In a major victory for REALTORS®, Governor Brown signed into law today a C.A.R.-sponsored bill, 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.
FTC WILL NOT ENFORCE MARS AGAINST REALTORS®
As another major victory for REALTORS®, the Federal Trade Commission (FTC) announced today that it will generally not enforce the Mortgage Assistance Relief Services (MARS) Rule against real estate brokers and agents engaged in short sales. Real estate professionals must nevertheless comply with MARS prohibitions against misrepresentations and other laws prohibiting unfair and deceptive acts. Also, FTC’s forbearance of enforcement is limited to real estate licensees in good standing and acting in compliance with state laws, who assist consumers in negotiating, obtaining, or arranging short sales in the course of securing the sale of the consumer’s home.
In its announcement today, the FTC acknowledged “it is especially important that the Rule not inadvertently discourage real estate professionals from helping consumers” with short sales. The FTC will, however, continue to enforce the MARS Rule as to all other providers of mortgage assistance relief services, and also as against real estate professionals doing loan modifications or other types of mortgage assistance relief services.
Next week, on July 21, 2011, the FTC’s rulemaking authority for MARS will be transferred to the new Consumer Financial Protection Bureau (CFPB), but the FTC will continue to enforce the Rule. The CFPB will have the authority to determine whether to change the MARS Rule as it applies to real estate professionals conducting short sales.
The FTC’s News Release is available at http://www.ftc.gov/opa/2011/07/mars.shtm.
Senate Bill 458, passed by California's legislature as an urgency statute with an immediate effective date, limits lenders' demands in connection with short sales. It effectively treats a short sale to which a lender consents as if it is a non-judicial foreclosure sale. This is significant because, under California law, a lender may not obtain a deficiency following a non-judicial foreclosure sale.
SB 458 follows Senate Bill 931, which was passed in 2010. SB 931 added Section 580e to California's Code of Civil Procedure. SB 931 provided that "[no] judgment shall be rendered for any deficiency under a note secured by a first deed of trust or first mortgage for a dwelling of not more than four units." SB 458 expands on SB 931 by prohibiting the holder of a residential mortgage loan from requiring the borrower to pay any additional compensation, aside from the proceeds of the sale, in exchange for the lender's written consent to the sale. In short, it appears a lender who agrees to a short sale may not require the borrower to either (a) pay additional sums beyond the proceeds of the short sale, or (b) sign a short sale note.
SB 458 also amends Section 580e to exclude many commercial transactions, such as where the trustor is a corporation, limited liability company or limited partnership.
JJ - K&L Gates
