Pub. 5 2015 Issue 1

n Anti-Deficiency Reform — continued on page 12 that issued the building permit for the dwelling.” 5 A complete understanding of the amendments requires knowledge of the history of Arizona’s anti-deficiency statutes. This article ex- plores the legislative history of the statutes, including the last failed reform effort that divided realtors and bankers. T HE CONSUMER PROTECTION ORIGINS OF THE ANTI-DEFICIENCY STATUTES Arizona has two anti-deficiency statutes. A.R.S. § 33- 814(G) applies when real property subject to a deed of trust is foreclosed through a non-judicial trustee’s sale. A.R.S. § 33- 729(A) applies when a mortgage or deed of trust is judicially foreclosed through a lawsuit. 6 Both statutes apply only to property of 2 ½ acres or less that is “limited to and utilized for” a single one-family or two-family dwelling. 7 Section 33- 729(A), however, applies only to “purchase money” loans. Both statutes were enacted in 1971 “with several other consumer-oriented laws” for the purpose of “protect[ing] certain homeowners from the financial disaster of losing their homes to foreclosure plus all their other nonexempt property on execution of a judgment.” 8 Judicial decisions interpreting the statute have consistently stressed the “consumer-oriented” nature of the statutes. 9 In Mid Kansas, the Arizona Supreme Court held that “we can infer that the legislature's primary intent was to protect individual homeowners rather than com- mercial developers.” 10 At the same time, the court recognized that because the language of the statutes was not limited to consumers, no class of mortgagors could be excluded from protection. 11 Thus, for decades, commercial developers, speculative home builders, and real estate investors enjoyed the same protection from personal liability on their defaulted loans as the consum- er homeowners the statutes were intended to protect. T HE LITTLE BILL THAT COULDN’T The Great Recession of the late 2000s brought with it a flood of residential foreclosures. Developers and spec build- ers were caught in the deluge alongside consumers. Unlike consumers, however, these commercial actors obtained multi- million dollar loans to build everything from high-end luxury homes to entire subdivisions, with the intention of making a sizeable profit. 12 In some cases, the anti-deficiency statutes shielded these businesses from the consequences of failing to repay their loans – effectively shifting all of the risk of default onto lenders. 13 The Arizona legislature responded to this loophole by pass- ing S.B. 1271, which was enacted into law in July 2009. 14 The act amended A.R.S. § 33-814(G) by limiting anti-deficiency protection to homes that had been utilized as a dwelling “by the trustor under the deed of trust for at least six consecutive months and for which a certificate of occupancy has been issued.” 15 It also placed the burden of proving that these conditions were met squarely upon the borrower, by provid- ing that “The trustor is responsible for demonstrating that the trust property was used by the trustor as a one-family or a single two-family dwelling for at least six consecutive months.” 16 While S.B. 1271 drew little attention prior to its enact- ment, it became “the focus of an intense repeal battle” almost immediately afterward. 17 Its sponsor argued that the amend- ments would “help community banks that lend to investors hiding behind the current laws.” 18 But opponents argued that the law went too far, by stripping anti-deficiency protection from homeowners who deserved it. Tom Farley, then CEO of the Arizona Association of Realtors, said “This won't just 11 WINTER 2015