Lender’s Remedy in case of Default

Foreclosure Generally

Foreclosure is a legal procedure used to terminate the right, title and interest of a mortgagor or trustor in real property by selling the encumbered property and using the sale proceeds to satisfy the liens of creditors.

A mortgage without a power of sale can only be foreclosed judicially (i.e., by court proceeding). A mortgage or a deed of trust which contains a power of sale may be foreclosed nonjudicially by trustee’s sale. Most security instruments in California expressly provide for power of sale, thus providing the choice of a trustee’s sale or judicial foreclosure sale.

Where anti-deficiency judgments are sought and permitted by law, foreclosure must be by judicial proceedings and a creditor may proceed with both a foreclosure and an action to obtain a deficiency judgment in the same judicial action.

As a general rule, procedural requirements in effect at the time the foreclosure is begun will govern, even if the requirements change. (Code of Civil Procedure Section 725a, et seq.)

“One-Action” Rule

Under California law, the “one-action” rule applies for recovery of any debt or enforcement of any right secured by a mortgage on real property. (Code of Civil Procedure Section 726)

The “one-action” rule requires the mortgagee or beneficiary to first foreclose the property before seeking a personal money judgment against the debtor for the deficiency, if this latter action is permitted under the anti-deficiency rules. Only after the security has been exhausted may the unpaid creditor seek a personal judgment against the trustor/mortgagor.

There are specific exceptions to the “one-action” rule, such as the “sold out junior beneficiary” and “worthless-security” exceptions.

Where a junior lien holder on a property foreclosed by a senior lien holder holds a nonpurchase money security which has become worthless because the junior creditor no longer has a lien on the property, the “sold out” junior may sue the debtor directly on the note. However, a “sold-out” junior beneficiary or mortgagee is prohibited from suing on a purchase money note following a foreclosure sale by a senior mortgagee or trust deed holder because a judgment would result in the equivalent of a deficiency judgment.

If a property is ‘‘legally” worthless, (i.e., nonexistent or not actually owned by the mortgagor, or in a situation in which foreclosure would be meaningless because the security has been destroyed or has become valueless without any act by the creditor) or where fraud is involved, the creditor is not limited to the “one-action” rule. Under such circumstances, the creditor may sue directly on the note and need not first foreclose.

California Financial Code Section 7460 limits the damages available to the lender in fraud actions where the security property is or was the occupied residence of the borrower.

“Worthless security” does not include a loss in property value or security value due to marketplace or economic declines. Should an opinion of value of the security property be required, the mortgagee or beneficiary must first foreclose to have the court determine “economic worthlessness” and whether a writ of attachment may be granted.

Purchase Money Securities

Code of Civil Procedure Section 580b prohibits deficiency judgments with limited exceptions where “purchase money” securities are involved. For this purpose, “purchase money” means (l) credit extended by a seller to a buyer with the seller “carrying back” a promissory note executed by the buyer and secured by a trust deed on the property being purchased as a part of the purchase price, or (2) a third-party lender advancing funds to

a buyer to be used to pay all or part of the purchase price of a dwelling of not more than four units to be occupied in part or entirely by the buyer.

Thus, buyer protection against deficiency judgments is limited by the type of real property purchased. Certain creditors are denied and other creditors may obtain a deficiency judgment. As previously indicated, where third-party money is advanced to enable a buyer to purchase a residential dwelling (1-4 units) in which buyer will reside, the lender is typically barred from obtaining a deficiency judgment. However, if the third-party lender loans funds to enable a buyer to purchase residential property over 4 units, or to purchase investment or commercial property, or raw land, or residential property of 1-4 units not intended to be buyer occupied, the lender may seek a deficiency judgment against the buyer when foreclosing judicially.

Anti-Deficiency Rules

When a mortgagee or beneficiary elects to “foreclose” under a power of sale, there is a complete bar against a deficiency judgment.

Under a judicial foreclosure, if a deficiency judgment is permitted following a judicial sale, the sale is subject to redemption (buy-back) by the debtor within three months if the proceeds of the sale were adequate to satisfy the amounts owing. Otherwise, the redemption period is one year after the sale. Only after the security has first been exhausted may the creditor sue the debtor for the balance owing on the note.

Deficiency Judgments

Purchase money anti-deficiency provisions also apply to installment land contracts, and to instruments determined to be, in fact, security devices (disguised mortgages, for example, equitable liens).

