Effects of Secured Transactions +7California · Real Estate · English

Deeds of trust contain clauses allowing the lender to declare the full debt due upon breach or default, including due-on-sale and due-on-further-encumbrance. These acceleration clauses let the lender demand payoff or renegotiation when title is transferred or further encumbered.

• ✓Acceleration allowed upon failure to pay debt service, taxes, or maintain property
• ✓Due-on-sale and due-on-further-encumbrance are forms of acceleration clauses
• ✓Loans without a due-on-sale clause are not affected by these rules

Wellenkamp v. Bank of America (1978) barred automatic due-on-sale enforcement by state lenders. Fidelity Federal v. de la Cuesta (1982) upheld federal lender enforcement. The Garn-St. Germain Act (effective October 15, 1982) made due-on-sale clauses automatically enforceable by all lenders, preempting state law.

• ✓Wellenkamp (1978) restricted automatic due-on-sale for state lenders
• ✓Fidelity Federal v. de la Cuesta (1982) upheld federal enforcement
• ✓Garn-St. Germain Act (Oct 15, 1982) made due-on-sale enforceable by all lenders

Purchase money debt has two definitions: priority over other liens brought by buyer, and anti-deficiency protection. A seller-carried loan is purchase money. A third-party loan is purchase money only if used to acquire and occupy a 1-4 unit residence. Investment/income financing does not qualify.

• ✓Seller/vendor financing of purchase price is purchase money
• ✓Third-party loan is purchase money only for owner-occupied 1-4 unit residences
• ✓Refinancing an owner-occupied home converts it to non-purchase money

Assignment of a debt secured by a mortgage carries the security. Assignment of the mortgage without the note transfers nothing, but transfer of the note without the mortgage gives the assignee the right to security. Recordation gives constructive notice to all persons.

• ✓Note without mortgage gives assignee right to security (Civil Code 2936)
• ✓Mortgage without note transfers nothing to assignee
• ✓Recording assignment gives constructive notice (Civil Code 2934)

Every licensee negotiating a loan or selling/assigning a note must cause the deed of trust or assignment to be recorded, and must recommend in writing immediate recordation. A servicing MLB may retain original documents but perfect delivery by recording and providing conformed copies.

• ✓Licensee must cause deed of trust or assignment to be recorded (B&P 10233.2, 10234, 10234.5)
• ✓Must recommend immediate recording in writing if not already recorded
• ✓Servicing MLB may retain originals but must perfect delivery by recording

When encumbered property is transferred, the buyer obtains new financing, buys subject to the loan, or assumes the loan. Buyers cannot take title subject to a loan with a due-on-sale clause. Under assumption, the buyer becomes principal debtor; a substitution of liability releases the seller.

• ✓Cannot take title subject to existing loan when due-on-sale clause exists
• ✓Seller generally remains personally liable except in purchase money situations
• ✓Substitution of liability releases the seller from all liability upon assumption

For owner-occupied residences, notable exceptions to enforcement include junior liens not related to occupancy, transfers between joint tenants, transfers to relatives on death, and transfers into revocable inter-vivos trusts. By October 15, 1985, transfers without lender consent were largely eliminated in California.

• ✓Junior lien creation not related to occupancy is exempt
• ✓Transfer to relative on death of borrower is exempt
• ✓Transfer into revocable inter-vivos trust (borrower as settlor/beneficiary) is exempt
• ✓Federal S&L may enforce clauses on loans originated while federally chartered

An acceleration clause in a deed of trust for property with four or fewer residential units is invalid unless the clause is printed in its entirety in both the security instrument and the promissory note or other debt document.

• ✓Acceleration clause must appear in both security instrument and promissory note
• ✓Applies to property containing four or fewer residential units (Civil Code 2924.5)
• ✓Covert transfers to avoid due-on-sale are not acceptable practice

Liens generally have priority by time of recordation, with notice (actual or constructive) determining priority. County and municipal property taxes and authorized assessments are 'super liens' retaining priority over deeds of trust regardless of when recorded.

