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California Enacts Anti-Deficiency Protections on Short Sales

The California Legislature has enacted legislation that protects borrowers who are forced to dispose of
their residential real property by way of a short sale from exposure to deficiency judgments. The
legislation known as SB 931 became effective on January 1, 2011 and adds new section 581e to the
California Code of Civil Procedure.

Under the new law, a holder of a first deed of trust against a dwelling containing not more than four (4)
units who consents to the sale of the property for less than the outstanding balance owed on the secured
indebtedness is obligated to accept the short sale proceeds as full and final payment of the borrower’s
debt.   In other words, the beneficiary under a first deed of trust against qualifying real property who
consents to a short sale is thereafter prohibited from obtaining a deficiency judgment against the
borrower-seller for any unpaid balance that might otherwise be due on the note.

Borrowers who presently find themselves in the middle of a short sale transaction, or who must
contemplate such a transaction, will want to be aware of the following aspects of this new law:

•        The anti-deficiency protections afforded by new Code of Civil Procedure section 580e only apply to
first deeds of trust and first mortgages. Holders of subordinate liens are not affected by the new law’s
provisions. Thus, depending upon the circumstances, borrowers may still have exposure for personal
liability on subordinate lien loans after the close of a short sale transaction.

•        The new law only applies to deeds of trust and mortgages secured by dwellings of four (4) or
fewer units. Thus, the law does not apply to commercial or most multi-family secured indebtedness.

•        Application of the new law is not limited to owner occupied properties. Provided it is improved
with a dwelling of not more than four (4) units, the anti-deficiency protections apply to residential
investment property.

•        The anti-deficiency protections are not limited to purchase money secured indebtedness.
Refinanced secured debt is also covered by the new law.

•        Code of Civil Procedure section 580e does not protect a borrower from liability for fraud with
respect to the short sale, or for waste with respect to the real property that secures the debt. Thus,
borrowers who commit fraud in connection with the short sale transaction can be liable to their lenders
for damages sustained independent of any deficiency under the secured note.

•        Predictably, corporations and political subdivisions of the state are exempt from the new law’s
provisions.

The full text of SB 931 is available here.

For more information about this subject, please contact Madison Christian at Christian Law Group.
Christian Law Group’s practice is focused on real estate transactions and litigation, residential
mortgage lending, real estate finance, and related matters.
Intelligent Advice. Sound Solutions.

Supervised Financial Organizations Required to Provide Foreign Translations

For some time now, lenders and others who negotiate specified contracts primarily in Spanish, Chinese,
Tagalog, Vietnamese and Korean have been required under California law to provide a written
translation of that contract, in the applicable foreign language, to the other contracting party prior to the
time of signing. The requirement to provide such a translation arose from the legislature’s recognition
that due to inalterable demographic shifts, English is no longer the primary language of a sizeable and
growing segment of the California population.

Up until now, and with certain exceptions, the requirement to provide a foreign language translation was
limited to loans or extensions of credit “secured other than by real property.” However, on October 11,
2009, that changed when Governor Arnold Schwarzenegger signed Assembly Bill 1160 into law. Under
this bill, which added new section 1632.5 to the Civil Code, supervised financial organizations that
negotiate loans or extensions of credit secured by residential real property primarily in one of the above-
referenced languages will also be required to deliver a translation of the contract to the other party prior
to its execution.

With the effective date for Assembly Bill 1160 looming on the horizon, here is what you need to know in
order to stay compliant. First, the bill applies to “supervised financial organizations.” A “supervised
financial organization” is defined as a state chartered bank, savings association, credit union, holding
company, Industrial Loan Company, Finance Lender, and Residential Mortgage Lender. Federally
chartered banks, credit unions, savings banks and thrifts, however, are exempt from the bills
requirements.

Second, the bill requires the delivery of a statutorily prescribed foreign language form (to be developed
jointly by the Department of Corporations and the Department of Financial Institutions) to the
contracting party whenever a supervised financial organization negotiates a loan or extension of credit
secured by residential real property primarily in Spanish, Chinese, Tagalog, Vietnamese or Korean. The
form must be delivered to the borrower no later than three (3) business days after receipt of a written
application. An updated form must also be provided to the borrower prior to consummation of the loan
if any of the loan terms materially change after the original translation is provided.

Third, a supervised financial organization is relieved of its obligations to provide a foreign language
translation if the party with whom it is negotiating, negotiates the terms of the contract through his or
her own interpreter. In order for this exemption to apply, the interpreter (1) must not be a minor, (2)
must be able to speak fluently and read with full understanding both the English language and the
language in which the contract is negotiated, and (3) must be neither employed by nor made available
through, the supervised financial organization.

Fourth, the failure to comply with Assembly Bill 1160 is deemed a violation of a supervised financial
organization’s licensing law and may result in administrative penalties up to $2500 for the first violation,
$5000 for the second violation, and $10,000 for each subsequent violation. An action for violations of the
law may be initiated only by a licensing agency or the Attorney General. There is no private right of
action.

Finally, Assembly Bill 1160 becomes operative on July 1, 2010, or 90 days following the issuance by both
the Department of Corporations and the Department of Financial Institutions of the statutorily required
foreign translation form, whichever date is later. As of the date of this writing, neither the Department
of Corporations nor the Department of Financial Institutions has yet issued the required form.

For more information about this subject, please contact Christian Law Group. Christian Law Group’s
practice is focused on real estate transactions and litigation, residential mortgage lending, real estate
finance, and related matters.
Intelligent Advice. Sound Solutions.