BILL ANALYSIS AB 1219 Date of Hearing: May 19, 1993 ASSEMBLY COMMITTEE ON JUDICIARY Phillip Isenberg, Chair AB 1219 (Boland) - As Amended: May 11, 1993 SUBJECT: This bill makes a number of substantive and clarifying changes šin the law relating to the nonjudicial foreclosure process. BACKGROUND History. Existing statutory law provides a detailed description of the šrights, duties and obligations of the parties involved in a nonjudicial šforeclosure proceeding. Generally, the courts have required strict šcompliance with the notice and other procedural requirements before a šlender (mortgagee or beneficiary) can exercise the right of a power of sale šby the nonjudicial foreclosure process. Over the past several years a number of proposals to modify and clarify the šobligations and rights of lenders, borrowers (mortgagors or trustors) and šthe trustee (the third party responsible for conducting the nonjudicial šprocess) have been included in "omnibus" bills introduced by the California šTrustees Association (CTA). Generally, these proposals were technical in šnature and intended to clarify the rights and responsibilities of the šparties involved in the nonjudical foreclosure process. This year, two šsuch "omnibus" bills have been introduced, AB 1196 (Johnson) and this bill š(AB 1219). AB 1196 passed this committee, April 21, 1993. Facts. According to the California Trustees Association, approximately š150,000-175,000 notices of defaults on obligations secured by mortgages or šdeeds of trust are recorded annually statewide. However, approximately 75% što 80% of these defaults are cured and the loans reinstated before a šnonjudicial foreclosure sale is finalized. DIGEST This bill makes a number of substantive and clarifying changes in the law šrelating to the foreclosure process. Specifically, the bill: 1) Clarifies that persons involved in foreclosure sales of mixed collateral (real and personal property) are exempt from licensing requirements for auctioneers. 2) Clarifies that an authorized agent of a trustee, mortgagee or beneficiary may: (a) file a notice of a default (NOD) to initiate the nonjudicial foreclosure process and (b) execute notices of rescession when defaults are cured and the foreclosure procedure terminated. - continued - AB 1219 Page 1 AB 1219 3) Permits a NOD to be posted on the property subject to nonjudicial foreclosure and mailed to the last known address of the defaulting property owner as an alternative to personal delivery or publication of the NOD. 4) Increases the statutory trustee's or attorney's fees (hereinafter "trustee's fees") that may be charged at various stages of the nonjudicial foreclosure process. (See Comment #2) 5) Specifies that a notice of sale (NOS) be published in print of no less than six-point type. 6) Clarifies that a postponement of a foreclosure sale by a trustee based on a good faith belief that the sale has been stayed by court order, by operation of law or by mutual agreement of the parties shall not be counted as one of the three postponements permitted by statute. (See Comment #3) 7) Provides that a trustee shall be entitled to dismissal in an action or proceeding in which the trustee is named as a party, except foreclosure actions, where the trustee is named as a necessary party. A judge may award reasonable attorney's fees based upon the conduct of the parties and upon the court finding the trustee's conduct was not an issue in the action or proceeding. 8) Eliminates the requirement of the trustee, who has been "substituted out," to acknowledge receipt of the notice of substitution. (The notice of substitution must still be mailed to the substituted trustee and an affidavit must be attached to the recorded substitution that the notice has been mailed to all necessary parties.) 9) Clarifies that the requirement that a notary public obtain the thumb print of a party signing a deed, quit claim deed or deed of trust within Los Angeles County shall not apply to a trustee's deed resulting from a nonjudicial foreclosure sale. 10) Clarifies that exemptions from disclosures required when title to reinforced masonry buildings are transferred shall apply to transfers of unreinforced masonry buildings (e.g., the disclosure need not be given when an unreinforced masonry building is transferred by a nonjudicial foreclosure sale). FISCAL EFFECT No significant fiscal impact on state or local agencies is anticipated. šThis bill will not be referred to the Assembly Committee on Ways and šMeans. - continued - AB 1219 Page 2 AB 1219 COMMENTS 1) Sponsor's Statement. California Trustees Association (CTA), the sponsor, states that this bill "is largely a technical measure making a series of changes to the law relating to real property foreclosures. The bill makes clarifying changes in areas such as posting notices of default, commencing foreclosure actions, foreclosure exception from auctioneering licensing and others." 