Transactions falling outside the provisions of Code of Civil Procedure Section 580b (i.e., non-purchase money transactions) depend upon a “purpose” scrutiny and a security property and related analysis by the court to determine if a deficiency judgment will be allowed where third-party lenders are involved.

A borrower generally cannot waive at the time of executing the loan the protections granted by law. Subsequent to signing the loan documents, a borrower may under limited fact situations execute a waiver of rights concerning the protections granted against deficiency judgments or the “one-action” rule.

Reinstatement Rights - Pre-sale

Under a judicial foreclosure, a trustor or mortgagor or his or her successor in interest, any beneficiary under a subordinate trust deed or mortgage, or any other person having a subordinate lien or encumbrance of record, may reinstate the loan at any time before entry of judgment by restoring the loan (usually to its installment-payment basis) by paying the delinquencies and advances on the debt plus costs and fees. Thereupon, all foreclosure proceedings terminate and the loan continues in full force and effect as if no such acceleration proceeding had taken place.

Under a trustee’s sale, the statutory right of reinstatement for the individuals named above ends five business days prior to the date of the trustee’s sale or of any postponed sale.

Redemption Rights - Post-Sale

Under a judicial foreclosure, only the judgment debtor or his or her successor in interest may redeem from a foreclosure sale. All junior lien holders are eliminated under the law effective July 1, 1983. (Code of Civil Procedure Section 729.020) As mentioned previously, the redemption period is three months if the sale proceeds satisfy the debt plus interest and costs of the action. If sale proceeds are insufficient to do this, the redemption period is one year. (Code of Civil Procedure Section 729.030) If the creditor waived the deficiency judgment or it was prohibited, there is no right of redemption. [Code of Civil Procedure Section 726(e)]

During the redemption period permitted under the judicial sale, the judgment debtor or tenant in the property is entitled to remain in possession but must pay rent to the buyer at the foreclosure. Often a mortgage or deed of trust permits the mortgagee or trustee to take possession upon default under the “assignment of rents” provision and manage the property, pay expenses, and collect the rent, applying the net proceeds to the maintenance of the property and to preserve the lender’s security.

Under the trustee’s power of sale foreclosure, no post-sale redemption right exists.

Statute of Limitations

Civil Code Section 2911 provides that a lien is extinguished by time if an action on the underlying debt or obligation is not brought within the time limits stated. Judicial foreclosure actions must be filed within four years after maturity of the obligation or any installment payment. Both a mortgage and trust deed secure a written debt or obligation that if not performed creates a cause of action for four years following the default. The mortgage, being only a lien, is extinguished without action by the mortgagee four years after default. (The rule is four years from and after: the date the last payment was due; the maturity date; the date the debt was last acknowledged by the mortgagor; or the date of the default under the loan terms, whichever is the later.) The power of sale under a mortgage is also lost for inaction.

However, a deed of trust grants the trustee all of the trustor’s right, title and interest in the trust property. Even though the statute of limitations bars an action on the note, the power of sale continues unaffected by the passage of time, except the requirement to periodically renew certain deeds of trust.

Judicial Sale

The court form of foreclosure, a judicial foreclosure, is usually sought when a mortgagee or beneficiary wants to obtain a deficiency judgment. The mortgagee or beneficiary must be mindful of whether a deficiency judgment against the debtor will be sought before concluding the foreclosure remedy. Depending upon the sale results, i.e., the sale proceeds are either sufficient to pay the debt in full or insufficient to do so, the statutory period of redemption for the debtor is either three months or one year from the date of the sale.

The process. The judicial foreclosure sale process involves:

• filing a complaint and notice of action (lis pendens) which will bind all persons acquiring liens or interests in the property during the pendency of the action;

• a summons served on the parties whose interests are to be eliminated, such as the trustor or his successor in interest and junior lien holders;

• the trial, after which the judgment is entered (decree of foreclosure and order of sale);

• the recording and serving by the Sheriff of Notice of Levy followed by the Notice of Sale.

The Notice of Sale cannot be earlier than 120 days after recording and serving of the Notice of Levy if a deficiency judgment is barred or waived. Where a deficiency judgment is available, the property is sold subject to the one-year redemption period, the 120-day notice period is not required and only a 20-day Notice of Sale is needed. The 20-day Notice of Sale must be made by posting the Notice of Sale in a public place and on the property at least 20 days before the sale and by publishing the notice once a week for three weeks in a newspaper of general circulation in the city or judicial district in which the property or any part of it are located. The notice must also be mailed to all defendants at their last known address and to any other person who has requested to be notified.

