Insolvency Legislative Update
California enacted a number of pieces of legislation over the last year or so of great importance to insolvency professionals. These include bills impacting mortgage foreclosures, sales of tax-defaulted property, wage garnishment and municipal bankruptcy.
This update will summarize the recent legislation pertaining to mortgage foreclosures, as well as legislation concerning municipal bankruptcies, sales of tax-defaulted property, and blighted property protection, among other insolvency-related subjects.
MORTGAGE AND FORECLOSURE LEGISLATION:
SB 980 (Prohibition on Foreclosure While Negotiating Loan Modification)
Current law (until January 1, 2013) prohibits any person who negotiates, attempts to negotiate, arranges, attempts to arrange, or otherwise offers to perform residential mortgage loan modifications for mortgages and deeds of trust secured by real property containing four or fewer dwelling units, for a fee paid by the borrower, from demanding or receiving any pre-performance compensation, requiring collateral to secure payment, or taking a power of attorney from the borrower. Existing law makes the violation of those provisions a crime and, with respect to an attorney, cause for imposition of discipline. This bill extends the operation of those provisions until January 1, 2017.
Enacted September 2012. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_0951-1000/sb_980_bill_20120925_chaptered.pdf
SB 458 (Protection from Deficiency Judgments Following Agreed Short Sale)
Pursuant to Senate Bill 580, Section 580e of the California Civil Procedure Code was amended to prohibit a lender or other party holding a deed of trust or mortgage secured by residential real property (one- to four-family units) from taking a deficiency judgment following a “short sale” (i.e., a sale for a price less than the remaining amount of the debt secured by the property) to which the lender has agreed in writing. Under such circumstances, the lender’s receipt of the sale proceeds fully discharges the remaining debt. This protection does not extend to a borrower who commits fraud with respect to the sale, or waste with respect to the property. This legislation also prohibits the holder of a note from requiring the borrower to pay any additional compensation in exchange for the holder’s written consent to the sale.
These protections do not apply to corporate or political subdivision borrowers. They also are inapplicable to any deed of trust, mortgage, or other lien given to secure the payment of bonds or other debt authorized by the Commissioner of Corporations, or that is made by a public utility subject to the Public Utilities Act. This legislation expressly provides that any purported waiver of these provisions is void, as being against public policy.
Enacted July 2011 (effective January 2012). Link to bill: http://leginfo.ca.gov/pub/11-12/bill/sen/sb_0451-0500/sb_458_bill_20110715_chaptered.pdf
SB 1069 (Prohibition of Deficiency Judgment on Refinanced Purchase Money Loan)
Existing law provides that a deficiency judgment following a judicial foreclosure is not permitted with respect to a deed of trust or mortgage given to the seller to secure payment of the balance of the purchase price of real property, or under a deed of trust or mortgage on a dwelling to secure repayment of a purchase money loan which was used to pay all or part of the purchase price of that dwelling. This legislation additionally provides that no deficiency judgment is permitted on any loan, refinance, or other credit transaction that is used to refinance a purchase money loan (as defined), or subsequent refinances of a purchase money loan, except to the extent that the lender advances new principal which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the refinance. The bill’s provisions only apply to a loan, refinance, or other credit transaction used to refinance a purchase money loan which is executed on or after January 1, 2013.
Enacted July 2012. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/sen/sb_1051-1100/sb_1069_bill_20120709_chaptered.pdf
AB 278 (Required Mortgage Service Communications with Borrower Before Foreclosure)
Existing law, until January 1, 2013, requires the holder of a mortgage or deed of trust (or authorized agent) to contact the borrower prior to filing a notice of default to explore options for the borrower to avoid foreclosure, as specified. Existing law requires a notice of default or, in certain circumstances, a notice of sale, to include a declaration stating that the holder of the mortgage (or authorized agent) has contacted the borrower, has tried with due diligence to contact the borrower, or that no contact was required for a specified reason.
This legislation adds mortgage servicers (as defined) to these provisions, and extends the operation of these provisions indefinitely, except that it deletes the requirement with respect to a notice of sale. The bill, until January 1, 2018, additionally requires the borrower to be provided with specified information in writing prior to recordation of a notice of default. The bill also prohibits the holder of a mortgage (or authorized agent) from recording a notice of default or, until January 1, 2018, recording a notice of sale or conducting a trustee’s sale, while a loan modification application is pending with respect to a first lien, under specified conditions.
