This Bulletin was prepared for CBA by Peter Munoz , partner with Reed Smith and member of the CBA Legal Affairs Committee.
California Senate Bill Number 458 (“SB 458”) signed into law on July 15, 2011 and effective immediately as an urgency statue, corrects the major defects in CCP 580e which was enacted by SB 931 in 2010 and treats a short sale consented to by a lender more like a non-judicial foreclosure sale. The new legislation should encourage the use of short sales both by borrowers and by lenders.
SB 458 is the product of intensive negotiations among the various interest groups involved in consumer real estate lending: consumer real estate lenders, mortgage banks, commercial banks, realtors and consumer advocates.
SB 458 revises and restructures prior CCP 580e. First, it divides consumer short sales into two categories: (i) those where a note is secured solely by a deed of trust/mortgage on a dwelling of not more than 4 units; and (ii) those where a note is secured by a deed of trust/mortgage on a dwelling of not more than 4 units but is also secured by other assets. The provisions applicable to the two categories are similar but not identical.
Note Secured Solely By A Dwelling
As for the first category the statute, CCP 580e section (a)(1) provides with unequivocal clarity that:
“No deficiency shall be owed or collected and no deficiency judgment shall be requested or rendered for any deficiency upon a note secured solely by a deed of trust or 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 amount of the indebtedness outstanding at the time of the sale in accordance with the written consent of the holder of the deed of trust or mortgage, provided both of the following have occurred : (A) the title to the property has been voluntarily transferred to a buyer by grant deed or by other document of conveyance that has been recorded in the county where all or part of the real property is located, and (B) the proceeds of the sale have been tendered to the mortgagee, beneficiary or the agent of the mortgagee or beneficiary in accordance with the parties’ agreement.”
This section has certain interesting aspects. First, it applies to any holder of a deed of trust/mortgage who agrees to receive proceeds from a short sale and, in fact, tendered proceeds as agreed. Prior 580e applied only to holders of first-priority liens.
Second, this provision would exclude loans secured by a dwelling of more than four units. Prior 580e has been criticized by lenders which make loans for the construction of residential developments secured by multiple dwelling units. The new language in SB 458 now makes it clear that if there were more than one dwelling unit held as collateral, subsection (a)(1) would not apply (but subsection (a)(2) would apply).
Third, by using the words “outstanding indebtedness,” SB 458 resolves the confusion that existed under prior 580e which used the words “indebtedness…due”. As lenders are award, the obligations which are “due” under a loan are often understood to mean those that are currently “due and owing.” However, the obligations which are “outstanding” means all amounts which have been advanced on a loan and includes those amounts which are currently due and those amounts which are not currently due but would be due in the future if the note should be accelerated.
Fourth, prior 580e required that the holder of the deed of trust/mortgage receive all the proceeds of the sale. Under SB 458 the parties are free to agree on how the sale proceeds are to be distributed (including use of such funds to pay senior debts).
Fifth, the new language of Section 580e would allow for dismissal on demurrer of any complaint for a deficiency filed by a lender in violation of this section. As such it would give the borrower a right to attorneys’ fees to the extent that attorneys fees are provided for in the deed of trust/mortgage.
As for the second category of notes, revised CCP 580e provides in subsection (a)(2) that if subsection (a)(1) does not apply:
“No judgment shall be rendered for any deficiency upon a note secured by a deed of trust or mortgage for a dwelling of not more than 4 units, if the trustor or mortgagor sells the dwelling for a price less than the amount of the indebtedness outstanding at the time of the sale in accordance with the written consent of the holder of the deed of trust or mortgage.”
This section goes on to expressly preserve the continuing rights and obligations of all parties to the loan upon completion of the short sale.
“Following the sale, in accordance with the holder’s written consent, 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 the note, deed of trust, or mortgage with respect to any other property that secures the note shall be treated and determined as if the dwelling had been sold through foreclosure under a power of sale in the deed of trust or mortgage for a price equal to the sale proceeds received by the holder.”
