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Illinois: Major Changes to Chicago’s Protecting Tenants in Foreclosed Rental Property Ordinance

Posted By USFN, Monday, June 8, 2015
Updated: Friday, September 25, 2015

June 8, 2015

 

by Lee Perres and Jill Rein
Pierce & Associates, P.C. – USFN Member (Illinois)

On April 15, 2015, the City Counsel of the City of Chicago passed amendments to Chicago’s Protecting Tenants in Foreclosed Rental Property Ordinance, also known as the “Keep Chicago Renting” Ordinance (the Ordinance). The published amendments are slightly different from the original proposed changes that were made available by the City. The amendments were published on May 6, 2015 and go into effect 90 days after publication. Accordingly, the changes to the Ordinance are effective on August 4, 2015.

The amendments, among other changes, amend various provisions of the original Ordinance, expand upon the definition of “qualified tenants,” as well as define “unlawful conversion” and “unlawful hazardous unit.” The amendments add a section clarifying when qualified tenants are to be provided with required notices under the Ordinance. The amendments also include new provisions to Section 5-14-050, which require relocation assistance to be paid to tenants in unlawful hazardous units or in instances where there has been an unlawful conversion. An analysis of the published amendments is below.

Overview of Changes

The definition of a “qualified tenant” has been expanded. See Section 5-14-020. The new amendment states that a qualified tenant can include a tenant who is a “child, spouse, or parent of the mortgagor” as long as the tenant did not reside in the same “dwelling unit with the mortgagor.” This change makes the Ordinance similar to current Illinois law. Previously, the distinction had not been made between a mortgagor who resides in the same dwelling unit with the mortgagor, and a mortgagor who resided in the same multi-unit building as the mortgagor. As such, where a foreclosure of a multi-unit building has occurred, and a tenant is the “child, spouse, or parent of the mortgagor,” the tenant could possibly be considered a “qualified tenant” if the other requirements of Section 5-14-020 are met.

The terms “unlawful conversion” and “unlawful hazardous unit” are defined. The new amendment states in Section 5-14-020 that “unlawful conversion means any dwelling unit that is an illegal or unlawful conversion, as that term is defined in Section 17-17-0240.5.” Section 17-17-0240.5 defines conversion, illegal or unlawful (units) as “[a]ny change to a building that results in the creation of one or more dwelling units that are illegal under the Zoning Ordinance either because they exceed the number of dwelling units permitted in the zoning district where the building is located, do not comply with the bulk and density standards of the zoning district where the building is located, or were created without a required special use.” See Section 17-17-0240.5.


The new amendment defines “unlawful hazardous unit” as “a dwelling unit that is hazardous based on life safety or sanitation conditions, as prescribed in rules promulgated by the commissioner.”

A provision has been added to the notice to tenants required under Section 5-14-040. The notice to tenants must contain the following statement: “You may go to the City of Chicago Department of Business Affairs and Consumer Protection’s website for additional information regarding your rights and obligations under the Ordinance or phone the City of Chicago’s 311 Service Center to file a complaint.” See Section 5-14-040(a)(1).

Further, these changes require that the notice to tenants, mandated under Section 5-14-040, must now contain the date that the notice was mailed. See Section 5-14-040(a)(1).

Also, a provision has been added to the Ordinance requiring the new owner to provide a Tenant Information Disclosure Form (Form) with the notice required under Section 5-14-040(a). See Section 5-14-040(b). As of the preparation of this article, the Form is not available from the City. The Ordinance provides that a tenant shall complete and return the Form to the person identified in the Form to receive it. It does not, however, require the tenant to comply and does not relieve the property owner of the requirement to extend the lease, offer a replacement unit, or pay the relocation assistance fee.

Further added are provisions to Section 5-14-050, stating what a new owner of a tenant-occupied property must do in order to advise a tenant of his or her rights under the Ordinance. The Ordinance mandates that after a foreclosure of an unlawful hazardous unit or unlawful conversion, a relocation fee is paid to a qualified tenant, or a replacement unit is offered and accepted by the tenant.

