By Professor Dan Schechter
Under California law, homeowners who borrow money to buy a house are protected from "deficiency liability" under Cal. Code Civ. Proc. §580b. Unfortunately, that protection is lost when the mortgage is refinanced, since the debt is no longer a "purchase money" obligation. Several years ago, the Insolvency Law Committee of the California State Bar began to work on a legislative proposal to extend purchase money protection to refinancing transactions; as a member of that committee, I have been closely involved in drafting the proposal and in attempting to shepherd it through the legislative process.
Following a long series of discussions among the State Bar, the lending industry and other relevant players, Sen. Ellen Corbett (D-San Leandro) offered to sponsor the bill (now labeled SB 1069). It has been amended during its journey through the Legislature and, as of mid-March, 2012, it is now before the Senate Committee on the Judiciary; although some peripheral issues have been cut from the current draft of the bill, the essence of our original proposal is still intact. Further hearings are expected before the bill comes before the full Senate later this year. If this bill passes in its present form and is signed by the governor, it will apply to transactions occurring after January 1, 2013.
Similar legislation proposed by the California Association of Realtors was passed during the last year of Gov. Schwarzenegger's administration. That proposal would have applied retroactively to all refinancing transactions, regardless of when they were funded. Our committee did not endorse that proposal because we had doubts about its constitutionality; we felt that it could violate the Contracts Clause because it would have altered the rights of parties to existing contracts. The governor's veto message specifically mentioned retroactivity as the reason for his veto of that bill.
Here is the latest version of SB 1069:
SUMMARY: An act to amend Section 580b of the Code of Civil Procedure, relating to deficiency judgments.
BILL NUMBER: SB 1069 AMENDED
AMENDED IN SENATE MARCH 15, 2012
INTRODUCED BY: Senator Corbett
FEBRUARY 13, 2012
An act to amend Section 580b of the Code of Civil Procedure, relating to deficiency judgments.
LEGISLATIVE COUNSEL'S DIGEST
SB 1069, as amended, Corbett. Deficiency judgments.
Existing law provides that no deficiency judgment shall lie following a judicial foreclosure with respect to, among other things, a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of real property, or under a deed of trust or mortgage on a dwelling to secure repayment of a purchase money loan which was in fact used to pay all or part of the purchase price of that dwelling.
This bill would additionally provide that no deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction that is used to refinance a purchase money loan, as defined, or subsequent refinances of a purchase money loan, except to the extent that the lender or creditor advances new principal which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the refinance. The bill would provide, for purposes of these provisions, that any payment of principal for a refinanced purchase money loan would be deemed to be applied first to the principal balance of the purchase money loan, and then to the remaining principal balance, as specified. The bill's provisions would apply to a loan, refinance, or other credit transaction used to refinance a purchase money loan which is executed on or after January 1, 2013.
Vote: majority. Appropriation: no. Fiscal committee: no. State-mandated local program: no.
THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:
SECTION 1. Section 580b of the Code of Civil Procedure is amended to read:
580b. (a) No deficiency judgment shall lie in any event for the following:
(1) After a sale of real property or an estate for years therein for failure of the purchaser to complete his or her contract of sale.
(2) Under a deed of trust or mortgage given to the vendor to secure payment of the balance of the purchase price of that real property or estate for years therein.
(3) Under a deed of trust or mortgage on a dwelling for not more than four families given to a lender to secure repayment of a loan which was in fact used to pay all or part of the purchase price of that dwelling, occupied entirely or in part by the purchaser.
(b) For purposes of subdivision (c), a loan described in paragraph (3) of subdivision (a) is a "purchase money loan."
(c) No deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction (collectively, a "credit transaction") which is used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, except to the extent that in a credit transaction, the lender or creditor advances new principal (hereafter "new advance") which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the credit transaction. Any new credit transaction shall be deemed to be a purchase money loan except as to the principal amount of any new advance. For purposes of this section, any payment of principal shall be deemed to be applied first to the principal balance of the purchase money loan, and then to the principal balance of any new advance, and interest payments shall be applied to any interest due and owing. The provisions of this subdivision shall only apply to credit transactions that are executed on or after January 1, 2013.
(d) Where both a chattel mortgage and a deed of trust or mortgage have been given to secure payment of the balance of the combined purchase price of both real and personal property, no deficiency judgment shall lie at any time under any one thereof if no deficiency judgment would lie under the deed of trust or mortgage on the real property or estate for years therein.
2011 CA S.B. 1069 (NS)
END OF DOCUMENT