Governor Jerry Brown signed into law just last week Senate Bill 458 which prohibits a deficiency after a short sale for one-to-four residential units, regardless of whether the lender is a senior or junior lienholder.

The following is quoted from the California Association of Realtor’s legal announcement:

Effective immediately for transactions closing escrow from this day forward, both senior and junior lienholders cannot require a borrower to owe or pay for a deficiency in a short sale.

This law also prohibits any deficiency judgment to be requested or rendered for senior or junior liens after a short sale of one-to-four residential units.  Any purported waiver of this rule shall be void and against public policy.

Although a lender cannot require a borrower to pay any additional compensation in exchange for a short sale approval, the new law does not prohibit a borrower from voluntarily offering a monetary contribution to a lender in hopes of obtaining a short sale.  A lender is also permitted under the new law to negotiate for a contribution from someone other than the borrower, such as other lenders, agents, relatives, and the like.

Exceptions to the new law include a lender seeking damages for a borrower’s fraud or waste; a borrower that is a corporation, LLC, limited partnership, or political subdivision of the state; a lien secured by a bond as specified; a public utility lien; and additional rules apply if a note is cross-collateralized by more than one property.

This law is fully set forth as Senate Bill 458 (Corbett) at www.leginfo.ca.gov.