive
protections for borrowers that were contained in SB 931.
CRL and HERA state that mortgage servicers, collection
agencies, and debt buyers are currently using abusive
SB 412 (Vargas), Page 6
tactics to collect deficiency debt from borrowers, even
where the borrower is not legally obligated to pay. Debt
collectors have repeatedly argued that the language
prohibiting deficiency "judgments" in anti-deficiency
statutes such as Code of Civil Procedure Section 580b mean
only that a debt collector is prevented from getting a court
judgment against a borrower. That language does not, they
argue, prevent a debt collector from using other means to
bully former homeowners into paying a debt for which there
is no legal recourse. (Staff attempts to clarify CRL's and
HERA's arguments by noting that Code of Civil Procedure
Section 580b is the statute commonly referred to as the
"purchase money protection" statute. Among its provisions,
this statute has the effect of making a purchase money loan
for residential real property a non-recourse loan, thus
precluding a lender from pursuing a borrower for more than
the collateral backing the loan, and protecting the personal
holdings of a borrower who defaults on that loan. HERA is
seeing situations in which collectors are going after the
personal assets of borrowers who had purchase money
mortgages).
According to CRL and HERA, the existing law language of
Section 580e specifically prevents the abusive practices
they are seeing (with Section 580b) from being extended to
borrowers who go through short sales, by clarifying that
debts covered by the statute are not simply barred from
deficiency judgments, but are completely eliminated. CRL
and HERA are concerned that the current language of SB 412,
which does reference deficiency judgments, would widely
expose consumers to improper collection efforts on debt
remaining following a short sale.
4. Author's Amendments:
a. In the days leading up to this committee's April 6th
committee hearing, the California Bankers Association
reached a verbal agreement with the California
Association of Realtors on short sale issues related to,
but not directly addressed by SB 412. That compromise
would entail making relatively small amendments to SB
412, to strike the bill's reference to first mortgages
and first deeds of trust.
If amended in the fashion shown immediately below, the
decision by a subordinate lien holder to agree to a short
SB 412 (Vargas), Page 7
sale, and receipt by that lien holder of sale proceeds in
accordance with that agreement, would prohibit that lien
holder from pursuing the borrower for further payments,
post-short sale (unless the agreement between the
borrower and the lien holder expressly authorized the
lien holder to do so).
Once amended in this fashion, SB 412 would have the support
of the Realtors and the financial services industry. CRL
and HERA would remain opposed.
The text of the bill, as proposed to be amended, would read
as follows:
Section 580e of the Code of Civil Procedure is amended to
read:
580e. (a) No judgment shall be rendered for any deficiency
upon a note secured by a first deed of trust or first
mortgage for a dwelling of not more than four units, in
any case in which the trustor or mortgagor sells the
dwelling for a sale price less than the remaining amount
of the indebtedness outstanding at the time of sale, in
accordance with the written consent of the holder of the
first deed of trust or first mortgage. Following the
voluntary transfer of title to a buyer by grant deed or
by other document of conveyance recorded in the county
where all or part of the real property is located and the
tender to the mortgagee, beneficiary, or the agent of the
mortgagee or beneficiary of the sale proceeds, as agreed,
the rights, remedies, and obligations of any holder,
beneficiary, mortgagee, trustor, mortgagor, obligor,
obligee, or guarantor of such note, deed of trust, or
mortgage, and with respect to any other property that
secures such note, shall be treated and determined as if
such dwelling had been sold through foreclosure under a
power of sale contained in the deed of trust or mortgage
for a price equal to the sale proceeds received by the
holder, in the manner contemplated by Section 580d.
(b) If the trustor or mortgagor commits either fraud with
respect to the sale of, or waste with respect to, the
real property that secures the first deed of trust or
first mortgage, this section shall not limit the ability
of the holder of the first deed of trust or first
mortgage to seek damages and use existing rights and
remedies against the trustor or mortgagor or any third
SB 412 (Vargas), Page 8
party for fraud or waste.
(c) This section shall not apply if the trustor or
mortgagor is a corporation, limited liability company,
limited partnership, or political subdivision of the
state. This section shall also not apply to any deed of
trust, mortgage, or other lien given to secure the
payment of bonds or other evidence of indebtedness
authorized or permitted to be issued by the Commissioner
of Corporations, or which is made by a public utility
subject to the Public Utilities Act (Part 1 (commencing
with Section 201) of Division 1 of the Public Utilities
Code).
(d) Any purported waiver of the provisions of subdivision
(a) by a person covered by this section shall be void and
against public policy.
5. Prior and Related Legislation:
a. SB 931 (Ducheny), Chapter 701, Statutes of 2010:
Prevented situations in which a borrower owed more money
to their mortgage lender following a short sale, than
they would have owed that lender following a nonjudicial
foreclosure brought by that lender.
b. SB 1178 (Corbett), 2009-10 Legislative Session:
Would give certain refinanced loans non-recourse status.
Vetoed by Governor Schwarzenegger.
c. SB 458 (Corbett), 2011-12 Legislative Session:
Substantially similar to SB 1178.
LIST OF REGISTERED SUPPORT/OPPOSITION
Support
California Bankers Association (sponsor)
California Credit Union League
California Independent Bankers
California Land Title Association
California Mortgage Association
California Mortgage Bankers Association
United Trustees Association
Opposition
SB 412 (Vargas), Page 9
Center for Responsible Lending
Housing and Economics Rights Advocates
Consultant: Eileen Newhall (916) 651-4102