The Nevada legislature recently passed Assembly Bill 273 which significantly alters lenders’ rights in Nevada. These changes are especially concerning for those who are purchasing unpaid promissory notes secured by real property in Nevada. Most of the Bill goes went into effect on June 10, 2011; the balance of the Bill goes into effect on July 1, 2011. It appears to apply in some instances retroactively. The following provides a discussion of those changes:
Effect on First Priority Lien Holders
Limitation Upon Amount of a First Priority Lienholder’s Deficiency Award. A deficiency judgment may be awarded to a senior lender and against either a borrower, guarantor, or surety liable for a debt after the completion of a foreclosure. Under existing Nevada law, judgment in favor of the original lender is limited to the lesser of: a) the difference between loan and market value of the property at time of sale with interest from the date of sale; b) the difference between the loan and the amount for which the property was actually sold plus interest. Bill 273 modifies this law to now provide that if a person purchased the note from a prior beneficiary, the deficiency is limited to the difference between the amount for which the person purchased the note and the fair market value or the value for which the property sold.
This change became effective on June 10, 2011, and the Bill does not provide that it applies only to those loans secured by real property after the effective date of the bill. This suggests that this provision applies retroactively to loans already in place and any deficiency judgment awarded after June 10, 2011. The retroactive application of this provision raises constitutional concerns.
Effect on Junior Lien Holders
- Limitation Upon Amount of Junior Lien Holder’s Deficiency Award. If a person purchases a note secured by a junior mortgage or lien on real property, and later files a deficiency action (not already barred by N.R.S. 40.430), the deficiency judgment is limited to the amount paid for the note, less the market value of the property, plus interest from the date they purchased the note. This change applies only to obligations secured on or after June 10, 2011.
- Deficiency Actions Precluded for Junior Lien Holder on Some Residential Properties. A junior lien holder cannot seek a deficiency judgment after a foreclosure sale at all if the owner of the note is a financial institution, the real property is a single family dwelling, the money was used to purchase that dwelling, the debtor continuously occupied the dwelling, and the debtor never refinanced. This change applies only to obligations secured on or after June 10, 2011.
- Shortened Statute of Limitations for Junior’s Suit for Breach of Note or Deficiency Action. If a junior lender otherwise can bring an action against a borrower or guarantor, following the extinguishment of its lien by foreclosure conducted by a senior lien holder, it must file such an action within 6 months of the foreclosure sale or deed in lieu of foreclosure. This applies only to an action commenced after a foreclosure sale or sale in lieu of foreclosure that occurs on or after July 1, 2011.
Effect for Both First Priority and Junior Lenders Regarding Guarantors
Limitation of the Amount of a Pre-Foreclosure Judgment Against a Guarantor. If a lender sues a guarantor before exhausting real property collateral, the court must hold a hearing to determine the fair market value of the collateral as of the date of the action. The judgment is limited to the difference between the amount owed the note and the lesser of either the fair market value of the property, or if a foreclosure sale occurs prior to judgment being entered, the amount for which the property was sold. This amendment is silent as to whether the guarantor receives the benefit of the limitation of deficiency in cases where the interest in the note was purchased for less than par value. This change applies only to an action brought against a guarantor commenced or after June 10, 2011.
Changes to the Application of Insurance Proceeds
The bill also amends Nevada law to indicate that the amount owed by the borrower to the beneficiary of a note secured by either a first priority or junior lien on real property shall not include the proceeds of any insurance funds received by or payable to the beneficiary. An example of insurance proceeds could include those paid for property damage relating to fire, or proceeds paid under a PMI insurance policy. In circumstances where the beneficiary purchased the note from a prior lender, the Bill is unclear as to this provision applies to reduce the gross amount owed on the note or the amount the beneficiary paid to purchase the note.