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 Eliminates Dual Tracking in Foreclosure Actions

Throughout the foreclosure crisis, California lenders have been free to employ a practice known as “dual tracking.”  This practice has allowed mortgage lenders to forge ahead with foreclosure actions, including property sale, irregardless of whether they were simultanously engaged in loan modification discussions with borrowers.  In fact, “dual tracking” is a practice that many mortgage investors have long required lenders to pursue in order to expedite the foreclosure process to the extent possible.

The practice of dual tracking has presented serious problems for borrowers facing the prospect of home foreclosure.  Many borrowers have been lulled into an illusory sense of security thinking that they were protected from foreclosure while engaged in good faith loan modification negotiations with lenders, only to be blindsided by a foreclosure sale in the midst of this process.

Additionally, communication channels between lenders and borrowers have frequently become muddled as simultaneous actions were being taken by different lending departments, making it very difficult for a borrower to obtain a clear picture of the status of his or her loan at any given point in time.

To address the serious problems created by dual tracking, California has now made this practice illegal.  On October 3, 2012, a negotiated settlement took effect that bars this practice by five of California’s largest mortgage lenders including Bank of America, Citi, JP Morgan Chase, Wells Fargo, and Ally.  On January 1, 2013, California’s prohibition of dual tracking, the first such law in the United States, becomes applicable to all mortgage lenders.

Beginning in January, homeowners will have a right to sue lenders who continue to engage in the practice of dual tracking.  Under this law known as The Homeowner Bill of Rights, banks found to have violated the law may be forced to pay attorneys’ fees incurred by the borrower.  In addition, lenders may be hit with statutory civil damages of up to $50,000 per violation.  Perhaps most importantly, borrowers will be able to obtain an injunction halting foreclosure proceedings if able to demonstrate a willful, intentional, or reckless violation of the law.

If you are a California homeowner that has been subject to the practice of dual tracking, you are urged to contact a Forclosure Lawyer at The Pivtorak Law Firm by calling (415) 484-3009, or click here to request a free, confidential consultation online.

Wells Fargo Loan Modification Class Action

The Pivtorak Law Firm, as lead co-counsel, has filed a class action lawsuit against Wells Fargo as a result of an allegedly deceptive forbearance-to-loan modification program.  This action was commenced in the federal district court for the Northern District of California on April 19, 2010.

The lawsuit alleges that Wells Fargo deceitfully attempted to collect payments from defaulted California residential mortgage borrowers by sending them a letter evidently promising to stop foreclosure proceedings and to approve them for a loan modification if they showed that they could make three monthly trial plan payments.  In reality, however, the letter promised nothing and most borrowers who made all three payments according to the agreement were not offered a loan modification but were subsequently foreclosed on by Wells Fargo, the suit says.  Plaintiffs allege that this program was initiated by Wells Fargo in order to circumvent the protections of California’s anti-deficiency laws, which prevent banks for pursuing homeowners’ personal money or property after a foreclosure sale.

The form letter sent to borrowers by Wells Fargo said that the bank had “good news.”  The letter also said that, according to financial information provided by the homeowner, they were qualified for a trial program showing they can make regular payments.  The suit alleges that the letter also contained other language that easily led borrowers to believe that their long and difficult struggle to make their mortgage payments was over.  Unfortunately, according to the lawsuit, their nightmare was just beginning.

Plaintiffs argue that instead of offering a three-month trial plan that is supposed to convert into a loan modification like the government’s Home Affordable Modification Program (“HAMP”), Wells Fargo intentionally gave borrowers the wrong impression that they were being offered such a program.  Instead, the suit says, Wells Fargo collected as many payments as it could from California residential borrowers before foreclosing on their homes.

On Jan. 3, 2011, Judge Joseph C. Spero ruled against Wells Fargo in its motion to dismiss Plaintiffs’ Rosenthal Fair Debt Collection Act and unfair competition law claims.  This ruling means that Plaintiffs have standing to pursue statutory damages against Wells Fargo for its unfair debt collection practices and restitution for payments borrowers made as a result of the bank’s collection letter as well as injunctive and declaratory relief, pending class certification.

UPDATES:

February 22, 2011 – Managing Partner, Steve Berman, and his colleague Tom Loeser of the law firm of Hagens Berman Sobol Shapiro, LLP, associated into the case and will serve as co-lead counsel, representing homeowners in the case against Wells Fargo.