After a foreclosure, if it is discovered that a rental unit is a “unlawful hazardous unit or unlawful conversion,” and the tenant is a “qualified tenant” as used in the statute, the new owner “shall pay a one-time relocation assistance fee of $10,600 to the qualified tenant unless the owner offers, and the tenant accepts the owner’s offer” of a new rental agreement of a replacement unit with a rental rate that does not exceed 102 percent of the current rental rate. See Section 5-14-050.

Detailed Analysis of New Sections

Additional Language to Section 5-14-040
— The notice to tenants required under Section 5-14-040 of the Ordinance must contain the following statement: “You may go to the City of Chicago Department of Business Affairs and Consumer Protection’s website for additional information regarding your rights and obligations under the Ordinance or phone the City of Chicago’s 311 Service Center to file a complaint.” See Section 5-14-040(a)(1). The notice to tenants must now contain the date that the notice was mailed. See Section 5-14-040(a)(1).

The notice to tenants mandated under Section 5-14-040(b) provides that a Tenant Information Disclosure Form (Form) must be provided with the notice required under Section 5-14-040. [Section 5-14-040 requires that within 21 days of becoming the owner of a foreclosed rental property, a specific notice is to be sent to any tenant of a foreclosed rental property, advising the tenants that, under certain circumstances, they may be able to obtain relocation assistance.] Within 21 days of receipt of the Form, the tenant shall complete and return the Form to the Owner. [“Owner” is defined as “any person who alone, or jointly or severally with others is: (1) pursuant to a judicial sale of a foreclosed rental property, the purchaser of the foreclosed rental property after the sale has been confirmed by the court and any special right of redemption has expired; or (2) a mortgagee which has accepted a deed-in-lieu of foreclosure or consent foreclosure on a foreclosed rental property. ‘Owner’ includes the owner and his agent for the purpose of managing, controlling or collecting rents.” See Section 5-14-020 of the Ordinance.]

However, the failure of the tenant to return the Form does not relieve the Owner of either providing a new lease or replacement rental unit, or providing the relocation assistance fee. See Section 5-14-040(b). The City of Chicago advises that the Form is currently being drafted by the Department of Business Affairs and Consumer Protection.

Additional Language to Section 5-14-050
— Under the amendments to the Ordinance, Section 5-14-50(a)(2) has been expanded upon to extend coverage to “unlawful hazardous unit[s]” and units which are “unlawful conversion(s)”. Although not specifically used as examples, unlawful hazardous units and unlawful conversion rental units generally include basement and attic units that do not contain proper emergency exits. In the event a building is foreclosed that contains a unit that is an “unlawful hazardous unit or unlawful conversion”, then the owner: “shall pay a one-time relocation assistance fee of $10,600 to the qualified tenant unless the owner offers, and the tenant accepts the owner’s offer of, a rental agreement at a replacement rental unit with an annual rental rate that does not exceed 102 percent of the qualified tenant’s current annual rental rate; and for any 12 month period thereafter, does not exceed 102 percent of the immediate prior year’s annual rental rate. The replacement rental unit may be located either in the same foreclosed rental property or at another location (emphasis added).”

In Section 5-14-050(a)(2), the commissioner may prescribe by rule conditions under which an owner may offer a qualified tenant residing in an unlawful hazardous unit to extend or renew, at the tenant’s option, the tenant’s current rental agreement — with an annual rental rate that complies with Section 5-14-050(a)(1), if the owner makes all necessary repairs to correct any life safety or unsafe sanitary conditions.

As such, the amendment requires that the owner pay the $10,600 unless the qualified tenant accepts the owner’s offer of a new lease “with an annual rental rate that does not exceed 102 percent” of the qualified tenant’s current annual rental rate. See Section 5-14-050(a)(2). This provision stands out from other provisions within the Ordinance because the owner could offer the extended lease, and if the qualified tenant did not accept the lease, the one-time relocation assistance fee did not have to be paid. However, as Section 5-14-050(a)(2) is currently written, the qualified tenant could reject the offer for a replacement unit and the one-time relocation assistance fee of $10,600 would be required.

