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Disclosure exemptions in sales of REO properties

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November 15, 2012

Transactions and Regulatory Committee [lead committee]
Legislative Committee

Question Presented: Should C.A.R. sponsor legislation to repeal the exemption from the TDS for REO properties, and thereby force foreclosing lenders complete a TDS?

Action Necessary: No - Optional

Position to be Taken [select one]:
1. Do Nothing. Maintain existing law.
2. Sponsor legislation to require REO sellers to provide a completed TDS (Transfer Disclosure Statement) in connection with a sale.
3. Other:

Direction to C.A.R. Staff:

Discussion:Caveat emptor ("let the buyer beware") is not the rule in California real estate, if indeed it ever was. The landmark case of Easton vs. Strassburger made it explicit as far back as the mid-1980s that both sellers and their agents could not sidestep the duty of disclosing what should be known about the property in the transaction.

C.A.R. sponsored legislation that clarified (and thus limited) the liability exposure of sellers and agents by codifying the duty and a statutory form for compliance in Civil Code Section 1102 and following.  Agents duties, and a standard of care, were similarly codified in Section 2079 and following of the same code. A 1993 case, Loughrin v. Superior Court made it clear that one could not escape disclosure liability simply by characterizing a sale as "as is."  C.A.R. legislation responded to that trap for unwary sellers and agents by requiring the Transfer Disclosure Statement (TDS) to be used in "as is" sales too. 

Some existing disclosure statutes, including the TDS statute, exempt foreclosing lenders from the requirement for completed statutory form disclosures; however, lenders are bound by the same obligation as any other seller to disclose material facts in their possession.  Some Realtors® have reported an unwillingness of lenders to make any disclosures and insist on an "as is" transaction that does not include formal disclosures.

Existing Exemptions. Civil Code 1102.2 contains a lengthy list of transfers that are not required to utilize a TDS.  One of these exempt classes of transactions (CC 1102.2(c) is for foreclosing lenders.  As a result, an REO sale by a lender is not subject to the CC1102 Article, and a TDS need not accompany the sale.

Note too; the legislative intent of Section 1102.2 is not intended to affect the existing duty to disclose in transactions not covered by the statute. In other words, they are exempt from the TDS, but not from disclosure obligations. Anecdotal reports suggest that lenders' asset managers are unaware of this obligation to "tell what you know."

What do lenders "know" now?  Even though a foreclosing lender may not have been living in the property, it may possess a considerable amount of information.  For example, a relatively recent appraisal may still be part of the bank’s file; or, there may have been a home inspection report generated as part of an asset manager’s activities. There may have been a citation for code violations to which the new owner (former lender) has responded, or there may have been inspections and reports generated from prior negotiations in connection with a transaction that did not close. 

Requiring a TDS on REO properties. The TDS can only be completed based upon a physical inspection of the property, and requires information from both the agent and the seller. If the lender is to complete such a disclosure, unless it already has an inspection report, it will have to inspect the property. Would a mandate to complete a TDS accomplish better information disclosure, or just increase the cost of the transaction?

What position will the lenders take? On the natural, lenders would be inclined to oppose any new mandate or new cost. However, if the requirement was limited to specified items already in a lender's file (for example a recent pest report or current inspection report), the burden would be relatively slight, especially if the lender is allowed to bill the requesting buyer for recovery of its costs of making the reports available. Cost recovery is currently the rule for making appraisals available. However, other sellers are not entitled to bill a recipient for the cost of supplying statutory disclosures.  If the lender were also given a statutory safe harbor from additional disclosures if they transmit the information in good faith, it might also create an incentive to comply without a mandate.

Should C.A.R. sponsor legislation requiring lenders to make the disclosures described?

This material is for discussion purposes only and has not been approved by the Transactions and Regulatory, Legislative or Executive Committees or the Board of Directors]