What does California State Law say about foreclosure?
California has several laws that every homeowner facing foreclosure should know about:
California Code §1695 - Home Equity Purchases
One key factor for both §1695 (Home Equity Purchases) and §2945 (Foreclosure Consultants) is that they are meant to protect the equity and property of owner occupants. If the property is held as an investment, these laws do not apply. Additionally, one major theme is constant in these laws: "unconscionability. " Unconscionability means that an agreement was unfair or oppressive, resulting in reasonably favorable terms to one party because of the circumstances at the time of the agreement. An act is unconscionable if it affronts the sense of justice, decency or reasonableness. An unconscionable agreement is void.
CALIFORNIA CODE § 1695
For this law to come into play, four factors must all be present:
- There is a Notice of Default recorded
- Property must be a 1-4 unit residential dwelling
- Owner occupies at least one unit as his principal residence
- The buyer will not occupy the property as its personal residence
The Rules of the Law
Let's examine what benefits the law bestows and requires from the standpoint of each party:
The Seller
- Must receive the statutory notice regarding 5-day right to cancel contract.
- The seller's cancellation right expires: (a) At midnight of the 5th day following the day the seller entered into the contract; or (b) At 8:00 a.m. on the day the property is scheduled for Trustee's Sale, whichever deadline occurs first.
- However, the seller's 5-day period does not start until the notice is actually given to the seller.
- If the seller cancels the contract, it is effective upon delivery of the cancellation notice to the address supplied by the buyer in the agreement.
- The seller retains a two year right of rescission after close of escrow. This right cannot be waived.
The Buyer ("Equity Purchaser")
- The agreement is not enforceable until the 5-day cancellation period has expired.
- Escrow cannot close until the 5-day cancellation period expires.
- The buyer must return within 1a days, without condition, all original documents to the seller upon receipt of the cancellation notice.
- All buyers are considered equity purchasers under this law. There is no minimum threshold number for them to meet.
- Until the seller's right of cancellation expires, the buyer cannot: (a) Accept any kind of conveyance from the seller
A real estate agent can still list the seller's property and represent the seller. However, when placing such listings in the MLS, the seller's agent should add comments advising cooperating agents to call him before submitting an offer. Most agents are completely unaware of these laws. The seller's agent should tell the cooperating agent if their client is not a buyer-occupant that they should give their client the CA.R. forms and withdraw from the transaction or they will need to show you proof of the surety bond and use contract forms that comply with the statute.
The Seller's Right of Rescission
a.) Within the 2-year period if the buyer's "conduct" and the "price paid" was "unconscionable," the seller may attempt to rescind the transaction and recover the property. To rescind, the seller must:
- Mail a Notice of Rescission to the buyer; and
- Restore the seller to its pre-closing status by returning all consideration paid.
b.) Upon receipt of the Notice of Rescission, the buyer or its successor (unless the successor was a Bona Fide Purchaser [BFP]) must:
- Reconvey title to the seller within 20 days free of any encumbrances placed on the property by the buyer; and
- The buyer cannot recover or deduct any funds expended for closing, carrying or repairs. If the property was sold to a bona fide purchaser (BFP), the seller cannot recover the property. In this case, the seller's only source of recovery is a right to recover money damages from the seller equal to the value of the property at the time of sale, minus the seller's original loan balance and anay funds received from the buyer, plus interest from the time of the violation.
Link to the California Code §1695
CALIFORNIA CODE §2945 - FORECLOSURE CONSULTANTS
This code section was adopted in 1979 at the same time as California Code § 1695. It was created to address problems that were being created by individuals who called themselves "Foreclosure Consultants" and who represented that they could assist homeowners who were in foreclosure, charged high fees for the service, sometimes securing the payment of their fees by placing a Deed of Trust on the property and performed no services or worthless services for the homeowner. On many occasions, because of the duress the homeowner was under, they also ended up with the deed.
1. Propertv Covered - A residence in foreclosure subject to this law is defined the same as in California Civil Code § 1695.
a. There is a Notice of Default recorded;
b. Property must be a 1-4 unit residential dwelling; and
c. Owner occupies at least one unit as his principal residence.
The Foreclosure Consultant
a. A foreclosure consultant is someone who, for a fee from the owner in default, agrees or represents that he can:
- Stop or postpone the foreclosure sale;
- Prevent lienholders from enforcing or accelerating the note;
- Help the owner reinstate the loan or receive an extension of the reinstatement period;
- Assist the homeowner in keeping their home;
The Agent/Broker Exception
a. An agent is not considered a foreclosure consultant when the agent:
- Receives only a contingency fee from the seller for selling the residence in foreclosure: and
- Receives no advance fees .
This exception in the law allows agents to help homeowners in need of their expertise as long as no advance fee is collected. If, however, an agent collects an advance fee or enters into an agreement to help the homeowner for a fee instead of acting as a listing agent, the agent can be deemed a foreclosure consultant.
Foreclosure Consultant Representatives
a. A foreclosure consultant is liable for all damages resulting from any acts of its representative b. Any representative deemed to be an employee or agent of the foreclosure consultant must:
- Be licensed as an agent;
- Have a surety bond for twice the value of the property; and
- Supply evidence of 1 & 2 above to all parties.
Thus, agents are not at this time able to represent foreclosure consultants.
Seller Remedies
a. Under both of the laws § 1695 and §2945, a violator is subject to significant liability and penalties:
I. Civil
(a) Actual damages
(b) Attorneys fees
(c) Court costs
(d) $2,500 civil penalty (CC § 1695)
(e) Triple damages
(f) Equitable relief
11. Criminal
(a) Fines of up to $10,000 (CC §2945) and $25,000 (CC §1695)
(b) 1 year in jail
(c) Cumulative to other penalties
Link to the California Code §2945
CALIFORNIA CODE §890 - RENT/EQUITY SKIMMING
This involves basically taking over a property, promising to pay the mortgage, but pocketing the rent instead. This is simply fraud and is also in violation of federal laws as well.
An important point to note is that California state law simply defines rent skimming as using rent from a property at any time during the first year of acquisition of a property without first applying the rent to the payment of mortgages on the property. This language is so broad you could even be guilty of rent skimming on your own property! If the loan was federally insured, i.e., FHA/VA, you could be fined up to $250,000 or five years in prison or both. At the state level, it is also a felony and there is civil liability for actual and punitive damages. Thus, when purchasing properties "subject to" existing financing, you have to be careful that you can follow through with your promises.