• ✓Priority is generally determined by time of recordation
• ✓Property taxes and assessments are super liens with priority regardless of recording
• ✓Special/ad valorem assessments have same priority as taxes (Gov Code 53930)

The terms debtor/borrower/trustor/mortgagor are interchangeable describing the borrower. Creditor/lender/beneficiary/mortgagee are interchangeable describing the lender. Effects of security instruments include assignment of debt, transfer, acceleration, offset statements, lien priorities, and purchase money distinctions.

• ✓Debtor, borrower, trustor, mortgagor are interchangeable terms
• ✓Creditor, lender, beneficiary, mortgagee are interchangeable terms
• ✓California is a lien theory, not title theory, state

In an assignment of an existing mortgage to an investor, an offset statement (estoppel certificate) is obtained showing the unpaid balance, interest paid date, rate, payment amount, maturity, acceleration clauses, and any owner claims. It supplements the beneficiary statement.

• ✓Offset/estoppel statement confirms obligations inuring to the assignee
• ✓Includes unpaid balance, interest rate, payment terms, and existing claims
• ✓Supplements the beneficiary statement of loan status

The fourth RESPA-required disclosure is the Servicing Disclosure Statement. It must be provided at application or within 3 business days after submission by a creditor/lender or mortgage broker anticipating table funding, or a dealer anticipating a first lien dealer loan. Its purpose is to inform the applicant whether loan servicing may, will, or will not be transferred.

• ✓Must be provided at application or within 3 business days after submission of the application
• ✓Required from creditors/lenders or brokers anticipating table funding, or dealers anticipating first lien dealer loans
• ✓'Mortgage servicing loan' is interchangeable with 'federally related mortgage loan'
• ✓California mortgage brokers who may not engage in table funding are not required to issue the Servicing Disclosure Statement

Under federal RESPA regulations, table funding is a settlement at which a loan is funded by a contemporaneous advance of loan funds and an assignment of the loan to the person advancing the funds. In California these are 'concurrent assignments.' Except for narrow cases involving California mortgage bankers under RMLA using affiliated lender funds, table funding is unauthorized under California law. A table-funded loan is NOT a secondary market transaction.

• ✓Table funding = contemporaneous advance of funds plus assignment of the loan to the person advancing funds
• ✓In California such transactions are 'concurrent assignments'
• ✓A table-funded loan is not a secondary market transaction for RESPA purposes
• ✓Table funding is unauthorized in California except for narrow RMLA mortgage banker exceptions

The Servicing Disclosure Statement notice informs first lien mortgage applicants that the right to collect mortgage payments may be transferred. Servicing refers to collecting principal, interest, and escrow payments, sending statements, tracking balances, and handling other loan aspects. The statement includes one of three servicing transfer options and states the borrower will receive advance notice before transfer.

• ✓Borrower must be given advance notice before a servicing transfer occurs
• ✓Statement discloses whether servicing may, will, or will not be transferred using one of three specified options
• ✓Servicing includes collecting principal, interest, and escrow payments and sending statements

The creditor/lender, authorized table funding broker, or qualifying dealer must deliver the Servicing Disclosure Statement within 3 business days of receipt of the application by hand delivery, U.S. Mail, or (if the applicant agrees) fax, email, or electronic means. If credit is denied within 3 business days, no statement is required. Co-applicants at the same address need only one copy; different addresses require separate copies.

• ✓Deliver within 3 business days of receipt of application via hand delivery, mail, or agreed electronic means
• ✓No Servicing Disclosure Statement is required if the borrower is denied credit within the three business days
• ✓Co-applicants at the same address need only one copy; different addresses require a copy to each

Secondary market transactions under RESPA are bona fide transfers of a loan obligation in the secondary market. A table-funded broker does not become the creditor/lender. HUD determines a bona fide secondary market transfer by the real source of funding and the real interest of the funding lender. A secondary market transaction occurs when a residential mortgage loan is sold and assigned from one actual creditor/lender to another.

