California Civil Code 1695 - Posted by frank

Posted by MichaelG on March 28, 2001 at 24:56:28:

Greatly informative post. Provided MUCH needed insight for the RE broker who,like many, was clueless on the subject.

I have a couple of questions about two parts of your response;

:remember this does not relate to purchasers of real out of foreclosure wherein the owner has no future claim to the property…only when the
owner is remaining in possession the property.

Are you saying that the cal statutes only apply if the owner will be remaining in the property??

:The codes both allow for a complete rescission of the contact AFTER the loan is brought current (up to a year afterward, I believe)…

Can you point me to the section of the statutes that makes reference to this period of recission. I am aware of the statutory period of recission immediately after the signing of the contract but was unaware of this exended recission period.

Please update me, your experienced insights will be forever appreciated.

California Civil Code 1695 - Posted by frank

Posted by frank on March 24, 2001 at 17:12:32:

California Civil Code 1695 require a R E broker to be bonded if he represents an owner in foreclosure. Does anyone know of such a bonding company? There are none in my area.

Re: California Civil Code 1695 - Posted by frank

Posted by frank on March 27, 2001 at 12:38:57:

I am confused! As a non attorney I have to read everything twice but this time I am missing it. You state that CCC 1695 does not require a licensed California real estate agent to be bonded in this case.
To quote CCC1695.15(1),“is bonded by an admitted surety insurer”. Has the Code been changed or is there some case law I am not aware correcting this passage?
Many thanks to all who helped with this question.
real estate agent to be bonded

Re: California Civil Code 1695 - Posted by John Beck

Posted by John Beck on March 27, 2001 at 09:39:56:

Dear Frank:

The so-called “Home Equity Sales Contracts” Act (i.e., Civil Code Sections 1695 through 1695.17) does NOT require that a licensed California real estate agent be bonded if he or she represents an owner whose property is in foreclosure (i.e., becomes the listing agent of that owner).

However, if the Home Equity Sales Contracts Act applies (i.e., the property in foreclosure is one to four residential units, it’s owner occupied and the buyer is an investor, not an owner-occupant purchaser), then the listing agent might be required to be bonded if that agent were to act as the dual agent of both the seller/property-owner-in-foreclosure AND the buyer/investor. (Note: If the property buyer is an owner-occupant buyer, then the Act does not apply.)

To avoid this possibility, a listing agent should be sure that the agency disclosure documentation shows the listing agent to be the exclusive agent of the seller, and listing agent should, in fact, act as sole, exclusive agent of the seller (to avoid the possible application of the doctrine of implied agency).

It’s highly doubtful that the California legislature intended Sections 1695.15 and 1695.17 to apply to licensed California real estate agents when those sections were added to the Act effective January 1, 1991. However, Section 1695 states that the Act should be “liberally construed” to effectuate its intent. In the appellate court case of Segura v. McBride, the court held that the Act applied to a widow who was not a foreclosure investor (apparently was not even a real estate investor) who had been sought out by the homeowner in foreclosure. The court stated: “While the archetype prompting the Legislature to regulate the field of equity purchasers may well have been the business person who seeks out and preys upon distressed homeowners, the resulting legislation embraced a broader class of persons in order to systematically protect homeowners from the unfair loss of precious home equity. Thus, the Act regulates not only the archetypical predator, but all equity purchasers, as defined”.

Apparently, there have never been any admitted surety insurers who have ever offered such insurance to all real estate agents. And even if one such insurer where to do so, according to the insurers I’ve spoken with, the cost of such insurance would be prohibitive, adding an additional 4 to 10% to the cost of selling the house!

John Beck
California Attorney at Law

Re: California Civil Code 1695…actually it’s… - Posted by Bill Gatten

Posted by Bill Gatten on March 25, 2001 at 13:28:43:

I’m prety sure Coldwell Banker in Ca. is the only Real Estate company that carries such a bond, and I’m told that they are bonded only because their own insurance company is the carrier (Allstate), which does not issue such bonds to anyone else (though they probably would alter their position for a couple million bucks).

Also…it is Civil Code Section 2945 (through 2945.11)–not 1695 which relates to Brokers who are acting as “Foreclosure Consultants.” Section 1695 (through 1695.17) relates to investors (Equity Pruchasers).