The new statute prohibits recordation of a notice of default or a notice of sale or the conduct of a trustee’s sale if a foreclosure prevention alternative has been approved and certain conditions exist and, until January 1, 2018, requires recordation of a rescission of those notices upon execution of a permanent foreclosure prevention alternative. The legislation also, until January 1, 2018, prohibits the collection of application fees and the collection of late fees while a foreclosure prevention alternative is being considered, if certain criteria are met, and requires a subsequent mortgage servicer to honor any previously approved foreclosure prevention alternative.
Further, this law authorizes a borrower to seek an injunction and damages for violations of certain of the provisions, with statutory damages up to the greater of treble actual damages or $50,000 for violation of certain provisions that is found to be intentional or reckless or resulted from willful misconduct. The bill also authorizes the awarding of attorneys’ fees for prevailing borrowers, as specified.
This legislation only applies to mortgages or deeds of trust secured by residential real property not exceeding 4 dwelling units that is owner-occupied, and, until January 1, 2018, only to those entities who conduct more than 175 foreclosure sales per year or annual reporting period (except as specified).
In addition, the bill requires, upon request from a borrower who requests a foreclosure prevention alternative, a mortgage servicer who conducts more than 175 foreclosure sales per year or annual reporting period to establish a single point of contact and provide the borrower with one or more direct means of communication with the single point of contact. The legislation specifies certain responsibilities of the single point of contact.
Moreover, the legislation requires that, before recording or filing foreclosure related documents (e.g., notice of default, notice of sale, related affidavit) the mortgage servicer ensure they are accurate and complete and supported by competent and reliable evidence to substantiate the borrower’s default and the right to foreclose, including the borrower’s loan status and loan information.
Finally, the bill, until January 1, 2018, provides that any mortgage servicer that engages in multiple and repeated violations of these requirements is liable for a civil penalty of up to $7,500 per mortgage or deed of trust, in an action brought by specified state and local government entities.
Enacted July 2012. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0251-0300/ab_278_bill_20120711_chaptered.pdf
AB 1599 (Changes to Foreclosure Procedures for Residential Property)
Existing law requires that, upon a breach of the obligation of a mortgage or deed of trust, the holder of the mortgage record a notice of default in the office of the county recorder where the mortgaged property is situated and mail the notice of default to the borrower. Existing law specifies other requirements and procedures for completion of a foreclosure sale, including recording a notice of sale prior to exercising a power of sale. Existing law requires, under specified circumstances, that a summary of mortgage terms be provided to the borrower in one of five specified languages.
This legislation, with respect to residential real property containing no more than 4 dwelling units, requires the mortgage holder (or authorized agent) to provide to the borrower, attached to a copy of the recorded notice of default and notice of sale, a summary of the information required to be contained in those notices in English and five specified languages.
The legislation also requires the Department of Corporations to provide a standard translation of the statement and summaries described above for a notice of default and a notice of sale, respectively, in those languages, and to make those documents available without charge on its internet website. The bill specifies that any mortgage holder who provides the department’s translations, in the manner prescribed, shall be in compliance with that provision.
Enacted September 2012. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_1551-1600/ab_1599_bill_20120925_chaptered.pdf
AB 2610/SB1473 (Protections for Tenants of Properties Subject to Foreclosure or Unlawful Detainer)
Existing law, until January 1, 2013, requires that a resident of property subject to foreclosure pursuant to a notice of sale under a mortgage or deed of trust be provided a specified notice advising the resident that, among other things, if the person is renting the property, the new property owner may either give the tenant a new lease or rental agreement, or provide the tenant with a 60-day eviction notice, and that other laws may prohibit the eviction or provide the tenant with a longer notice before eviction.
This legislation revises certain portions of the notice to instead require a resident of property upon which a notice of sale has been posted to be advised that if the person is renting the property, the new property owner may either give the tenant a new lease or rental agreement, or provide the tenant with a 90-day eviction notice.
The bill provides tenants or subtenants holding possession of a rental housing unit under a fixed-term residential lease entered into before transfer of title at the foreclosure sale the right to possession until the end of the lease term except in specified circumstances (including if the new owner will occupy the property as a primary residence, or if the lease was signed within the last 15 days). A tenant or subtenant in possession of a rental housing unit under a month-to-month lease at the time that property is sold in foreclosure must be provided 90 days’ written notice to quit before the tenant or subtenant may be removed from the property.
The legislation further requires a residential lease that is entered into 75 days or more after a notice of default against the property has been recorded to contain a notice to advise the potential tenant that the foreclosure process has begun on the property, and that the property may be sold, which may terminate the lease.