• ✓A bona fide secondary market transfer depends on the real source of funding and real interest of the funding lender
• ✓A mortgage broker in a table-funded transaction does not become the creditor/lender
• ✓Creation of a dealer loan or assignment of a dealer consumer credit contract is not a secondary market transaction

A real property sales contract is an instrument by which the seller (vendor) agrees to convey title to real property after the buyer (vendee) has met certain conditions specified in the contract, and does not require conveyance within one year. It is also called an Installment Sales Contract, Agreement to Convey, Agreement for Purchase and Sale, Land Sale Contract, or Land Contract of Sale.

• ✓Seller (vendor) agrees to convey title only after buyer (vendee) meets specified conditions
• ✓The contract does not require conveyance within one year
• ✓It must meet requirements set forth in Section 2985 et seq. of the California Civil Code

When selling under an unrecorded land contract, the seller is prohibited from encumbering the parcel beyond the amount due under the contract without the buyer's written consent. The seller must apply installment payments first to obligations secured by the property and hold tax/insurance payments in trust.

• ✓Seller of an unrecorded parcel cannot encumber it beyond the amount due without the purchaser's written consent
• ✓Seller must apply installment payments first to obligations secured by the property
• ✓Seller must hold in trust payments for taxes and insurance and use them only for those purposes unless otherwise agreed
• ✓The contract must recite the number of years to complete payment and the basis for any tax estimate

The land contract carries several disadvantages for the buyer, including transfer restrictions, poor collateral value, uncertain title, and litigation risks if the seller dies, becomes bankrupt, or is declared incompetent before conveyance.

• ✓The contract may include covenants restricting assignment or transfer
• ✓Most financial institutions regard a land contract as poor collateral
• ✓Buyer has no assurance seller has good title when the contract is made and cannot rescind for that reason
• ✓If seller becomes bankrupt, dies, or is adjudicated incompetent before conveyance, buyer faces time-consuming, expensive litigation
• ✓Many disadvantages are eliminated by using a contract secured by a deed of trust or a three-party instrument with title insurance

A buyer is entitled to prepay all or part of the balance due on any real property sales contract entered into on or after January 1, 1969, for subdivided residential lots containing a dwelling for not more than four families. The seller may prohibit prepayment by written agreement for up to 12 months following the sale.

• ✓Prepayment right applies to contracts entered on or after January 1, 1969, for residential lots with dwellings for not more than four families
• ✓Seller may, by written agreement, prohibit prepayment for up to 12 months following the sale
• ✓Any waiver of this prepayment provision by the buyer is contrary to public policy, unenforceable, and void, but does not affect the rest of the contract

Historically the seller's primary advantage was the ease of eliminating the purchaser's interest upon default. Barkis v. Scott held that Civil Code Section 3275 was a sufficient barrier to harsh and unreasonable foreclosure, and later cases expanded remedies of defaulting vendees—even willful defaulters—effectively removing the automatic power of sale.

• ✓Barkis v. Scott held Civil Code Section 3275 barred harsh and unreasonable foreclosure proceedings
• ✓Later cases extended relief even to willfully defaulting vendees, removing the automatic power of sale
• ✓The land contract's advantage as a security device has dissipated in favor of a deed of trust with power of sale

A real property sales contract for purchase of property in a subdivision must clearly set forth the legal description of the property, all existing encumbrances at the date of the contract, and the terms of the contract.

• ✓Must clearly set forth the legal description of the property
• ✓Must disclose all existing encumbrances at the date of the contract
• ✓Must state the terms of the contract

Assessors establish base year values based on the property's status since February 28, 1975. Unchanged parcels keep a locked base value adjusted up to 2% annually; sold/transferred parcels get a new base year value; new construction receives its own base year value for the added improvement.