Both sections are written to: "…prevent fraud and deception, harassment, and unfair dealings by foreclosure consultants and equity purchaser (individuals purporting to be able to save individuals from foreclosure with the intent to end up with their property).

ut remember this does not relate to purchasers of real out of foreclosure wherein the owner has no future claim to the property…only when the owner is remaining in possession the property. If you work foreclosures…be very wary (especially in Ca.) about trying to work out a deal for an owner in which you might end up with the property.

The codes both allow for a complete rescission of the contact AFTER the loan is brought current (up to a year afterward, I believe)…

Bill Gatten

Check this one out, if your thinking about jumping in: Onofrio v. Rice

Buy A House, Go To Jail
Real Case Dealing with the Little Used, But Deadly, Civil Code Section 2945

In 1979, the California Legislature reacted to a few well-publicized horror stories involving a very small number of very bad people who were taking advantage of people in foreclosure. The reaction naturally took the form of an amendment to the Civil Code to include the Mortgage Foreclosure Consultant Law (CC Sections 2945 et seq.). Section 2945 neatly sets forth the intent of the lawmakers: "The Legislature finds and declares that homeowners? in foreclosure are subject to fraud, deception, harassment, and unfair dealing by foreclosure consultants from the time a Notice of Default is recorded . . . Foreclosure consultants represent that they can assist homeowners who have defaulted?often charge high fees,? secured by a deed of trust on the residence to be saved, and perform no service or essentially a worthless service. The intent and purpose of this article are the following: (1) to require that foreclosure consultant contacts be in writing… to permit recession of foreclosure consultant contracts. (2) The provisions of this article shall be liberally construed to effectuate this intent and to achieve these purposes."Since 1979, a total of only three decisions have been reported which have dealt with some question under this statutory scheme. It is unknown how many lawsuits have used the Foreclosure Consultant Law to obtain relief for homeowners. However, in 1993, in the case of Onofrio v. Rice, the Orange County Superior Court rendered a judgment that clearly announced that this little known or used law is a powerful and potentially ruinous tool for litigants challenging foreclosures.

On a Friday morning in 1990, Mrs. Evelyn Onofrio had run out of real options to save her home. The Orange County resident?s home was in foreclosure and set for sale that same day. She had been unable to qualify for a loan to cure the delinquencies on her first and second deeds of trust; her homeowners’ association assessments were severely delinquent and even the association was threatening foreclosure or other action. She had little equity in the home, she had already filed bankruptcy AND the lenders had relief from the automatic stay. On the morning of the day of the sale, Mr. Rice, a licensed real estate broker, was driving to see a property on which he was thinking of bidding at a foreclosure sale scheduled that same afternoon. When he arrived at the property he saw a woman in the front yard and approached her. She introduced herself as Mrs. Onofrio, and Mr. Rice asked if she knew the house was set for foreclosure sale that afternoon and told her that he was interested in looking inside the house because he might bid for the property. She told him he could not enter the house, and besides, there was not going to be a sale. At the foreclosure sale that afternoon, Rice again saw Onofrio when she and another woman gave the auctioneer a written request for a 24-hour postponement (at the time of these events Civil Code Section 2924g © (1) still allowed this procedure). So, the sale was postponed until the following Monday. After the postponement was accomplished, Onofrio approached Rice and asked for one of his business cards. The card identified him as a licensed broker and an investor in real property.

The next day, Saturday, Rice received a telephone call from Onofrio. She told him that the woman at the sale had been acting as her consultant to find a loan to stop the foreclosure, but that Onofrio had lost confidence that she could accomplish the task. Onofrio proceeded to ask Rice if he could help her by loaning her some money as a “bridge loan,” allowing her time to finalize a pending loan for which she had been approved by Mission Viejo National Bank (I wonder why MV National Bank has closed?). Onofrio informed Rice that she needed about $12,000 to bring all the loans and homeowners’ association current. She also stated that she only needed the loan for three months. After thinking it over, Rice agreed to make Onofrio the loan for one year; she remained adamant that three months was more than adequate. Rice met with Onofrio at her house on Saturday, and again on Sunday, to determine all that had to be done and to talk over the terms of the loan. On the Monday after the foreclosure sale, Rice contacted the lender whose loan was going to sale, and in one telephone conversation, convinced the lender to postpone this sale for a time sufficient for him to:

  1. Get a reinstatement quote from the second deed of trust;
  2. To obtain a reinstatement quote from the homeowners’ association;
  3. To assist Onofrio with the application/ motion to the bankruptcy court allowing Onofrio, the debtor in the bankruptcy, to obtain the loan and encumber her property with a third deed of trust in favor of Rice, and finally:
  4. To complete his loan to Onofrio by paying each of the creditors? demands. [ALWAYS REMEMBER THIS: The only time such a process will ever, EVER work cleanly is when fate has decided to royally hurt you! Rice was not yet aware of this rule.]

