§ 580.7.Circumstances In Which Letter of Credit Not Enforceable In Loan Transaction
Title 8. Of the Trial and Judgment In Civil Actions · Chapter 1. Judgment in General · Last amended 1997 · Last verified July 28, 2026
In one sentenceSection 580.7 makes a letter of credit unenforceable in a loan transaction when it's issued to a beneficiary to avoid default on an existing residential purchase-money loan owed by a natural person, closing off a way lenders might otherwise sidestep the purchase-money anti-deficiency protection.
(1)"Beneficiary" means a "beneficiary" as defined in paragraph (3) of subdivision (a) of Section 5102 of the Commercial Code.
(2)"Customer" means an "applicant" as defined in paragraph (2) of subdivision (a) of Section 5102 of the Commercial Code.
(3)"Letter of credit" means a "letter of credit" as defined in paragraph (10) of subdivision (a) of Section 5102 of the Commercial Code whether or not the engagement is governed by Division 5 (commencing with Section 5101) of the Commercial Code.
(b)No letter of credit shall be enforceable by any party thereto in a loan transaction in which all of the following circumstances exist:
(1)The customer is a natural person.
(2)The letter of credit is issued to the beneficiary to avoid a default of the existing loan.
(3)The existing loan is secured by a purchase money deed of trust or purchase money mortgage on real property containing one to four residential units, at least one of which is owned and occupied, or was intended at the time the existing loan was made, to be occupied by the customer.
(4)The letter of credit is issued after the effective date of this section.
Plain-English Summary
This section pairs with § 580.5 to keep letters of credit from becoming a workaround for consumer borrowers' purchase-money protections. It applies only when several conditions line up: the customer is a natural person (not a business entity), the letter of credit is issued to the beneficiary to avoid a default on an existing loan, that existing loan is secured by a purchase money deed of trust or mortgage on a residential property of one to four units that the customer owns and occupies (or intended to occupy when the loan was made), and the letter of credit is issued after this section's effective date.
When all of those circumstances exist, the letter of credit isn't enforceable by any party to it. The provision targets the specific scenario where a lender, facing a defaulting purchase-money residential loan, tries to obtain a letter of credit as a substitute source of recovery from an individual borrower — exactly the kind of maneuver that would otherwise let a lender collect what § 580b says can't be collected.
Frequently Asked Questions
When is a letter of credit unenforceable under § 580.7?
When the customer is a natural person, the letter is issued to avoid default on an existing loan, that loan is a purchase money deed of trust or mortgage on an owner-occupied residence of one to four units, and the letter was issued after this section's effective date.
Does this section apply to business borrowers?
No, it applies only when the customer is a natural person.
How does this section relate to § 580b?
It prevents a letter of credit from being used to recover, in substance, what § 580b's purchase-money anti-deficiency protection already bars a lender from collecting from a residential borrower.
Amendment History
Amended by Stats. 1996, Ch. 176, Sec. 3. Effective January 1, 1997.
Source & verification. Section text is reproduced verbatim from
the Deering's California Codes Annotated / vLex. Enacted by the California Legislature.
Last verified July 28, 2026.
· Official source
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