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Does California’s First-Look Law Apply to Servicers or Investors?

On January 1, 2023, California’s SB 2170 became effective, creating a new “First Look” policy on REO properties. Encompassed in Civil Code § 2924p, the new law requires “institutions” who acquire a 1-4 unit residential property at a foreclosure sale to only negotiate with or sell the property to certain “eligible bidders” for the first 30 days after listing the property for sale.

To qualify, the Eligible Bidder must sign an affidavit under penalty of perjury attesting to being on the following:

  • A prospective owner-occupant (subject to certain restrictions);
  • A nonprofit corporation that meets four specified requirements, including that its primary activity is the development and preservation of affordable rental or home ownership housing in California;
  • A community land trust based in California;
  • A limited-equity housing cooperative based in California; or
  • The state, the Regents of the University of California, a county, city, district, public authority, or public agency, and any other political subdivision or public corporation in the state.

An Institution is defined to include any of the following who have foreclosed on 175 or more residential real properties (1-4 units) in the preceding annual reporting period:

  • A depository institution chartered under state or federal law;
  • A person licensed under the California Financing Law in the Financial Code;
  • A person licensed under the California Residential Mortgage Lending Act in the Financial Code; or
  • A person licensed under the Real Estate Law in the Business and Professions Code.

The question we have been asked frequently is whether the 175 foreclosure threshold applies to the servicer or the investor who take title at the foreclosure sale. California’s Homeowner Bill of Rights statutes (where we first saw the 175+ threshold), very clearly look at whether the loan servicer handles 175 or more qualifying foreclosures. In turn, it would make sense then that the 175 or more requirement under the new First Look law would also count the servicer’s foreclosures. However, that does not appear to be how the new law is written. Civil Code § 2924p(c) provides that:

“All of the following apply to sales of real property containing one to four residential dwelling units, inclusive, that is acquired through foreclosure under a mortgage or deed of trust by an institution or that is acquired at a foreclosure sale by an institution …

(1) During the first 30 days after the property is listed for sale, the institution shall only accept offers from eligible bidders.

(2) An eligible bidder shall submit with their offer to the institution …”

This language specifically targets the institutional buyer at the foreclosure sale who will be receiving and accepting offers to purchase the property, and the loan servicer is not mentioned. This institution may have a servicing or real

estate agent working for it, but unless that servicer/agent is the entity that acquired record title to the property, it does not appear that the law would apply to the servicer/agent or that the number of foreclosures performed by the servicer would be part of the calculation. The servicer/agent may process the offers on behalf of the institutional seller, but it is not the institution.

In sum, according to the plain statutory language of § 2924p, it appears that the new law’s requirements only apply if the institution who purchased the property at the foreclosure sale conducted 175 or more annual residential foreclosures in California. It is very unlikely that many investors will meet that threshold and, as a result, most investors will not have to comply with California’s First Look program. Of course, please keep in mind that no court has weighed in on this issue yet and a judge could reach a different conclusion.

Extra Credit: The new law applies from the date that the property is listed for sale. If the qualifying “institution” spends six months evicting the tenants and getting the property ready to sell, the 30 days would run from the date that the property is ultimately listed, not the date of the foreclosure sale. Conceivably, if the property is never “listed” for sale or the qualifying institution transfers the property to another entity after the foreclosure sale, the first look requirements may never kick in.

Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.

About Author: T. Robert Finlay

Robert Finlay is one of the three founding partners of Wright, Finlay & Zak. Since 1994, Finlay has focused his legal career on consumer credit, business, and real estate litigation and has extensive experience with trials, mediations, arbitrations, and appeals. Finlay is at the forefront of the mortgage banking industry, handling all aspects of the ever-changing default servicing and mortgage banking litigation arena, including compliance issues for servicers, lenders, investors, title companies, and foreclosure trustees.

About Author: Michelle A. Mierzwa

Michelle A. Mierzwa joined Wright, Finlay & Zak’s Compliance Division in 2015, providing loan originators, lenders, servicers, trustees and others in the mortgage industry with state and federal compliance and regulatory counsel. Since 1998, Her accomplishments include creating the legal department for one of the largest non-judicial foreclosure trustees in the Western U.S., the management and resolution of litigated matters through jury and bench trials and appellate practice, the coordination of compliance audits, and managing the California branch of a national law firm. Mierzwa served two three-year terms on the Board of Directors of the United Trustees Association (UTA) and is a member of the Legislative Committees of the California Mortgage Bankers Association and the UTA. She is licensed to practice in California and Washington.

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