Re: California Foreclosure - I’m confused on Section 2945 (long) - Posted by John Beck
Posted by John Beck on February 20, 2000 at 11:57:41:
The so-called Mortgage Foreclosure Consultants Act (being California Civil Code Sections 2945 through 2945.11) does NOT apply when a buyer makes a simple offer to buy, and buys, a “residence in foreclosure” (i.e., one to four dwelling units which are owner-occupied and against which there is an outstanding notice of default."
HOWEVER, if a real estate investor offers to buy, and buys, a “residence in foreclosure”, then that person DOES have to comply with the so-called Home Equity Sales Contract Act (being California Civil Code Sections 1695 through 1695.17).
HOWEVER, further, if a real estate investor uses certain sophisticated pre-foreclosure “purchase” techniques, then the Mortgage Foreclosure Consultants Act might apply. I’ve explained this in greater detail in three following articles I wrote on the subject sometime back:
Onofrio v. Rice ?
A Particularly Dangerous Pre-Foreclosure Purchase Technique - Part 1
Investor’s attempting to make a pre-lender-foreclosure purchase repeatedly run into a major problem: The property owner in foreclosure doesn’t want to sell. Most owners in foreclosure are owner-occupants of single family dwellings. The overwhelming majority of those owners ? especially the ones with equity ? do not want to sell. They want to obtain the money necessary to reinstate (or cure) the loan in default ? thereby keeping their home and the current financing against that home. When a pre-foreclosure investor makes contact with with a homeowner in foreclosure and offers to buy the property, that investor usually is rejection. The owner is looking for money to reinstate the loan or loans in default ? not looking to sell the property.
Can a pre-foreclosure investor turn such an owner into a seller? Pre-foreclosure investors are constantly searching for approaches which are effective in doing just that. And one of the most effective approaches is to go with the flow. Don’t attempt to convince an owner who doesn’t want to sell that he or she should sell. That’s like swimming up stream against a strong current. Even the strongest swimmers will tire and give up.
Solution? Lend the owner the money necessary to reinstate the loan and, then, secure that loan with a deed of trust against the property. If the owner pays off the loan, you’ve helped that owner out of a difficult situation ? and earned interest on your money. If not, then the you’re in a position to foreclose on the property ? or take a deed in lieu of foreclosure. (After all if the owner couldn’t make payments on the current loans, obviously he or she may have problems making those payments plus the payment on the new loan.)
Further such an approach avoid the application of the Home Equity Sales Contract Act, Civil Code Section 1695 through 1695.17. Specifically, Section 1695.1 provides that the Act doesn?t apply when a foreclosure investor takes title by ?a deed in lieu of foreclosure of any voluntary lien or encumbrance of record? or by ?a deed from a trustee acting under the power of sale contained in a deed of trust … at a … [trustee?s] sale …?
This can be an extra-ordinarily effective approach. Unfortunately for California foreclosure investors the California legislature learned of this technique ? and disapproved of it. The legislature passed the Mortgage Foreclosure Consultants Law.
Mortgage Foreclosure Consultants Law
Civil Code Sections 2945 through 2945.11 embodies the so-called Mortgage Foreclosure Consultants Act. Section 2945.1 (a) defines a “foreclosure consultant” as "any person who makes any solicitation, representation, or offer to any owner to preform for compensation or who, for compensation, performs any service which such person in any manner represents will in any manner do any of the following:
(1) Stop or postpone the foreclosure sale.
(2) Obtain any forbearance from any beneficiary or mortgagee.
(3) Assist the owner to exercise the right of reinstatement provided in Section 2924c.
(4) Obtain any extension of the period within which the owner may reinstate his obligation.
(5) Obtain any waiver of an acceleration clause contained in any promissory note or contract secured by a deed of trust or mortgage on a residence in foreclosure or contained in any such deed of trust or mortgage.
(6) Assist the owner to obtain a loan or advance of funds.
(7) Avoid or ameliorate the impairment of the owner’s credit resulting from the recording of a foreclosure sale.
(8) Save such owner’s residence from foreclosure."
Unless an investor is excluded from the application of the statute (see Section 2945.1(b) ? basically private party investors are NOT excluded), then that person must comply with its provisions.
The statute applies to the foreclosure investor under the same set of circumstances as those which trigger the application of the Home Equity Sales Contract Act (Civil Code Section 1695 through 1695.17): The property is in foreclosure (i.e. there is an outstanding notice of default recorded against the property), it is owner-occupied and it consists of one to four residential units.
Does the Mortgage Foreclosure Consultants Law Apply to Private Investor Loans Made to Home Owners in Foreclosure?
