California Homeowners’ Protection Against Deficiency Judgments

Homeowners who are worried about foreclosure may wonder what would happen if a foreclosure sale fails to cover all their debts. For example, if a foreclosure sale raises $50,000, but the homeowner owes $60,000, can the lender sue the homeowner for the remaining $10,000? In California, lenders are unlikely to succeed because the Golden State has the nation’s strongest anti-deficiency laws.

Anti-deficiency laws restrict, and in many cases, prohibit, lenders from collecting the remaining balance from the homeowner. Lenders can only obtain the balance through a court order, or deficiency judgments. However, courts are required to apply anti-deficiency laws liberally in order to carry out certain public policies underlying the anti-deficiency laws.

California enacted its anti-deficiency laws to 1) prevent multiplicity of actions, 2) require exhaustion of security before resort to debtor’s unencumbered assets, and 3) prevent unjust creditor acquisition of borrower’s property (Cadlerock Joint Venture v. Lobel). Each anti-deficiency law is designed to carry out these purposes.

One-Action Rule

The first purpose behind California’s anti-deficiency laws, preventing multiplicity of actions, greatly restricts lenders’ ability to collect deficiency balances. This restriction comes from the One-Action rule, which prohibits lenders or loan servicers from collecting deficiency balances unless the lender uses judicial foreclosure (California Code of Civil Procedure 726(a)). Judicial foreclosure is foreclosure through the courts. This rule channels all attempts to collect deficiency balances through the courts by prohibiting lenders from seeking deficiency balances outside of the courthouse.

Court intervention in the foreclosure process cannot be understated. Most lenders foreclose a home without appearing before a judge. If the lender goes to court, it will cost the lender significantly more time and money, which may discourage the lender from foreclosing the property altogether. Even if the lender decides to go to court, the borrower at least has the opportunity to present his or her case before a judge.

The One-Action Rule does carry an exception though. If the “entire value of security has been lost through no fault of the creditor, the creditor may immediately bring a personal action on the debt” despite the one form of action rule” (Bank of America v. Graves). If the property loses all value and the lender has nothing to do with the loss of value, then the lender can seek deficiency without foreclosing the property in court.

However, “no fault of the creditor” can include a few situations outside of fraud. For instance, “the creditor may not unilaterally divest its security interest without the consent of the debtor” (Cadlerock Joint Venture v. Lobel). The lender must notify the borrower if the lender intends to sell or give away parts of its interest in the property or the lender must comply with the One-Action rule.

Even if the lender does find a way around the One-Action rule though, other anti-deficiency laws may still apply.

Security-First Rule    

In some cases, the lender may seek the deficiency balance before foreclosure. The second purpose of California’s anti-deficiency laws is fulfilled by the Security-First rule, which requires the lender to “exhaust his security judicially before he may obtain a monetary deficiency judgment against the debtor (Security Pacific National Bank v. Wozab). The Security-First rule does not prevent the lender from foreclosing or seeking the deficiency balance. Instead, the Security-First rule forces the lender to choose between foreclosure or deficiency.

Unlike the One-Action rule, the Security-First rule is typically triggered by the borrower. The borrower can raise the Security-First rule as an affirmative defense if the lender seeks deficiency first, thereby forcing the lender to go through the foreclosure process before requesting the deficiency balance. On the other hand, even if the borrower fails to invoke Security-First, “he may still invoke it as a sanction against the creditors…[who] has made an election of remedies and waived the security” (Security Pacific National Bank v. Wozab). In other words, the lender may lose the right to foreclose if the borrower does not trigger the Security-First rule immediately and the lender decides to seek deficiency before foreclosure.

Prohibition on Dwellings  

The One-Action rule and Security-First rule are both restrictions on how a lender can obtain a deficiency judgment. The next anti-deficiency law, Section 580, prohibits deficiency judgments against the borrower altogether. Section 580b prohibits deficiency judgments if the judgment is for a loan used to purchase a dwelling with at most four families living in it (California Code of Civil Procedure 580b).

Section 580 is one of the strongest anti-deficiency protections in the nation. Section 580c extends the deficiency protection to any loan or subsequent loan used to refinance the mortgage, regardless of whether it’s the first refinanced loan or the fifth loan. The first version of 580c only protected the value of the original loan in the refinanced loan. The state legislature recently amended 580c so that refinanced loans executed after January 1st 2013 will receive the same anti-deficiency protection as original loans.

