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Push them back, shove them back, way back.

Despite the opposition of major consumer and industry groups, the National Conference of Commissioners on Uniform State Laws (ULC) adopted the proposed Uniform Home Foreclosure Procedures Act in July. [paragraph] There is much to like in the act, such as limiting local governments from regulating foreclosures, expediting foreclosures for abandoned properties and extinguishing junior liens in short sales. Outweighing these potential benefits, however, are the likely material delays in, and increased costs of, foreclosure resulting from the imposition of foreclosure-resolution requirements and assignee liability for origination errors. [paragraph] Individual state legislatures must now evaluate whether to enact the act in whole, in part or not at all, in light of foreclosure law. the anticipated active opposition from stakeholders.

Background on the act

The ULC is a nonprofit, unincorporated association comprised of state commissioners. It drafts uniform and model laws for the states to consider enacting.

According to the ULC website, a "uniform" act seeks to establish the same law on a subject among the various jurisdictions, while a "model" act seeks to substantially achieve the same principal purposes even if the act is not adopted in its entirety by every state.

In July 2011, the Executive Committee of the ULC created a study committee to consider drafting a uniform home foreclosure law to address the substantive concerns of borrowers facing foreclosure and to assist loan holders to expedite foreclosures where there is no justification for delay.

It took the study committee four years to draft the final version of the Uniform Home Foreclosure Procedures Act. Within the same time frame, the Consumer Financial Protection Bureau (CFPB) proposed and finalized servicing regulations that address many of the same issues. Synchronizing the Uniform Home Foreclosure Procedures Act with the CFPB servicing regulations was, and continues to be, a challenge.

To what loans does the act apply?

The Uniform Home Foreclosure Procedures Act applies to loans secured by one-to-four-family residential properties, without regard to size of the loan or owner occupancy, although the "foreclosure-resolution" requirements are limited to owner occupants.

When does the act apply?

The act applies to foreclosures commenced on or after its effective date, regardless of when the loans are closed. The right to assert a defense to foreclosure against a subsequent loan holder based on fraud, material misrepresentation or breach of promise in the origination of a loan applies only to loans made after the effective date.

How does the act affect existing state and local foreclosure law?

The Uniform Home Foreclosure Procedures Act provides for the repeal of some state foreclosure laws, but each enacting state will have to determine how the act will interact with existing state law. It is designed to replace certain provisions relating to notices of default, right to cure, mediation, advertisements and public sales, and other aspects of the foreclosure process.

But the act also is intended to be an overlay to existing law and not, for example, force a nonjudicial foreclosure state to convert to judicial foreclosure. This creates a tension between the uniform aspects of the law and the fact that each state has to pick and choose what state law is displaced by the act, perhaps disrupting the compromises made by the study committee in seeking to balance the interests of borrowers and loan holders and servicers.

While there may be uncertainty on how the act affects existing state foreclosure law, its effect on local foreclosure law is clear: It prohibits a local municipality, county or other political subdivision from imposing a regulation, restriction or limitation on foreclosure or varying the rights and obligations of creditors, servicers or borrowers. This limit does not invalidate or modify ordinances or regulations generally applicable to the use of real property, such as zoning or building and safety code laws.

To what entities does the act apply?

The primary duties imposed under the Uniform Home Foreclosure Procedures Act rest with the "creditor," which is defined as the party entitled to enforce a mortgage loan under other law, such as section 3-301 of the Uniform Commercial Code (UCC). This may be both the owner of the loan and the servicer or either. The act authorizes a creditor to delegate duties to a servicer and for a servicer to delegate duties to the subservicer, which, in turn, are subject to all duties imposed on the creditor and servicer.

The final version of the act passed on whether the owner of a note would be liable as a principal for the acts of the servicer as its agent, concluding that the answer "is determined by law of the state other than the act."

What acts of a creditor are prohibited?

The act bars creditors from "discouraging" a borrower from participating in loss mitigation through oral or written misleading statements, or from "misrepresenting" any aspect of the foreclosure process. Illustrative examples of a misrepresentation include informing the borrower that he or she is not eligible for a loss-mitigation option when the option is available and the creditor has not evaluated the option.