Although the Act doesn’t explicitly states that it applies to loans made by private parties, a very strong argument can be made that it does. Clearly the investors using this technique are offering to preform a service (i.e., lending money) which will stop the foreclosure sale and will assist the owner in foreclosure in exercising his or her right of reinstatement. Further, by making the loan, the investor is assisting the owner in obtaining a loan – and all of this is being done with the intent of saving the owner’s home from foreclosure. Further all of this is being done for compensation: interest income.
A California appellant court in Tomlin v. Cole, (1984) 152 Cal. App. 3rd 556, 199 Cal. Rptr. 632, assumed that the Mortgage Foreclosure Consultants Act covered loans made by non-exempt lenders but failed to apply the Act to the particular facts of the case since the loan that was made had been make prior to the time a notice of default had been recorded against the property.
However, the court?s assumption that the statute applied to loans has been criticized by authors Miller and Starr in their excellent treatise, Current Law of California Real Estate. These authors state: ?This decision is strange for two reasons: First, the mere loan of funds, rather than the performance of services for compensation, would not appear to be within the terms of the statute in any event; the plaintiff was not a ?foreclosure consultant? even if a notice of default had been recorded (CC §2945.1).? See footnote 98, Section 9:102, page 333 of the Current Law of California Real Estate, Second Edition, by Harry D. Miller and Marvin B. Starr, published by Bancroft-Whitney.
Now, however, this controversy has been put to rest. In the recent case of Onofrio v. Rice, (May 1997) 55 Cal.App.4th 413, the court had no difficulty whatsoever in applying the Act ? to the VERY substantial financial detriment of the investor!
Severe restrictions are placed upon foreclosure consultants. As a foreclosure consultant, an investor can not charge interest in excess of 10 percent per annum [Section 1945.4(b)], can not take a lien of any type on real property [Section 1945.4©] and, most importantly, can not in any way whatsoever acquire any interest whatsoever in the owner’s home (any such interest is voidable by the home owner) [Section 1945.4(e)].
What Are the Penalties for Violation of the Act?
Assuming that the Mortgage Foreclosure Consultants Act would have been violated, Section 2945.6 provides the following:
(a) An owner may bring an action against a foreclosure consultant for any violation of this chapter. Judgment shall be entered for actual damages, reasonable attorney’s fees and costs, and appropriate equitable relief. The court also may, in its discretion, award exemplary damages equivalent to at least three time the compensation received by the foreclosure consultant in violation of subdivision (a), (b), or (d) of Section 2945.4, in addition to any other award of actual or exemplary damages.
(b) The rights and remedies provided in subdivision (a) are cumulative to, and not a limitation of, any other rights and remedies provided by law. Any action brought pursuant to this section shall be commenced with four years from the date of the alleged violation.
In the Onofrio case, the appellate court sustained a judgment against the investor for actual damages of $65,174, exemplary damages of $195,523 and attorney fees and costs of $52,788!
Further Section 2945.7 makes it a misdemeanor criminal offense punishable by a fine of not more than $10,000, imprisonment for not more than one year, or both, for each violation of Section 2945.4 mentioned above.
Onofrio v. Rice ?
A Particularly Dangerous Pre-Foreclosure Investment Technique ? Part 2
Last week, I wrote about a pre-foreclosure investment approach: Lending money a homeowner in foreclosure. This approach can produce a very favorable ?either/or? kind of result for the pre-foreclosure investor. If the loan is paid off, the investor can get a very substantial interest rate return. In the recent appellate court case of Onofrio v. Rice, (May 1997) 55 Cal.App.4th 413, the pre-foreclosure investors (the Rices, a husband and wife investment team,) lent to the homeowner in foreclosure (Evelyn Onofrio) $21,000 at a 35 percent annual interest rate and securing the loan with a third deed of trust against the property. Certainly a very substantial interest rate return!
Or, if the loan is not paid off, then the pre-foreclosure investor could foreclose and might end up buying the home which was secured for the loan at a bargain price. In the Onofrio case, the Rices did just that. Trial court determined that the Rices ended up buying Onofrio?s property for $65,174 under its fair market value. A very nice profit!
As can be seen, this could be a very attractive ?either/or? combination for pre-foreclosure investors ? and it certainly looked very attractive to the Rices.
However, the trial court held ? and the appellate court affirmed on appeal ? that this approach has been largely disapproved of by the California legislature. Effective July 11, 1980, a statute called the so-called Mortgage Foreclosure Consultant Act, Civil Code Sections 2945 through 2945.11, became law. The purpose of the law was to severely restrict this ?either/or? approach.