• ✓Base year value cannot change unless there is a change in ownership or new construction
• ✓No change since Feb 28, 1975 = base value locked, adjusted up to 2% per year
• ✓Sold/changed ownership = new base year value as of date of change, adjusted up to 2% per year
• ✓New construction gets its own base year value for the added improvement; land and improvement may have different base years

Several transfers are excluded from 'change in ownership' and thus avoid reappraisal, including eminent domain replacements, disaster replacements, parent-child transfers, senior/disabled base value transfers, spousal transfers, and proportional entity transfers.

• ✓Parent-child transfer of principal residence plus first $1 million of full cash value excluded (Section 63.1) - claim filed within 3 years
• ✓Grandparent-grandchild transfers excluded if parents deceased (after March 27, 1996)
• ✓Persons over 55 or disabled may transfer base year value to replacement property (Section 69.5)
• ✓Spousal transfers (Section 63) and transfers into revocable trusts (Section 62) excluded
• ✓Comparable replacement for eminent domain (Section 68) and disaster (Sections 69, 69.3, 70) excluded
• ✓Parent-child exclusion claim must be filed within 3 years of transfer or 6 months after notice of supplemental/escape assessment

Certain improvements are excluded from the definition of 'new construction' for purposes of reappraisal, so they do not trigger reassessment.

• ✓Water conservation equipment for agricultural use is excluded
• ✓Fire detection/extinguishing systems and fire-related egress modifications excluded
• ✓Modifications for disabled person access excluded
• ✓Seismic retrofitting and normal maintenance/repair excluded
• ✓Active solar energy systems (Section 63(b)) and environmentally contaminated property excluded

Under Section 51, assessors must recognize declines in value. Taxable value is the lower of the base year value (compounded annually) or the full cash value (Section 110). The owner may need to bring declines to the assessor's attention.

• ✓Taxable value = lower of base year value or full cash value
• ✓Owner may need to expressly notify assessor of decline in value
• ✓County board of equalization must hear applications for reduction in assessment

In California, comprehensive plans are called 'general plans.' Every city and county must adopt its own general plan for long-term physical development covering its entire planning area. Courts describe it as 'a constitution for all future developments,' and all land use decisions must be consistent with it.

• ✓Every city and county must adopt a general plan (California Government Code Section 65300)
• ✓All city and county land use decisions must be consistent with the general plan
• ✓The planning area includes all land under jurisdiction plus outside land bearing relation to its planning

State law requires the general plan to address seven major categories called 'elements.' Additional elements may be required based on location, and optional elements may be included. All elements must form an integrated, internally consistent statement of development policies.

• ✓The seven required elements are: land use, circulation, housing, conservation, open space, noise, and safety
• ✓Some jurisdictions must also address coastal development and mineral resource protection
• ✓The general plan and all its elements must be integrated, internally consistent, and compatible

Legislation and court decisions established the general plan as the local constitution for physical development. Zoning ordinances of general law cities, subdivision maps, and public works must be consistent with the general plan.

• ✓Zoning ordinances of general law cities must be consistent with the general plan
• ✓Every city/county except Los Angeles is prohibited from approving a subdivision map inconsistent with the general plan; all (including LA) must deny inconsistent maps
• ✓A 1980 court decision requires public works of all cities/counties to be consistent with the plan
• ✓A conditional use permit may not be granted if the general plan inadequately addresses state-mandated issues (1984 decision)

General plans are typically arranged into four basic components: background data/analysis, statement of goals and development policies, supporting diagrams, and a program of implementation measures. Formats differ by jurisdiction based on local conditions.

• ✓Four components: background data/analysis, goals and policies statement, diagrams, and implementation program
• ✓Local planning agency is ultimately responsible for developing the plan, whether prepared in-house or by consultants

After the plan is written, the planning commission holds at least one public hearing and forwards recommendations to the local legislative body, which conducts at least one public hearing and then adopts, amends, or denies the plan by resolution.

