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Expansion of California’s Anti-Deficiency Laws. Increased Protection for Borrowers After the Foreclosure of Purchase Money Loans.

Foreclosure Litigation, Mortgage & Lending Law, and Real Estate Law by Peter N. Brewer, Esq.

Effective January 1, 2014, Senate Bill 426 went into effect and modified California’s anti-deficiency laws to do two things:

1)    Clarify the protection implied in the earlier versions of the statute that prevents lenders from trying to collect on “sold-out” purchase money junior loans; and

2)    Redefine “purchase money” to also include refinancing of the original purchase money amount and related loan costs of that refinance for loans entered into on or after Jan. 1, 2013.

After the number of non-judicial foreclosures surged in recent years, the industry engaged in the confusing practice of selling off the junior notes that had been wiped out in the foreclosure sale or forgiven as part of a short sale approval.  If the junior notes had been “piggyback” loans used to purchase the property, then they were uncollectible anyway.  However, this did not stop lenders, servicers and collection agencies from attempting to collect or from negatively reporting the borrower.

The new law restates Section 580d to say “no deficiency shall be owed or collected” in those circumstances.   As noted by the legislative history for Senate Bill 426, “the inclusion of the word ‘owed’ is intended to prevent a lender from continuing to report a loan as delinquent after foreclosure by eliminating the underlying debt itself.”

Additionally, Section 580b was amended to protect borrowers who had refinanced their original purchase money loans.  Accordingly, the relevant section of Section 580b now reads:

580b. (b) 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.

This means that for a “cash out” refinance, only the new cash out of the property, i.e. money not used to pay off the original loan or the costs of the refinance, would be considered fair game for the lender to seek a deficiency against the borrower.

Neither of these modifications is intended to limit lender remedies against guarantors.

If you or a friend is seeking real estate legal counsel regarding a California based property, don’t hesitate to contact our law firm at (650) 327-2900 or to learn more about our firm and read attorney bios, visit us on the web at

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