2014 Enhancements of California’s Anti-Deficiency Statutes Give Added Protections to Foreclosed Homeowners

2014 Updates to California Anti-Deficiency RulesWith the new year California homeowners who might suffer a foreclosure now will have enhanced protections against mortgage lenders or debt buyers trying to collect on a foreclosed first mortgage or sold-out junior mortgage. Senate Bill 426, signed into law in July 2013 and effective on January 1, 2014, strengthens California’s existing anti-deficiency statutes. Specifically, SB 426 amends CCP Sections 580b and 580d. This follows on the relatively recent addition of Section 580e applicable to the short sale context, which prevented second mortgage lenders (usually home equity line lenders) from using the short sale as leverage to coerce homeowners into agreeing to remain liable for the balance of the second mortgage after the short sale. SB 426 also follows last year’s amendments to California’s anti-deficiency rules that included refinanced purchase money loans (where there is no advance of principal) to be given the same protections as original purchase money loans.

To understand the new protections afforded to foreclosed homeowners in California, let’s recall what the two existing anti-deficiency statues amended by SB 426 already provided.

CCP Section 580b, is commonly referred to as the “Purchase Money Prohibition.” The basic prohibition contained in 580b is against deficiency judgments after a foreclosure sale of property securing a “purchase money” loan, regardless of the foreclosure method used by the lender (i.e., trustee sale or judicial foreclosure). 580b makes purchase money loans “non-recourse.” Note that the Purchase Money Prohibition does not apply to construction loans on commercial property and may not apply to construction loans on residential property.

On the other hand CCP Section 580d, which is commonly called the “Private Sale Deficiency Prohibition,” bars a mortgage lender from seeking a deficiency judgment for a balance owed after electing to foreclose using a non-judicial foreclosure sale. Non-judicial foreclosures are the foreclosure method of choice among mortgage lenders in California. This is essentially an election of remedies statute. The basic bargain of that statute is that if the lender (the beneficiary under the deed of trust) elects a trustee sale rather than the more cumbersome judicial process, then the lender cannot later seek a deficiency judgment against the homeowner. Note, however, that Section 580d does not protect against sold-out junior mortgage lenders—most often home equity lines. This is the basic problem with continuing liability for home equity lines or “HELOCs” after a foreclosure.

So what changes to California’s anti-deficiency rules became effective in 2014 as a result of SB 426? Prior to enacting SB 426, CCP Section 580b did not prohibit a lender from claiming that a deficiency was due or from attempting to collect that deficiency from the borrower using extra-judicial methods of collection like credit reporting or selling the debt to collection agencies. Sure, they couldn’t sue the foreclosed homeowner, but that didn’t mean they couldn’t harass her into paying. So, in effect SB 426 extends the anti-deficiency protections of 580b to more closely resemble a bankruptcy “discharge” of the underlying debt rather than simply preventing a lender from obtaining a judgment for the deficiency. The new language of 580b wipes out the debt period. The lender of a purchase money mortgage lender—or a collection agency who later buys the deficiency “debt”—can no longer try to collect that “debt” by any means.

Similarly, SB 426 amended Section 580d to expressly state that after a non-judicial foreclosure, no deficiency shall be owed or collected by any other means. In other words, the prohibition extends to other methods of collection such as by phone calls, credit reporting, etc., and like the language added to Section 580b, the effect is to essentially wipe out the debt for the deficiency, not just prohibit a judgment by the mortgage lender or a debt buyer or collection agency for the mortgage lender. If you are in danger of foreclosure, you should call us for a free consultation to see whether Chapter 13 bankruptcy may be able to help.

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