• ✓The planning commission holds at least one public hearing before forwarding recommendations
• ✓The legislative body adopts, amends, or denies the plan by resolution after a public hearing
• ✓In some charter cities, the planning commission may take final action without a public hearing

Amendments to mandatory elements of general plans are limited in frequency. Amendments may be initiated by planning agencies, in any manner specified by the legislative body, or by initiative measure.

• ✓Mandatory element amendments are limited to no more than four times during any calendar year
• ✓Amendment by initiative measure has been upheld by the California Supreme Court
• ✓If a development agreement is in effect, its terms supersede conflicting general plan amendments

The Residential Listing Agreement Exclusive (RLA) is a listing for sale of specifically described real property. The phrase 'right to sell' means 'right to find a buyer' — it does NOT authorize the broker to sign transaction documents for the seller. Modifications are made using form MT.

• ✓'Right to sell' means 'right to find a buyer' only
• ✓A listing does NOT authorize the broker to sign transaction documents for the seller
• ✓A typical listing authorizes placing a 'for sale' sign, MLS entry, cooperating with buyer's agents, and accepting a good faith deposit

Under Business and Professions Code Section 10147.5, in sales of residential property of not more than four units (including a mobilehome), the listing must contain, in not less than 10-point boldface type before the compensation clause, a notice that commission rates are not fixed by law and are negotiable. A broker cannot preprint or insert a commission rate prior to negotiation.

• ✓B&P Code Section 10147.5 requires the negotiability notice in 10-point boldface type before the compensation clause
• ✓Notice: 'The amount or rate of real estate commissions is not fixed by law. They are set by each broker individually and may be negotiable between the seller and broker.'
• ✓A broker cannot use a listing with a preprinted or pre-inserted commission rate before negotiation
• ✓Applies to residential property of not more than four units including a mobilehome

A protection clause designates a period after listing expiration during which the broker's commission is protected if the owner personally sells to someone who physically entered/was shown the property or wrote an offer during the listing term.

• ✓The broker must notify the owner in writing of prospective buyers' names before or within the time specified in the agreement
• ✓Protection applies to buyers who physically entered, were shown, or wrote an offer during the listing term
• ✓The commission is protected only for a designated time period after expiration

A listing must have a definite term ending at 11:59 PM on a specified day. The property description must be specific and detailed to avoid doubt and assist enforcement.

• ✓A listing must have a definite term
• ✓The term ends at 11:59 PM on a specified day
• ✓Accurate property description assists enforcement of the listing

In return for exclusive rights, the broker agrees to use due diligence to find a suitable buyer and negotiate a sale, making the listing a bilateral contract. The broker's right is 'irrevocable,' meaning it cannot be revoked without the other party's consent, though breach may allow legal rescission.

• ✓The listing is a bilateral contract requiring broker due diligence
• ✓'Irrevocable' means it cannot be revoked by either party without the other's consent
• ✓Breach of contract (e.g., failure to use due diligence) may subject the contract to legal rescission
• ✓The seller agrees to indemnify and hold the broker harmless for undisclosed material facts

The seller typically represents, unless specified in writing, that they are not aware of a notice of default, loan delinquencies, bankruptcy/insolvency affecting the property, threatened or pending litigation, or current/pending/proposed special assessments, and agrees to notify the broker of changes.

• ✓Seller must disclose notices of default, loan delinquencies, and bankruptcy/insolvency
• ✓Seller must disclose threatened/pending litigation and special assessments
• ✓Seller must notify the broker of any changes to these items

After execution, the broker or broker's designee has the right to approve the listing terms within 5 days or cancel in writing. All owners must sign; partnerships/corporations require proper officials with authorization. When signed by an authorized licensee, the listing becomes a bilateral contract with a 5-day management approval contingency, and a copy must be given to the seller at signing.

• ✓Broker/designee has 5 days to approve or cancel the listing in writing
• ✓All owners must sign the listing
• ✓Broker must give the seller a copy of the agreement at the time of signing
• ✓Dispute resolution requires mediation first, then arbitration if initialed by all parties

A trust account separates trust funds from non-trust funds, providing better physical and accounting control. It protects principals' funds from litigation against the broker and from probate, and provides enhanced FDIC insurance coverage.

