LENDER’S REMEDIES IN CASE OF DEFAULT

LENDER’S REMEDIES IN CASE OF DEFAULT

Foreclosures Generally

Foreclosure is a procedure used to terminate the right, title, and interest of a trustor/mortgagor in the security
real property by selling the encumbered property and using the sale proceeds in an effort to satisfy the debt/loan
of the lender/creditor.

A mortgage without a power of sale can only be foreclosed judicially (i.e., by court proceeding) pursuant to the
Code of Civil Procedure, commencing with Section 695.010, “The Enforcement of Money Judgments”. A deed
of trust or mortgage that contains a power of sale may be foreclosed nonjudicially by trustee’s sale in
accordance with the procedural law provided for in Civil Code Section 2924 et seq. Most security instruments
utilized in California expressly provide for power of sale, thus offering a choice to the lender/creditor of
electing a non-judicial or judicial foreclosure sale.

As previously discussed in this Chapter, where anti-deficiency judgments are sought and permitted by law, the
foreclosure must be accomplished judicially. The lender/creditor may proceed in the same court action to
foreclose, quiet title, and to eject the trustor/mortgagor, and to then proceed through the sale of the security
property (should the proceeds prove to be insufficient to fully pay the debt/loan) to obtain a money judgment as
ordered by the court. Money judgments are evidenced by an abstract of judgment which may be enforced
against the assets of the borrower/debtor through a writ of execution. The entire proceeding constitutes one
form of action comprised of respective parts (Code of Civil Procedures 726 et seq.).

As a general rule, procedural requirements in effect at the time the judicial foreclosure is begun will govern,
even if the requirements change (Code of Civil Procedure Section 725a et seq.). However, when amendments
occur to the non-judicial foreclosure procedural law, careful reading of the amendments is required to learn the
operative dates of each amendment and the effect the amendments may have on non-judicial foreclosures in
process (Civil Code 2924 et seq.).

“One-Action” Rule

Under California law, the “one-action” rule applies for recovery of any debt or enforcement of any right
secured by a deed of trust or mortgage on real property (Code of Civil Procedure Section 726).

The “one-action” rule requires the beneficiary/lender/mortgagee to first foreclose the security property before
seeking a personal money judgment against the maker/trustor/mortgagor. The personal money judgment
represents the deficiency between the amount of debt/loan (including any related authorized fees, costs and
expenses), and the amount received for the property at the judicial foreclosure sale.

The foregoing assumes this second part of the action is permitted under the anti-deficiency rules. Only after the
security has been exhausted may the unpaid lender/creditor seek a personal money judgment against the
maker/trustor/mortgagor. However, this stepped judicial procedure may not apply to guarantors. It should be
noted that a maker/trustor/mortgagor cannot guaranty his or her own debt. Depending upon the facts, limited
exceptions to the “one-action” rule may be available, e.g., the security becomes worthless due to the act or
negligence of the maker/trustor/mortgagor.

If a property is ‘‘legally” worthless (i. e., nonexistent or not actually owned by the maker/trustor/mortgagor, or
in a situation in which foreclosure would be meaningless because the security has been destroyed or has
become valueless not from any action of the creditor/lender) or where fraud is involved, the creditor/lender is
not limited to the “one-action” rule. Under such circumstances, the creditor/lender may sue directly on the
promissory note and need not first judicially foreclose.

California Financial Code Section 7460 authorizes depository institutions and their affiliates (as defined) to
seek damages for alleged fraud from the maker/trustor/mortgagor in an amount not to exceed 50% of the actual
damages, unless the security property is the owneroccupied residence of the borrower and the amount of the
loan is $150,000 or less (this amount being adjusted annually, commencing January 1, 1987, in accordance with
the Consumer Price Index published by the United States Department of Labor).

“Worthless security” does not include a loss in property or security value due to marketplace or economic
declines. Unless expressly authorized in the security instrument to occur with prior notice during the loan term,
the creditor/lender must generally first foreclose to have the court determine “economic worthlessness” in the
form of an opinion of value of the security property (an appraisal) and whether a writ of attachment may be
granted in connection therewith.

Status of “Sold Out” Junior Lien Holders

A first deed of trust or mortgage is a security instrument that achieves in the records of the county where the
security property is located first priority as the result of the date and time of recordation or through an express
subordination of a previously recorded security instrument. First deeds of trust or mortgages take precedent and
have priority over junior deeds of trusts or mortgages, i. e., security instruments that are either recorded
subsequent to or expressly subordinated to the prior recorded deed of trust or mortgage. A foreclosure by the
holder of a first deed of trust or mortgage will extinguish junior deeds of trust and mortgages and other liens
that are recorded subsequent to the prior recorded deed of trust or mortgage (as defined) except for super liens,
e. g., property taxes or certain bonds and assessments. This is known as lien cleansing.

A holder of a junior deed of trust or mortgage or other lien holders in such circumstances are “sold out” juniors.
Should the junior lien be a purchase money deed of trust or mortgage, the holder cannot proceed with a suit for
a money judgment for the amounts owed in accordance with the terms of the promissory note. However, if the
junior lien is a non-purchase money deed of trust or mortgage, the holder is not barred from proceeding with
such a suit.

As to the Parties

When the deed of trust or mortgage includes a power of sale, there are three parties to the security instrument.
In a deed of trust the three parties are: the trustor (borrower), the trustee (third party), and the beneficiary
(creditor/lender). In a mortgage with power of sale, the three parties are the mortgagor (borrower), the trustee
(third party), the mortgagee (creditor/lender). The trustor/mortgagor conveys technical title to the trustee to
hold until the trustor/mortgagor performs or defaults under the terms of the promissory note and deed of trust or
mortgage.

California is a lien theory not a title theory state. Accordingly, the technical title conveyed does not carry with it
limitations on the exercise of the “Bundle of Rights” extended to property owners under our constitutional
system, including the rights of possession and use of the security property. Therefore, the conveyance of
technical title is to accomplish a hypothecation or pledging of the security property as collateral for the
repayment of the debt/loan or the performance of an obligation without giving up the right to use and further
encumber the security property.

In the deed of trust or mortgage, the trustee’s function is to reconvey or release the technical title received by
the trustee to the security property back to the trustor/mortgagor when the debt/loan is paid in full. The trustee

also is authorized to proceed with the power of sale to nonjudicially foreclose and sell the security property to
pay the debt/loan, should the trustor/borrower breach the terms of the promissory note and deed of trust or
mortgage. The third power or authority conveyed to the trustee is to execute any instruments as directed by the
beneficiary/creditor/lender to reform the description of or any other provision of the deed of trust or mortgage.

The trustee in a mortgage with power of sale performs much the same functions as under the deed of trust. In a
mortgage, the manner through which to evidence the repayment of the debt/loan is historically known as a
certificate of discharge/satisfaction of mortgage. However, a mortgage with power of sale should be treated by
the trustee in the same manner as a deed of trust with a power of sale for this purpose, i. e., a deed of
reconveyance may be used.

As to Reinstatement

Under a deed of trust or mortgage, the trustor/mortgagor and certain other persons, including successors in
interest and subordinate lien holders listed in Civil Code Section 2924c, may reinstate the loan by curing the
default at any time in a non-judicial foreclosure proceeding up to five days prior to the date of the scheduled
trustee’s sale or the date of the postponed trustee’s sale.

In a judicial foreclosure proceeding, the same parties may reinstate before the sale is conducted as ordered by
the court. Reinstatement is accomplished by paying all delinquencies, including advances made by the lender to
a senior lien holder , plus all authorized fees, costs and expenses incurred because of the foreclosure action.

Under either security instrument, the lender’s right to accelerate payment of the debt/loan in the event of a
breach or default is limited by the statutory right of reinstatement. This right is intended to provide the
trustor/mortgagor with an opportunity to cure the breach or default (assuming it is curable) within a defined
period prior to the trustee’s sale or prior to the court ordered judicial sale. An example of a non-curable default
is a breach of the due-on-sale or due on further encumbrance provisions.

As to Redemption

Code of Civil Procedure Section 729.020 provides that property sold subject to the right of redemption may be
redeemed after the sale only by the judgment debtor or his successor in interest (i.e., the trustor/mortgagor).
Liens are money claims and include, among others, deeds of trust and mortgages. Junior lien holders are no
longer entitled to redeem the debt or loan represented by a senior lien. The junior lien (including deed of trust
or mortgage) cannot reattach unless pursuant to an order by a court of competent jurisdiction.