The sale. The sale is to be held between 9 a.m. and 5 p.m. on a business day in the county where the property or some of it is located. The foreclosing creditor, debtor, junior lien holders and others may bid at the sale. The foreclosing creditor may creditbid up to the amount owed him, and cash bid in excess of the debt. All other bidders must bid cash except that a bidder may, if the bid price exceeds $5,000, deposit with the party conducting the sale the greater of $5,000 or 10 percent of the bid amount, and pay the balance within ten days of the sale, plus interests and costs, and damages if he fails to pay and a second sale is required.

After the sale. The Sheriff issues the highest bidder a prescribed Certificate of Sale stating the title is subject to any redemption privilege of the debtor. The certificate operates to transfer title to the purchaser. The purchaser receives no rights to possession for the period of redemption, but does have the right to receive rents. The title received by the highest bidder is subject to any senior liens but free of any junior liens. The Certificate of Sale is recorded.

Sale proceeds are applied to costs of lawsuit and attorney fees; selling expenses; amount due beneficiary; junior lien holders in order of priority; and finally the excess to the debtor.

If the debtor does not redeem the property within the 3-month or l-year (if a deficiency judgment has been obtained) redemption period, the Sheriff will issue a Deed of Conveyance containing special recitals concerning the foreclosure and sale and will record the deed. The grantee receives all right, title and interest of the trustor as of the date the trust deed or mortgage foreclosed upon was recorded. The grantee may now evict the trustor or tenant in possession.

A creditor seeking a deficiency judgment must file application in the court case within three months of the sale for a determination of the deficiency. If the court enters a deficiency judgment against the trustor or mortgagor and the beneficiary or mortgagee records it, the judgment becomes a lien upon all property owned by the debtor or acquired by him or her within ten years of the entering of the judgment ruling.

If a debt is secured by both real and personal property, the creditor may foreclose upon the real property under the power of sale and bring a separate action on the personal property security.

Trustee’s Sale - “Power of Sale” Foreclosure

The alternative method of foreclosure is called a “trustee’s sale” or “power of sale.” Usually, a corporate trustee is the entity initiating and handling the proceedings for the beneficiary or mortgagee. It is important that all statutory provisions governing the sale be complied with, as any irregularity may invalidate the sale. The “power of sale” is based upon Civil Code Section 2924, et seq., which is procedural and not substantive law.

Unless a mortgagor or trustor files suit contesting the sale, or obtains a court injunction (for example, to determine whether a valid lien exists, or whether there is a default, or the amount of the default), the court system may be entirely bypassed in a trustee’s sale.

Under the existing statutes, the time required between filing of the Notice of Default and Sale and the actual sale date allows the debtor time to seek a judicial trial or injunction to establish underlying facts. Of course, after the trustee’s sale, the mortgagor, trustor, or any other party affected by the sale may bring an action to set aside the sale, usually on procedural grounds, even though the sale is characterized as absolute.

Generally. No security instrument can be foreclosed at a trustee’s sale unless it contains a “power of sale” provision. Without a power of sale, the mortgage or trust deed must be judicially foreclosed; however, the power of sale may be an independent document as long as it is properly integrated.

In a trustee’s sale, no deficiency judgments are permitted, nor does the debtor have postsale redemption rights. However, during the statutory reinstatement period (Civil Code Section 2924, et seq.), the debtor or any other party with a junior lien or encumbrance of record on the real property may in most fact situations reinstate (bring current and restore) the debt accelerated by the creditor because of the default.

Reinstatement restores the loan to its installment-paying or other basis by curing the default and paying all costs and fees incurred by the creditor, who must then terminate the foreclosure action.

After the statutory reinstatement period, the debtor may still redeem (buy back) the property and avert the foreclosure sale by paying off the entire debt, plus interest and costs, fees, advances and any damages to the creditor, at any time within five business days prior to the date of the trustee’s sale or any sale. This is the exercise of the trustor’s “equity of redemption” privilege.

Special rules. Special rules apply in trustee’s sales involving bankruptcy, substitution of trustee, federally insured or guaranteed loans, individuals in military service, senior citizens, and Unruh Act mortgages (on single-family owner-occupied residences arising from a contract for goods or services). The advice of legal counsel should be obtained in advance of proceeding with a foreclosure involving any of the foregoing fact situations.

