Borrower's Anti-Deficiency Protections Expanded

BORROWERS' ANTI-DEFICIENCY PROTECTIONS EXPANDED Effective January 1, 2014, California’s anti-deficiency laws that generally prohibit a foreclosing lender from obtaining a deficiency against a borrower have been expanded to also prohibit the lender from claiming that a deficiency is owed or collecting on a deficiency. Existing law already generally prohibits a short sale lender from claiming a deficiency is owed or from collecting a deficiency. Currently, certain lenders and debt collectors contact borrowers after foreclosure in an attempt to collect on deficiencies claimed to be due and owing. The new law, Senate Bill 426, will generally prohibit a lender from claiming that a deficiency is owed, such as on a credit report, or from collecting a deficiency. The new law applies to loans foreclosed upon by a trustee’s sale, as well as loans secured by purchase-money, owner-occupied, one-to-four residential unit properties (including refinances with no cash out). A lender, however, can pursue a deficiency against a guarantor or other surety (such as a mortgage insurer), or pursue other security for a cross-collateralized loan. In a related case, a California appellate court recently decided that a lender is prohibited from pursuing a deficiency against a borrower after a short sale of a purchase money loan (Coker v. JP Morgan Chase Bank (2013 WL 3816978) filed July 23, 2013). The Coker case involved a borrower who successfully negotiated a short sale, but agreed to remain responsible for the deficiency on a purchase money loan. After close of escrow, the lender demanded that the borrower repay over $116,000. The court, however, ruled that the anti-deficiency protection for purchase money loans under section 580b of the California Code of Civil Procedure applied not just to foreclosures, but to short sales as well. The court also decided that the waiver of a borrower’s anti-deficiency protection under section 580b was void as against public policy. The Coker case may help borrowers with short sales that closed escrow before California’s short sale anti-deficiency laws under section 580e came into effect in 2011 for one-to-four residential units (first trust deeds only starting January 1 and all deeds of trusts starting July 15). This court decision is especially significant for short sale borrowers given that another court recently decided that the statutory anti-deficiency protections under section 580e do not apply retroactively to a short sale that occurred before the statute was enacted (Bank of America, N.A. v. Roberts (2013 WL 3754831) filed July 17, 2013).