Although Section 580 offers borrowers strong protection against deficiency judgments, 580 does not apply in every case. Section 580b does not apply if the requirements are not met: 1) the loans must be taken out for the purposes of paying the mortgage, and 2) the property must be the borrower’s dwelling. Section 580 does not apply in cases where the lender is suing for fraud because borrowers who commit a wrong cannot be rewarded with legal protection (Alliance Mortgage v. Rothwell).

Conclusion

California offers the strongest anti-deficiency laws in the nation to borrowers thanks to its One-Action rule, Security-First rule, and protection of dwellings. Although the laws contain a few corner case exceptions, homeowners who have been foreclosed are assured that lenders will not take the clothes off their backs as well.

California Homeowner Bill of Rights Halts a Foreclosure

The California Homeowner Bill of Rights is less than half a year old, but it is already making its presence known to banks and other lending institutions. On April 15th, 2013, Kevin Singh filed for a preliminary injunction against Bank of America (BoA) and ReconTurst, the lenders who sought to foreclose Singh’s home. The Eastern District Court of California granted Singh’s request and issued a temporary restraining order, preventing BoA from selling Singh’s home in Sacramento. A month later, the parties settled and the case closed.

Singh v. Bank of America shows that the California Homeowner Bill of Rights is capable of giving homeowners much needed legal assistance. The District Court cited the California Homeowner Bill of Rights in its decisions, specifically the section in the California Homeowner Bill of Rights in its decisions, specifically the section prohibiting “dual tracking.” Dual tracking is the practice of negotiating with homeowners in default on their loans for a loan modification while simultaneously advancing the foreclosure process.

In Singh’s case, Singh had submitted an application for a first lien loan modification. BoA, however, never responded to the application. Instead, the bank used its subsidiary, ReconTrust Co., to foreclose Singh. As a result, the District Court found that the California Homeowner Bill of Rights “prevents BoA from conducting a trustee’s sale.”

However, in order to obtain this injunction, Singh had to meet a few requirements.  First, Singh had to submit a complete application for a loan modification. This requirement is easy to fulfill, but also very important, because the completed application is specifically required by the California Homeowner Bill of Rights as an aspect of dual tracking.

Second, the borrower has the burden of proving that granting preliminary injunction is a reasonable course of action for the court to take (Granny Goose Foods, Inc. v. Brotherhood of Teamsters & Auto Truck Drivers). The borrower proves this by showing that the borrower is likely to succeed on the merits, that the borrower would suffer irreparable harm without the injunction, that the balance of equities is in the borrower’s favor, and that the injunction is in the public interest (Winter v. Natural Resources Defense Council).

These factors are easier to prove than they sound. An injunction which “enforces a recently enacted law designed to protect the public,” like the California Homeowner Bill of Rights, would suffice. If a person’s family is forced to leave the home, it counts as an “irreparable harm,” so just being foreclosed is typically enough to prove that the borrower would suffer “irreparable harm.”

The third factor which must be proven, that the balance of equities be in the borrower’s favor, is fulfilled by the fact that preliminary injunctions are temporary. BoA’s ability to foreclose is “merely delay[ed],” at least until future hearings can fully resolve the case. The fourth factor in determining whether a preliminary injunction can be granted, succeeding on the merits, will depend on the facts of the case. In Singh, the facts closely matched the situation envisioned as illegal in the California Homeowner Bill of Rights – a bank “dual tracking” a borrower, so proving that Singh could prevail on the merits was not difficult.

The final hurdle to a preliminary injunction, at least in federal court, is the need for a bond payment. The bond is a safety measure in case the court made an error in issuing the injunction. The bond must be paid within a week of the injunction being issued. The amount for the bond depends on the costs the court believes the lender would suffer if the injunction was incorrectly given.

The California Homeowner Bill of Rights has taken its first test and Singh v. Bank of America proves that the new law is fulfilling its promise to help borrowers keep their homes. Although there are a few hoops that the borrower must jump through to utilize the California Homeowner Bill of Rights, the requirements are not difficult to meet.

Most important though, the case sends a strong signal to banks and other lending institutions. Although Singh has to pay a security deposit of $1,000, BoA has to pay $100,000 in legal fees for this one case. Given that Singh’s home is not worth $100,000 right now, BoA and other banks have every incentive not to foreclose unless it is absolutely necessary. In contrast with the foreclosure crisis of 2008, where foreclosure was the first response banks chose when a borrower defaulted, the law has changed dramatically.

California Homeowner Bill of Rights Empowers People Fighting to Stay in Their Home

The California Homeowner Bill of Rights was designed to protect homeowners from unfair practices by lenders and mortgage servicers during the foreclosure process. It was written to make borrowers aware of proper procedure before and during a foreclosure, the resources that they have to guide them through foreclosure, and what they can do if they have found that the lenders or mortgage servicers have not followed the law during the process.