Within 21 days “after the date upon which the tenant returns or should have returned” the Form pursuant to Section 5-14-040, the owner shall provide notice to the qualified tenant that the owner is “paying the required relocation fee or offer to extend or renew the qualified tenant’s rental agreement, or provide a rental agreement for a replacement rental unit, whichever is applicable …” See Section 5-14-050(a)(3). If a qualified tenant “fails to accept the owner’s offer to extend or renew the tenant’s rental agreement, or to accept a rental agreement for a replacement unit, whichever is applicable, within 21 days of receipt of the offer [unless more time is provided by the commissioner of business affairs and consumer protection] … the owner shall not be liable to such tenant for the extension or renewal of the tenant’s rental agreement; provided that a qualified tenant’s refusal to accept the owner’s offer for a replacement rental unit or to extend or renew the tenant’s current rental agreement for an unlawful hazardous unit pursuant to [5-14-050(a)(2)] does not affect the tenant’s right to payment of relocation fee.” See Section 5-14-050(a)(3). [The definition of “qualified tenant” has been expanded by the amendments to the Ordinance to include “(1) a tenant in a foreclosed rental property on the date that a person becomes the owner of that property; and (2) has a bona fide rental agreement to occupy the rental unit as the tenant’s principal residence.” See Section 5-14-020. A bona fide lease is considered bona fide only if: “(i) the mortgagor or any child, spouse, or parent of the mortgagor residing in the same dwelling unit with the mortgagor, is not the tenant; the lease was a result of an arms-length transaction; and (iii) the lease requires the receipt of rent that is not substantially less than fair market rent for the property, or the rental unit’s rent is reduced or subsidized due to a government subsidy.] Although the term “replacement unit” is not defined within the Ordinance, it appears that the unit offered as a replacement must be a similar size, in a similar location, and contain similar amenities.

When Section 5-14-050(a)(3) of the Ordinance is read with Section 5-14-050(a)(2) (which provides that the relocation assistance fee of $10,600 to a qualified tenant is not required if the option to extend the tenant’s lease is not accepted), the addition of Section 5-14-050(a)(3) would limit the time frame of when the owner would have to make the necessary one-time payment of the $10,600 relocation fee. As such, under the amendment, if the Form is provided to the tenant, and no response is given within 21 days, the owner must still make an offer for lease renewal or a payment of the one-time relocation fee (within 21 days), and wait 21 days for a response. As such, within approximately 42 days (not accounting for time delays with mailing) of the tenant receiving the Form, the owner will know if a new lease will need to be offered, if a one-time payment must be provided, or if an eviction can occur.

However, there is a provision within Section 5-14-050(a)(3), which states that additional time can be provided to a qualified tenant, as “established by the commissioner of business affairs and consumer protection,” to “accept the owner’s offer to extend or renew the tenant’s rental agreement, or to accept a rental agreement for a replacement rental unit … within 42 days of the offer …” See Section 5-14-050(a)(3).

Editor's Note: The Tenant Information Disclosure Form (“Form”) required by the amendments to Chicago’s Protecting Tenants in Foreclosed Rental Property Ordinance (the “Ordinance”) and corresponding Rules are now available:
http://www.cityofchicago.org/content/dam/city/depts/bacp/Rules/keepchicagorentingrules20150729.pdf.
The Form can also be found on the
City's website. The amendments go into effect on August 4, 2015.

©Copyright 2015 USFN and Pierce & Associates, P.C. All rights reserved.
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TILA and the Filtering of Post-Jesinoski Rescission Notices

Posted By USFN, Monday, May 11, 2015
Updated: Friday, September 25, 2015

May 11, 2015

 

by T. Matthew Mashburn
Aldridge Connors LLP– USFN Member (Georgia)

In my previous USFN e-Update article (Feb. 2015 ed.) regarding the United States Supreme Court’s decision in Jesinoski v. Countrywide Home Loans, Inc., No 13-684, 574 U.S. __ (Jan. 13, 2015), some anticipated problems were identified that could arise from what was written in the Court’s opinion, and more importantly, what was NOT written in that opinion. In this article, possible options are presented that lenders might proactively take to handle an increase in notices of rescission, should the notices materialize as expected.

