California’s 2020 legislative session produced two laws fundamentally altering foreclosure procedures for private lenders: AB 3088 and SB 1079. Enacted as COVID-19 relief measures, these bills extend consumer protections to many business purpose loans and create post-foreclosure purchase rights for qualified bidders.
Unlike temporary emergency measures that expired after brief effectiveness periods, these laws establish multi-year frameworks reshaping California foreclosure practice. AB 3088 took effect immediately as emergency legislation, while SB 1079 became operative January 1, 2021, and extends through January 1, 2026.
Private lenders must understand these requirements immediately—foreclosures initiated without compliance face borrower challenges, potential unwinding, and significant delays.
AB 3088: Extending Consumer Protections to Business Purpose Loans
AB 3088 creates two distinct sets of requirements: forbearance request communication obligations and California Homeowner Bill of Rights pre-contact mandates.
Forbearance Request Communication Requirements
AB 3088 requires lenders to respond substantively to borrower forbearance requests when specific conditions align.
The forbearance communication rules apply when all of the following are true:
- Loan originated prior to August 31, 2020
- Lender is a California Finance Lender, DRE licensed broker, RML, or state/federal bank
- Loan is secured by one-to-four family property
- Borrower was current as of February 1, 2020
- Borrower requests forbearance due to COVID-related financial hardship
- Borrower is an individual or entity other than corporations or LLCs owned by corporations
When these conditions are met, lenders must:
- Respond to forbearance requests rather than ignoring them
- Provide reasons for denial if forbearance is declined
- Identify which denial reasons are curable
- Revisit forbearance if borrower cures deficiencies within 21 days
Even when these technical requirements don’t apply, best practices favor responsive communication with borrowers requesting forbearance. Maintaining borrower relationships, documenting reasonable efforts to work with struggling borrowers, and demonstrating good faith create better litigation posture than simply ignoring requests.
Homeowner Bill of Rights Extension
AB 3088’s more significant impact extends California’s Homeowner Bill of Rights (HBOR) to certain business purpose loans. HBOR, originally enacted in 2013, required lenders to contact borrowers before initiating foreclosure to discuss loss mitigation options. These requirements previously applied only to consumer loans—loans for personal, family, or household purposes.
AB 3088 expanded HBOR to cover business purpose loans meeting specific criteria, creating pre-foreclosure contact obligations for loans that never previously required such procedures.
HBOR pre-contact requirements apply to business purpose loans only when all of the following conditions exist:
1. Property Type: One-to-four family residential property 2. Lien Position: First position lien only 3. Borrower Type: Individual owner (not entity) 4. Portfolio Size: Individual owns three or fewer one-to-four family rental properties 5. Occupancy: Property occupied by tenant under arms-length market lease 6. Tenant Status: Tenant unable to pay rent due to COVID-related income reduction 7. Lender Type: California Finance Lender, DRE broker, RML, or bank
All seven conditions must be satisfied for HBOR to apply. If any single condition is not met, pre-contact requirements don’t apply.
Items three through six create substantial uncertainty for lenders:
- How does the lender verify how many properties the individual borrower owns?
- How does the lender know whether a tenant occupies the property?
- How does the lender determine whether that tenancy is “arms-length” and at “market” rates?
- How does the lender ascertain whether the tenant’s rental payment difficulty stems from COVID-related income reduction?
These information gaps create compliance dilemmas. Lenders often cannot definitively know whether HBOR applies without borrower cooperation—cooperation frequently unavailable in default situations.
When uncertainty exists about whether these conditions are met, conservative practice favors HBOR compliance. The pre-contact requirements add approximately 30-60 days to foreclosure timelines—a modest delay compared to litigation defending foreclosures conducted without required pre-contact when HBOR actually applied.
HBOR Pre-Contact Requirements
When HBOR applies, lenders must attempt borrower contact before recording a Notice of Default.
Initial Contact Attempt
Lenders must attempt telephone contact with the borrower. If the borrower answers: 1. Provide HUD’s contact number 2. Inform borrower of right to 14-day follow-up call 3. Discuss the nature of the default 4. Discuss potential modification or forbearance options
If this initial conversation addresses the default, the borrower may waive the 14-day follow-up call. After this discussion, lenders must wait 30 days before recording the Notice of Default.
Send a first-class letter stating:
- Loan is in default
- Lender attempted contact under HBOR
- HUD contact information
- Phone number to reach lender to discuss default
After this letter, attempt three additional telephone calls on different days of the week and at different times of day. If the borrower answers any of these calls, provide HUD information, discuss the default, and wait 30 days before proceeding.
