November 9, 2015
by David E. Johnson
Lerner, Sampson & Rothfuss
USFN Member (Kentucky, Ohio)
During its 2015 regular session, the Kentucky General Assembly introduced House Bill 470 to add nonjudicial foreclosure as an option in Kentucky. Although the bill was subsequently withdrawn, it is expected to be reintroduced in 2016 and represents a marked departure from this state’s historical approach to mortgage enforcement. Kentucky long ago abolished the practice of “strict foreclosure” and requires a judicial process to foreclose a mortgage lien while protecting the homeowner’s equitable right of redemption.
The proposed new regime would add a nonjudicial foreclosure option by recrafting new mortgage originations as deeds of trust with a power of sale. This would not affect already-existing mortgages, and it would not eliminate current judicial foreclosure procedures. Rather, upon a default under a deed of trust, the beneficiary would have the option to pursue either judicial or nonjudicial recourse against the borrower. If it chooses the nonjudicial option, the borrower can still demand that the judicial process be used instead, and other parties objecting to the nonjudicial process can file suit to enjoin a trustee’s sale under certain conditions. Thus, the two systems are not mutually exclusive and appear likely to overlap. Interestingly, unlike existing judicial foreclosure statutes, the proposed law would provide for no right of redemption when a property is sold nonjudicially by a trustee.
This bill enjoys significant support from the Kentucky Bankers Association, whose members seek to reduce the expenses of foreclosure and to expedite the lien enforcement process. The streamlined notice procedures outlined in the new bill would enable a beneficiary to get to a sale date faster, while preserving the parties’ rights to resort to the courts, if necessary, to protect their interests. Certain other aspects of the process, such as distribution of surplus proceeds, appear to be reserved specifically for the courts, although there are some unanswered questions in the draft bill about exactly how this would work. In other words, there is some degree of hybridization contemplated between the new and old systems. The ability to pursue loss mitigation would remain, but the shorter timelines can be expected to put more onus on the borrower to pursue a resolution sooner before the abbreviated nonjudicial process can run its course.
For firms practicing foreclosure law in Kentucky, the proposed legislation can be expected to require substantial changes in existing procedures, forms, policies, and training of both attorneys and support staff. The notice requirements and procedural steps to complete a nonjudicial foreclosure will be very exacting and create ample pitfalls for the unwary. Also, the nonjudicial method will require a mechanism to coordinate with the judicial side of a practice when a party to an otherwise nonjudicial case invokes the jurisdiction of the courts. After enactment of the final version of the bill, firms should have a window of opportunity to make the necessary adjustments before seeing the first defaults under the newly-minted deeds of trust.
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