Short Sale Legislation Progress Report: Legislation To Correct Misguided Statute Enacted to Govern Short Sales
Last year, the California Legislature enacted a statute that prohibits a deficiency judgment under a note secured by a first deed of trust against a dwelling of not more than four units that is sold at a short sale with a written consent of the lender. The existing statute, codified as Code of Civil Procedure Section 580e, also provides that once the secured lender consents to the short sale, the lender agrees to accept the sale proceeds as full payment and that the short sale fully discharges the remaining amount of the indebtedness on the note. In my capacity as Secretary to the Financial Institutions Committee of the Business Law Section of the State Bar of California, I became active in conjunction with a working group from the California Bankers Association Legal Affairs Committee who was attempting to address the many shortcomings of the statute as enacted. In addition to careless draftsmanship, the statute has serious negative unattended consequences. Apparently, the authors were thinking only of a typical residential loan secured by one single family residence. Unfortunately, the language of a statute was not so limiting.