Accordingly, a junior lien holder must proceed with a lawsuit in the form of an action for a money claim for
amounts remaining owed to secure an abstract of judgment as an unsecured creditor. As indicated, liens are
money claims and also are encumbrances against the title of the security property; however, all encumbrances
are not liens. An example of an encumbrance that is not a lien is an easement.

The redemption period is three months after the judicial sale date, if the sale proceeds are sufficient to pay the
secured indebtedness (debt/loan) plus interest and costs of foreclosure. The redemption period is one year after
the judicial sale date, if the sale proceeds do not satisfy the amount of the debt/loan plus interest, authorized
fees, costs, and expenses. However, if the beneficiary/lender/mortgagee waives or is prohibited from obtaining
a deficiency judgment (e.g., a non-purchase money loan subject to a non-recourse agreement), there no longer
would be any right of redemption according to Code of Civil Procedure Section 726 (the “one-action” rule).

Under a deed of trust or a mortgage with power of sale, the trustor/mortgagor in most cases has a statutory right
of reinstatement after the notice of default up to five business days prior to the date of the trustee’s sale or the
date of any postponed sale and a right of redemption thereafter up to the time that the trustee or the agent of the
trustee cries the sale. No right of redemption applies following the trustee’s sale. The sale is absolute unless
otherwise ordered by a court of competent jurisdiction in a subsequent proceeding brought to set aside the sale.

As to Deficiency Judgments

A deficiency judgment is a personal judgment against a debtor/borrower for the difference between the unpaid
balance of the secured debt/loan (plus interest, authorized fees, costs, and expenses of sale) and the amount of
the actual proceeds of the sale. Depending upon the language used in establishing prepayment or yield
maintenance provisions (and assuming these provisions have not been imposed inconsistent with applicable
law), the additional amount due will increase the unpaid balance of the secured debt/loan.

Anti-deficiency Rules

Where a beneficiary or mortgagee elects to foreclose the security by power of sale (non-judicial foreclosure)
rather than by judicial foreclosure, a deficiency judgment is automatically barred under Code of Civil
Procedure Section 580d. Section 726 et seq. of the same code sets certain limits for a deficiency judgment; and
Section 580b prohibits deficiency judgments when specified purchase money secured loans are involved (as
previously discussed in this Chapter).

A seller/vendor extending purchase money credit generally cannot obtain a deficiency judgment if the
trustor/mortgagor breaches or defaults and a foreclosure sale fails to bring sufficient proceeds to pay off the
entire amount owing under the promissory note. An exception to this rule exists in the sale of a property to a
developer for land development or vertical construction and the seller/vendor subordinates his or her purchase
money lien to the deed of trust or mortgage evidencing the land development or construction loan. Upon default
by the purchaser/developer, the seller/vendor would typically lose his or her security interest after a foreclosure
sale under the senior lien. However, Code of Civil Procedure Section 580b will not be applied to bar recovery
by the subordinating junior seller/vendor of the unpaid balance of the purchase price of the security property
when the senior deed of trust or mortgage is a land development or vertical construction loan (Spangler v.
Memel (1972) 7Cal. 3rd603).

As previously discussed, if the proceeds of the court ordered sale pursuant to a judicial foreclosure were
adequate to satisfy the entire amount owing, the redemption right extended to the debtor/borrower would be
limited to three months. Should the proceeds from the court ordered sale of the security property be insufficient
to pay the entire amount owing (as defined), the lender/creditor may elect to sue the debtor/trustor/mortgagor
for the residual balance owing pursuant to the terms of the promissory note. When a deficiency judgment is
permitted following a judicial foreclosure and the court ordered sale of the security property, the redemption
right extended to the debtor/trustor/mortgagor is for one year following the sale.

Purchase money anti-deficiency provisions also apply to installment land contracts, and to instruments
determined to be, in fact, security devices (disguised mortgages such as equitable liens or, as previously
mentioned, hidden security devices). Disguised mortgages of whatever nature are not to be pursued by MLBs
without the involvement of and advice from knowledgeable legal counsel.

To determine whether a deficiency judgment will be allowed where third-party lenders are involved, secured
transactions falling outside the provisions of Code of Civil Procedure Section 580b (i.e., non-purchase money
transactions) depend upon a “purpose” scrutiny and a security property and related analysis by a court of
competent jurisdiction.

A borrower/trustor/mortgagor generally cannot waive at the time of executing the security instruments and
related loan documents the anti-deficiency protections granted by applicable law. These protections are
generally deemed to be a non-waiveable public policy (Civil Code Section 1667). In narrow fact situations, it
may be possible for the borrower/trustor/mortgagor to execute a waiver of rights concerning the protections
granted against deficiency judgments or the “one-action” rule. However, such waiver attempts should not be
accomplished without the prior advice of knowledgeable legal counsel.

Short Sales

Finally, legislation effective January 1, 2011 altered the anti-deficiency rules with respect to short sales. Senate
Bill 931 amended Section 580e of the Code of Civil Procedure stating that a lender holding a first deed of trust
secured by a dwelling consisting of not more than 4 units cannot obtain a deficiency judgment in a short sale
transaction if the lender agrees in writing that they will accept the sale proceeds as payment in full for the
amount owed. However, if the borrower commits fraud in the transaction or commits waste with respect to the
property, the lender can seek damages against the borrower.

As to Guarantors

When the deed of trust or mortgage is guaranteed by a third party other than the maker/trustor/mortgagor, the
surety or guarantor may waive rights of subrogation, reimbursement, indemnification, or contribution and any
other rights and defenses that are or may become available to the surety or guarantor by reason of applicable
law. This would include, among others, any rights or defenses the surety or guarantor may have by reason of an

election of remedies by the lender/creditor or that the promissory note or other obligations are secured by real
property.

In the context of the repayment of the debt/loan or performance of the obligation being secured by real
property, the rights or defenses the surety or guarantor may have include, but are not limited to, any rights or
defenses pursuant to sections 580a, 580b, 580d, or 726 et seq. of the Code of Civil Procedure. As a predicate to
the waiver of the foregoing rights and defenses, the surety or guarantor must affirmatively waive these rights
and defenses in the manner described and with the language required pursuant to Civil Code Section 2856,
commonly known as the Gradsky waiver.

As to Satisfaction of Mortgages

When any mortgage has been satisfied, the mortgagee or the assignee of the mortgagee must initiate the
discharge procedure by executing a certificate of the discharge/satisfaction, as provided in Civil Code Section
2939. This provision applies to mortgages without the power of sale. The mortgagee is to within 30 days of
satisfaction, record or cause to be recorded (except as limited by applicable law) such certificate of
discharge/satisfaction in the office of the county recorder in which the mortgage is recorded. Upon written
request of the mortgagor, the mortgagee shall then deliver the original promissory note marked paid in full and
the mortgage instrument to the person entitled to make such request and to receive these instruments (Civil
Code Section 2941).

When the debt/loan or the obligations secured by any deed of trust or mortgage with power of sale has been
paid in full or satisfied, the beneficiary or mortgagee or the assignee of either shall deliver to the trustee the
original note and deed of trust or mortgage together with a request for a full reconveyance or for a certificate of
discharge/satisfaction with such other documents as may be necessary to reconvey and extinguish the deed of
trust or mortgage from the title of the security property.

Within 21 calendar days after receipt of all necessary documents, instructions and authorized fees, costs, and
expenses, the trustee is to execute and record or cause to be recorded (except as limited by applicable law), a
full reconveyance or a certificate of discharge/satisfaction in the office of the county recorder in which the deed
of trust or mortgage is recorded. Upon the written request of the trustor/mortgagor, the trustee shall then deliver
the original note marked paid in full and the deed of trust or mortgage to the person entitled to make such
request and receive such instruments. A copy of the reconveyance or discharge shall be delivered to the
lender/beneficiary/mortgagee, its successor in interest, or its servicing agent, if known (Civil Code Section
2941).

