BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 306|
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CONSENT
Bill No: SB 306
Author: Calderon (D)
Amended: 4/21/09
Vote: 21
SENATE BANKING, FINANCE & INSURANCE COMM : 9-0, 4/1/09
AYES: Calderon, Runner, Correa, Cox, Florez, Kehoe, Liu,
Lowenthal,
Padilla
NO VOTE RECORDED: Harman
SENATE JUDICIARY COMMITTEE : 5- 0, 4/14/09
AYES: Corbett, Harman, Florez, Leno, Walters
SUBJECT : Real property transactions
SOURCE : California Escrow Association
Escrow Agents Fidelity Corporation
United Trustees Association
DIGEST : This bill enacts three separate provisions
relating to real property transactions. This bill enacts
technical and clarifying changes to SB 1137 (Perata,
Corbett, Machado, Chapter 69, Statutes of 2008), which
required, among other things, that a lender or servicer
contact a borrower at least 30 days prior to filing a
Notice of Default (the first step in the non-judicial
foreclosure process), and that tenants receive notice that
their rental property is in foreclosure; establishes a
minimum time period in which a payoff demand statement must
CONTINUED
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be valid, create a short-pay demand agreement; and
clarifies the coverage of the Escrow Agents' Fidelity
Corporation.
ANALYSIS : Existing law:
1.Provides rules by which an entitled person, as defined,
may request a payoff demand statement in connection with
a mortgage or deed of trust, and defines a payoff demand
statement as a written demand made by an entitled person
or authorized agent, setting forth the amounts required
as of the date of preparation by the beneficiary
(generally, the lender), to fully satisfy all obligations
secured by the loan that is the subject of the payoff
demand statement (Civil Code Section 2943). Also
requires the following in connection with a payoff demand
statement:
A. The statement must include information reasonably
necessary to calculate the payoff amount on a per diem
basis for the period of time, not to exceed 30 days,
during which the per diem amount is not changed by the
terms of the note.
B. The beneficiary or his or her authorized agent must
prepare and deliver the payoff demand statement to the
entitled person within 21 days of receiving the demand
for it.
C. However, if the loan is subject to a recorded
notice of default (NOD) or a filed complaint
commencing a judicial foreclosure, the beneficiary is
under no obligation to prepare and deliver a payoff
demand statement, unless the written demand for the
statement is received prior to the first publication
of a notice of sale, or the notice of the first date
of sale established by a court.
2.Defines an exchange facilitator (EF), as specified;
requires EFs doing business in California to meet
specified financial criteria and comply with specified
requirements related to their custodianship of money and
property involved in Section 1031 real property
exchanges; and establishes specified prohibitions which
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apply to EFs doing business in California (Financial Code
Section 51000 et seq.).
3.Establishes the Escrow Agents' Fidelity Corporation
(EAFC) to provide fidelity coverage to escrow agents, as
specified, and requires each person licensed under the
Escrow Law, who is engaged in the business of receiving
specified types of escrows within California, to
participate as a member in EAFC (Financial Code Sections
Section 17312 and 17314).
4.Regulates the non-judicial foreclosure process pursuant
to the power of sale contained within a mortgage contract
or deed of trust, and provides that in order to commence
the non-judicial foreclosure process, a trustee,
mortgagee, or beneficiary must record a NOD and allow
three months to lapse before setting a date for sale of
the property (Civil Code Section 2924). Further requires
the following, in connection with the filing of an NOD:
A. Prior to recording an NOD, a mortgagee, trustee,
beneficiary, or authorized agent is required to make a
due diligence effort, as defined, to contact a
borrower, for purposes of assessing the borrower's
financial situation and exploring options for avoiding
foreclosure.
B. That mortgagee, trustee, beneficiary, or authorized
agent is required to wait at least 30 days after
making contact with a borrower or upon exhausting its
due diligence efforts to contact the borrower, before
recording an NOD.
C. The aforementioned 30-day period in which a due
diligence effort must be made to contact the borrower
does not apply if the borrower has surrendered the
property to the mortgagee, trustee, beneficiary, or
authorized agent; the borrower has contracted with an
organization, person, or entity whose primary business
is advising people who have decided to leave their
homes on how to extend the foreclosure process; or the
borrower has filed for bankruptcy, and the proceedings
have not yet been finalized.
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This bill:
Payoff Demand Changes
1. Establishes a minimum period of time that a payoff
demand statement must be valid, as the lesser of: (a)
ten days from the date of preparation by the
beneficiary, or (b) the number of days from the date of
preparation by the beneficiary until the terms of the
note result in a change in the per diem amount.
2. Defines a short-pay agreement as an agreement, in
writing, in which the beneficiary agrees to release its
lien on a property in return for payment of an amount
less than the secured obligation.