What duty of care is imposed on a creditor?

A duty to comply in good faith with the Uniform Home Foreclosure Procedures Act's requirements and act in good faith throughout the foreclosure process is imposed in section 105(a) on those people whose conduct is governed by the act. "Good faith" is defined to mean "honesty in fact and the observance of reasonable commercial standards of fair dealing." (This definition is based on section 1-304 of the UCC.) Borrower conduct is governed by the act only as to their participation in the foreclosure-resolution program described later.

Subsection (b) imposes an obligation on creditors to comply with all obligations under the act in a "commercially reasonable manner." The study committee deleted from later versions of the Uniform Home Foreclosure Procedures Act explicit language that section 105 did not create an independent cause of action.

What notices of pending foreclosure must be given by creditors and what rights of cure does the borrower have?

Section 201 of the Uniform Home Foreclosure Procedures Act prohibits creditors from initiating foreclosure until 30 days after the borrower is provided with a certain preforeclosure notice. The study committee based the notice's language on the Fannie Mae/Freddie Mac uniform security instrument and the servicing standards imposed in the 2011 global foreclosure settlement with the U.S. Department of Justice, 49 state attorneys general and five banks.

The committee grappled with how and whether to conform the contents and timing of the notices with the CFPB requirements.

Borrowers are afforded the right to cure monetary and nonmonetary defaults, and reinstate the loan after the required notice is sent and not later than two days before a scheduled or postponed foreclosure sale, without regard to any acceleration of the debt.

What loss-mitigation options must be provided to a borrower?

Like the CFPB regulations, the Uniform Home Foreclosure Procedures Act specifically provides in section 305 that it does not impose a duty on a creditor to provide any specific loss-mitigation option.

What are the elements of foreclosure resolution?

Article III of the act imposes mediation-like requirements, called foreclosure resolution, reflecting the strongly held views of many on the study committee that foreclosure may be avoided through the early intervention of an independent third party.

The committee chose not to select a particular method of early intervention, recognizing that several states already have various iterations of foreclosure diversion. Instead, the Uniform Home Foreclosure Procedures Act includes an appendix of model rules and best practices for states to consider and requires the foreclosure-resolution agency (which may be a court) to establish procedures and standards for foreclosure resolution meeting minimum standards, including appointing a neutral individual to assist borrowers making a request.

Prior to commencing a judicial foreclosure or not later than 30 days after sending the pre-foreclosure notice for a nonjudicial foreclosure, the creditor must notify an eligible borrower of the availability of the foreclosure-resolution process. The act limits this process to borrowers who are owner-occupants and permits a creditor not to send the notice if a court or governmental agency has determined the property is abandoned in accordance with other provisions of the act. A borrower must opt in to the foreclosure-resolution program within 30 days of the creditor's notice, and the creditor may not charge the borrower for participating.

Once the foreclosure-resolution agency schedules a meeting, both the creditor and borrower must attend and participate in compliance with agency rules, which may provide for participation by phone. The creditor must designate a person with authority to reach a settlement agreement "if the authority exists," and it must advise the borrower of available loss-mitigation options and evaluate the borrower for available loss-mitigation options before or during the foreclosure resolution. It must provide specific reasons for refusing to offer any loss-mitigation option requested by the borrower and the information on which the refusal is based. There is no exception for creditors that already have determined the borrower's ineligibility for available loss-mitigation options in accordance with CFPB and applicable investor or insurer requirements.

A creditor may not complete a foreclosure of an eligible borrower without a court or agency order until 90 days have elapsed after the creditor sent the required notice of foreclosure resolution. This 90-day deadline, however, is not firm, as the court or foreclosure-resolution agency may direct the parties to continue foreclosure resolution beyond that date. This means that a creditor that already has rejected the borrower for loss mitigation in accordance with CFPB, investor and insurer requirements must continue to delay completion of foreclosure until the foreclosure-resolution agency's schedule permits the conclusion of the process.

Of course, the Uniform Home Foreclosure Procedures Act cannot require Fannie Mae, Freddie Mac, the Federal Housing Administration (FHA) or private mortgage insurers to take these delays into account when imposing compensatory fees or curtailment of interest for a servicer's failure to foreclose quickly enough within state timelines. The nonbinding commentary attached to the act provides that "extensions should not be routinely granted due to agency or court delays."