Limitations to Recording of Reconveyance or Certificate of Discharge/Satisfaction

Pursuant to Civil Code Section 2941 and other applicable law, the trustee under a deed of trust or a mortgage
with power of sale (or a mortgagee of a mortgage without power of sale) are not to record or cause the deed of
reconveyance or the certificate of discharge/satisfaction to be recorded when any of the following
circumstances exist:

1. The trustee or mortgagee has received written instructions to the contrary from the trustor or
mortgagor, from the current owner of the land, or from the lender/mortgagee of the debt/loan or
obligations secured by the deed of trust or mortgage (or from the lender’s/mortgagee’s servicing agent,
if known), or from the escrow holder designated for this purpose;

2. The deed of full reconveyance or certificate of discharge/satisfaction is to be delivered to the
mortgagor or trustor, or to the current owner of the land, through an escrow (as requested by the
escrow holder) to which the mortgagor, trustor, or current owner of the land is a principal or a party;
and,

3. When personal delivery is requested in writing by the mortgagor or trustor, or by the current owner of
the land, or by the authorized agent of either (with the understanding the reconveyance or discharge is
to be recorded by said parties).

Required Timely Recording of the Deed of Full Reconveyance or Certificate of Discharge/Satisfaction

If a deed of full reconveyance (or certificate of discharge/satisfaction) is not issued and recorded within 60
calendar days of the payment in full of the debt/loan, or release of or the performance of the obligations, and
upon receipt of a written request by the trustor/mortgagor or the trustor’s/mortgagor’s heirs, successors in

interest (including assignees), or by an authorized agent of the foregoing, the beneficiary/lender/mortgagee may
execute and acknowledge a document substituting another as trustee to issue a deed of full reconveyance or a
certificate of discharge/satisfaction (Civil Code Sections 2934a, 2939 and 2941).

It is clear deeds of trust and mortgages have been deemed to be functional equivalents under applicable
California law and that each security instrument may include a power of sale. What remains unclear as of this
writing is whether the mortgagee of a mortgage with power of sale will issue or cause to be issued a certificate
of discharge/satisfaction or whether the trustee will be instructed to issue such certificate. In any event, the
trustee’s interest in a mortgage with power of sale must also be extinguished at the time of payment in full of
the debt/loan or performance of the obligations.

If a deed of full reconveyance (or as applicable, a certificate of discharge/satisfaction) is not executed and
recorded in accordance with the previous paragraphs or within 21 days of the trustee’s receipt of all required
documents, instruments, instructions and authorized fees, costs, and expenses necessary to effect the
reconveyance or discharge, then within 75 calendar days of payment in full or satisfaction of the debt/loan or
release of or performance of the obligations, a title insurance company may elect to prepare and record a release
of the debt/loan or of the obligations. The release shall be deemed, when recorded, to be the equivalent of a
reconveyance of the deed of trust (or as applicable, the discharge/satisfaction of the mortgage).

However, at least 10 days prior to issuance and recording of a full release pursuant to this paragraph, the title
insurance company shall mail by U. S. Mail, first-class with postage prepaid, to the trustee, trustor/mortgagor,
and beneficiary/mortgagee (beneficiary/lender/creditor) of record, or their successors in interest, at the last
known address for each party the intention to release the debt/loan or the obligations.

The release shall set forth:

1. The name of the beneficiary/lender/mortgagee;

2. The name of the trustor/mortgagor;

3. The recording reference to the deed of trust or mortgage;

4. A recital that the debt/loan or obligations secured by the deed of trust or mortgagee have been paid in
full; released or performed; and,

5. The date and amount of payment, release or performance.

Sanctions and Penalties

Failure to comply with Civil Code Section 2941 makes the violator liable to the person affected for all damages
sustained by reason of the violation. Further, the violator must forfeit to that person the sum of $500. In
addition, Civil Code Section 2941.5 provides that every person who willfully violates Section 2941 is guilty of
a misdemeanor punishable by a fine of not less than $50 or more than $400, or by imprisonment in a county jail
not to exceed 6 months, or by both such fine and imprisonment. The trustee’s failure to timely deliver the deed
of reconveyance (or the certificate of discharge/satisfaction, if applicable) has resulted in the trustee being
subjected to emotional damages under a tort theory in addition to the sanctions and penalties (Pintor v. Ong
(1989) 211 Cal.App 3rd 837).

Fees for Services Rendered

A trustee, beneficiary or lender/mortgagee may charge a reasonable fee to the trustor or mortgagor or the
current owner of the land for services involved in the preparation, execution and recordation of the full
reconveyance (or as applicable, the discharge/satisfaction) including, but not limited to, document preparation
and forwarding services, plus any additional official fees that may be required (e.g., notary and recording).

Unless the lender/mortgagee is exempt from applicable state law, the fees charged for the foregoing are not to
exceed $45 plus official fees. These fees are conclusively presumed to be reasonable. It is important to note that
such fees cannot be charged prior to the opening of a bona fide escrow, or more than 60 days prior to full
satisfaction of the debt or obligations secured by the deed of trust or mortgage.

Reinstatement Rights - Pre-sale

As previously discussed under a judicial foreclosure, a trustor/mortgagor or his or her successor in interest, any
beneficiary/lender/mortgagee under a subordinate deed of trust or mortgage, or any other person having a
subordinate lien or encumbrance of record, may reinstate the debt/loan at any time before entry of judgment by
restoring the loan (usually to its installmentpayment basis) by paying the delinquencies and advances on the
debt/loan plus authorized fees, costs, and expenses. Thereupon, all foreclosure proceedings terminate and the
loan continues in full force and effect as if no such acceleration proceeding had taken place.

As previously mentioned, under a power of sale exercised in a non-judicial foreclosure, the statutory right of
reinstatement for the individuals named above ends five business days prior to the date of the trustee’s sale or
the date of any postponed sale.

Redemption Rights - Post-sale

By way of review, only the judgment debtor or his or her successor in interest may redeem the security property
subsequent to a judicial foreclosure sale. All junior lien holders are eliminated under the law effective July 1,
1983 (Code of Civil Procedure Section 729.020). Further, the redemption period is three months, if the sale
proceeds satisfy the debt/loan plus interest, costs of the action, and authorized fees, costs, and expenses. If sale
proceeds are insufficient to pay the entire amount owed (as defined), the redemption period is one year (Code
of Civil Procedure Section 729.030). If the creditor waived the deficiency judgment or it was prohibited, there
is no right of redemption (Code of Civil Procedure Section 726(e)).

During the redemption period permitted following a judicial foreclosure and a court ordered sale of the security
property, the judgment debtor or tenant occupying the property is entitled to remain in possession but must pay
rent to the successful bidder/buyer following the judicial foreclosure sale.

Often a deed of trust or mortgage permits the beneficiary/lender/mortgagee to take legal possession of the
security property upon default prior to the foreclosure sale (whether a judicial or a trustee’s sale) under the
“assignment of rents” provision and manage the property, pay expenses, and collect the rents, applying the net
proceeds to the maintenance of the property and to preserve the lender’s security. However, to proceed to
exercise an “assignment of rents” provision may require a court order appointing a receiver who will collect the
rents and maintain the security property as authorized by the order.

Should the assignment of rents provision in a deed of trust or mortgage be in connection with a loan made on
security property that is non-owneroccupied and the provision is deemed to be an absolute rather than a
conditional assignment of rents (and a court of competent jurisdiction does not disagree with this legal
conclusion), the lender/beneficiary/mortgagee may be able to take control of the security property without a
receiver as a beneficiary/mortgagee in possession. Such an action should not be taken without the prior advice
of knowledgeable legal counsel.

Statute of Limitations

Civil Code Section 2911 provides that a lien is extinguished if an action on the underlying debt or obligation is
not brought within the required time limits. Judicial foreclosure actions must be filed within four years after
maturity of the obligation or any installment payment. Deeds of trust and mortgages secure a written debt/loan
or the performance of obligations that if not paid as agreed or performed create a cause of action in connection
with the promissory note (evidencing the debt and representing the agreement to repay) for four years following
the default, the date the loan matures, or the date that the debt was last acknowledged by the debtor/borrower,
whichever occurs last.

However, a deed of trust or a mortgage with power of sale conveys to the trustee technical legal title to the
security property for the purposes of exercising the powers granted to the trustee. Even though the statute of
limitations bars an action on the promissory note, the power of sale continues and may be exercised, whether
the security instrument is a deed of trust or mortgage. Except as amended in Civil Code Section 822.020, the
“1982 Marketable Title Act” requires the security instrument to be periodically renewed to continue to be
enforceable.

