December, 2004
Legislative Update

2004
UTA BILL, OTHER KEY BILLS SIGNED

by Mike Belote, UTA Legislative Advocate

One measure of the changes wrought by the new Schwarzenegger administration is the rejection of more bills passed by the Legislature. Whereas in 2003, Governor Davis vetoed only six percent of the bills sent to him, in 2004 Governor Schwarzenegger vetoed a full 25 percent, including virtually all of the bills opposed by broad coalitions of business. Interestingly, this increased number of vetoes does not mean the enactment of fewer laws: in the second year of the 2003-2004 legislative session, the Legislature passed a lot more bills than the previous year, so the total number of new laws remained almost identical between the two years.

Of the approximately 950 new laws for the year, three were of particularly vital interest for UTA. These were SB 1277, the UTA-sponsored bill making a whole series of changes to foreclosure laws; AB 578, relating to electronic recording of real estate documents, and AB 1338, amending the “Cal-FIRPTA” withholding laws. As an urgency statute, AB 578 became effective immediately upon the Governor's signature on September 21, 2004; the other two bills become effective on January 1, 2005, along with the vast majority of all bills signed by the Governor.

UTA BILL ADDRESSES “SURPLUS ASSISTANCE COMPANIES”

SB 1277 was sponsored by UTA and carried by Senator Dick Ackerman (R-Fullerton). Resulting from the UTA “wish-list” process, the bill makes a lengthy series of changes to the foreclosure laws, and addresses the abuses perpetrated by a small group of companies offering to “assist” consumers in obtaining surplus funds from foreclosure sales. As noted above, the changes become effective on the first of the new year.

As is typical of UTA-sponsored measures, some of the changes in the law are relatively technical, and are designed to clarify ambiguities in trustee practice. Among the changes are the following:

  • Civil Code Section 2924b (b) is amended to clarify that the obligation on trustees to send required notices applies to trustees authorized to record notices of sale, in addition to notices of default;
  • Inclusion of a new subparagraph (4) of this subsection to clarify that a “person authorized to record a notice of default or a notice of sale” includes an agent of the beneficiary, agent of the named trustee, person designated in an executed substitution of trustee, or agent of that substituted trustee;
  • Deletion of archaic language in Civil Code Section 2924b (d) relating to special notices, to conform the law to modern standard form deeds of trust;
  • Addition of language in Civil Code Section 2924l that requires courts to provide trustees with sufficient time to conduct discovery and prepare pre-trial motions, in cases where trustees are brought back into cases, after having been let out pursuant to “declarations of non-monetary default”;
  • Clarification that substituted trustees and agents of beneficiaries may also avail themselves on these declarations of non-monetary default;
  • Amendments to Civil Code Section 2934a, to require beneficiaries who execute, but do not record, a substitution prior to or concurrently with the NOD, to send the same notices as are required when the substitution is effected after the NOD is recorded but before recording the notice of sale;
  • Clarification that trustees named in recorded substitutions are deemed authorized to act for all purposes from the date of execution of the substitution, along with a statement that, once recorded, the substitution constitutes conclusive evidence of that authority to act.

As noted above, in addition to these changes in foreclosure laws, SB 1277 was also intended to address the growing problem of “surplus assistance companies” offering to help homeowners to recover their share of surplus proceeds following trustee's sales, in exchange for a substantial percentage of the funds. Trustees have actually been sued for attempting to deliver surplus funds to homeowners, who were duped into executing assignments or powers of attorney in favor of the surplus assistance companies. To address this situation, SB 1277 includes provisions which:

  • Define the activity of assisting owners to recover surplus funds from the trustee or beneficiary as within the existing “foreclosure consultant” law in the Civil Code;
  • Defines this same activity as within the foreclosure consultant definition of “services”, such that the existing foreclosure consultant limitations and penalties will apply to the surplus assistance companies;
  • Create a 65-day “cooling off period” following the trustee's sale during which the surplus assistance company may not contract to assist the owner in recovering surplus funds, with a special disclosure to the owner when the contract is executed after the 65-day period;
  • Amend Civil Code Section 2945.4 to expressly include among the violations of the foreclosure consultant law the activity of contracting with owners prior to the expiration of the 65-day period;
  • Immunize trustees for liability for providing any of these disclosures to owners, in case they haven't received them from the surplus assistance companies.