• ✓Trust funds in a true trust account cannot be frozen pending litigation against the broker or during probate
• ✓Each client's funds in a trust account at a federally insured bank are FDIC-insured up to $250,000 per owner (per 1965 FDIC opinion), not just $250,000 for the entire account
• ✓The account must be designated as custodial and each owner's name and interest disclosed on the depositor's records

A subdivider, builder, or developer must understand the difficulties of subdividing and the market. The development plan must account for state and local government regulation, including the Subdivided Lands Law, the Subdivision Map Act, the California Environmental Quality Act (CEQA), zoning, local general and specific plans, and public opinion.

• ✓Development plans must comply with the Subdivided Lands Law and Subdivision Map Act
• ✓CEQA (California Environmental Quality Act) applies to development plans
• ✓Zoning, local general/specific plans, and public opinion affect the development

The developer's educated guess at the rate at which lots will sell is the 'absorption rate,' which impacts marketing, financing, and overhead costs, all adjusted for anticipated future price fluctuations. Estimated pre-tax profit is derived by subtracting the sum of all project costs from the estimate of retail sales price, factoring in the time before profits are realized.

• ✓The absorption rate is the estimated rate at which lots will sell
• ✓Absorption rate affects marketing, financing, and overhead costs
• ✓Pre-tax profit = estimated retail sales price minus total project costs, factoring in time to realization

Zoning and planning preconditions can drastically reduce a property's potential. Before purchasing, a developer or builder should consult the local planning agency and private land use specialists to evaluate the likelihood of final project approval and the probable time frames for the approval process.

• ✓Zoning and planning preconditions can drastically reduce property potential
• ✓Consult the local planning agency before purchasing property
• ✓Evaluate likelihood of approval and probable time frames with land use specialists

A developer uses professionals such as civil engineers, construction engineers, soil engineers, land use planners, architects, landscape architects, contractors, attorneys, title companies, bankers, real estate analysts, market researchers, and cost accountants. The plan consists of: (1) physical layout of tract in engineered detail; (2) land use processing and approval schedule; (3) amenities to be provided; (4) initial and continuing financing until the last sale; (5) advertising and sales promotion.

• ✓A development plan includes engineered tract layout, approval schedule, amenities, financing, and advertising/sales promotion
• ✓Financing must continue until the last sale is complete
• ✓Developers rely on a broad team of engineers, planners, attorneys, and financial professionals

To determine adequate profit, the developer must calculate: cost of the land; cost of government fees; cost of off-site improvements (water mains, sewers, streets, gutters, curbs, sidewalks, street lighting); survey, legal, marketing, financing and office/overhead costs; and the likely retail sales price of lots or units, sometimes far in the future.

• ✓Profit calculation includes land cost, government fees, off-site improvements, overhead, and estimated retail sales price
• ✓Off-site improvements include water mains, sewers, streets, gutters, curbs, sidewalks, and street lighting
• ✓Retail sales prices must be projected, sometimes far into the future

A developer may subdivide a large tract pursuant to a phased master plan designed to meet anticipated demand/absorption rate. These projects are more complex, involve master governing restrictions, face more obstacles to state and local approval, and generally take more time with greater uncertainty.

• ✓Phased master plans are designed to meet anticipated demand/absorption rate
• ✓Master-planned projects involve master governing restrictions
• ✓Larger phased projects face greater approval obstacles, time, and uncertainty

A broker may gain subdividing experience in a limited role. An acreage owner might engage the broker as a subdivider, with the broker arranging skilled consultants (civil engineer, land planner, land use attorney). The broker and land owner may form a partnership: one contributing capital and land, the other contributing management and marketing (sweat equity).

• ✓A broker can be engaged as a subdivider to arrange consultants
• ✓Broker and owner may form a partnership dividing capital/land and management/marketing roles
• ✓'Sweat equity' refers to contributed management and marketing effort