Within the week, Rice and Onofrio, working together as was necessary to get cooperation from the creditors, the bankruptcy trustee, and the Bankruptcy Judge, completed their loan transaction, on which Mrs. Rice was the beneficiary, and which required $16,000 in real outlay. And then there was silence for a few months. And then there was silence for a few more months. (See Rule above.)

Rice then tried unsuccessfully to telephone Onofrio to inquire about paying off his loan. Next, he wrote a letter urging Onofrio to work on her refinancing and to please communicate with him about her progress. By this time he had been forced to advance payments to the first and second deeds of trust, but he was not ready to panic. Then he waited. And then he wrote some more letters. And then he foreclosed after waiting for a single payment which never came, and after advancing every single payment on every secured obligation owed by Onofrio for over a year.Rice?s foreclosure sale resulted in title being held by Mr. and Mrs. Rice. It was then necessary to go through formal eviction proceedings. And then everything came to the proverbial screeching halt.

Onofrio filed a lawsuit in the Superior Court claiming (1) EIGHT separate violations of Regulation Z (12CFR, 226.1 et. seq.); (2) SEVEN separate violations of the California Business and Professions Code (B&PC Sec. 10231.1 et. seq.) relating to duties of brokers when making loans, and (3) usury.

(Ok, ok, I know that there is no mention of foreclosure consultants. Learn something from Rice, be patient. On the other hand, keep reading so you will avoid being ignorant. See Rule above.)In the action sought, Onofrio and her attorneys actually and repeatedly demanded (with straight faces) that Rice walk away from his loan and all his advances because of the “violations” set forth in the action. This was not the environment for meaningful settlement discussions. Vigorous litigation ensued. During the litigation, Rice continued to make every single payment related to the property he now “owned” but which Onofrio happily occupied. Rice saw an opportunity to cut his losses by purchasing an assignment of the second deed of trust. His reasoning was that his line of credit carried a significantly lower interest rate than he was paying monthly to the second. As the case progressed toward trial, Rice was almost able to terminate the whole case on summary judgment. All the Regulations-Z causes of action and the usury cause of action were dismissed by the court.The court was poised to terminate the remaining causes of action, as well, but determined there was a factual question about the status of Mrs. Rice in the transaction. And this is the question that proceeded to trial. By the time of trial, Rice?s loan of $16,000 had become an outlay of over $110,000, and it had been almost three years since making the loan. Onofrio still occupied the house and the court refused to require her to pay anything for the privilege.

The Trial The trial began with the impassioned plea of Onofrio that Rice was attempting to steal her home. After several complete days of trial Onofrio?s attorney asked the judge to allow an amendment to their action: they wished to add a cause of action for violation of California?s Foreclosure Consultant Law (Civil Code sec. 2945 et seq.). The court readily granted this request, and as the man says, IT WAS A WHOLE NEW BALLGAME![Time for another rule: NEVER, NEVER, NEVER wait until trial has commenced to seek amendment of the complaint as Onofrio did. CAMERON?S LAW OF NEGATIVE NON-RECIPROCITY clearly states that no matter what the judge allows the other guy to get away with, when you try the same thing the judge will not allow it, especially when the result to you is very, very negative.]

To shorten a sad tale, the trial ended in judgment for Onofrio. Rice was found to be a foreclosure consultant and the penalty for this quasi-crime was: (1) Rice?s original loan, the third deed of trust, was voided and deemed satisfied; (2) all sums advanced by Rice were deemed void as against Onofrio, and again, such advances were deemed satisfied; (3) the second deed of trust purchased by Rice was deemed satisfied; (4) Rice was found liable to Onofrio for treble the amount of equity in Onofrio?s home (note that she never lost the house, lived in it the whole time, and got title restored to her); (5) Rice?s foreclosure under his third deed of trust was voided, and (6) Rice was held responsible for Onofrio?s attorney fees.