Two weeks after the third call attempt, send a certified letter with return receipt requested containing:
- Nature of the default
- All dates, times, and methods of attempted contact
- HUD contact information
- Contact information for reaching the lender
Wait 30 days after this letter is delivered, then the lender may proceed with Notice of Default.
Documentation Requirements
HBOR compliance demands meticulous documentation:
- Date and time of each contact attempt
- Identity of the person making contact attempts
- Method of contact (telephone, first-class mail, certified mail)
- Content of any conversations
- Copies of all letters sent with proof of mailing/delivery
Creating systematic checklists and documentation protocols prevents inadvertent compliance failures that could derail foreclosures months after initiation.
Post-NOD Modification Requests
Even after recording the Notice of Default and Notice of Sale, borrowers retain rights to request loan modifications. If a borrower submits a modification request more than five business days before the scheduled foreclosure sale, the lender must:
- Review the modification request
- Respond to the borrower before conducting the sale
- Deny or approve the modification
Lenders may deny all modification requests, but they must respond. Simply ignoring modification requests while proceeding to sale violates HBOR.
SB 1079: Post-Foreclosure Purchase Rights
While AB 3088 affects pre-foreclosure procedures, SB 1079 creates entirely new rights after foreclosure sales complete.
The Traditional Foreclosure Process
Understanding SB 1079 requires understanding traditional California foreclosure:
1. Notice of Default (NOD) is recorded 2. 90 days later, Notice of Sale (NOS) is recorded 3. 21-30 days after NOS, foreclosure auction occurs 4. At auction, property sells to highest bidder (either the foreclosing lender via credit bid or third-party cash bidder) 5. Trustee’s Deed Upon Sale records, transferring title to the auction purchaser
Historically, once the auction concluded, the process was final. Title transferred immediately to the winning bidder, and the property belonged to that bidder without further complication.
SB 1079 fundamentally changes this finality.
Eligible Bidders: New Post-Auction Purchase Rights
SB 1079 creates two classes of “eligible bidders” who may purchase foreclosed properties even after the auction concludes:
Natural persons (individuals, not entities) who intend to occupy the property as their primary residence within 60 days and for at least one year. They must execute an affidavit stating:
- Intent to occupy as primary residence within 60 days
- Intent to occupy for at least one year
- No relationship to the borrower
Current tenants occupying the property as their primary residence under arms-length leases entered before the Notice of Default. They must execute affidavits stating:
- Current occupancy as primary residence
- Arms-length lease predating NOD
- No relationship to the borrower
These eligible bidders receive extraordinary rights to purchase the property after the foreclosure auction—rights that can override the winning bid at auction.
Post-Foreclosure Purchase Process
Scenario One: Eligible Bidder Wins at Auction
If an eligible bidder (prospective owner-occupant or tenant) appears at the foreclosure auction and submits the highest bid, the process concludes immediately. The Trustee’s Deed Upon Sale records in their name, and no extended purchase period applies.
This scenario creates no disruption—the foreclosure completes as it always has.
Scenario Two: Tenant Submits Post-Auction Bid
If the foreclosure auction occurs and the property either reverts to the foreclosing lender or sells to a third party, tenants receive extraordinary protection:
The tenant must notify the trustee of intent to purchase. No funds are due at this time—simply notice of intent.
The tenant may purchase the property for exactly the amount bid at auction—not a penny more. If the foreclosing lender bid $300,000 and won, the tenant may purchase for $300,000. If a third party bid $350,000, the tenant may purchase for $350,000.
The tenant has 45 days from the auction date to submit a cashier’s check for the full purchase price.
If the tenant complies, the Trustee’s Deed Upon Sale records in the tenant’s name rather than the original auction winner’s name. The property belongs to the tenant.
Scenario Three: Prospective Owner-Occupant Submits Post-Auction Bid
Prospective owner-occupants receive similar but slightly different rights:
Any qualifying individual may submit a written bid to the trustee stating their intent to purchase and their bid amount.
The prospective owner-occupant must bid more than the final auction price. Even one penny more suffices, but the bid must exceed the auction price.
If multiple prospective owner-occupants submit bids, a “blind auction” occurs—the trustee accepts all bids within the 15-day window, and the highest bidder who completes payment wins.
The winning bidder has 45 days from the auction to submit a cashier’s check for their bid amount.
The highest bidder who timely submits payment receives title via Trustee’s Deed Upon Sale.
Scenario Four: Tenant vs. Owner-Occupant
If both a tenant and one or more prospective owner-occupants submit qualifying bids, the tenant prevails even if owner-occupants bid higher amounts. The tenant’s right to purchase at the exact auction price trumps owner-occupants’ bids.