The Procedure

The beneficiary notifies the trustee of the default (usually a failure to make specified installment payments of principal and interest or make a balloon payment) and delivers the original note and trust deed to the trustee along with receipts, payment records and other evidence of advances made by the beneficiary to protect the security (e.g., payments to senior lenders, or taxes, fire insurance, etc.). The beneficiary signs a document for the trustee usually entitled Declaration of Default and requests foreclosure be started by the trustee.

(Any one beneficiary in a “fractionalized” trust deed may initiate the foreclosure. Further, Section 2941.9 has been added to the Civil Code regarding fractionalized trust deed holders or holders of notes in series. Section 2941.9 establishes a process through which all beneficiaries under a trust deed may agree to be governed by beneficiaries holding more than 50% of the record beneficial interest of the note. The parties must agree in writing to majority rule and each fractionalized note holder or holder of a note in series must be noticed of the action taken. The agreement between the note holders must be in the form of an affidavit and is to be acknowledged and recorded.)

The beneficiary furnishes the date of the original default to the trustee. The trustee normally obtains a title company foreclosure guaranty report showing the present condition of the record title, parties in interest and encumbrances. The trustee then prepares, records, mails and publishes the Notice of Default and Election to Sell as prescribed by statute (Civil Code Section 2924, et seq.).

Notice of default and election to sell. The Notice of Default must be executed by the beneficiary or the trustee and must state an election on the part of the beneficiary to declare the entire debt due because of the default. (Absent this declaration, the full amount owing on the debt cannot be collected at the foreclosure sale.) The Notice should make it clear that unless the default is noncurable, the trustor or the successor trustor may reinstate and cure the default prior to five business days immediately before the date of the trustee’s sale or any postponed sale.

The Notice of Default is recorded in the office of the county recorder where the real property, or some of it, is located at least three months before Notice of Sale is given.

Within ten days after recordation of the Notice of Default, a copy of the Notice containing the recording information must be sent by certified or registered mail to all persons who have requested notice and to the trustor at his or her last known address.

If there has been no request for notice by the trustor, or the request by the trustor includes no address, then the Notice of Default must be published weekly for four weeks in a newspaper of general circulation in the proper jurisdiction starting within ten days of the recording date, or the notice may be personally delivered to the trustor.

The Notice of Default, and also the Notice of Sale, are valid if the foreclosure statutes have been strictly followed, whether or not the trustor (mortgagor) has actual knowledge of the notices.

The Notice of Default must also be sent within one month of recording by registered or certified mail to persons listed in Civil Code Section 2924b even though they have not recorded a request to receive notice. These persons are: successors in interest to the trustor or mortgagor; a beneficiary or mortgagee of any junior recorded trust deed or mortgage or the assignee of such beneficiary or mortgagee; the vendee of any contract of sale, or the lessee of any lease of the interest being foreclosed which is junior to the security instrument being foreclosed, or to the successor in interest to such vendee or lessee; to the State Controller if a recorded lien for postponed property taxes exists against the property; and such other parties as are required by law.

Notice of sale. If the loan is not reinstated, the trustee issues a Notice of Trustee’s Sale, the content and form of which is prescribed by Civil Code Section 2924f(b). The Notice of Sale sets a sale date not sooner than twenty days after the recording date of the Notice of Sale. Actual practice usually requires a longer time (e.g., 31 days), especially if federal tax lien notice requirements are to be met or other justifiable delays are encountered. In any event, the sale date is set to allow time for the required recording, publication, posting and mailing of the Notice of Trustee’s Sale.

The Notice of Sale must be recorded at least fourteen days, and mailed by registered or certified mail to the trustor and other persons requesting/receiving notice of default at least twenty days, before the sale (Civil Code Section 2924b). The notice must be published once a week over a period of at least twenty days in a newspaper of general circulation in the city, county or judicial district where the real property, or any part of it, is located. Three publications of the notice not more than seven days apart are required. The notice must be posted for at least twenty days in at least one public place in the city, judicial district, or county of the sale, and in a conspicuous place on the property (a door, if possible, if the property is a single-family residence).

If the loan has not been reinstated by the debtor, a partial payment accepted by the beneficiary may not terminate the foreclosure. The beneficiary, however, should be careful when accepting partial payments to set forth in writing:

• whether it is the intention of the parties that the partial payment constitute a reinstatement and therefore a cure of the default; or • whether the partial payment is to be construed to be part of a work-out agreement providing a plan for payment of all delinquencies and related costs and expenses; or

• whether the partial payment has been received without any effect on the foreclosure process, thereby permitting the beneficiary to proceed with foreclosure as though no payment has been received.

