California Short Sale Law

New California Short Sale law causes confusion

Recently enacted California Senate Bill 306 (about short sale) has been mischaracterized by some practitioners as landmark legislation through calling for a 21-day turnaround for short sale approvals.  This is not accurate.

The new law actually inserts a short payoff amount request into the existing payoff demand (short sale) law.

This generally requires a lender to respond to a request for a payoff demand (short sale) statement within 21 days from when it is requested, typically by escrow.

The new law requires that, after a short sale has been approved, the lender shall respond to a request for a short-pay demand statement within 21 days. The lender’s response to escrow can be a short-pay demand statement or even, depending on the circumstances, a written statement electing not to proceed with the proposed transaction.

More short sale confusion

Another provision of SB 306 (short sale law) may also cause confusion:

• A lender may approve a short sale subject to its review of a closing statement prepared by escrow, but sometimes the lender does not review that closing statement promptly.
• Under the new law, if a lender fails to approve the closing statement within four days, the closing statement shall be deemed approved, but only if it is “not clearly contrary to the terms of the short-pay agreement or the short-pay demand statement provided to the escrow holder.”
• The new law is only for short sales already approved and does not bind a lender to a short payoff amount in the offer has not been approved by the letter.

Senate Bill 306 (short sale law) contains other technical changes in real estate related laws, including the following:

• Expanding the existing requirement for a lender to contact specified borrowers for the purposes of exploring options for avoiding foreclosure at least 30 days before filing a notice of default. 
• This requirement to explore options to avoid foreclosure now applies to owner-occupied residences and owner-occupied residential property with two-to-four dwelling units.
• Extending the existing requirement for a lender to record a notice of sale from 14 to 20 days before a trustee’s sale.
• This provision does not change existing law requiring a lender to wait at least 20 days after mailing a notice of sale before conducting a trustee’s sale.

This new law came into effect January 1, 2010.  The full text of Senate Bill 306 is available here.