The new law extends the operation of these provisions until December 31, 2019.
Existing law provides, that in an unlawful detainer action, if an owner has obtained service of a prejudgment claim of right to possession, no occupant of the premises (whether or not that occupant is named in the judgment for possession), may object to the enforcement of the judgment. This legislation provides that in any action for unlawful detainer resulting from a foreclosure sale of a rental housing unit pursuant to specified provisions, the foregoing provisions regarding objection to the enforcement of a judgment do not limit the right of a tenant or subtenant to file a prejudgment claim of right of possession or to object to enforcement of a judgment for possession, regardless of whether the tenant or subtenant was served with a prejudgment claim of right to possession.
Enacted September 2012. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_2601-2650/ab_2610_bill_20120925_chaptered.pdf
AB 1950 (Restrictions on Mortgage Loan Modification Agents)
Existing law, until January 1, 2013, prohibits any person who negotiates or arranges residential mortgage loan modifications for a fee, from demanding or receiving pre-performance compensation, or requiring security as collateral or taking a power of attorney from the borrower, and makes a violation of that prohibition a misdemeanor subject to specified fines. This legislation extends the operation of the above-described provisions indefinitely.
This bill also prohibits any person from engaging in the business of, or advertising as, a mortgage loan originator without first having obtained a license endorsement, as specified.
Enacted September 2012. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_1901-1950/ab_1950_bill_20120925_chaptered.pdf
JUDGMENT ENFORCEMENT/EXEMPTION LEGISLATION
AB 929 (Changes to Exemptions to Judgment Debt Enforcement)
Existing law identifies particular property of a debtor that is exempt from enforcement of a money judgment. Existing law provides for the adjustment of these exemption amounts based on changes in the annual California Consumer Price Index for All Urban Consumers. Those exemptions are available to a debtor in a federal bankruptcy case, unless the debtor elects certain alternative exemptions available under federal bankruptcy law. Existing law also provides that a specified portion of equity in a homestead (as defined) is exempt from enforcement of a judgment debt, and establishes the amounts of the homestead exemptions available based on specified criteria.
This legislation increases the dollar amount of the exemptions for a debtor’s interest in motor vehicles, jewelry, and implements, professional books, or tools of the trade of the debtor or the debtor’s dependent. Additionally, beginning April 1, 2013, and every 3 years thereafter, the Judicial Council is required to submit to the Legislature the amount by which the dollar amounts of the homestead exemptions may be adjusted based on the change in the annual California Consumer Price Index for All Urban Consumers. Further, this bill increases the amounts of the homestead exemptions (to $175,000) for persons 55 years of age or older who meet specified income criteria.
AB 1388 (Exceptions to Exemptions to Wage Garnishment)
Current law requires an employer to withhold the amounts required by an earnings withholding (wage garnishment) order from the earnings of an employee payable for any pay period that ends during the withholding period specified in the order. Existing law provides an exemption from such garnishment for the portion of the employee’s earnings that the employee proves is necessary for the support of the employee or their family. However, under prior law, this exemption is not available if the debt was incurred for the common necessaries of life furnished to the judgment debtor or the family of the judgment debtor.
Assembly Bill 1388 deletes that exception for the common necessaries of life. Instead, this legislation provides an exception from the exemption to wage garnishment for a debt incurred pursuant to an order or award for the payment of attorney's fees in connection with certain family law proceedings.
Enacted October 2011. Link: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_1351-1400/ab_1388_bill_20111009_chaptered.html 10/18/11
AB 506 (Municipal Bankruptcy)
Under prior law, a municipality could file a petition and prosecute to completion bankruptcy proceedings under federal law, subject to certain requirements. Assembly Bill 506 prohibits a local public entity from filing under federal bankruptcy law unless the local public entity has participated in a specified neutral evaluation process with interested parties, or the local public entity has declared a fiscal emergency and has adopted a resolution by a majority vote of the governing board at a noticed public hearing that includes findings that the financial state of the local public entity jeopardizes the health, safety, or well-being of the residents of the local public entity's jurisdiction or service area absent bankruptcy protections.
Enacted October 2011. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0501-0550/ab_506_bill_20111009_chaptered.html
AB 261 (Sale of Tax Defaulted Property)
Current property tax law generally authorizes a county tax collector to sell tax-defaulted property after a certain time period (either 3 or 5 years, depending on certain criteria) has elapsed since the property became tax-defaulted. Under current law, when tax-defaulted property is sold, the deed conveys title to the purchaser free of all encumbrances of any kind existing before the sale, with specified exceptions including an exception for specified easements. Pursuant to Assembly Bill 261, easements of any kind are included within those specified exceptions to the conveyance of title free of encumbrances.