The sale. The sale is to be conducted at a public auction by the trustee, or auctioneer

named by the trustee, on any business day between 9 a.m. and 5 p.m. in a public place in the county where the property, or some part of it, is located. All bids must be for payment in cash, cashier’s check from a qualified lender specified in the code, or “a cash equivalent which is authorized by law or has been designated in the Notice of Sale as acceptable to the trustee.” (Civil Code Section 2924h)

Until the auction bidding concludes, the debtor or any junior lien holder may still redeem the property by paying off the defaulted loan in full, plus all fees, costs and expenses permitted by law. Reinstatement of a monetary default under the terms of an obligation secured by a deed of trust or mortgage may be made at any time within the period commencing with the date of recordation of the Notice of Default, until five business days prior to the date of sale set forth in the initial recorded notice of sale. As previously stated, the reinstatement period revives as a result of a postponed sale where the postponed sale date is more than five business days subsequent to the initial sale date. [Civil Code 2924c, subdivision (e)]

Any person, including the debtor, creditor or a junior lien holder may bid. Only the selling beneficiary (holder of the debt being foreclosed) may credit-bid or offset up to the amount of the debt owed the creditor plus interest and costs. Junior lien holders may not credit-bid the amount of their junior liens. However, the amount bid by the junior lien holder would serve to reduce any potential liability that the trustor had to the junior lien holder. Further, the junior lien holder, who controls the senior lien being foreclosed, is not entitled to purchase the security property at a depressed price and then sue the trustor for deficiency under their now sold out junior promissory note.

A trustee may reject all bids if the trustee believes they are all inadequate. At the trustee’s discretion, the sale may be postponed and a new sale date at the same location announced. Bid fixing, restraining from bidding or the offering or accepting of consideration for not bidding at a trustee’s sale (“chilling the bidding process”) is unlawful and subjects the participants to fine, imprisonment, or both. [Civil Code Section 2924h(f)] The trustee may postpone a sale, by announcement at the time and place of sale, up to three times, for other compelling reasons given in the statutes. If there are more postponements, a new Notice of Sale must be published, recorded, mailed and posted.

After the sale. The successful bidder receives a Trustee’s Deed to the property containing special recitals giving notice of compliance with the foreclosure statutes to protect the purchaser and subsequent purchasers. The title conveyed is without covenant or warranty that there are no title defects and relates back in time to the date the trustor signed the trust deed. The Trustee’s Deed passes to the purchaser the title then held and any after-acquired title of the trustor, not the trustor’s title as of the sale date.

However, title will remain subject to certain liens:

• federal tax liens filed more than thirty days before the date of the trustee’s sale unless the proper twenty-five day notice has been given the Internal Revenue Service;

• assessments and real property taxes; and

• valid mechanic’s liens.

Even with proper notice to the IRS, the federal government may have the right for 120 days following the trustee’s sale to redeem the property by paying the amount advanced by the successful bidder.

Provided that the beneficiary successfully makes a “full credit bid” (bids the full amount of unpaid principal and interest and any charges, penalties, costs, expenses, attorneys’ fees, and advances that may be lawfully due and owing to the beneficiary), the sale eliminates the debt and obligation of the trustor. Whether a beneficiary full credit bids or underbids, completion of a trustee’s sale will extinguish the mortgage or trust deed lien securing the debt and obligation in favor of a beneficiary, and will extinguish any junior liens and encumbrances (e.g., mortgages, deeds of trust, judgment liens, easements, and leases which do not have priority over the lien which has been foreclosed or which do not evidence a tenancy subject to a local rent control ordinance).

A beneficiary may elect to underbid when the beneficiary anticipates a collateral action against the debtor/trustor or a claim against a third party for part payment of the amount due and owing to the beneficiary. A beneficiary may elect to proceed with a legal action for fraud, waste or malicious destruction of the security against the debtor/trustor, or third parties, or, for example, if a casualty loss has occurred to the security property for which insurance coverage is available, a beneficiary would underbid and then file a claim against the insurer under the terms of the insurance policy to recover the cost of damage to the property as part of the amount due the beneficiary.