Background
In the Jesinoski case, the Supreme Court of the United States (SCOTUS) was asked to answer a very straightforward and very narrow question: after the automatic three-day right of rescission expires, if a consumer has the right to rescind a loan because of some error in the disclosures, must the consumer file a lawsuit and have a court declare the rescission effective, or does TILA allow the consumer to rescind the loan by simple written notice to the lender?

In an opinion written by Justice Scalia, SCOTUS unanimously answered: a simple written notice is sufficient because TILA says nothing about a lawsuit being required for rescission. TILA gives the qualifying consumer an absolute right to rescind a qualifying loan within three days of consummation by providing a simple written notice to the lender. Upon rescission, the lender has to return any money the borrower has given the lender and cancel any security interest in the consumer’s property. Should the lender fail to provide proper disclosures at loan closing, the borrower has up to three years to rescind the loan (now accomplished by simple written notice according to Jesinoski).

The Problem
After the three-day initial rescission period expires, the borrower is given the loan proceeds. Yet, TILA applies the exact same rescission procedure as it does before the borrower has received any loan proceeds. [One would think that 15 U.S.C. § 1635’s reference to “(b) Return of money or property following rescission” would be primarily concerned with the repayment of the loan proceeds by the borrower to the lender. It is not.] Thus, the lender still has to return any money that the borrower has given to the lender (borrower’s counsel has argued that this means ALL monthly payments that have been received by the lender prior to the rescission); the lender has to cancel any security interest in the consumer’s property (borrower’s counsel argues that this means the lender now has an unsecured loan, whether the borrower pays the debt or not). Then — and only then — must the borrower repay the loan proceeds. But what about the situation where the borrower is broke? The statute is silent. As long as a lawsuit was required to rescind, this serious defect in the statute was handled by the courts, which uniformly required that the loan principal be repaid in order for the collateral to be released. “… [W]e’ve not found a single case in the 45-year history of this Act where the borrower has gotten any kind of windfall. We’ve looked extremely hard at this.” [Statement of David C. Frederick, Proceedings in Case 13-684 (Official Transcript), p. 8.]

This gatekeeping role traditionally played by the courts was one of the main pillars presented by lender’s counsel at oral argument before the Supreme Court. [Statement of Seth P. Waxman, Official Transcript, p. 27.] Indeed, the absence of any direction from the Supreme Court on this defect in the law is surprising given that Justices Scalia, Alito, Kennedy, Sotomayor, and Ginsburg all asked questions at oral argument predicated on borrowers behaving badly.

Since Jesinoski, the borrower is able to rescind the loan with a simple written notice, and according to the plain language of the statute, the lender is required to cancel the security interest without regard to whether the borrower has returned the loan proceeds (or even can return the loan proceeds).

Unless — and until — this defect in the statute is corrected, every single case is predestined to end up in exactly the same place where SCOTUS decided it would not: in court. Rather than putting the onus on the borrower to take the case to court for clarification as to the parties’ respective rights and obligations, the burden is now squarely placed on the lender — whom, previously, did not have the initial burden.

This change is a desirable result according to the Consumer Finance Protection Bureau (CFPB), in its presentation at oral argument. [The CFPB appeared as amicus curiae on behalf of the consumers. The CFPB has jurisdiction to administer TILA.] “If I wanted to foreclose, for instance, on the property and I needed my security interest to be absolutely rock solid in order to do that, then I might bring a declaratory judgment action, or I might, in the context of the foreclosure, ask the court to declare that the rescission was invalid.” [Statement of Elaine J. Goldenberg, Official Transcript, p. 21.] Thus, the CFPB did not address nonjudicial foreclosures, except to suggest that the lender should seek a declaratory judgment (thus, defeating the entire concept of a nonjudicial foreclosure). The option to seek a declaratory judgment in all nonjudicial foreclosures where the lender does not want to risk suit is an unacceptable answer to lenders, who might choose not to offer products like home equity lines of credit, thus costing consumers a very valuable financing option.