3. Defines a short-pay demand statement as a written
agreement, conditioned on the existence of a short-pay
agreement, which is prepared in response to a written
demand made by an entitled person or an authorized
agent, setting forth an amount less than the outstanding
debt, together with any terms and conditions, under
which the beneficiary will execute and deliver a
reconveyance of the deed of trust securing the note that
is the subject of the short-pay demand statement.
4. Provides that a short-pay demand statement shall be
valid for the same length of time as a payoff demand
statement (i.e., a period of time that is no greater
than 30 days from the date of preparation by the
beneficiary and no less than the lesser of: a) ten days
from the date of preparation by the beneficiary, or b)
the number of days from the date of preparation by the
beneficiary until the terms of the note result in a
change in the per diem amount).
5. Requires a beneficiary or his or her authorized agent to
provide a short-pay demand statement to an entitled
person or his or her authorized agent within 21 days of
receiving a demand for the statement from the entitled
person or his or her agent, but would provide that if a
beneficiary or his or her authorized agent elects not to
proceed with the short-sale transaction, he or she is
not required to provide a short-pay demand statement;
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instead, the beneficiary or his or her authorized agent
is required to provide a written statement regarding its
decision not to proceed with the transaction, within 21
days of receiving the demand for the short-pay demand
statement.
6. Further provides that if the terms and conditions of the
short-pay agreement require approval by the beneficiary
of a closing statement or similar document prepared by
the escrow holder, approval or disapproval must be
provided no more than four days after the beneficiary
receives the closing statement, except as specified.
EAFC Coverage Clarification
7. Explicitly exempts money or property held by or
deposited with a person acting as an EF from real
property escrows for which EAFC is required to provide
fidelity coverage.
SB 1137 Cleanup
8. Clarifies that the 30-day period during which a
mortgagee, trustee, beneficiary, or authorized agent
must contact a borrower or make due diligence efforts in
that regard expires 30 days after initial contact is
made.
9. Revises the declaration that a mortgagee, beneficiary,
or authorized agent is required to make when it records
a NOD by eliminating the requirement to identify whether
a borrower has surrendered his or her property and
instead requires the notice to include a statement
noting that contact was not required pursuant to one of
three exceptions under existing law (bankruptcy,
surrender of property, or contracting to extend the
foreclosure process).
10.Redefines a pending bankruptcy case as one in which a
case has been filed by the borrower under Chapter 7, 11,
12, or 13 of Title 11 of the United States Code and in
which the bankruptcy court has not entered an order
closing or dismissing the bankruptcy case, or granting
relief from a stay of foreclosure.
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11.Tightens the definition of mortgages or deeds of trust
to which SB 1137 applies, by clarifying that the bill
applies to mortgages or deeds of trust recorded from
January 1, 2003 through December 31, 2007, secured by
residential real property containing no more than four
dwelling units, which includes the principal residence
of the borrower, as indicated by the borrower to the
lender in loan documents.
12.Restates legislative findings and declarations regarding
the obligations of servicers to maximize the net present
value of an asset pursuant to a pooling and servicing
agreement.
13.Clarifies the procedures that must be followed when a
mortgagee, trustee, beneficiary, or authorized agent
mails a specified notice to the resident of a property
on which foreclosure proceedings have begun, by
requiring the notice to be sent via first-class mail,
concurrently with the notice of sale, which is already
required to be mailed to the trustor, mortgagor, and
other entitled parties pursuant to Civil Code Section
2924b.
14.Makes other minor and technical clarifying changes.
Background - Each of the three provisions of this bill is
described separately below.
Payoff Demand Changes: Escrow agents hold funds for others
during real estate transactions, and disburse those funds
to parties involved in real estate transactions, in
accordance with escrow instructions. Because nearly all
real property transactions involve mortgages, escrow agents
rely on lenders to provide the payoff statements needed to
calculate how much money to disburse to each party involved
in the transaction. Some lenders have begun providing
payoff statements to escrow agents that expire before the
escrow agent is able to disburse funds. Valid (unexpired)
payoff statements are required, to ensure that the title to
a property can be properly conveyed to the purchaser.
Escrow agents are seeking a change in the law to ensure
that the payoff statements they receive from lenders are
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valid for a long enough period of time to allow them to
disburse funds in accordance with valid payoff statements,
which, in turn, allows property title to transfer cleanly.
Existing law specifies a maximum length of time that payoff
statements must be valid, but does not specify a minimum.