Indeed, the timing of the foreclosure-resolution process is one of its most controversial aspects. In a nod to the lenders' timing concerns, the study committee reversed its earlier position and permitted creditors to initiate, but not complete, foreclosure after the required notice has been sent. But whether a servicer simultaneously may manage to the as-of-yet unwritten rules of a foreclosure-resolution agency and the CFPB servicing regulations is, at best, a guess.

The CFPB regulations impose detailed timing requirements for informing and evaluating borrowers of and for loss-mitigation options. If lenders wait until after the exhaustion of the loss-mitigation processes mandated by the CFPB regulations, foreclosure could be delayed considerably after the lender already conclusively determined the ineligibility of the borrower for available loss-mitigation options.

If lenders offer foreclosure resolution at the same time as the servicer's loss-mitigation process unfolds, there could be substantial borrower confusion. The CFPB regulations prohibit servicers from pursuing foreclosure while considering a borrower for loss mitigation on a "dual-track" basis. These foreclosure-resolution requirements seem to create their own type of prohibited dual track by permitting a servicer to initiate but not complete foreclosure, while simultaneously offering and participating in the required foreclosure process.

Who may foreclose?

The Uniform Home Foreclosure Procedures Act outlines a process for pursuing both judicial and nonjudicial foreclosures. It does not define a default under the loan documents on which a foreclosure must be based, but it does address basic pleading requirements.

Early versions of the act adopted the long-held UCC principle that the mortgage follows the note and that the holder of the note may enforce the note without regard to the lack of intervening assignments of mortgages, recorded or not; the study committee ultimately dropped this provision at the urging of consumer groups, and the act refers this issue to other state law. Lost note affidavits are addressed in detail, following the existing rules that they are required in judicial foreclosures but not in nonjudicial foreclosures. Where required, an affidavit must describe the efforts made to locate the note-- a "bare assertion" that the note is lost or cannot be found is insufficient.

When is a deed in lieu of foreclosure enforceable?

The act enables a homeowner and a creditor to negotiate a transfer of the mortgaged property in full satisfaction of the homeowner's debt to the creditor if others entitled to notice do not object within 20 days. The result is the discharge of junior liens on the property, except for subordinate interests protected from termination under other laws such as some leasehold interests, without the need for a foreclosure sale--a benefit to lenders under existing law. No minimum benefit or consideration must be provided to the homeowner by the creditor other than the full satisfaction of the debt. A junior lienholder who objects through the court may tender to the creditor the amount due under the negotiated transfer and assume the benefit of the proposed transfer.

How does the act treat abandoned properties?

The act authorizes expedited foreclosures of abandoned properties in both judicial and nonjudicial foreclosures based on the premise that abandoned properties offer no benefits to homeowners or tenants who no longer reside there and have significant negative impacts on neighborhoods and the surrounding communities. Only a court in a judicial foreclosure or the applicable governmental entity in a nonjudicial foreclosure may make a determination of abandonment, which must be based on credible evidence. A government agency independently may determine that a property is abandoned, which serves as a presumption of abandonment in a judicial proceeding.

A court in a judicial foreclosure may order a public sale of an abandoned property not more than 45 days after the foreclosure judgment. Alternatively, if the court determines there is no equity in the property available for subordinate lienholders, the court may grant a creditor's motion for transfer of the abandoned property directly to the foreclosing creditor without a public sale, resulting in the extinguishment of all subordinate interests. A creditor may expedite the public sale of the property not later than 60 days after the applicable government agency makes a determination of abandonment, absent a judicial challenge. A borrower has no right of redemption.

The quid pro quo for the expedited foreclosure of an abandoned property is the creditor's obligation to maintain the property to prevent conditions creating a public or private nuisance. Commencing when a determination of abandonment is made, the creditor's obligation continues until the property is conveyed to a purchaser or the creditor's mortgage is released. The creditor may enter the property for the limited purpose of maintenance, inspection and repair, without risk of liability for trespass or damage other than for negligence or willful misconduct. It would have no responsibility for property maintenance until it pursues the expedited foreclosure process for abandoned properties.