This uncertainty was made even more troublesome by the comment from the CFPB attorney that the lenders would be forced into a position of guessing what to do, and would have to pay damages if the lender “guesses” wrong on the issue of whether there was a rescission and proceeds to collect on the loan anyway. “If the lender guesses wrong, then it may be that it will subsequently be held liable for damages for guessing incorrectly and for failing to follow the unwinding procedures under Section 1635(b) when it should have done so.” [Statement of Elaine J. Goldenberg, Official Transcript, p. 19.] However, lenders do not wish to be in a position of guessing. Lenders cannot properly price loans on the basis of guesswork. Again, rather than operate on the basis of guesswork, lenders might opt to not offer the product at all (and may look to trigger any “pay on demand” or “credit freeze” feature in the currently existing loans so that the problem does not become worse).

The question that the Supreme Court did not answer was, who will fill the gatekeeping role that courts (and the cost of litigation) had been playing in weeding out non-meritorious claims? Caught in all of this uncertainty, lenders have been struggling to bring some order to the post-Jesinoski environment. Lenders are searching for ideas and suggestions for dealing with, responding to, and otherwise processing a wave of rescission notices inspired by Jesinoski (the vast majority of which will be determined to be without merit after great cost, expense, and delay). [The first three reported cases, following Jesinoski, all involve plainly non-meritorious claims. In re Residential Capital, LLC, Case No. 12-12020 (Bankr. S.D. N.Y. Apr. 9, 2015); Taylor v. Wells Fargo Bank, N.A., Civil Action No. 14-617 (D.C. D.C. Mar. 25, 2015); Lagrant v. U.S. Bank National Association, Civil Action No. 3:14-cv-809-HEH (D.C. Va. Mar. 16, 2015).]

The Jesinoski decision did not acknowledge the critical gatekeeping function of the phrase “[t]he procedures prescribed by this subsection shall apply except when otherwise ordered by a court.” 15 U.S.C. § 1635(b) (emphasis supplied). Subsection (b) was added in the 1980 amendments for the express purpose of preventing the sort of abuse that will be unleashed by Jesinoski.

A straight reading of the plain terms of the statute reveals that “unwinding” the transaction after the loan proceeds have been distributed, according to the same system that is used before the loan proceeds have been distributed, yields a nonsensical result.


Scalia, J.: …[Y]ou are urging that the statute creates a system in which a creditor who has a secured interest, simply because somebody comes up almost 3 years later and says, “you didn’t give me two copies of this particular document, I got only one copy,” and even if that’s not true, immediately the secured interest is converted into an unsecured interest. That is a huge difference. And I find it difficult to believe that’s what Congress intended. Mr. Frederick: Well, the language of the statute actually makes that very clear, and so do the regulations. [Colloquy of Justice Scalia and Mr. Frederick, Official Transcript, pp. 5-6.]

Prior to Jesinoski, most courts either modified the statutory procedure, refused to follow the statutory procedure, or “expressly rejected the regulatory scheme and, substituting their own notions of equity, turned the statutory process around.” [Keest and Sarason, Truth in Lending, 2d Edition, National Consumer Law Center, § 6.9.1.4.1, p. 247.] Clearly, lenders cannot exercise equitable powers in the way of a court to modify, reject, or reverse the statutory scheme of “unwinding.” However, by taking the resolution of the issue of rescission out of the courts and placing it in the lender’s mailroom, the Supreme Court has created a vacuum where the guiding hand of the courts previously existed.

