August 1, 2013
by Eric D. Cook
Wilford, Geske & Cook, P.A.
USFN Member (Minnesota)
Minnesota’s 2013 legislative session ended on May 20 with the passage of a new foreclosure bill that imposes mandatory loss mitigation obligations on servicers, prohibits dual tracking, and exposes the industry to significant litigation risk for failing to fully exhaust all available options.
The legislation was designed to create a cause of action under state law, allow a mortgagor to enjoin or set aside a foreclosure sale for violations of the new statute, and a prevailing borrower is entitled to recover attorney fees and costs. Minn. Stat. § 580.043 will likely delay some foreclosures, but the increased risk of lawsuits will stand out as the most significant change to Minnesota’s nonjudicial foreclosure process. A last-minute revision to the bill applied it to judicial foreclosures as well as nonjudicial proceedings.
Housing advocates will now gain a strong tool to penalize servicers for a failure to comply with the CFPB final mortgage servicing rules in Regulation X. The new statute has some differences from the CFPB regulations that will make compliance more challenging and uncertain in Minnesota. Legal Aid and other housing advocates pushed for the legislation after a version that included mandatory mediation failed earlier in the session. The loss mitigation requirements are effective August 1, 2013, and the dual-tracking prohibitions will be effective on October 1, 2013.
The law requires a servicer to notify a mortgagor in writing of available loss mitigation options, facilitate the submission and review of loss mitigation applications, offer loss mitigation options if the mortgagor is eligible, and comply with any appeal period applicable to the loss mitigation option. Minnesota courts will likely need to resolve the ambiguities created in § 580.043 and certain to arise in practice, including the extent to which a servicer must assist a borrower in completing a partial application. The new statute may prove challenging for the unwary servicer. The best practice for servicers may be to halt a foreclosure proceeding once a borrower speaks up to inquire about loss mitigation, even if the borrower fails to cooperate thereafter, or fails to provide a complete application. In limited instances, it might be appropriate for a servicer to postpone a scheduled foreclosure sale while exhausting loss mitigation alternatives.
The law also bans dual tracking, which means a servicer must not refer a matter to a foreclosure attorney, or must halt a commenced foreclosure, while negotiating a loan modification. Small servicers (5,000 or fewer mortgage loans) are exempt from most requirements.
On the positive side, a deadline is imposed for a mortgagor to commence litigation for violating the statute. A failure to record a lis pendens before the end of redemption creates a conclusive presumption that the servicer complied with loss mitigation obligations. However, certainty about litigation risks won’t be known until Minnesota’s six-month redemption period expires without the legal challenge.
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Summer USFN Report.