What are the consequences of violating the act?

A court in a judicial foreclosure or in response to a defense asserted by the borrower in a nonjudicial foreclosure has wide latitude to discipline a creditor or servicer that materially violates the Uniform Home Foreclosure Procedures Act, ranging from dismissing or staying the action to imposing appropriate sanctions. A dismissal or injunction may be permanent if the court finds "substantial misconduct by the creditor or servicer or other good cause."

A borrower may bring an action for actual damages--including for emotional distress--resulting from a violation, and a court may award statutory damages without regard to actual harm of up to $15,000 for a "pattern and practice" violation. The court may award the costs of the action and reasonable attorney's fees to the prevailing party; costs and attorneys fees may not accrue following a material violation until cured.

There is a one-year statute of limitation to seek damages, commencing on the date the violation occurred. According to the accompanying commentary, the homeowner's remedy for violations of the act is to seek damages from the foreclosing creditor or servicer or any other remedy allowed under state or federal law, but a bona fide sale purchaser of the property is entitled to rely on the conclusive effect of the foreclosure sale.

The state attorney general may enjoin pattern and practice violations and seek civil money penalties in an amount determined by each state.

Does the act provide for assignee liability?

One of the most controversial aspects of the act, from the industry's perspective, is the right of a borrower to assert defenses to foreclosure against a subsequent creditor. Under federal law, a borrower may assert a defense to foreclosure against a holder of a non-Qualified Mortgage (non-QM) loan based on alleged ability-to-repay violations by the originator. Under the Home Ownership and Equity Protection Act (HOEPA), a borrower may assert a defense to foreclosure against a subsequent holder of a "high-cost" mortgage loan based on alleged violations by the originator of HOEPA or any other state laws; states have their own mini-HOEPA laws with various degrees of assignee liability.

These laws are designed to displace the "holder in due course" doctrine that arises under UCC sections 3-302 and 3305. Basically, if a subsequent creditor qualifies as a holder in due course, article 3 limits the defenses to payment that a borrower may assert based on the origination of the loan by another. The idea is that an "innocent" purchaser who did not know of the origination issues should not be prevented from enforcing a borrower's debt, except for such matters as 1) duress, the lack of legal capacity of the borrower to sign a contract, or the illegality of the transaction, which under other law nullifies the borrower's obligations; or 2) fraud that induced the borrower to sign the loan documents with neither knowledge nor reasonable opportunity to learn of their character or essential terms.

Under section 705 of the Uniform Home Foreclosure Procedures Act, a subsequent creditor that qualifies as a holder in due course is subject to certain claims and defenses that the borrower could assert against the originating creditor based on specific allegations of fraud (not limited as defined earlier), material misrepresentation or a breach of promise that substantially deprives the borrower of the benefit of the expected bargain--claims that a subsequent creditor is unlikely to discover from a loan file review.

The borrower can bring a declaratory judgment action in advance to obtain a judicial determination of the validity of the defense. The borrower's right to raise a defense survives until the earlier of six years after loan closing and the applicable state statute of limitation. Relief is limited to reducing the amount of the outstanding debt by the amount of the resulting economic loss, capped at the amount owed on the debt. A court may determine that the relief results in the cure of the default and the reinstatement of the debt.

The study committee continuously rejected industry arguments that assignee liability based on common law claims of wrongdoing would impact the willingness of lenders to lend or purchasers to purchase, as has been the case under HOEPA. It will impact their willingness to support the Uniform Home Foreclosure Procedures Act.

So where does that leave us?

The Uniform Home Foreclosure Procedures Act is not self-executing. Individual states have to adopt the act in whole as a uniform law or in part as a model law or not at all. While there are some helpful provisions in the act, the likely result would be to push and shove foreclosure timelines way back.

Laurence E. Platt is a partner in K&L Gates LLP's Washington, D.C., office. He can be reached at
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Comment:Push them back, shove them back, way back.(DEFAULT SERVICING)
Author:Platt, Laurence E.
Publication:Mortgage Banking
Date:Oct 1, 2015
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