The 2006 amendments to Civil Code Section 882.020 provide the lien of a deed of trust or mortgage shall
expire 10 years after the final maturity date or the last date fixed for payment of the debt/loan, if the date can be
ascertained from the recorded document. If the final maturity date cannot be determined from the recorded

document, then the deed of trust or mortgage shall expire 60 years after the date the security instrument was
originally recorded.

However, if a “notice of intent to preserve interest” is recorded prior to the expiration of the lien (whether a
deed of trust or mortgage) under either of the above scenarios, then the enforceability of the security instrument
shall be extended for an additional 10 years after the notice is recorded.

Judicial Sale

A judicial foreclosure is usually sought when a beneficiary or mortgagee wants to obtain a deficiency judgment.
The mortgagee or beneficiary, as well as the servicing agent (including MLBs), must be mindful of whether a
deficiency judgment against the debtor/borrower will be sought before electing the foreclosure remedy.
Consultation with knowledgeable legal counsel is recommended before selecting the foreclosure remedy, i.e., a
judicial foreclosure or non-judicial foreclosure.

The Process

The judicial foreclosure sale process involves:

1. Filing a complaint and notice of action (lis pendens) which will bind all persons acquiring liens or
interests in the property during the pendency of the action;

2. A summons served on the parties whose interests are to be eliminated/extinguished, such as the trustor
or his successor in interest and junior lien holders, including in deeds of trust or mortgages;

3. The trial, after which the judgment is entered (decree of foreclosure and order of sale); and,

4. The recording and serving by the Sheriff of Notice of Levy followed by the Notice of Sale.

The Notice of Sale cannot be earlier than 120 days after recording and serving of the Notice of Levy if a
deficiency judgment is barred or properly waived.

When a deficiency judgment is available, the property is sold subject to the one-year redemption period, the
120-day notice period is not required and only a 20-day Notice of Sale is needed. The 20-day Notice of Sale
must be made by posting the Notice of Sale in a public place and on the property at least 20 days before the sale
and by publishing the notice once a week for three weeks in a newspaper of general circulation in the city or
judicial district in which the property or any portion of the property is located. The notice must also be mailed
to all defendants at their last known address and to any other person who has requested to be notified.

The Court Supervised Sale

The court ordered sale is to be held between 9 a.m. and 5 p.m. on a business day in the county where the
property or some portion of the property is located. The foreclosing lender/creditor, debtor/borrower, junior lien
holders (including deeds of trust or mortgages) and others may bid at the sale. The foreclosing lender/creditor
may credit-bid up to the amount owed to it, him or her, and cash bid in excess of the amount of the debt/loan.

All other bidders must bid cash except that a bidder may, if the bid price exceeds $5,000, deposit with the party
conducting the sale the greater of $5,000 or 10 percent of the bid amount, and pay the balance within ten days
of the sale, plus interests, fees, costs, and expenses as authorized by the court. Should the successful bidder fail
to pay the amounts owed pursuant to the successful bid, he or she may be subject to costs and damages as
determined by the court. In such an event, a second sale is required.

After the Sale

The Sheriff issues the highest bidder a prescribed Certificate of Sale stating the title is subject to any
redemption privilege of the debtor/borrower. The certificate operates to transfer title to the highest/successful
bidder. The bidder/purchaser receives no rights to possession for the period of redemption, but does have the
right to receive the rents inuring from or impose rents for the occupancy of the property. The title received by
the highest/successful bidder is subject to any senior liens but free of any junior liens, including deeds of trust
or mortgages. The Certificate of Sale is recorded. Recording of the certificate does not result in clear,
marketable title. Such title will not be achieved until the Sheriff issues a Deed of Conveyance, as described
below.

Sale proceeds are applied to costs of the lawsuit and attorney fees; to selling expenses; to the amount due the
beneficiary/mortgagee of the security instrument foreclosed; to junior lien holders (including deeds of trust or
mortgages) in order of priority; and finally the excess to the debtor/borrower (if any).

If the debtor/borrower does not redeem the property within the 3-month or l-year redemption period (as
applicable), the Sheriff will issue a Deed of Conveyance containing special recitals concerning the judicial
foreclosure and court ordered sale and will record or cause to be recorded the deed conveying title to the
highest/successful bidder to whom the Certificate of Sale was previously issued. The grantee receives all right,
title and interest of the trustor/mortgagor as of the date of initial recording of the deed of trust or mortgage
foreclosed upon (i.e., the title conveyed relates back to the date of initial recording). The grantee may now evict
the trustor/mortgagor or tenant in possession.

A lender/creditor seeking a deficiency judgment must file application in the court case within three months of
the sale for a determination of the deficiency. If the court enters a deficiency judgment against the
trustor/mortgagor and it is recorded by the beneficiary/lender/mortgagee, the judgment becomes a lien upon all
property owned by the debtor/borrower or acquired by him or her within ten years of the entering of the
judgment ruling.

If a debt/loan is secured by both real and personal property, the creditor may foreclose upon the real property
under the power of sale and bring a separate action on the personal property security pursuant to the
Commercial Code, or may (if authorized in the security instruments) elect to foreclose both the real and
personal property security pursuant to the rules applicable to real property as set forth in Civil Code Section
2924 et seq.

Trustee’s Sale - “Power of Sale”- Non-Judicial Foreclosure

When the security instrument includes a power of sale, the alternative remedy for a creditor/lender to proceed
against the security property (in the event of a breach or default by the debtor/borrower) is through a non-
judicial foreclosure. A non-judicial foreclosure results in a privately conducted but publicly held “trustee’s
sale” pursuant to the power of sale included within the security instrument. The exercise of the power of sale
must be at the direction of the beneficiary/lender/mortgagee to whom the power is typically conferred (Civil
Code Sections 2932 and 2932.5).

The Procedure

Accordingly, the beneficiary/lender/mortgagee following a breach of the terms and provisions of the
promissory note and/or the security instrument (usually a failure to make specified installment payments of
principal and interest or to make a balloon payment) and will notify the trustee to issue and record a Notice of
Default. When notifying the trustee, the beneficiary/lender/mortgagee may (but often does not) deliver the
original note and deed of trust or mortgage to the trustee. Further, adequate evidence of the amounts owing that
are delinquent and/or in breach in the case of a monetary default, and/or in breach of the required performance
of the obligations described in the security instruments in the case of a non-monetary default are to be provided
to the trustee by the beneficiary/lender/mortgagee.

The amounts to reinstate or cure a monetary default will likely vary during the non-judicial foreclosure
proceeding. Accordingly, the amounts owing that are reported delinquent and in breach to the trustee will not
be comprehensively set forth in the Notice of Default as these amount may increase. Also, the debtor/borrower
may be required as a condition of reinstatement to provide reliable evidence of the payment of senior liens
(including deeds of trust and mortgages), property taxes, assessments, property casualty insurance premiums,
and of the payment of any other liens in the chain of title that are to be paid to protect the security of the
beneficiary/lender/mortgagee).

The document prepared by the beneficiary/lender/mortgagee to inform the trustee of the breach is generally
referred to as a Declaration of Default. Usually, the trustee named in the security instrument is a corporate
entity. The named trustee or properly substituted trustee prepares and records the Notice of Default and
proceeds thereafter as a limited agent with the non-judicial foreclosure (Civil Code Sections 2924c and 2934a).

In the absence of an applicable agreement to the contrary, any one beneficiary in a “fractionalized” deed of trust
may invoke the power of sale and initiate the non-judicial foreclosure by preparing and delivering to the trustee
a Declaration of Default. Civil Code Section 2941.9 was added to establish a process through which the

beneficiaries of a deed of trust may agree to be governed by beneficiaries holding more than 50% of the
recorded beneficial interests in the fractionalized promissory note evidencing the debt secured by the deed of
trust (or in a series of notes secured by the same property by a deed of trust or deeds of trust of equal priority),
exclusive from any notes or interests therein held by a licensed real estate broker (including MLBs) or any
affiliate of the broker that is the issuer or servicer of the promissory notes and deeds of trust. Applicable law
establishes a process through which the parties must agree in writing to majority rule and each “fractionalized”
note holder or holders of notes issued in series must be noticed of the action taken. The majority action
agreement between the note holders must be in the form of an affidavit and is to be acknowledged and recorded
(Business and Professions Code Section 10238 et seq.; and Civil Code Section 2941.9).