As the appellate court state in the Onofrio case stated: ?Indeed, the Senate Judiciary Committee in its original analysis of Senate Bill No. 1128 [which, eventually, in part, became the Mortgage Foreclosure Consultants Act] warned of just this kind of conduct. ?Many homeowner who have found themselves in default on their home mortgage payments have actually lost their homes through deceptive loans made to them by unscrupulous business[people.] [¶ These ?loans? usually require the homeowner in default to convey, via a Trust Deed, the homeowner?s interest in his [or her] home (i.e. … equity) in exchange for the payment of the full amount of he regular mortgage arrearage. The loans are usually written with high finance charges, and the payments become difficult for the homeowner to make. [¶ As soon as the homeowner defaults on the second loan, the money lender, or a third party to whom the Trust Deed has been conveyed in the meantime, attempts to evict the homeowner out of his [or her] home.?
As I pointed out in last week?s column, the Mortgage Foreclosure Consultants Act applies to any pre-foreclosure investor dealing with a homeowner in foreclosure who ?makes any solicitation, representation, or offer to any owner to preform for compensation or who, for compensation, performs any service which such person in any manner represents will in any manner … do any of the following: … (6) Assist the owner to obtain a loan or advance of funds.?
This Act places severe restriction on the pre-foreclosure investor/foreclosure consultant. As a foreclosure consultant, an investor can not charge interest in excess of 10 percent per annum [Section 1945.4(b)], can not take a lien of any type on real property [Section 1945.4©] to secure the indebtedness and, most importantly, can not in any way whatsoever acquire any interest whatsoever in the owner’s home (any such interest is voidable by the home owner) [Section 1945.4(e)].
However, some investors are exclude from the application of this Act. For instance, Section 2945.1(b)(3) appears to provide that if the loan made by the investor is ?arranged? (i.e. brokered) by a licensed California real estate broker, then the act does not apply. Further, the real estate broker arranging the loan is not considered a mortgage foreclosure consultant ?when that person (A) engages in acts whose performance requires licensure … [as a real estate broker], (B) is entitled to compensation for the acts preformed in connection … with the arranging of a loan secured by a lien on a residence in foreclosure, © does not claim, demand, charge, collect, or receive any compensation until the acts have been performed … and (D) does not acquire any interest in a residence in foreclosure directly from the owner for whom the person agreed to perform the acts other than as a trustee or beneficiary under a deed of trust given to secure the payment of the loan or that compensation.?
In the Onofrio case, the Rices attempted to avoid the application of the Act using the above provision. The husband, Marshall D. Rice, who was a licensed California Real Estate Broker arranged the $21,000 loan. The lender was his wife, Myra Rice, who lent the money ?from her sole and separate property.?
As might be expected, Onofrio, the borrower/homeowner in foreclosure, later defaulted on that loan. Myra Rice recorded a notice of default against the property on September 21, 1991. As the appellate court stated: ?By April 30, 1992, the Rices had purchased the second deed of trust [which, apparently, was also in default]. On May 7, the couple, as husband and wife and joint tenants, recorded an assignment of deed of trust from the second lienholder and on June 10 bought the property at the foreclosure sale conducted pursuant to Myra?s September 1991 notice of default. Finally on June 17, the Rices recorded a trustee?s deed upon sale acknowledging they now owned the property.?
The appellate court sustained a judgment against the Marshall D. Rice, as the real estate broker, for actual damages of $65,174, exemplary damages of $195,523 and attorney fees and costs of $52,788! The reason: The appellate court concluded that, contrary to requirement of Section 2945.1(b)(3)(D) quoted above, Rice had ?acquired an interest in Onofrio?s residence directly from foreclosure when it was Myra and not he who loaned Onofrio the money.?
Onofrio v. Rice ?
A Particularly Dangerous Pre-Foreclosure Investment Technique ? Part 3
Home owners in foreclosure ? especially those homeowners having a good of equity ? typically don?t want to sell their homes. They want the money necessary to reinstate (or cure) the loan in default ? thereby retaining ownership of the home and its equity. Consequently, any investor who offers to purchase the homeowner?s home and its equity at a discount is rebuffed.
However, a more sophisticated (and, some might say, diabolical) pre-foreclosure investor might overcome the resistance of the home owner to sell and actually buy that person?s home without paying the homeowner anything whatsoever for that person?s equity. How? By lending the homeowner the money necessary to reinstate the loan.
As shown in my discussion of the Onofrio v. Rice, (May 1997) 55 Cal.App.4th 413, over the last two weeks, this approach could produce a very favorable ?either/or? result for the pre-foreclosure investor. The Rices, a husband and wife investment team, lent to the homeowner in foreclosure, Evelyn Onofrio, the $21,000 necessary to reinstate both the first and second deed of trust which were in default ? securing the 35% loan by a third deed of trust against the property. At the time of making the loan, the property was reported to be worth about $130,000. The balance of the first was somewhere around $20,000, with the second being about $45,000.
Consequently, the Rices had a loan with a 50% equity cushion ? or, put a different way, 50% loan-to-value. With an extraordinary 35% interest rate return. By contrast, institutional lenders are currently making conforming 80 to 95% loan-to-value, fixed interest rate loans amortized over 30 years at around 8% per annum. If Onofrio had paid off the loan, the Rices would have gotten an extraordinary return, extraordinarily well secured.