Like many UTA bills, SB 1277 contains a large number of quite technical provisions, and thanks are due to Phil Adleson, Marty McGuinn, Ron Roup and other lawyers involved in UTA for their assistance.

ELECTRONIC RECORDING FINALLY ENACTED

After many years of frustration, late in the 2004 legislative year an agreement was finally reached on expanding California's electronic recording laws to counties beyond Orange and San Bernardino. In each of the past several years, promising attempts to expand the law died when consensus could not be reached on appropriate security measures to prevent fraud in electronic recording of real estate documents. The successful bill was AB 578, carried by Assembly Member Mark Leno (D-San Francisco).

Enacting the “Electronic Recording Delivery Act of 2004”, AB 578 is an extremely detailed bill, with very comprehensive security language included. For this reason, UTA members are urged to consult the actual chaptered version of the bill for full details. Highlights, however, include the following:

  • All 58 counties are covered by the bill—this is not a pilot project for a small number of counties as previously proposed;
  • The bill covers both “digitized” records, meaning a scanned image of an original paper document, and “digital” records, which are those created or generated by electronic means but not created in original paper form. The paperless world!
  • Counties may participate in the Electronic Delivery Act by resolution of the respective boards of supervisors, and upon “system certification” by the state Attorney General;
  • Digitized records of instruments affecting a right, title or interest in real property may be submitted by title insurers, underwritten title companies, institutional lenders, and governmental entities. At the insistence of UTA, this section clarifies that these documents may be delivered by agents of institutional lenders, as long as the agent is not also a vendor of electronic delivery systems;
  • There are special rules for electronic signatures of notaries, when the signature on a document must be accompanied by a notary seal;
  • Before any electronic delivery system may become operational, there are extremely extensive provisions for system certification by the Attorney General. The Attorney General must approve ER software; adopt regulations for review, approval, and oversight of ER systems; devise a program for local inspection and review of systems; and approve a list of security auditors to contract with counties;
  • Among many other requirements, the regulations must require criminal records checks and fingerprinting of employees who will have access to the systems;
  • Persons convicted of felonies or certain misdemeanors may not be security auditors or be granted secure access to ER systems;
  • Counties are authorized to impose a fee of up to $1 per document recorded by a county, which may be limited to those documents recorded electronically;
  • The system may permit the recording of both digitized and digital documents, limited to reconveyances, assignments, and substitutions, without either the security audit or criminal background checks, if both the county recorder and the Attorney General certify that the system for these documents do not permit the manipulation of the data by the authorized submitter or any third party;
  • “Authorized submitters” of the reconveyances, assignments and substitutions include title companies, underwritten title companies, institutional lenders and their agents, and entities of government.

Because of the costs and system certifications required by AB 578, we expect different counties to proceed very differently. Some counties appear interested in moving quickly to implement their electronic recording authority, while others, and particularly the very small counties, may be some years from implementation.

WITHHOLDING LAW FINALLY CLARIFIED ON FORECLOSURES

Ever since the “Cal-FIRPTA” withholding law on real estate transactions was first enacted in the early 1990's, the application of the law to foreclosures has been somewhat unclear. The law expressly exempted trustee's sales when the property was purchased at the sale by a foreclosing institutional beneficiary, but it appeared as if withholding could be required if the foreclosing beneficiary was non-institutional or if the property was purchased at sale by a third party bidder. Geraldine Soderberg wrote an excellent summation of this problem in an earlier edition of CTA News.

Despite the precise language of the former withholding law, no one is aware of withholding ever having been conducted in a foreclosure circumstance. Such critical questions as who the “seller” is in a foreclosure, who should perform the withholding, and where the withheld funds would come from were all unclear.

Finally, UTA was successful this year in inserting language in a bill which completely exempts foreclosures from Cal-FIRPTA withholding. The bill is AB 1338 by Assembly Member Ed Chavez (D-La Puente), effective on January 1, 2005. The relevant new language is added to Revenue and Taxation Code Section 18662 (e)(3)(C): no withholding is required “where the transferee has acquired the property at a sale pursuant to a power of sale under a mortgage or deed of trust or a sale pursuant to a decree of foreclosure or has acquired the property by a deed in lieu of foreclosure”. There, that should do it!