The individual action of the holder of a fractional interest in a promissory note or of the holders of notes issued
in series secured by the same deed of trust or by deeds of trust of equal priority, may also be limited by the
administration, operation and management agreement (including loan servicing) representing the investment
contract relationship established as part of the offering/prospectus resulting in the issuance of securities either
by exemption, registration, or coordination (Securities and Exchange Comm. v. W. J. Howey Co., 328 U.S. 293
(1946) and Securities and Exchange Comm. v. Glenn W. Turner Enterprises, Inc., et al., No. 72-2544, 474 F.2d
476(1973)).

At the time of the preparation of the Declaration of Default, the beneficiary/lender/mortgagee will inform the
trustee of the date of the original breach or default. Typically, the trustee obtains from the title company a
trustee’s sale guarantee report (TSG) assuring the trustee of the identity of the holders of and the priority of
liens against the security property (including deeds of trust and mortgages) and to whom notice is required,
among other matters. The trustee then prepares, records, mails, and posts on the security property the Notice of
Default and Election to Sell pursuant to the power of sale (Civil Code Section 2924 et seq.).

Since non-judicial foreclosures are conducted in accordance with procedural law, it is important compliance
with applicable law occurs. Any irregularity or defect in carrying out this procedure may invalidate the trustee’s
sale. The power of sale and the procedural law to which non-judicial foreclosures are subject are based upon
Civil Code Section 2924 et seq., a codification of the process through which non-judicial foreclosures may be
conducted without state action, i.e., a procedural and not a substantive law (I.E. Associates v. Safeco Title Ins.
Co. (1985) 39 Cal.3d 281, 287-288).

Unless a mortgagor or trustor files suit contesting the trustee’s sale to obtain a court ordered temporary
restraining order (TRO) and/or a preliminary injunction (e.g., to determine whether a valid lien exists, whether
there is a breach resulting in the alleged default, or whether there is a dispute in the amount owing), a judicial
proceeding may be entirely bypassed in non-judicial foreclosures resulting in a trustee’s sale of the security
property (Anderson v. Heart Federal Savings ("Heart") 208 Cal. App. 3d 202, 256).

Asking a court to intervene can be costly and time consuming and will generally require the use of legal
counsel. The debtor/borrower may be required to tender the amount owing in a manner acceptable to the court
and must make an adequate showing of the grounds the court believes will likely result in a preliminary
injunction for a TRO to be issued. For a preliminary injunction to follow, the debtor/borrower must
demonstrate to the court that triable issues exist over the grounds raised in the dispute for the matter to be set
for trial and for the non-judicial foreclosure to be enjoined until resolution of the dispute occurs by court order.

Under existing statutes, the time required between filing of the Notice of Default and of the Notice of Sale and
the actual sale date allows the debtor the opportunity to pursue the judicial process discussed in the previous
paragraph to ultimately establish underlying facts and applicable law. As previously noted, after the trustee’s
sale, the trustor/mortgagor, or any other party affected by the sale, may bring an action to set aside the sale
(usually on procedural grounds), even though the sale is characterized as absolute.

Special Rules

Special rules apply in trustee’s sales involving bankruptcy, substitution of trustee, federally insured or
indemnified loans, individuals in military service, senior citizens, and Unruh Act deeds of trust or mortgages
(on single-family owneroccupied residences arising from a contract for goods or services). The advice of
knowledgeable legal counsel should be obtained in advance of proceeding with a non-judicial foreclosure
involving any of the foregoing fact situations.

Notice of Default and Election to Sell

The Notice of Default must be executed by the beneficiary or the trustee and must state an election on the part
of the beneficiary/lender/mortgagee to declare the entire debt due because of the breaches and defaults. Absent
this declaration, the full amount owing on the debt cannot be collected at the trustee’s foreclosure sale. The
Notice should make it clear that unless the default is non-curable, the trustor/mortgagor or the successor in
interest of the foregoing may reinstate and cure the default prior to five business days immediately before the
date of the trustee’s sale or of the date of any postponed sale.

The Notice of Default is recorded in the office of the county recorder where the real property or some portion
of the property is located at least three months before Notice of Sale is given. Within ten days after recordation
of the Notice of Default, a copy of the Notice containing the recording information must be sent by certified or
registered mail to all persons who have requested notice and to the trustor/mortgagor at his or her last known
address.

If there has been no request for notice by the trustor/mortgagor or the request by the trustor/mortgagor includes
no address, then the Notice of Default must be published weekly for four weeks in a newspaper of general
circulation in the judicial jurisdiction starting within ten days of the recording date, or the notice may be
personally delivered to the trustor/mortgagor (Civil Code Section 2924b(d)).

The Notice of Default and the Notice of Sale are valid if the foreclosure procedural law has been strictly
followed, whether the trustor/mortgagor has actual knowledge of the notices. The Notice of Default must also
be sent within one month of recording by U. S. Mail, registered or certified, to persons listed in Civil Code
Section 2924b, even though they have not recorded a request to receive notice. These persons are: successors in
interest to the trustor/mortgagor; a beneficiary/lender/mortgagee of any junior recorded deed of trust or
mortgage or the assignee of such beneficiary/lender/mortgagee; the vendee of a contract of sale; or to a lessee
of a lease encumbering the security property being foreclosed that is junior to the security instrument being
foreclosed or to the successor in interest to such vendee or lessee; to the State Controller, if a recorded lien for
postponed property taxes exists against the property; and such other parties as are required by law, including
the IRS in the event of an income tax lien.

Notice of Sale

If the loan is not reinstated and the trustee issues a Notice of Sale, the content and form of the notice is
prescribed by Civil Code Section 2924f(b). The Notice of Sale sets a sale date not sooner than twenty days after
the recording date of the notice. Actual practice usually requires a longer time (e.g., 31 days), especially if
federal tax lien notice requirements are to be met or other justifiable delays are encountered. In any event, the
sale date is set to allow time for the required recording, publication, posting, and mailing of the Notice of Sale.

The Notice of Sale must be recorded at least fourteen days, and mailed by registered or certified mail to the
trustor/mortgagor and other persons requesting/receiving the Notice of Default, at least twenty days before the
sale (Civil Code Section 2924b). The notice must be published once a week over a period of at least twenty
days in a newspaper of general circulation in the city, county, or judicial district where the security real
property or a portion of the property is located. Three publications of the notice not more than seven days apart
are required. The notice must be posted for no less than twenty days in at least one public place in the city,
judicial district, or county of the sale, and in a conspicuous place on the property (a door, if possible, if the
property is a single-family residence).

If the loan has not been reinstated by the trustor/mortgagor, a partial payment accepted by the beneficiary may
not terminate the foreclosure unless received in consideration of a forbearance agreement among the parties.
The beneficiary/lender/mortgagee should be careful when accepting partial payments to set forth in writing:

1. Whether it is the intention of the parties that the partial payment constitute a reinstatement and,
therefore, a cure of the default; or

2. Whether the partial payment is to be construed to be part of a work-out or forbearance agreement
providing a plan for payment of all delinquencies and related and authorized fees, costs, and expenses;
or

3. Whether the partial payment has been received without any effect on the foreclosure process, thereby
permitting the beneficiary/lender/mortgagee to proceed with foreclosure as though no payment had
been received.

The Trustee’s Sale

The sale is to be conducted at a public auction by the trustee, or the crier/auctioneer named by the trustee, on a
business day between 9 a.m. and 5 p.m. in a public place in the county where the property or some portion of
the property is located. The sale is to occur on the date and at the time noticed for the scheduled sale, or on the
date and time of the postponed sale. The date and time of a postponed sale is to be cried on the date and time of
the scheduled sale or a previously postponed sale.

Unless expressly authorized in the notice by the trustee, all bids must be for payment in cash, cashier’s check or
its equivalent from a qualified depository financial institution specified in Section 5102 of the Financial Code
that is authorized to do business in this state, or a “cash equivalent” which is authorized by law or has been
designated in the Notice of Sale as acceptable to the trustee (Civil Code Section 2924h).

Until the bidding commences, the trustor/mortgagor or a holder of a junior deed of trust or mortgage may still
redeem the property by paying off the defaulted loan in full, plus all authorized fees, costs, and expenses (as
permitted by law). Reinstatement of a monetary default may be made at any time within the period commencing
with the date of recordation of the Notice of Default, until five business days prior to the date of sale set forth in
the initial recorded notice of sale. As previously stated, the reinstatement period revives as a result of each
postponed sale where the postponed sale date is more than five business days subsequent to the initial sale date
or the date of a previous postponed sale (Civil Code Section 2924c(e)).