2) Increased statutory trustee's and attorney's fees. CTA contends that while there is no known opposition to this bill, it contains one potentially controversial feature. Sections 4 and 5 of the bill increase the statutorily authorized trustee's fees. Existing law sets the fees a trustee or attorney may charge for services provided at different stages in the foreclosure process. Specifically, the law provides that: a) In regard to the period before a NOD is recorded and a NOS is mailed, the fees shall be: i) $200 with respect to any unpaid balance on the secured obligation that is $50,000 or less. ii) An additional 1/2% of any portion of the unpaid balance between $50,000 and $150,000. iii) An additional 1/4% of any portion of the unpaid balance between $150,000 and $500,000. iv) An additional 1/8% of any portion of the unpaid balance between $500,000. b) In respect to the period after the NOS is mailed and until the property is sold, the fees shall be: i) $300 with respect to any unpaid balance on the secured obligation that is $50,000 or less. ii) An additional 1% of any portion of the unpaid balance between $50,000 and $150,000. ii) An additional 1/2% of any portion of the unpaid balance between $150,000 and $500,000. iv) An additional 1/4% of any portion of the unpaid balance greater than $500,000. c) Upon the sale of the property, the fees shall be $300 or 1% of the unpaid balance, whichever is greater. - continued - AB 1219 Page 3 AB 1219 Any trustee or attorney fees within these limits shall be conclusively špresumed to be lawful and valid. These statutorily authorized trustee's fees were established in 1985. CTA šcontends that inflation alone would justify an increase of minimum fees of š$200 and $300 to $278 and $417, respectively. Further, CTA states that šwhile it understands that "the Legislature is and must be cautious in šauthorizing increased trustee's fees, it! believes that the passage of štime and changes in the foreclosure marketplace make the increase šappropriate this year." 3) Postponement of trustee's sale. Under existing law, trustees may postpone a foreclosure sale only three times without the necessity of republishing a new notice of sale. The trustee is required to postpone a sale if: (a) ordered by a court, (b) the sale is stayed by operation of law (bankruptcy) or (c) stayed by mutual agreement of the parties. A postponement for one of the required reasons will not be counted as one of the three postponements a trustee is permitted to make for any other reason. CTA states that trustees are often told that a sale must be postponed because a bankruptcy petition has been filed. Under these circumstances the "prudent" trustee will delay the sale. According to CTA, "if the information later turns out to be inaccurate, the question arises whether the postponement counts against the three postponement limit. If these postponements do count against the limit, trustors may be tempted to falsely allege that a postponement is required in order to force republication of the notice of sale" (e.g., a defaulting borrower may seek an extended delay of the sale by giving false information to cause a postponement and, thus, force republication of the NOS). The limit on postponements was placed in the law in response to allegations that some foreclosure sales were being postponed in order to give advantage to certain bidders to the detriment of the defaulting borrower. This bill does not guarantee that any postponement above the three postponement limitation will be upheld by a court postponement. In a judicial challenge to the foreclosure sale, the trustee may be required to establish that a postponement above the existing limit was based on a "good faith" belief that the postponement was required under the law. 4) Dismissal of trustees. CTA states that trustees "are frequently inserted in a deed of trust without their knowledge, with the understanding that they may be later 'substituted out' in favor of another trustee. Frequently when a dispute arises between trustor (borrower) and beneficiary (lender), the trustee is named as a party merely by virtue of being shown on the deed of trust." CTA also contends that these suits "typically have! nothing to do with the š conduct of the trustee, who must then incur attorneys' fees in order to obtain a dismissal from the action." - continued - AB 1219 Page 4 AB 1219 To remedy these situations, the bill provides that trustees are entitled to dismissal and may be awarded reasonable attorney's fees when a court finds that the trustee's conduct was not an issue in the proceeding. The court is given discretion to award the attorney's fees based on the conduct of the parties. AB 1196 (Johnson), which passed this committee in April 1993, also contained a provision that required dismissal of the trustee when a court finds that the trustee's conduct was not an issue in the action. However, AB 1196 also provided that the award of attorney's fees was mandatory upon such a finding. At the request of some committee members, the dismissal and attorney's fee provision was deleted from the bill. CTA states that the dismissal and discretionary attorney's fees provision in this bill is in response to the committees members' concern that the mandatory provision in AB 1196 was subject to potential abuse. SUPPORT OPPOSITION California Trustees Association Unknown (sponsor) - continued - AB 1219 Page 5