Senate Bill 306

The Treasury Department announced this month that it is close to finalizing an incentive program to entice lenders and servicers to rely more on short sales as an alternative to foreclosure. This is not to be confused with the new Senate Bill.

Senate Bill 306

Contrary to what many believe, the recently enacted Senate Bill 306 does not require lenders to review short sale requests from sellers and their agent in 21 days. The new California law, which addresses certain escrow procedures, has been mischaracterized by some real estate agents as landmark legislation calling for a 21 day turnaround for short sale approvals. Unfortunately, the new law has nothing of the kind.

Basically, the bill inserts a short payoff amount request into the existing payoff demand law which generally requires a lender to respond to a request for a payoff demand statement within 21 days from when it is requested, typically by escrow or a short sale negotiator. The new law essentially requires that the lender respond to a request for a short-pay demand statement within 21 days. Since the short payoffs are generally requested AFTER the short sale has already been approved, the law will have little or no effect on the time it takes to actually get an approval. Additionally, the lender’s response to escrow can be a short-pay demand statement or even, depending on the circumstances, a written statement electing not to proceed with the proposed transaction.

There is another provision of SB 306 which has caused some confusion as well. In practice, a lender may approve a short sale subject to its review of a closing statement prepared by escrow, but the lender does not necessarily review that closing statement right away. This can sometimes cause short sales to drag on. Under the new law, if a lender fails to approve the closing statement within four days, the closing statement shall be deemed approved, but only if it is “not clearly contrary to the terms of the short-pay agreement or the short-pay demand statement provided to the escrow holder.” In other words, the closing statement will be considered approved after the time has elapsed, but it cannot be substantially different than the deal the lender had earlier approved. So, while the new law may help move the process along, it does NOT bind a lender to a short payoff amount in an offer that the lender has not approved.

Senate Bill 306 contains other technical changes in real estate related laws. This new law comes into effect Jan. 1, 2010. The full text of Senate Bill 306 is available at

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