Any person may bid at the trustee’s sale, including the trustor/mortgagor, lender/creditor, or a junior lien holder
( such as deeds of trust or mortgages). Only the foreclosing beneficiary/lender/mortgagee (who is the holder of
the debt/loan evidenced by the promissory note and the security instrument being foreclosed) may credit-bid to
offset up to the amount owed plus interest and authorized fees, costs, and expenses. Junior lien holders
(including deeds of trust and mortgages) may not credit-bid the amount of their junior liens. However, amounts
bid at the foreclosure sale by the junior lien holder would serve to reduce any potential liability that the
trustor/mortgagor has to the junior lien holder. Further, if the junior lien holder (deed of trust or mortgage) is
one and the same as the holder of the senior security instrument being foreclosed (or effectively controls the
security instrument being foreclosed), then this holder is not entitled to purchase the security property and later
sue the trustor/mortgagor for deficiency under a “sold out junior” status.

A trustee may reject all bids if the trustee reasonably believes they are inadequate (Civil Code Section 2924h).
At the trustee’s discretion, the sale may be postponed and a postponed sale date at the same location
announced. Generally, the trustee’s actions to reject bids or to postpone the sale are the result of prior
instructions from the holder of the security instrument being foreclosed. Bid fixing, restraining from bidding,
or the offering or accepting of consideration for not bidding at a trustee’s sale (“chilling the bidding process”)
is unlawful and subjects the participants to fine, imprisonment, or both (Civil Code Section 2924h(g)). A
trustee may state that the security property is being sold at the trustee’s sale “as is”. However, the trustee must
disclose any material facts that affect the security property and its condition or value about which the holder has
notice or knowledge (Karoutas vs. Home Fed Bank, 232 Cal. App. 3d. 767 (1991)).

In the event that the trustee’s sale proceedings are postponed for a period or periods totaling more than 365
days, the scheduling of any further sale is to be proceeded by giving a new Notice of Sale that must be
published, recorded, mailed, and posted in the manner required by applicable law (Civil Code Section 2924f).
Fees and costs incurred to process the new notice of sale are not to exceed the amount specified by applicable
law (Civil Code Sections 2924c, d, and 2924g(c)(2)). When postponing a sale, the trustee must publicly declare
the reason for the postponement and announce the date, time, and place the postponed sale is to occur.

After the Sale

The successful bidder receives a trustee’s deed to the property containing special recitals giving notice of
compliance with the foreclosure statutes to protect this bidder and subsequent purchasers of the security
property. The title conveyed is without covenant or warranty that no title defects exist, and the title relates back
in time to the date the trustor/mortgagor signed the deed of trust or mortgage. The trustee’s deed passes to the

successful bidder/purchaser the title held at the time the security instrument was recorded and any after-
acquired title of the trustor/mortgagor, not the trustor’s/mortgagor’s title as of the sale date.

However, title will remain subject to certain liens:

1. Federal tax liens filed more than thirty days before the date of the trustee’s sale unless the proper
twenty-five day notice has been given the Internal Revenue Service;

2. Real property taxes and assessments; and,

3. Valid mechanic’s liens.

Even with proper notice to the IRS, the federal government may have the right for 120 days following the
trustee’s sale to redeem the security property by paying the amount advanced by the successful
bidder/purchaser.

Provided that the beneficiary/lender/mortgagee successfully makes a “full credit bid” (bids the full amount of
unpaid principal and interest and any authorized charges, penalties, costs, expenses, attorneys’ fees, trustee’s
fees, and any advances that may be lawfully due and owing to the beneficiary/lender/mortgagee); the sale
eliminates the debt/loan and obligations of the trustor/mortgagor. Whether a beneficiary/lender/mortgagee “full
credit bids” or “underbids”, completion of a trustee’s sale will extinguish the deed of trust or mortgage securing
the debt/loan and the obligations in favor of a beneficiary/lender/mortgagee.

In addition, junior liens and encumbrances (e.g., deeds of trust or mortgages, judgment liens, easements, and
leases which do not have priority over the security instrument that has been foreclosed) will be extinguished
from the record of title to the security property. The interests of tenants who occupy a residential security
property subject to a local rent control ordinance may not be extinguished by the foreclosure sale. Even if no
local rent control ordinance is operative, tenants may not be removed from the foreclosed property prior to the
time required pursuant to applicable to California law, generally no less than 60 days following the date of a
properly delivered Notice to Vacate.

A beneficiary/lender/mortgagee may elect to “underbid” when a collateral action is anticipated against the
debtor/trustor/mortgagor or a claim is anticipated against a third party for part payment of the amount due and
owing under the promissory note and security instrument being foreclosed. A beneficiary/lender/mortgagee
may elect to proceed with a legal action for fraud, waste or malicious destruction of the security property
against the debtor/trustor/mortgagor or against third parties.

Further, if a casualty loss has occurred to the security property for which insurance coverage is available (even
if not a result of the actions described in the previous sentence), a beneficiary/lender/mortgagee should
“underbid” and then file a claim against the insurer under the terms of coverage extended by the insurance
policy to recover the cost of damages to the security property as part of the amount due. The failure to
“underbid” in such circumstances may result in the denial if the claim by the insurance carrier (Alliance
Mortgage Co. v. Rothwell 10 Cal. 4th 1226 (Cal. 1995)). The issue of whether to “underbid” should be
discussed in advance with knowledgeable legal counsel.

Liens or encumbrances, including real property taxes and assessments, which are senior to the foreclosed deed
of trust or mortgage remain on the title to the security property. In a trustee’s foreclosure sale, the title is free of
any right of redemption by the debtor/trustor and the debtor/trustor has no further rights or interests in the
security property absent a successful legal action to set aside or void the trustee’s sale.

Separate from a civil action to set aside the trustee’s sale, a Petition in Bankruptcy can be filed by the
debtor/trustor/mortgagor. As part of the bankruptcy proceedings, the court may void the trustee’s foreclosure
sale at the request of the debtor/trustor/mortgagor or of the trustee appointed by the bankruptcy court, or as
otherwise authorized under the U.S. Bankruptcy Code. Upon voiding the foreclosure sale, the security property
may be returned to the bankrupt estate or ultimately to the estate of the debtor/trustor/mortgagor in a manner
consistent with the order of the bankruptcy court.

It is important to note that sales transactions of residential real property during a non-judicial foreclosure
proceeding may be rescinded by the debtor/trustor within two years from the date of such transaction upon
written notice if unconscionable advantage has been taken of the debtor/trustor (Civil Code Section 1695.14).

The issues presented by the Home Equity Sales Contracts Act, commencing with Civil Code Section 1695 will
be discussed later in this Chapter.

The successful bidder/purchaser is generally entitled to immediate possession of the security property and may
evict the former debtor/trustor/mortgagor by instituting an Unlawful Detainer action subsequent to delivery of a
three-day Notice to Quit. As previously mentioned, should the occupant be a tenant pursuant to a local rent
control ordinance or who occupies under the terms of a lease junior to the foreclosed lien without a non-
disturbance and attornment agreement, the successful bidder/purchaser at the foreclosure sale may evict the
tenant in accordance with applicable law subsequent to the delivery of a 60 day Notice to Vacate. If the tenant
fails to vacate, an Unlawful Detainer action could then be pursued by the successful bidder/purchaser
subsequent to the delivery of a three-day Notice to Quit.

If a tenant occupies pursuant to a lease agreement that is either senior in priority to the foreclosed lien (or is
junior but subject to a non-disturbance and attornment agreement) or whose occupancy is subject to the
provisions of a local rent control ordinance, the successful bidder/purchaser should seek legal advice before
taking any action to evict the tenant or otherwise terminate the occupancy of the tenant. On the other hand, the
successful bidder/purchaser should also seek professional advice regarding whether an eviction is in the
interests of the successful bidder/purchaser or if continuing the occupancy of the tenant is economically
preferable, particularly in the context of a commercial or industrial property where the occupancy is pursuant to
a long term lease.

When deciding to continue a tenancy or to evict the tenant in occupancy, the successful bidder/purchaser
should consider whether a local ordinance has been adopted requiring the property be properly maintained,
including the interior and exterior, e.g., grounds, landscaping and such amenities as a pool by the current owner
of the fee title. These local ordinances often impose fines up to $1,000 per day up to a maximum of $100,000
which may attach to the property in the form of an assessment and, therefore, may be foreclosed in accordance
with applicable law and subject to payment in the event of a conveyance or further encumbrance. This is a
significant issue for beneficiaries/lenders/mortgagees who foreclose their security instrument when there is no
third-party successful bidder resulting in the security property becoming real estate owned (an REO).