After the “National Mortgage Settlement” in 2012, California Governor Jerry Brown agreed to sign California Assembly Bill 278 into law. The bill, which was designed by California Attorney General Kamala Harris, mimics the same service standards of the National Mortgage Settlement. All mortgage loan officers must abide by the California Homeowner Bill of Rights regardless of their involvement in the National Mortgage Settlement.

Sections 4 and 5 focus on the process of face-to-face interviews between the lender and the borrower before a foreclosure can be commenced, which allows the homeowner to seek out alternatives to foreclosure.

These sections also contain the procedures that mortgage servicers must follow to ensure “due diligence” when serving a borrower with a delinquency notice. A servicer must send the borrower a first-class letter, and call the borrower a minimum of three times during the morning, afternoon and evening. The servicer must also follow-up by sending a certified letter. They should also be able to provide a toll-free telephone number with live agents to take all calls. If the servicer has an active website, then it must provide a toll-free telephone number and a section which suggests documents for the borrower to gather before speaking with a mortgage servicer agent.

Section 6 of the Bill states that the borrower, if facing financial difficulty, must be notified by a mortgage servicer, trustee, mortgagee, authorized agent or beneficiary that they have the right to request a copy of their promissory note, a copy of their deed of trust/mortgage, a copy of assignments or deed of trust that would be needed to allow the servicer to foreclose, and a copy of their payment history highlighting the most recent period where they were no more than 60 days behind in payment. This set of rules favors the borrower because, in most cases, mortgage servicers aren’t required to keep copies of every single one of the documents previously mentioned. They may only have three out of four documents required to continue with the foreclosure. Since the Bill was written, there has been an increase in companies that offer to keep records in order to furnish the mortgage services with the proper documents when the time comes for them to supply the borrower with the requested copies.

There are also regulations preventing foreclosure on a home while there is a pending loan modification application or workout plan on a first mortgage; this is known as “dual-tracking,” which is covered in section 7. The Bill specifies that the benefits of the loan or workout plan must be greater than the benefit of foreclosing to the borrower. If the borrower’s loan modification application has been denied, then the Bill offers the borrower the gift of time. The borrower will have no less than 31 days after they have received notice of denial to appeal the rejected application.

The borrower has the right to direct contact with the person or group that has the authority to prevent the foreclosure from moving forward, which is referred to as the “single point of contact” in section 9. The borrower benefits from the “single point of contact” because it allows them the opportunity to discuss alternatives to foreclosure with the bank’s representatives.

In order to proceed with a non-judicial foreclosure, the mortgagee, beneficiary, trustee or their agents must first file a notice of default in the public records three months and 20 days prior. They must also file a notice of sale 20 days prior to the actual sale date.
Section 10 describes other provisions that would ensure that the filing of the notice of default is valid. The notice of default may only be filed by the beneficiary under the mortgage or deed, the original trustee or substituted trustee if on the deed of trust, or an agent assigned by the beneficiary on the deed of trust.

Section 12 of the Bill explains that if the borrower hasn’t already attempted to use all of the resources as an alternative to foreclosure, such as the first lien loan modification process, then another servicer may suggest other alternatives to the borrower. The servicer would then be obligated to communicate with the borrower in writing and state that the borrower is eligible for evaluation for foreclosure prevention; if it is or is not necessary for the borrower to submit an application, how to obtain an application, and an explanation on the application process. The manner in which the borrower’s application is processed is also covered in the Bill.  While the application is pending, the servicer may not file a notice of default or a notice of sale. The borrower cannot be charged for application fees, processing fees, or any other fees related to the prevention of foreclosure by the servicer. The Bill also prevents servicers from collecting late payment fees during a pending application or while the borrower is appealing a denied application, as long as the borrower is making their loan modification payments on time or any foreclosure prevention method is being considered or in process.

Accuracy of documentation is highly stressed in the Bill. The servicer must keep accurate and authentic documentation regarding a homeowner’s loan. Having reliable evidence is also necessary when submitting documents such as a declaration, notice of default, notice of sale, assigning a deed of trust, or substituting a trustee. If there are any mistakes made, such as inaccuracy or lack of evidence, the servicer may be fined up to $7,500 per mortgage or deed of trust by the court. The borrower would also have the right to file suit for financial damages based on these regulations.

The California Homeowner’s Bill of Rights has received a great deal of positive feedback. The Bill has been in effect since January 1, 2013. Many predict that the provisions of the Bill will soon be replicated and used in other states.