Possible Lender Responses

Should the lender do something or nothing in the face of this new uncertainty? There is some support for the argument that the proper response of a lender, to a notice under Jesinoski, is simply to do nothing. At oral argument, it was stated that the CFPB’s position was that “an invalid notice of rescission that’s not timely has no effect in the world.” [Note that this statement has two requirements. An “invalid” notice that is also “not timely.”] “… it puts no requirement on the lender to do anything and you can see that from the language of Section 1635(b).” [Statement of Ms. Goldenberg, Official Transcript, p. 18.]

Furthermore, during the Circuit Court of Appeals split in the run-up to Jesinoski, the Third Circuit Court of Appeals (which was on the side of the split that was ultimately adopted by SCOTUS) wrote, in deciding Sherzer v. Homestar Mortgage Services, 707 F.3d 255 (3rd Cir. 2013), that “[b]y sending a notice of rescission, the obligor becomes obliged to tender any property he has received from the lender ‘[u]pon the performance of the creditor's obligations.’ 15 U.S.C. § 1635(b). Thus, a notice of rescission is not effective if the obligor lacks either the intention or the ability to perform, i.e., repay the loan” (emphasis supplied). [Statement of Ms. Goldenberg, Official Transcript, p. 18.] Had the Supreme Court included either one of these concepts in its opinion in Jesinoski, the incentive for borrowers to send bogus notices of rescission might have been tempered.

While a blanket policy of doing nothing has operational efficiency and has some arguable support from the CFPB and the courts, it also runs the risk of inflaming a jury or a judge in the rare case where the notice was actually legitimate and timely. (We can easily visualize the operations manager of a lender on the witness stand in front of a jury in a wrongful foreclosure suit: Question by Borrower’s Counsel: Upon receipt of the borrower’s notice declaring that you had failed to comply with TILA, and thus were obligated to unwind the transaction under this critically important consumer protection statute, what did you do? Response from Lender’s Representative: It is our policy to ignore notices of rescission.

Accordingly, while doing nothing might arguably be permitted, doing something is usually the preferred course of action, if for no other reason than demonstrating that the lender takes this important piece of consumer protection legislation seriously.

Assuming the lender does something, what should it do? The notices of rescission prompted by Jesinoski will fall into one of four possible categories: (1) untimely letters that have no merit; (2) untimely letters that would have had merit had they been sent at the proper time; (3) timely letters that have no merit; and (4) timely letters with merit. The great failing of Jesinoski is that there is no downside to the borrower sending a notice of rescission in bad faith. Rather than the “price of admission” to assert a rescission as being the cost to hire a lawyer (and the time and trouble to litigate the case), Jesinoski reduces the “price of admission” to the cost of a postage stamp. Indeed, there might be great benefit to the unscrupulous borrower in sending a meritless notice of rescission because the lender will be delayed while it processes the letter. [Sotomayor, Justice: “… the bank, as soon as it receives the notice of rescission – one of the benefits for people who don’t want to pay a mortgage is that it suspends the mortgage payments; correct? Mr. Frederick: That’s correct.” Official Transcript, p. 10.]


The Big Sort — Since the Supreme Court’s opinion acknowledged that the three-year statute of limitations, which was established sixteen years ago in Beach v. Ocwen Federal Bank, 523 U.S. 410, 411-13, 118 S. Ct. 1408, 140 L.Ed.2d 566 (1998), was still in effect, the initial sorting will be between timely and untimely rescission letters. This can be referred to as the “Big Sort” because (1) it will take the least amount of time to analyze, and (2) if the arguments that have been put forward in actual existing cases since the time of the Jesinoski opinion are any indication, this will be the largest number of letters. This “Big Sort” might be possible to accomplish with “one touch” (the person opening the letter might be trained to spot the statute of limitations and determine whether the closing pre-dates the letter by more than three years). In such a case, the letters can be filed under “without merit” or generate a standard rejection letter. As referenced above, a standard rejection would probably be preferred over no response at all. A standard rejection response would also place the onus back on the borrower to seek redress in the courts. Further, filing the notice and the rejection in the loan file will help with due diligence in the sale of the notes or in the event of foreclosure.