Disposition of Sale Proceeds

The trustee distributes the foreclosure sale proceeds in the following order:

1. To authorized trustee’s fees, costs, and sale expenses;

2. To beneficiary/lender/mortgagee to satisfy the full amount of unpaid principal and interest and any
charges, penalties, costs, expenses, attorney’s fees, and advances that may be lawfully due and owing;

3. To junior lien holders in order of priority, whether their debt/loan is matured; and,

4. Any surplus that remains would then be distributed to the debtor/trustor/mortgagor.

If either a junior lien holder or the debtor/trustor/mortgagor disputes the distribution of funds, the trustee should
file a Complaint for Interpleader and Declaratory Relief to have the court decide the issue.

Statement of Condition of Debt

Pursuant to Civil Code Section 2943, any time before or within two months after the recording of a Notice of
Default under a deed of trust or mortgage with power of sale or before thirty days prior to entry of a decree of
judicial foreclosure; the debtor/trustor/mortgagor or entitled person (as defined in the law) may make written
demand of the beneficiary or mortgagee for a written beneficiary statement showing:

1. The amount of the unpaid balance of the obligation secured by the deed of trust or mortgage and the
interest rate together with the total amounts, if any, of all overdue installments of either principal or
interest, or both;

2. The amounts of periodic payments, if any;

3. The date on which the obligation is due in whole or in part;

4. The date to which real estate taxes and special assessments have been paid to the extent the
information is known to the beneficiary/lender/mortgagee;

5. The amount of hazard insurance in effect and the term and premium of such insurance coverage to the
extent the information is known to the beneficiary/lender/mortgagee;

6. The amount in an account, if any, maintained for the accumulation of funds with which to pay taxes
and insurance premiums (escrow impound account);

7. The nature and amount, if known, of any additional charges, costs, or expenses paid or incurred by the
beneficiary/lender/mortgagee which have become a lien on the security real property; and,

8. Whether the obligation secured by the deed of trust or mortgage can or may be transferred to a new
borrower.

Section 2943 of the Civil Code also provides that the beneficiary/lender/mortgagee may make a charge not to
exceed $30 for furnishing each required beneficiary statement, except when the loan is insured by FHA or
indemnified by VA or is subject to some other federal exemption. The deed of trust or mortgage should provide
whether the charge may be imposed and how much may be charged for the statement.

Within 21 days of receipt of the written demand, the beneficiary/lender/mortgagee or his or her authorized
agent shall prepare and deliver the statement together with a complete copy of the promissory note or other
evidence of indebtedness. If requested, the beneficiary/lender/mortgagee or its authorized agent shall furnish a
copy of the deed of trust or mortgage at no additional charge. Such statements may be requested in connection
with the sale, refinance, or further encumbrance of the security property.

A penalty of $300 and liability for damages is prescribed for the beneficiary’s/lender’s/mortgagee’s willful
failure to deliver the statement within 21 days. The beneficiary/lender/mortgagee may reasonably require the
entitled person to produce evidence that he/she/they are eligible to make the request in accordance with
applicable law. The beneficiary/lender/mortgagee may demand payment of the authorized fee at the time of
request. The entitled person should include within the written request for the beneficiary statement that the
request is being made pursuant to Civil Code Section 2943.

Civil Code Section 2943 includes the definition and use of pay-off demand statements as distinct from
beneficiary statements. The beneficiary statement is intended to provide information when the loan may be
transferred to a buyer of the security property or for loan status purposes. The pay-off demand statement details
amounts owing for purposes of loan pay-off. While the beneficiary statement may not be requested subsequent
to 60 days following the recordation of notice of default, the pay-off demand statement may be requested
anytime except following the first publication of the notice of a trustee sale or of the applicable hearing before
the court supervising the judicial sale.

The “Short-Pay Demand”

Recent California legislation has added requirements in connection with “Short-Pay Demand Statement”. This
phrase means a written statement issued subsequent to and conditioned on the existence of a “Short-Pay
Agreement” that is in the possession of the entitled person and that was prepared in response to a written
demand made therefor by an entitled person including an authorized agent. The “Short-Pay Demand Statement”
is to set forth the amount less than the outstanding indebtedness (debt/loan) together with any terms and
conditions under which the beneficiary/lender/mortgagee will execute and deliver a reconveyance of the deed
of trust or discharge/satisfaction of the mortgage securing the promissory note. The operative period of this
demand statement shall not be greater than 30 days from date of preparation by the
beneficiary/lender/mortgagee.

The “Short-Pay Request” is defined to mean a written request made by an entitled person, including an
authorized agent, requesting the beneficiary/lender/mortgagee to provide a “Short-Pay Demand Statement” that
includes the following:

1. A copy of an existing contract to purchase the property for an amount certain;

2. A copy of the “Short-Pay Agreement” in possession of the entitled person; and,

3. Information related to the release of any other lien on the security property, if any.

Unless otherwise provided by applicable law, a beneficiary/lender/mortgagee or his or her authorized agent is
required (upon receipt of a “Short-Pay Request”) to prepare and deliver a “Short-Pay Demand Statement” to the
person requesting the statement within 21 days of receipt of the “Short-Pay Request”. The
beneficiary/lender/mortgage or its authorized agent may elect not to proceed with the transaction that is subject
to the “Short-Pay Request” and may refuse to provide a “Short-Pay Demand Statement” for the transaction. In
lieu, a beneficiary/lender/mortgagee is to provide a written statement to the person requesting the “Short-Pay
Demand Statement”, within 21 days of the receipt of the “Short-Pay Request” that the
beneficiary/lender/mortgagee elects not to proceed with the transaction.

Should the terms and conditions of the “Short-Pay Agreement” require approval by the
beneficiary/lender/mortgagee of a closing statement or similar statement prepared by an escrow holder,
approval or disapproval is to be provided in not more than 4 days after receipt by the
beneficiary/lender/mortgagee of the closing statement, or the closing statement shall be deemed approved
(provided the statement is not clearly contrary to the terms of the “Short-Pay Agreement” or to the “Short-Pay
Demand Statement” provided to the escrow holder).

As is the case with a request for beneficiary statement, the beneficiary/lender/mortgagee must respond to a
request for a pay-off demand statement or a “Short-Pay Demand Statement” within 21 days after receipt, and
the failure of a beneficiary/lender/mortgage to timely respond may subject the beneficiary/lender/mortgagee to
an automatic $300 sanction plus actual damages and attorney’s fees. Needless to say, each request for a payoff
demand statement or for a “Short-Pay Demand Statement” is to be in writing and should indicate that the
request is being made pursuant to Civil Code Section 2943, as amended.

The fee for a pay-off demand statement is the same as the fee for a beneficiary statement. Failure to specifically
identify whether the statement being requested is a beneficiary statement or a pay-off demand statement will
allow the beneficiary to “default” to the pay-off demand statement exclusive of a “Short-Pay Demand
Statement”. The provisions added to Civil Code Section 2943 describing and requiring the “Short-Pay Demand
Statement” procedure are subject to repeal as of January 1, 2014, unless a statute is enacted before January 1,
2014 that deletes or extends that date.

Annual and Monthly Accounting - Impound Accounts

Under Civil Code Section 2954, any trustor/mortgagor under a deed of trust or mortgage, or a vendee under a
real property sales contract, may make a written request of the beneficiary/lender/mortgagee or of the vendor
for a statement of condition of account. A statement is to be provided within 60 days after the end of each
calendar year.

The statement includes an itemized accounting of money received for interest and principal repayment or held
in or disbursed from an impound/trust account (an escrow account), if any, for payment of property taxes,
insurance premiums, or other purposes relating to the security property. The debtor/trustor/mortgagor is entitled
to receive one statement for each calendar year without charge. A monthly statement or passbook showing
money received for interest and principal or held in and disbursed from an impound/trust account (an escrow
account) constitutes compliance with this requirement.