This bill would provide that minimum, by requiring payoff
statements to be valid for no lesser than the lesser of ten
days from date of preparation or the number of days from
the date of preparation by the beneficiary until the terms
of the note result in a change in the per diem amount. For
example, on a mortgage that is scheduled to reset on the
first of the month: Under the provisions of the bill, a
payoff demand statement prepared on the 16th of the month
would have to be valid for ten days. A payoff statement
prepared on the 25th of the month would have to be valid
until the end of the month.
This bill also creates a new type of payoff demand
statement, called a short-pay demand statement. As the
number of short sales has increased in the current housing
downturn, escrow agents have had trouble securing the valid
payoff statements they need from lenders during short sale
transactions. The changes contained in this bill are
intended to allow escrow agents to obtain valid payoff
statements during short-sale transactions.
EAFC Coverage Clarification: The Escrow Agents' Fidelity
Corporation (EAFC) was created to provide California's
licensed escrow agents with affordable fidelity coverage,
which they are required to hold as a condition of their
licensure. Fidelity coverage protects money, which is held
by escrow agents on behalf of others, against fraud in real
estate transactions. Section 1031 real property exchanges
(also known as tax-deferred exchanges, delayed exchanges,
non-simultaneous exchanges, like-kind exchanges, or Starker
exchanges) allow taxpayers to sell one or more investment
or business properties and purchase one or more like-kind
replacement properties without having to pay capital gains
taxes on the transaction. In order for these transactions
to qualify for tax-preferred treatment, the seller cannot
have control over the sales proceeds; instead, the proceeds
transfer to an individual called an exchange facilitator,
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who holds them until the close of the 1031 exchange.
EAFC believes that its coverage extends to concurrent
exchanges of real estate, and not delayed exchanges, such
as Section 1031 exchanges. Thus, EAFC is seeking a
statutory clarification that it is not required to cover
fidelity losses from escrow accounts during the period of
time that an exchange facilitator has control over escrowed
money or property involved in a 1031 exchange.
SB 1137 Cleanup: SB 1137 (Perata, Chapter 69, Statutes of
2008) enacted changes intended to decrease residential
foreclosures, protect renters whose residences fall into
foreclosure, and give local governments more tools with
which to combat blighted, vacant foreclosed properties.
Enacted on an urgency basis, the measure included language
which has proved ambiguous in places. Trustees, the
persons who physically facilitate non-judicial
foreclosures, have requested language to clarify the
operation of several of the bill's provisions relating to
nonjudicial foreclosure. Justification for some of the
more significant changes in the bill follows:
Clarifying that initial contact starts the 30 day clock
will ensure that each subsequent contact with a borrower
does not continue to push back the start of the 30-day
period.
Shortening the declaration that a mortgagee, beneficiary,
trustee, or authorized agent is required to make conforms
the requirements of the declaration to a later section of
SB 1137, which lists multiple reasons why a lender might
not be required to contact a borrower pursuant to the bill.
At present, the law requires a declaration to be included
in the NOD regarding whether failure to contact a borrower
was a result of one of the permissible reasons (but not the
others). Under this bill, this provision is changed to
require the NOD to include a declaration that the contact
requirements were satisfied; if no contact is made, the
bill does not require the beneficiary to list exactly why.
Redefining a borrower as a natural person is intended to
ensure that only individuals must be notified, not
corporations or other legal "persons" who might purchase
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property. This change also clarifies that only original
signatories to the loan must be notified; beneficiaries
will not be required to notify individuals to whom a loan
may have been assigned, because this information is not
always known to the beneficiary.
Amending the definition of owner-occupied, residential real
property in the section of SB 1137 related to borrower
contact requirements is intended to clarify that a
borrower's representation is sufficient to determine
whether a property is an owner-occupied, principal
residence. This amendment is also intended to avoid the
possibility that the owner of a large apartment complex
could move into one of its units, and in doing so, trigger
SB 1137 borrower contact reporting requirements.
Redefining the meaning of pending bankruptcy proceedings is
intended to clarify a provision that has created questions
as to its meaning through its legal imprecision.
Clarifying the delivery procedures to be followed regarding
one of the notices required to be sent is necessary to
reflect the fact that existing law imposes a requirement on
trustees that is sometimes impossible to meet. As
currently drafted, the law requires trustees to mail this
notice "at the same time" that the property is posted with
a notice of foreclosure sale. Trustees are often unaware
of the exact date a property is posted, because they use a
third party posting and publishing company to physically
post the notice. This bill directs the trustee to mail the
notice at a time certain that is known to them (when they
mail the notice of foreclosure sale to the borrower and
other specified parties listed in existing law).
FISCAL EFFECT : Appropriation: No Fiscal Com.: No
Local: No
SUPPORT : (Verified 4/20/09)
California Escrow Association (co-source)
Escrow Agents Fidelity Corporation (co-source)
United Trustees Association (co-source)
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JA:nl 4/21/09 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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