Legislating While Sacramento Burns

Michael Belote

By Michael Belote, Esq., California Advocates, UTA California Lobbyist

Given the enormity of the state budget crisis, and challenges facing the economy, it is easy to lose sight of the general legislative process which continues largely unabated, in good times and bad.  As this column is written, just three weeks remain in the 2011 legislative year.  Incredibly, more than 1,000 bills remain alive to be addressed in the final days of the session.

Previous UTA columns have detailed the bills which, fortunately, will not be enacted this year, covering subjects such as balloon payment loans, prepayment penalties, $20,000 surcharges on recording notices of sale, pre-foreclosure counseling, mandatory recordation of deeds of trust and assignments, mortgage modification programs, and more.  But of nearly 40 bills of interest to UTA in California this year, three merit mention at this point - one that has already become law, one on the governor’s desk for signature, and one that appears to be dead.

The bill already enacted is SB 458 (Corbett), dealing with short sales.  Since the bill contains an urgency clause, it went into effect immediately upon the governor’s signature on July 11, 2011.  Code of Civil Procedure Section 580e is amended by SB 458.

The stated purpose of SB 458 is to extend the current prohibition on deficiency judgments on first deeds of trust following an approved short sale, absent fraud or waste, to second trust deeds, and to clarify that the prohibitions do not apply to multiple collateral loans.  UTA consulted on the language of the change in this very technical area.  Near the end of the legislative process, however, significant language was inserted relating to financial contributions from borrowers in order to get the short sale approved.

As enacted, new Code of Civil Procedure Section 580e (b) reads as follows:  “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.”  The new language obviously has potential ramifications for any transactions pending on July 11 which required a financial contribution from the borrower/seller.  Beyond that issue, questions are already arising concerning the exact meaning of the prohibition against borrower contributions.  What about contributions which cause the deed of trust to be reconveyed prior to closing the short sale transaction?  What about contributions which the borrower indicates are voluntary, and not required as a condition of approving the short sale?  And more broadly, will the contribution prohibition make lenders less likely to approve the short sales themselves? 

A second bill important to UTA is SB 4 (Calderon), relating to notices of sale. SB 4 has been approved by both houses of the legislature, and will soon be on the governor’s desk for signature.  If signed, the bill will become effective on January 1, 2012.

SB 4 proposes to amend Civil Code Section 2924f.  On or after April 1, 2012, the bill would require notices of sale on single-family, one to four residential properties to contain specified notices to potential bidders and to borrowers.  The notice to bidders is basically designed to warn that the bidder should investigate the existence, size and priority of other liens on the property, and to be aware that the lien being foreclosed may not be a senior lien.  The notice to borrowers is intended to provide information on how borrowers can track sales and postponements.

Finally, SB 4 requires trustees to make a good faith effort to provide up to date information on sales and postponements, free of charge, via a website or telephone recording which is available 24 hours per day, seven days per week.  The language has been carefully crafted to allow for maintenance or other service interruptions, and to clarify that other than the obligation to maintain the telephone or web service, the bill confers no new rights on anyone, or obligations on the trustee.  And failure to comply would not invalidate an otherwise valid sale.

The purpose of the SB 4 language on websites and telephone recordings was to respond to concerns from consumer groups that borrowers have trouble tracking sales and postponements, and sometimes are unaware of an eventual sale until faced with eviction.

The third issue, which may well have gone away, relates to SB 561 and trustee involvement in HOA assessment lien foreclosures.  Early versions of the bill appeared to prohibit an entity contracted to enforce the obligation from acting as trustee in a nonjudicial foreclosure sale.  In other words, a trustee cannot act as trustee!  UTA attended hour upon hour of meetings on the subject.  While many in the Capitol understood the UTA position, the sponsors of the bill resisted changing the language.  The bill is technically alive for 2012 because it has passed the Assembly, but it appears that stalemate was reached and the bill is unlikely to move forward.