No increase in the monthly rate of payment of a trustor/mortgagor or vendee for an impound/trust account (or
escrow account) will be effective until the beneficiary/lender/mortgagee or vendor has furnished the
trustor/mortgagor or vendee with an itemized accounting of the monies presently held in the impound account
and with a statement of the new monthly rate of payment and the factors necessitating the increase. The use
and maintenance of an impound/trust account (escrow account) by the beneficiary/lender/mortgagee is subject
to applicable federal and state law, including the fees that may be imposed on the trustor/mortgagor.

Existing law prohibits the use of impound/trust account (escrow accounts) except in those fact situations
described below:

1. When the security property is an owner occupied dwelling, unless required by state or federal
regulatory authority if the loan has been made, insured or indemnified by a state or federal government
lending or insurance agency; or upon the failure of the borrower to pay two consecutive tax
installments on the security property prior to the delinquency date for such payments;

2. When the security property is owner occupied, unless the original principal amount of the loan is 90%
or more of the sales price of the security property at the time of sale; or the loan is 90% or more of the
appraised value of the security property; or whenever the combined principal amount of the loans
against the security real property exceeds 80% of the appraised value of such property; or,

3. The loan is made in compliance with the requirements for higher priced mortgage loans established in
Regulation Z of the Federal Truth-In-Lending Act (TILA) pursuant to 15USC Section 1601et seq.,
whether the loan is a higher priced mortgage loan; or when a loan is refinanced or modified in
connection with a lender’s homeownership preservation program or a lender’s participation in such a
program is sponsored by a federal, state or local government or a non-profit organization.

Contact Requirements Prior to Filing a Notice of Default

Civil Code Section 2923.5 has been added to require an initial contact with the borrower (as defined) at least 30
days prior to the recording of a Notice of Default. This requirement applies to loans secured by residential real
property consisting of 1 to 4 dwelling units within which an owner occupies and the security instrument for the
loan was recorded during the period of January 1, 2003 through January 1, 2008, inclusive. Exemptions from
the required contact include:

1. When the borrower has previously surrendered the keys and possession of the security property to the
beneficiary/lender/mortgagee or its authorized agent;

2. When the borrower has contracted with an entity whose primary business is advising homeowners on
how to avoid or extend the foreclosure process; or,

3. When the borrower/homeowner has filed a petition in bankruptcy and an order has not been entered
closing or dismissing the bankruptcy or granting a relief from stay.

Unless an exemption applies, contact or attempted contact must be made with the borrower to discuss the
borrower’s financial situation and foreclosure alternatives. Due diligence to contact the borrower
(trustor/mortgagor) must be undertaken by the beneficiary/lender/mortgagee, its servicing agent, or another
lawfully authorized agent.

Due diligence requires that an initial contact be made with the borrower (trustor/mortgagor), either in person or
by telephone, advising of the availability of a United States Department of Housing and Urban Development
(HUD) certified housing counseling agency and the toll free telephone numbers of such agencies who may
provide counseling services to the borrower.

The borrower is also to be advised that he or she has a right to request a subsequent meeting with the
beneficiary/lender/mortgagee, its servicing agent, or other authorized agent, with the meeting scheduled to
occur within 14 days. The contact with the borrower is also to provide the opportunity to assess the borrower’s
financial situation and to explore options to avoid foreclosure.

A borrower may designate by written consent a HUD certified counseling agency, an attorney, or another
advisor to discuss with the beneficiary/lender/mortgagee, its servicing agent or other authorized agent, the
borrower’s financial situation, options for the borrower to avoid foreclosure, or any loan modification or
workout plan offered by the beneficiary/lender/mortgagee.

When the borrower, the loan transaction, and security property are subject to this law; a Notice of Default filed
or recorded pursuant to Civil Code Section 2924 et seq. is to include a declaration that the
beneficiary/lender/mortgagee its agent or other authorized agent has:

1. Contacted the borrower;

2. Has tried with due diligence to contact the borrower in accordance with applicable law; or,

3. That no contact was made with the borrower because the borrower has surrendered the keys and
possession of the security property to the beneficiary/lender/mortgagee, its servicing agent, or other
authorized agent; or the borrower has contracted with an organization, person, or entity, whose
primary business is to advise homeowners how to extend the foreclosure and/or how to avoid the
borrower’s contractual obligations to beneficiaries/lender/mortgagees; or the borrower has filed a
petition in bankruptcy pursuant to Chapters 7, 11, 12 or 13 and the bankruptcy court has not entered an
order closing or dismissing the bankruptcy or granting a stay of relief from a foreclosure.

If the beneficiary/lender/mortgagee, its servicing agent or other authorized agent, has previously directed the
trustee to record the Notice of Default (prior to the enactment of Civil Code Section 2923.5) and no Notice of
Rescission has been recorded, then the Notice of Sale issued and recorded pursuant to Civil Code Section 2924
shall include a declaration that the borrower (trustor/mortgagor) was contacted to assess the borrower’s
financial situation and to explore alternatives to foreclosure, or that efforts were made exercising due diligence
in accordance with applicable law and no contact occurred. Civil Code Section 2923.5 is to remain in effect
until January 1, 2013, and as of that date is repealed, unless a later enacted statute extends the aforementioned
date of repeal.

Delayed Notice of Sale

Civil Code Section 2923.52 has been added to require the delay period of three months between
filing/recording of the Notice of Default and filing/recording of the Notice of Sale (Civil Code Section
2924(a)(2)) to be extended for an additional 90 days to allow the parties to pursue a loan modification as a
means to delay foreclosure. The requirement for such further extension is subject to the following conditions:

1. The loan was recorded during the period from January 1, 2003 to January 1, 2008 inclusive, and the
loan is secured by residential property;

2. The loan at issue is the first deed of trust or mortgage against the security property;

3. The borrower occupied the property as the borrower’s principal residence at the time the loan became
delinquent; and,

4. A Notice of Default has been recorded on the security property.

The requirement for the further extension of 90 days does not apply to loans made, purchased, or serviced by a
California state or local public housing agency or authority; a state or local housing finance agency; a secured
transaction that is subject to the Military and Veterans Code; or the loan is collateral for securities purchased by
an agency or authority referred to hereinbefore. In addition, the 90 day further extension does not apply to
loans serviced by a mortgage loan servicing agent, if the servicing agent has obtained a temporary or final order
of exemption pursuant to Civil Code Section 2923.53 that is current and valid at the time the Notice of Sale is
given.

For example, if the servicing agent is licensed and regulated by the DRE, the exemption order must be obtained
from the Commissioner of the DRE. A comprehensive loan modification program must be implemented by the
servicing agent that meets the requirements imposed by the commissioner of the department or agency through
whom the servicing agent is licensed.

The loan modification program is to consider the objective of keeping borrowers in their California homes
rather than foreclosing when the anticipated recovery under the loan modification or workout plan exceeds the
anticipated recovery through foreclosure on a net present value basis. The loan modification program targets a

ratio of the borrower’s housing related debt to the borrower’s gross income of 38% or less on an aggregate
basis for the lender’s loan modification program. As a predicate to the loan modification program being
acceptable to the commissioner licensing and regulating the servicing agent, the program is to include a
combination of the following features:

1. An interest rate reduction, as needed, for a fixed term of at least five years;

2. An extension of the amortization period of the loan term to no more than 40 years from the original
date of the loan;

3. Deferral of some portion of the principal amount of the unpaid principal balance until maturity of the
loan;

4. A reduction of principal amount owing;

5. Compliance with an applicable federally mandated loan modification program; and,

6. Such other factors the commissioner determines are appropriate, and the commissioner may consider
efforts implemented in other jurisdictions that have resulted in a reduction in foreclosures.

When determining a loan modification solution for a borrower, the servicing agent is to seek to achieve long-
term sustainability for the borrower. The commissioner has been given 30 days of receipt of an initial or revised
application to determine whether the proposed loan modification program meets the requirements imposed by
applicable law.

Upon approval of the loan modification program for which the servicing agent has applied, the commissioner is
to issue a final order exempting the loan servicer pursuant to the terms of the order from the requirements of
Civil Code Section 2923.52. If the commissioner concludes that the loan modification program is not
acceptable, the application is to be denied. However, the servicing agent may submit a revised or modified
application. The commissioners were required to adopt emergency and final regulations to clarify the
application of this law (Civil Code Section 2923.52 and 2923.53) no later than 10 days after the date the law
took effect, i.e., May 21, 2009. Civil Code Sections 2923.52 and 2923.53 are to remain in effect until January

1, 2011 and as of that date is repealed, unless a later enacted statute extends the aforementioned date of repeal.