by THEODORE A. PRENOVOST, ESQ.
Governor Brown signed into law on July 15, 2011 Senate Bill 458, prohibiting a deficiency after a short sale for one-to-four residential units, regardless of whether the lender is a senior or junior lienholder. Effective immediately for transactions closing escrow from this day forward, both senior and junior lienholders cannot require a borrower to owe or pay for a deficiency in a short sale. This law also prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units. Any purported waiver of this rule shall be void and against public policy.
Although a lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval, the new law does not prohibit a borrower from voluntarily offering a monetary contribution to a lender in hopes of obtaining a short sale. A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, agents, relatives, and the like.
Exceptions to the new law include a lender seeking damages for a borrower’s fraud or waste; a borrower that is a corporation, LLC, limited partnership, or political subdivision of the state; a lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.
This law is fully set forth as Senate Bill 458 (Corbett) at www.leginfo.ca.gov.
As we have discussed in the past, the much abbreviated rendition of Code of Civil Procedure § 580e [enacted late 2010 – see attached] afforded anti-deficiency protection " … under a note secured [only] by a first deed of trust or first mortgage …", i.e., junior deed of trust holder(s) or mortgagee(s) were not subject to the anti-deficiency bar to seek damages against the borrower after a short sale approved by the first trust deed – that loop-hole is now closed and all approving secured creditors are subject to anti-deficiency protection in favor of the borrower – short sale seller. Furthermore, the amended statute sets new prohibitions against lenders negotiating or requiring addition consideration from the borrower in exchange for agreeing to a short sale – except as allowed in the statute as referenced above.
This additional anti-deficiency protection was originally sought in 2010 by industry lobbyists but not included therein when Governor Schwarzenegger signed the first version of Code of Civil Procedure § 580e into law. One more thing to think about when negotiating short sales.
Theodore A. Prenovost 17 year experienced trial attorney specializing in local, regional and national civil litigation on behalf of banks, businesses, contractors, corporations, finance companies and individuals both directly and through their insurance companies construction defect, employment liability, real estate finance and business litigation.. More information about this law firm can be obtained at (714) 547-2444.
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