Current law provides that a proceeding based on alleged invalidity or irregularity of any proceedings instituted in a sale of tax-defaulted property can only be commenced within a specified period. This legislation provides that such a proceeding can only be commenced by recorded interest holders and their successors in interest in the real property, as specified.
Enacted September 2011. Link to bill: http://www.leginfo.ca.gov/pub/11-12/bill/asm/ab_0251-0300/ab_261_bill_20110921_chaptered.html
AB 2455 (Deferred Debt Payments for Military Members)
Under current law, members of the U.S. Military Reserve and National Guard called to active duty as a result of the Iraq or Afghanistan wars are entitled to defer payments on specified obligations (including credit cards, retail installment contracts, mortgages and auto loans) while on active duty. Assembly Bill 2455 now extends this same benefit to the spouses and legal dependents of qualified military service members. The lender may require confirmation that the service member is not receiving their active duty income from an employer during that time.
Enacted July 2010. Link to bill: http://leginfo.ca.gov/pub/09-10/bill/asm/ab_2451-2500/ab_2455_bill_20100719_chaptered.pdf
AB 2314 (Blighted Property Protection)
Under current law, a local government enforcement agency may issue a notice of violation to the owner of a residential property for the failure to comply with building codes or for the existence of a nuisance on the property. After giving the owner 30 days’ notice to abate the violation or nuisance (or a shorter period of time if deemed necessary to prevent or remedy an immediate threat to the health and safety of the public or occupants of the structure), the enforcement agency may institute any appropriate action or proceeding to prevent, restrain, correct, or abate the violation or nuisance. These actions or proceedings may include civil fines, prosecution of the owner for a misdemeanor, and in the case of a property that constitutes a substandard building” (as defined), court appointment of a receiver. If a court appoints a receiver, the receiver takes complete control of the property, collects rents, and pays all operating expenses. The receiver also hires contractors to remedy the code violations. For his/her services, the receiver is entitled to the same fees, commissions, and necessary expenses as receivers in actions to foreclose mortgages. If the rents and other income from the property are insufficient to cover the costs of repair, the receiver may borrow funds and, with court approval, secure that debt and any unrecovered costs and fees of the receiver with a lien against the property.
Existing law, until January 1, 2013, requires the owner of a foreclosed, vacant, residential property to maintain the property, including preventing excessive foliage growth that diminishes the value of surrounding properties, preventing trespassers or squatters from remaining on the property, preventing mosquito larvae from growing in standing water, and preventing other conditions that create a public nuisance. After giving the owner at least 30 days to remedy the violations, or less if conditions on the property threaten public health or safety, a governmental entity may impose a fine of up to $1,000 per day for a violation of these requirements. The governmental agency must allow for a hearing and the opportunity to contest any fine imposed. Existing law directs these fine revenues to local nuisance abatement programs.
This legislation deletes the sunset on the latter provisions requiring an owner of a foreclosed, vacant, residential property to maintain the property.
This legislation provides that if a person has purchased and is in the process of diligently abating any violation at a residential property that has been foreclosed on or after January 1, 2008, an enforcement agency shall not commence any action or proceeding until at least 60 days after the person takes title to the property, unless a shorter period of time is deemed necessary by the enforcement agency in its sole discretion to prevent or remedy an immediate threat to the health and safety of the neighboring community, the public or occupants of the structure.
This bill additionally provides that if an entity releases a lien securing a deed of trust or mortgage on a property for which a notice of pendency of action has been recorded (as specified), it shall notify in writing the enforcement agency that issued the order or notice within 30 days of releasing the lien.
The new law further allows a receiver for substandard residential property to seek a court order ordering the property owner to pay all unrecovered costs associated with a receivership.
Enacted August 2012. Link to bill: http://leginfo.ca.gov/pub/11-12/bill/asm/ab_2301-2350/ab_2314_bill_20120827_chaptered.pdf
Prepared by Gary Kaplan ([email protected]) of Farella Braun + Martel LLP in San Francisco, California, with editorial contributions by Insolvency Law Committee member Monique Jewett-Brewster, in Alameda, California. Mr. Kaplan is a member of the State Bar of California Insolvency Law Committee.