Scenario Five: No Qualifying Bids
If no eligible bidder submits a qualifying bid within 15 days, the original auction result becomes final. The trustee records the Trustee’s Deed Upon Sale on the 18th day after auction, and title transfers to the original winning bidder.
Similarly, if an eligible bidder submits an intent to bid but fails to provide the cashier’s check within 45 days, the intent becomes void. On the 48th day, the trustee records the Trustee’s Deed Upon Sale for the original auction winner.
Strategic Implications
For Foreclosing Lenders
Historically, lenders with personal guarantees often bid less than the full loan amount at foreclosure—allowing creation of deficiency judgments against guarantors. SB 1079 makes this strategy dangerous.
If a lender bids $200,000 on a $400,000 loan, an eligible bidder can purchase for $200,001, leaving the lender with no property and only $200,000 in proceeds—eliminating any meaningful deficiency claim.
Conservative bidding strategy now requires credit bidding the full amount owed (principal, interest, fees, costs) to prevent eligible bidders from stealing the property for below-market prices.
The 45-day window creates insurance ambiguity. The Trustee’s Deed Upon Sale doesn’t record until day 18 or day 48, but it “relates back” to the auction date for title purposes.
Foreclosing lenders should immediately insure properties at which they are the winning bidder, even though they may ultimately lose the property to an eligible bidder. The alternative—being uninsured if the property burns down during the 45-day window—creates unacceptable risk.
Tenants receive preferential treatment over prospective owner-occupants. Lenders foreclosing on occupied properties should assume tenants may exercise purchase rights.
For Cross-Collateralized Loans
SB 1079 prohibits “bulk sales” of multiple properties securing a single loan. Each property must be sold individually at separate auctions.
This prohibition creates strategic complexity for cross-collateralized loans securing multiple properties:
- Bidding strategy becomes critical
- Each property’s individual value must be considered
- The order of sales may affect proceeds allocation
- Eligible bidders may purchase some properties but not others
Lenders holding cross-collateralized loans should consult counsel before initiating foreclosure to develop proper bidding strategies.
Market Impact Assessment
SB 1079’s practical impact remains unclear. The requirement for cashier’s checks within 45 days creates significant barriers:
- Traditional mortgage financing cannot close in 45 days with no property access
- Only cash buyers or hard-money borrowers can participate
- Straw buyer schemes may emerge to exploit the process
Whether the law achieves its stated goal—expanding homeownership opportunities—or simply creates new complications and fraud potential will become evident as case law develops.
Compliance Requirements and Best Practices
AB 3088 Compliance
Create systematic processes identifying which loans are subject to HBOR requirements. Use decision trees or checklists addressing all seven criteria.
When conducting HBOR pre-contact, document every attempt, every conversation, every letter, every timeline. Missing documentation can doom foreclosures months after initiation.
The 30-60 day delay from HBOR compliance is modest compared to litigation defending improper foreclosures. If you cannot definitively prove HBOR doesn’t apply, comply with it.
Even for non-HBOR loans, implement regular written borrower communication, maintain thorough records, and document all forbearance considerations. These practices create better foreclosure-defense positioning.
SB 1079 Compliance
Credit bid the full amount owed unless strategic reasons justify accepting potential loss to eligible bidders.
The 15-day and 45-day windows are absolute. Calendar these dates precisely and monitor for eligible bidder communications.
Secure hazard insurance on auction-won properties immediately, understanding that the Trustee’s Deed relates back to auction date.
Engage counsel before foreclosing on multiple properties securing single loans. Bidding strategy requires careful planning.
Conclusion
AB 3088 and SB 1079 represent fundamental shifts in California foreclosure practice. AB 3088 extends consumer protections to business purpose loans based on hard-to-verify conditions, while SB 1079 creates post-auction purchase rights that eliminate foreclosure finality for 45 days after auction.
These laws emerged from COVID-19 panic and well-intentioned but potentially misguided desires to protect homeownership. Their practical effect creates complexity, delay, uncertainty, and compliance burdens without clear evidence they achieve stated goals.
California private lenders must adapt to this new reality:
- Implement systematic HBOR compliance protocols
- Modify bidding strategies to account for post-auction purchase rights
- Document foreclosure procedures meticulously
- Engage qualified California foreclosure counsel early in default resolution
The foreclosure landscape in California will continue evolving through litigation interpreting these statutes’ ambiguous provisions. Early compliance and conservative interpretation provide the best protection until case law clarifies enforcement standards.
For guidance on California foreclosure compliance, AB 3088 requirements, or SB 1079 procedures, contact Geraci LLP’s Litigation & Foreclosure Practice Group.
