The California One Action Rule – Avoid a Deficiency Judgment – Know Your Rights!
The California One Action Rule – Avoid a Deficiency Judgment – Know Your Rights!
As the real estate crisis continuously affects society today and foreclosures are still on the rise, it is important for all homeowners to know their rights in the event of a property foreclosure or a short sale. As many borrowers have second and third mortgages placed on their properties, the event of one or more mortgages going into default is not uncommon. To avoid potential lawsuits and to protect homeowners’ rights, California lawmakers passed the One Action or “Security First” rule. This law states that lenders can only take one action when a debtor defaults on a loan.
What exactly constitutes an “action” under California law? When a borrower defaults on a loan, the lender has two options to collect security. The lender may begin with several collection methods, but can legally only select one. One option is a judicial foreclosure (often a lengthy and expensive process), consisting of lenders seeking a court order to foreclose on a property in addition to seeking a deficiency judgment; that is unless the loan is a purchase money or non-recourse loan. The other, most common option for lenders is to choose a non-judicial “Trustee Sale” foreclosure to recover the property in hopes to sell to a third party and pay off the loan. Under this option the foreclosing lender waives their rights to obtain a deficiency judgment. A lender choosing one of these options in the event of default constitutes an “action” under the California One Action Rule.
If my property forecloses, can I still be sued for the remaining debt? The California One Action Rule therefore implies that if a bank forecloses on a property by means of a non-judicial foreclosure, they cannot pursue borrowers for remaining debts on a first mortgage. However, this legislation, similar to Senate Bill 931 (Short Sale Deficiency Protection Law), does not have any impact on a second or third mortgage. These respective lenders still are entitled to their “one action” and can therefore seek remaining balances on a foreclosed property. Although it has been found that second trustee lenders are more likely to track down borrowers years later for remaining balances when they know the borrowers financial situation has improved. Because the 2nd mortgage is now unsecured, it is highly possible to negotiate a favorable settlement of 10-50% of the balance due.
Why is it necessary for California to have a “One Action” Rule? Simply put, the one action rule was created to protect the borrower from multiple actions affecting the debt. It is more vital than ever for California homeowners to know their borrowers’ rights, and the California One Action Rule in addition to Senate Bill 931 are two very powerful pieces of legislature that every homeowner must be aware of. Know your rights!
Just the Facts
- CA One Action Rule protects homeowners in the event of foreclosure.
- The One Action Rule only applies to the foreclosing lender, other lenders may still have recourse.
- Under the One Action Rule, if a lender forecloses on a property in a non-judicial “Trustee Sale”, that lender cannot pursue the borrower for the remaining unpaid debt or deficiency.
- Lenders on second and third mortgages are also entitled to their “one action” and can seek remaining debts as their entitled “action”.
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