Liens or encumbrances, including real property taxes, which are senior to the foreclosed trust deed remain on the security property. The title is free of any right of redemption by the debtor/trustor and the debtor/trustor has no further rights or interest in the security property absent a successful legal action to set aside or void the trustee’s sale. Further, a Petition in Bankruptcy may be filed by the debtor/trustor which may permit either the debtor/trustor or a trustee in the bankruptcy to void the foreclosure sale and return the security property to the estate of the debtor/trustor. Also, a transaction involving residential real property in foreclosure may be voidable and may be rescinded by the debtor/trustor within two years from the date of such transaction upon written notice if unconscionable advantage has been taken of the debtor/trustor. (See Civil Code Section 1695.14.)

The successful bidder and purchaser is entitled to immediate possession of the security property and may evict the debtor-trustor by instituting an Unlawful Detainer action subsequent to delivery of a three-day Notice to Quit. In the event the occupant is a tenant who occupies under the terms of a lease junior to the foreclosed lien and who does not occupy pursuant to any local rent control ordinance, the purchaser at the foreclosure sale may evict the tenant subsequent to the delivery of a thirty-day Notice to Vacate and thereafter, if the tenant fails to vacate, by instituting an Unlawful Detainer action subsequent to the delivery of a three-day Notice to Quit. Some attorneys recommend concurrently delivering a thirty-day and a three-day notice to tenants occupying the foreclosed property.

If a tenant occupies pursuant to a lease agreement that is senior in priority to the foreclosed lien or whose occupancy is subject to the provisions of a local rent control ordinance, the successful purchaser should seek legal advice before taking any action to evict the tenant or otherwise terminate the occupancy of the tenant. On the other hand, if the lease is subordinate in priority to the foreclosed lien, the leasehold interest may be extinguished as a result of the foreclosure sale.

Disposition of sale proceeds. The trustee distributes the foreclosure sale proceeds in the following order:

• to trustee’s fees, costs and sale expenses;

• to beneficiary to satisfy the full amount of unpaid principal and interest and any charges, penalties, costs, xpenses, attorney’s fees, and advances that may be lawfully due and owing;

• to junior lien holders in order of priority, whether matured or not;

• any surplus to the debtor/trustor.

If either a junior lien holder or the debtor/trustor disputes the distribution of funds, the trustee should file an interpleader action and have the court decide the issue.

Foreclosure Abuses

In 1979, corrective legislation was passed aimed at home-equity purchasers and mortgage foreclosure consultants. (Civil Code Sections 1695, et seq. and 2945, et seq.) These laws provide protection for homeowners who are in default on loans secured by their residences.

Civil Code Section 1695, et seq. (Home Equity Sales Contracts) requires that a contract for the sale of a residence in foreclosure to a person (an equity purchaser) who does not intend to occupy the property contain specified provisions. The law allows rescission of such contracts under specified conditions. Further, an equity purchaser who violates Section 1695.6 or Section 1695.13 may be liable for actual damages, exemplary damages in an amount not less than three times the equity seller’s actual damages, attorney’s fees and costs, and equitable relief. A criminal conviction for violation of Section 1695.6 (or for any practice which operates as fraud or deceit upon the equity seller) may result in a fine of not more than $10,000 and/or a jail sentence of not more than one year.

The law establishes a presumption that a grant to an equity purchaser with an option for the equity seller to repurchase is a loan rather than a sale transaction. Because of the specific requirements of the Home Equity Sales Contract Law, the standard real estate purchase contracts and receipts for deposits customarily used in the real estate brokerage business are not acceptable for use in home equity sales when the real property is in foreclosure. Accordingly, a real estate licensee should seek the advice of legal counsel to prepare the proper contract forms and for advice regarding the manner in which such sales must be conducted.

Civil Code Sections 2945, et seq. (Mortgage Foreclosure Consultants) address the problem of consultants who represent that they can assist homeowners who are in foreclosure, often charge high fees, frequently secure the payment of their fees by a deed of trust on the residence in foreclosure and have been known to perform no service or essentially a worthless service to the homeowner.