And if the loan wasn?t paid off? It wasn?t in the Onofrio case. The Rices foreclosed; took back Onofrio?s home, buying it (according to the findings of the trial court judge) $65,174 under its fair market value. How much did the Rices pay of Onofrio? s equity? Remember: None of the $21,000 lent to Onofrio went into her pockets; it went to pay down the loan. Basically, Onofrio ended up selling her home to the Rices even though she never wanted, nor agreed, to sell it. And she sold her substantial approximate $65,000 equity for nothing. The Rices made a ?killer? deal!
Except that Onofrio sued. And the trial court judge ?killed? the Rices. And the appellate court affirmed, holding ? among other things ? that the husband, Marshall D. Rice, violated the Mortgage Foreclosure Consultants Act, Civil Code Sections 2945 through 2945.11.
Probably the most controversial aspect of the Onofrio case was how the court computed damages.
First, the court found that Onofrio?s actual damages were $65,174 ? the difference between a fair market valuation $130,000 at the time of the trustees sale and the approximate balances due on the original first and second deeds of trust (around $16,000 plus for the first and $45,000 for the second).
Second, the court held that Rices’ purchase violated Civil Code Section 2945.6. This section states in part that: ?The court also may, in its discretion, award exemplary [also known as ?punitive?] damages and shall award exemplary damages equivalent to at least three times the compensation received for the foreclosure consultant in violation of subdivision (a), (b), or (d) of Section 2945.4, in addition to any other award of actual or exemplary damages.? As the appellate court stated, the trial court found ?section 2945.4, subdivision (d) violations. Subdivision (d) of Section 2945.4 provides that: ?It shall be a violation for a foreclosure consultant to: … (d) Receive any consideration from any third party in connection with services rendered to an owner unless such consideration is fully disclosed to the owner.? (Note: The appellate court decision did not make clear just what the nature of the compensation received by Rice, the husband, from a third party (his wife?) happened to be. Clearly this decision could have been written much better.) Since the actual damages were found to be $65,174, then the exemplary (to make an example out of) damage were found to be three times that amount, or $195,523.
Totalling both the actual and exemplary damages, Rice owed Onofrio $260,697. However, the court ?gave the Rices a $36,000 offset for the fair rental value of the property for the 36 months Onofrio was in possession but failed to pay rent? ? leaving $224,697 due.
Third, the trial court awarded Onofrio reasonable attorney?s fees and court costs of $65,174. Subdivision (a) of Section 2945.6 provides in part that: ?Judgment shall be entered for actual damages, reasonable attorney?s fees and costs, …? Additionally, the appellate court found that Civil Code ?section 1717 provides ample statutory authority for the award of Myra [Rice]?s note and deed of trust contained attorney fee provisions.? Section 1717 provides that: ?In any action on a contract, where the contract specifically provides that attorney?s fees and costs … shall be awarded, then the party who is determined to be the party prevailing on the contract … shall be entitled to reasonable attorney?s fees in addition to other costs.?
Now, the Rices? owe Onofrio $289,871. On a property whose total value was about $130,000! But that?s not all!
Fourth, the court granted rescission of the trustees sale. Subdivision (a) of Section 2945.6 provides in part that: ?Judgment shall be entered for … and appropriate equitable relief.? Onofrio got her home back.
And fifth, and finally. Before having bought Onofrio?s home at the trustees sale, the Rices bought (i.e. took an assignment of) the second deed of trust for approximately $45,000. The trial court cancelled the note and deed of trust. Again, the appellate court found this to be ?appropriate equitable relief.?
The net result: Evelyn J. Onofrio (who apparently didn?t meet her obligations to any one of three lender for over three years) got her $130,000 home back ? with about $16,000 due against it. When she first met the Rices, she had about $65,000 against it.
She lived rent (and mortgage payment) free for over three years.
Further she?s now owed $224,697 by the Rices. And she?ll have her $65,174 in attorney?s fees and costs paid for by the Rices.
If you thought pre-foreclosure investing was profitable, think again. Suing pre-foreclosure investors may be even more profitable!
The Rices? attorney pointed out to the court Civil Code Section 1692 which provides in pertinent part: ?A claim for damages is not inconsistent with a claim for relief based upon rescission. The aggrieved party shall be awarded complete relief, including restitution of benefits, if any, conferred by him [or her] … and any consequential damages in which he [or she] is entitled; but such relief shall not include duplicate or inconsistent items of recovery.?
The appellate court stated that the ?award makes perfect sense.? I have to confess: It made no sense whatsoever to me. In any event, there?s one lesson to be learned from the Onofrio case: Any investor using this ?lending? approach to pre-foreclosure investing should be VERY careful!
California Attorney at Law