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Capital One Faces Suit Over Short Sales

SANTA ANA, Calif. (CN) - Homeowners say in a class action that Capital One illegally made them pay thousands of dollars in deficiency contributions after short sales of their homes, though the state prohibited that in 2010.

Then-Gov. Arnold Schwarzenegger signed Senate Bill 931 into law in late 2010 to reduce foreclosures and boost short sales.

Before the law took effect in January 2011, homeowners had no incentive to short sell their homes because while lenders could not obtain a deficiency judgment on foreclosed properties, they could go after homeowners who sold short.

"However, it quickly became apparent that where there was a second mortgage, the junior lien holder often refused to release the lien and the short sale never went through," according to the complaint.

"In February 2011, SB 458 was introduced, and on July 15, 2011, it was signed into law on an emergency basis. Section (a) of SB 458 expanded SB 931's prohibition on obtaining a deficiency judgment to junior lien holders. Additionally, Section (b) of SB 458 further mandate that a 'holder of a note shall not require the trustor, mortgagor, or maker of the note to pay any additional compensation, aside from the proceeds of the sale, in exchange for the written consent to the sale.' ...

"Capital One has refused to comply with SB 458. In clear violation of the statute's unambiguous prohibition, Capital One has illegally required California borrowers to pay the deficiency on their mortgages, in addition to 'the proceeds of the sale, in exchange for [Capital One's] written consent to the sale.' As a result, Capital One has generated substantial revenues from the collection of deficiencies from California-based borrowers in connection with completing short sales". (Brackets in complaint.)

Lead plaintiff Roni Teson says Capital One came after her for a $60,000 deficiency contribution on her Rancho Cucamonga home, and refused to approve a short sale offer of $570,000, even after her Realtor reminded the bank holding company of the new law.

Teson had been diagnosed with stage IV breast cancer, was on disability and could no longer keep up her mortgage payments, according to the complaint, whose other named plaintiff is Laurie Hatfield.

The complaint states: "A 'short sale' is when a borrower owes more than his/her house is worth and the bank allows the borrower to sell the house for less than is owed on the property. The incentive to do nothing but await a foreclosure - rather than undergo a short sale - was believed to be driving California's spiraling foreclosure rate, which in turn was only further reducing the equity of California's homeowners and preventing real property values from recovering."

Teson and Hatfield cite a study from mid-2010 which showed that the state had the second-highest foreclosure rate in the United States.

"Modesto posted the nation's third highest metro foreclosure rate, with 4.59 percent of its housing units (one in 22) receiving a foreclosure filing. Other California metro areas in the top ten were Merced at Number 4 (4.47 percent of housing units); Riverside-San Bernardino-Ontario at Number 5 (4.37 percent); Stockton at Number 6 (4.37 percent); and Vallejo-Fairfield at Number 9 (3.91 percent). A total of 93,263 properties in the Los Angeles-Long Beach-Santa Ana metro area received a foreclosure filing in the first half of 2010, the second highest total of any metro area nationwide and 2.11 percent of all housing units (one in 47) - ranking Number 35 in terms of foreclosure rate," the complaint states.

The plaintiffs are represented by Mary Blasy with Scott+Scott of San Diego.

They seek damages for violations of California's Code of Civil Procedure, violations of California's Business and Professional Code, conversion and unjust enrichment.

A Capital One spokeswoman would not comment on the lawsuit.

A representative of Scott+Scott was not available for an interview.

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