The law requires that contracts for services of foreclosure consultants contain specified provisions. The law allows rescission of such contracts under certain conditions and makes violation of the provisions relating to such contracts a crime. It is illegal for any person to take “unconscionable advantage” of any property owner in foreclosure. While real estate licensees may, under certain circumstances, be exempt from the provisions of the Mortgage Foreclosure Consultants law, a licensee should proceed with an abundance of caution when dealing with owners of property where a Notice of Default has been recorded and/or a home-equity sales contract is being considered. Among other requirements, the real estate licensee must act within the course and scope of his or her license, must not accept any advance fees, and must not acquire any interest in the residence in foreclosure. Again, the real estate licensee should seek the advice of legal counsel prior to representing a seller of residential real property that is subject to a Notice of Default. Representing an equity purchaser may be difficult due to the bonding requirement because the bonds have been proven to be unavailable.

Statement of Condition of Debt

Pursuant to Civil Code Section 2943, any time before or within two months after the recording of a notice of default under a deed of trust or mortgage with power of sale, or before thirty days prior to entry of a decree of judicial foreclosure, the debtor, trustor or mortgagor or entitled person (as defined in the law) may make written demand of the beneficiary or mortgagee for a written beneficiary statement showing:

1. the amount of the unpaid balance of the obligation secured by the mortgage or deed of trust and the interest rate, together with the total amounts, if any, of all overdue installments of either principal or interest, or both;

2. the amounts of periodic payments, if any;

3. the date on which the obligation is due in whole or in part;

4. the date to which real estate taxes and special assessments have been paid to the extent the information is known to the beneficiary;

5. the amount of hazard insurance in effect and the term and premium of such insurance to the extent the information is known to the beneficiary;

6. the amount in an account, if any, maintained for the accumulation of funds with which to pay taxes and insurance premiums;

7. the nature and amount, if known, of any additional charges, costs or expenses paid or incurred by the beneficiary which have become a lien on the real property involved; and

8. whether the obligation secured by the mortgage or deed of trust can or may be transferred to a new borrower.

Section 2943 of the Civil Code also provides that the mortgagee or beneficiary may make a charge not to exceed $60 for furnishing the beneficiary statement, except when the loan is insured by FHA or guaranteed by the Department of Veterans Affairs.

Whether the charge may be imposed and how much the charge may be will addressed in the deed of trust.

Within 21 days of receipt of the written demand, the beneficiary or his or her authorized agent shall prepare and deliver the statement together with a complete copy of the note or other evidence of indebtedness. In addition, if requested, the beneficiary or his or her authorized agent shall furnish a copy of the deed of trust or mortgage at no additional charge.

A penalty of $300 and liability for damages is prescribed for willful failure on the part of the beneficiary or mortgagee to deliver the statement within 21 days. The beneficiary may reasonably require that the entitled person produce evidence that they are eligible to make the request pursuant to the terms of the law and may demand payment of the fee at the time of request.

Civil Code Section 2943 was also amended to include the definition and use of pay-off demand statements as distinct from beneficiary statements. The beneficiary statement is intended to provide information when the loan may be transferred to a buyer of the security property. The pay-off demand statement details amounts owing for purposes of loan pay-off. While the beneficiary statement may not be requested subsequent to 60 days following the recordation of notice of default, the pay-off demand statement may be requested anytime except following the first publication of the notice of a trustee sale or of the hearing of a court supervised sale.

As is the case with a request for beneficiary statement, the beneficiary must respond to a request for a pay-off demand statement within 21 days of receipt and the failure of a beneficiary to timely respond may subject the beneficiary to an automatic $300 sanction plus actual damages and attorney’s fees.

The fee for a pay-off demand statement is the same as the fee for a beneficiary statement. Failure to specifically identify whether the statement being requested is a beneficiary statement or a pay-off demand statement will allow the beneficiary to “default” to the pay-off demand statement.

Annual and Monthly Accounting

Under Section 2954 of the Civil Code, any mortgagor, trustor, or vendee under a mortgage, trust deed, or real property sales contract may make a written request of the lender or vendor for a statement of condition of account. A statement is to be provided within sixty days after the end of each calendar year. The statement includes an itemized accounting of money received for interest and principal repayment and received and held in or disbursed from an impound or trust account, if any, for payment of property taxes, insurance premiums, or other purposes relating to the property. The debtor is entitled to receive one statement for each calendar year without charge.

A monthly statement or passbook showing money received for interest and principal and received and held in and disbursed from an impound or trust account constitutes compliance with this requirement. Where a written request for accounting is on file with the mortgagor, trustor, or vendee, the monthly rate of payment for impound or trust accounts cannot be increased until the itemized accounting of the condition of the account, a statement of the new monthly rate of payment, and an explanation of the factors necessitating the increase each have been furnished.