As with subsection (a)(1), subsection (2) applies to all lienholders that consent to the sale not only to lienholders with first priority liens. This subsection also uses the term “outstanding indebtedness” not indebtedness which is “due.”
In addition, subsection (a)(2) expressly preserves all rights, remedies and obligations of all parties and treats all parties as if a non-judicial foreclosure sale had been conducted by virtue of the secured party’s consent to the short sale. This effectively incorporates by reference the long history of caselaw interpreting CCP 580d. It makes that case law applicable to interpreting the legal effect of a short sale consented to by the secured party. This language and the incorporation of this case law resolves the most serious problem of prior CCP 580e which expressly required the consenting secured party to accept the sale proceeds in satisfaction of the secured obligation. SB 458 makes it clear that if a secured creditor holds any additional collateral or any guaranty to support the secured obligation, the secured obligation is not deemed satisfied. The secured creditor will retain all rights to foreclose on such additional collateral and all rights to collect from any guarantor following completion of the consented short sale.
Another interesting point is that the caselaw of CCP 580d is incorporated only into subsection (a)(2) and not into subsection (a)(1). A punctilious and literal interpretation of SB 458 could support an argument that the incorporation of the caselaw of CCP 580d into CCP 580e, applies only to category (a)(2) loans (i.e. notes secured by more than a single dwelling) and does not apply to category (1) loans (i.e. notes secured solely by a single dwelling unit.
However such a narrow interpretation is not logical and could be said to lead to absurd legal results that could not have been intended by the Legislature.
Exclusions from Scope of 580e
SB 458 also preserves and expands upon the exclusions set forth in prior CCP 580e. First, revised CCP 580e provides that the protections: “shall not limit the ability of the holder of the deed of trust or mortgage to seek damages and use existing rights and remedies against the trustor or mortgagor or any third party for fraud or waste.” This provision is not entirely necessary since the case law of CCP 580d already excludes any claims and damages for fraud or waste.
SB 458 expressly provides that it “shall not apply to any deed of trust or mortgage or other lien given to secure payment of bonds or other evidence of indebtedness authorized or permitted to be issued by the Commissioner of Corporations, or that is made by a public utility subject to the Public Utilities Act…”
SB 458 also adds another major limitation. Prior CCP 580e excluded situations where the trustor/mortgagor was a corporation or a political subdivision of a State and has been criticized on the grounds that it could be apply to too many non-consumer residential transactions where trustors/mortgagors were limited partnerships and limited liability companies. Revised CCP 580e has been amended to expand the exclusions and now shall not apply to situations where the trustor/mortgagor is a corporation, limited liability company, limited partnership or political subdivision of the state. This additional language will go a long way toward excluding most commercial loan transactions and narrowing the scope of CCP 580e to consumer residential transactions where an individual is involved or such individual’s estate planning trust is involved.
However it is important to note that revised CCP 580e does not exclude all non-residential loans. If there is a commercial loan made to a borrower who is an individual or a trust, and if that loan is secured by a dwelling of 1-4 units either by itself or as part of a collateral package, that loan would be subject to CCP 580e if the Lender should agree to a sale of the dwelling for payment of less than the outstanding secured obligation. So the Lender must be careful in how it deals with its collateral.
Attempts to Avoid Applicability and Waivers
To insure that the protections of CCP 580e are not too easily avoided, language was added that:
“A holder of a note shall not require the trustor, mortgagor or maker of the note to pay any additional compensation aside from the proceeds of the sale in exchange for the written consent to the sale.”
Further revised CCP 580e expressly provides that any purported waiver of the protections shall be void as against public policy.
Finally to expedite the effectiveness of the SB 458, it provides that it is enacted as an “urgency statute” and will be effective immediately.
Kevin Gould, Director of State Government Relations, is CBA’s lead lobbyist on SB 458.
- Peter Munoz is based in San Francisco and can be reached at 415-659-5964 firstname.lastname@example.org.
The information contained in this CBA Regulatory Compliance Bulletin is not intended to constitute, and should not be received as, legal advice. Please consult with your counsel for more detailed information applicable to your institution.
Posted with permission from Leland Chan, California Bankers Association