If Delinquent Debt is Extinguished Should It Be Reported

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If Delinquent Debt is Extinguished Should It Be Reported

Postby ChrisGreen » Tue Jul 29, 2014 3:09 pm

Murphy v Ocwen Loan Servicing. ED California 2014


Plaintiffs' contention is that § 580b of the Cal. Civ. Proc. Code effectively extinguishes their debt, and thus to furnish information indicating that the debt still exists is inaccurate and misleading within the meaning of the federal Fair Credit Reporting Act ("FCRA") and California's Consumer Credit Reporting Agencies Act ("CCRAA"). (ECF No. 43 ¶¶ 29-41.)
. . .

Notwithstanding the intent behind § 580b to protect the debtor, § 580b does not extinguish the debt for all purposes. An additional security may, in certain circumstances, be realized to cover the debt even though the debtor's personal liability has been extinguished. See Redlinger v. Imperial Savings & Loan Ass'n, 47 Cal. App. 3d 48 (1975) (creditor reacquired a fire-damaged property at a foreclosure sale for less than the amount due, and notwithstanding § 580b, was permitted to receive the insurance proceeds)
. . .

Plaintiffs make a legal argument that when § 580b extinguishes a debt, but the loan servicer continues to furnish information to CRAs without at least noting that the debt cannot be collected, this claim against the furnisher is actionable under the FCRA and the CCRAA. In this Court's view, to bring claims such as the instant one into the purview of cases like Gorman, Saunders, and Abdelfattah is to establish a claim based on a legal argument regarding § 580b and the purposes of the FCRA and the CCRAA.[8]

After further consideration the Court finds Plaintiffs' legal argument persuasive. Finding Plaintiffs have stated a claim effectively reverses the Court's prior order (ECF No. 40) as no new material facts have been alleged in the instant complaint. However after conducting a more searching review of the legislative history of Cal. Civ. Proc. Code § 580b and considering the parties' new arguments focused on the misleading nature of furnishing information about a debt for which no deficiency judgment can be obtained, the Court finds Plaintiffs state a claim under the FCRA and the CCRAA.

Article by: Chris Green
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Good News for California Homeowners Who Had a Foreclosure

Postby Hello MFC-Robert » Thu Feb 12, 2015 10:55 pm

During the Great Depression, back in the 1930s, many home buyers had their homes foreclosed. Such foreclosure sales were often quick sales to the highest bidder on the steps of a courthouse, not inside a courtroom where a judge could order an appraisal and supervise the sale. Then, the bank or other secured creditor (such as the seller) filed a civil action seeking “a personal judgment against the debtor-mortgagor for the difference between the fair market value of the property held as security and the outstanding indebtedness.” See Cornelison v. Kornblush, 15 Cal.3d 590, 603, 125 Cal.Rptr. 557, 542 P.2d 981 (1975).

The fair market value minus the costs of the sale and outstanding balance on the mortgage loan is often called the deficiency. A judgment for the unpaid deficiency is a deficiency judgment. Imagine if a home buyer purchased a house for $100,000, putting in a $25,000 down payment, then lost their job during an economic downturn in which the real estate values dropped and was unable to make the mortgage payments. The bank would foreclose, perhaps selling the house for $65,000, leaving a $10,000 deficiency. If the bank was given a $10,000 deficiency judgment, then when the former home owner found a job, their wages would be garnished and they may even suffer with having their bank account levied, until the judgment was fully satisfied. This would push many people into bankruptcy and depressed the real estate markets.

In 1933, the California Legislature enacted Code if Civil Procedure Section 580b to prohibit any deficiency judgment against the property buyer/debtor, if the lender foreclosed on a mortgage or deed of trust or if the buyer was unable to complete a sale contract. This was among several popular laws that California and other states enacted during the Great Depression. It is commonly referred to as one of California’s Anti-Deficiency Statutes.

Since then, the California Legislature has amended Section 580b to strengthen protections for property buyers from deficiency judgments. Until the Legislature amended the statute in 2013, which took effect on January 1, 2014, Section 580b did not extinguish the loan deficiency, even though no court would permit a deficiency judgment. Herrera v. LCS Fin. Servs. Corp., 2009 WL 2912517, at *4 (N.D.Cal. Sept.9, 2009); Abdelfattah v. Carrington Mortgage Services, LLC, 2013 WL 495358, at * 2 ( N.D.Cal. Feb. 7, 2013) (interpreting section 580d). The result was that mortgage lenders and credit reporting agencies continued reporting the unpaid deficiency on the consumer’s credit reports, as though it were a legally binding debt of the consumer.

On January 1, 2014, Section 580b was amended “to clarify that where a statute prohibits a deficiency judgment, the underlying debt is effectively extinguished and, as such, is no longer owed and cannot be collected.” Assembly Floor Analysis on S.B. 426, 2013 S.2013–14 Sess. (June 19, 2013). Thus, since 2014, these deficiency debts must be considered “extinguished.”

In the past few years, U.S. District Courts have considered the credit reporting of deficiency balances by a lender or mortgage servicing company. In Johnson v. Wells Fargo HM Inc., 2013 WL 7211905 *8 (C.D. Cal., Sept.13, 2013) the U.S. District Court held for the consumer and against the defendant, for violating the Fair Credit Reporting Act and California CCRAA for “failing to report that a debt is not subject to a deficiency judgment [which] is also potentially misleading.” This finding was adopted by another U.S. District Court in Murphy v. Ocwen Loan Servicing, LLC, 2014 WL 2875635 *7 (E.D. Cal., June 24, 2014).
Robert Stempler, Attorney at Law
California State Bar # 160299
Email: Robert@StopCollectionHarassment.com
Telephone: (805) 246-2300
_ © 2015 Consumer Law Office of Robert Stempler, APC

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