Rice was given the right to offset against foregoing the reasonable value of the “use” of the property by Onofrio during the time he had atrustee?s deed to the property. The bottom line: in return for making the $16,000 loan to Onofrio, Rice was held liable for what amounted to $350,000.Where is the justice here? How can there be so little proportion between the “bad act” and the punishment? Why would the second deed of trust and all the advances made for the ultimate benefit of Onofrio on obligations having nothing to do with Rice be forgiven? And, how can someone get the house and an award for the “lost” equity that hasn’t been lost at all? All are excellent questions. Welcome to the macabre world of the FORECLOSURE CONSULTANT LAW.

FORECLOSURE CONSULTANT LAW. To be a foreclosure consultant, one has to fit the definition(s) set forth in Civil Code section 2945.1 (and remember, the definition is to be “liberally construed” which means that if there is a question as to qualification, the court will likely say, “you?re it”). Foreclosure consultant means any person who makes any solicitation, representation, or offer to any other owner to perform for compensation… any of the following:

  1. Stop or postpone the foreclosure sale;
  2. Obtain any forbearance from any beneficiary;
  3. Assist the owner to exercise the right of reinstatement…;
  4. Obtain any extension of the period [to] reinstate;
  5. Assist the owner to obtain a loan or advance of funds;
  6. Avoid…impairment of the owner?s credit…;
  7. Save the owner?s residence from foreclosure. From the facts above, it would seem that Rice set out to qualify under as many of the defined acts as possible, yet all he did was the necessary work to accomplish the goal of making a loan.

Consider for a moment: the activity that led up to a ruinous damage award was nothing more than the usual broker activity in trying to close a loan, and yet it qualifies under this statute as a foreclosure consultant.

Now, there are some exceptions to the seemingly all-inclusive definition of a foreclosure consultant. Civil Code Section 2945.1(b) states that attorneys (surprise!) are NOT foreclosure consultants if they are performing legal services. Real estate licensees are also excluded, if they are making “direct loans” OR when the actions of the licensed person require a license, entitle the licensee to compensation (relating to the sale of the residence or the arranging of a loan on the residence in foreclosure) the licensee does not claim, demand, charge, collect or receive any compensation until the acts have been performed, and does not acquire any interest in the residence directly from the owner for whom services have been performed.

There are more exceptions, but they are too numerous and too complicated to set forth in the limited space available. Your attention to the code section in question is commended. Rice should have sought legal counsel before making the loan to Onofrio so that the pitfalls of the “exceptions” could have been explained to him. Seemingly, Rice came within the real estate broker exception. The court, however, made every effort to bring Rice within the definition of a foreclosure consultant. In the end, the court found that since Rice had not made an effort to assign the loan/deed of trust to another lender, the “direct loan” exception for a broker would not apply.Still,

Rice could have avoided the severe sanctions of the foreclosure consultant law if he had given the disclosure that the law clearly sets forth. In Section 2945.3 of the Civil Code, the formal requirements for the written contract between the consultant and the homeowner, and the wording for the notice of right to rescission, are set forth. Since he did not know of the law, he obviously did not review the section in question. But even if Rice had known of the law, it is not clear that he could have determined that his activities would not have been exempt. At trial, as an expert witness for the defense, Professor Roger Berhardt testified that he had reviewed the statutes in question and he found them incomprehensible.

So, what lessons should be taken from this horror story? Aside from the need to seek legal advice from time to time, anyone who is dealing with owners of properties that are in foreclosure should consider that they are possibly acting as a foreclosure consultant. The disclosures required by Civil Code Section 2945 are relatively simple to give, and given the downside of noncompliance, they are a bargain. Even loan brokers who are asked to arrange a loan for an owner in foreclosure should consider having legal counsel review this law to be sure that the activities undertaken actually do fall within an exception.

Re: California Civil Code 1695 - Posted by TJ

Posted by TJ on March 24, 2001 at 18:00:15:

What does 1695 say? Is it just concerning brokers representing owners in foreclosure who are trying to sell? Or is it broader than that? I’m starting to get into the preforeclosure market - as a buyer/principal -and I happen to be a broker. Do I face any special liabilities? And anyway, if anyone needs a RE broker it’s someone in foreclosure. What does the statute try to accomplish? In CA we’ve already got a bad enough reputaion as a lousy state to do business in. Sounds like one more bonehead anti-business law.

Re: California Civil Code 1695 - Posted by David

Posted by David on March 24, 2001 at 17:38:32:

I believe you won’t find one. 1695 was written to pretty much kill the CRE investor’s ability to profit from foreclosures.