The Little Sort — With all untimely letters thus eliminated from the notice pool, the lender will now turn to timely letters. This pool will contain (1) timely letters without merit, and (2) timely letters with merit. Most letters will be without merit because currently there is no penalty to the consumer for asserting a meritless claim, and a potential reward for doing so. In order to determine whether the letter has merit or is meritless, the lender should create categories for claims, with some categories warranting more attention than others.

The current range of meritless claims is the “one copy” allegation. In this claim, the consumer denies receiving two copies of the notice of rescission at the closing (even despite having signed an acknowledgment at closing that he or she did receive two copies). Unfortunately, this claim was given support by counsel for the consumers at the oral argument in Jesinoski. “There is confusion here on this particular form because the – what this says – what is [sic] says is, ‘The undersigned each acknowledge receipt of two copies.’ It doesn’t say, ‘The undersigned each acknowledge each receiving two copies.’” [Statement of Mr. Frederick, Official Transcript, p. 51. Of course, lenders might consider changing their right of rescission forms to head off this argument.]

Timely notices, without merit: These will receive a standard rejection as well. This rejection should be drafted by counsel with experience in consumer lending and, specifically, with experience in dealing with right of rescission issues. Claims that are not part of nationwide or internet trends can be forwarded to counsel for further evaluation and, ultimately, rejection.

Responding to notices of rescission that have merit: Once the letters have been sorted and a timely notice with potential merit has been identified, the unwinding process of 15 U.S.C. § 1635(b) is finally triggered. Here, the CFPB clearly anticipates that there will be an exchange between the borrower and the lender. “In that circumstance, I would certainly start by going to the borrower and trying to work it out privately, which is, I think, what Congress primarily intended when it set up the scheme.” [Statement of Ms. Goldenberg, Official Transcript, p. 21.] If this exchange is successful in resolving the issue, the matter is concluded. If the exchange is not successful in bringing about a resolution, then the parties will be back in court.

Conclusion

Until the Courts, the Congress, or the CFPB clarify the confusion created by the Jesinoski decision, lenders should create a “triage” for identifying and processing notices of rescission, and developing policies for (1) either rejecting or ignoring untimely notices; (2) identifying and rejecting non-meritorious letters; and (3) identifying meritorious letters, which will then be responded to in a timely and appropriate fashion.

If the lender and the consumer cannot resolve the issue, then litigation will inevitably ensue. For the time being, the response to timely, seemingly meritorious notices will necessarily include a request that a court modify the terms of the statute and require repayment of the loan as a condition for rescission. Ironically, this is the exact position that nearly all cases were in before the Supreme Court issued its opinion in Jesinoski.

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Minnesota Legislature Clarifies Foreclosure Publication Statutes

Posted By USFN, Monday, May 11, 2015
Updated: Friday, September 25, 2015

May 11, 2015

 

by Brian H. Liebo
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

After identifying a growing area of litigation challenging foreclosures in Minnesota, this author’s firm reached out to the Minnesota Bar Association and the Minnesota Bankers Association to advocate for a necessary change to the legal publications statutes. These efforts were fruitful, and the Minnesota legislature passed a clarifying law this session under bills HF953 and SF1147.

Governed by a provision under Chapter 580 of Minnesota’s Foreclosure by Advertisement statutes, notices of sheriff’s sales must be published for six weeks prior to sheriff’s sales in qualified newspapers. For over a century, it has been the accepted custom and practice in Minnesota to publish those notices in any qualified newspapers located in the same county as the mortgaged property. Using a county-wide standard, the newspaper selection could be made based on the best quality and pricing among a larger pool of newspapers. Consistent with this practice, the Minnesota Secretary of State maintains a list of qualified legal publishers in Minnesota, which is arranged by county as the first category on the list.

Borrowers seeking to challenge foreclosures have been arguing that the newspaper selection standard should be closer to a city-based standard — rather than a county-based one — even if that would reduce competition by narrowing the selection of available legal publishers and, therefore, increase pricing that mortgage servicers and reinstating borrowers would have to pay. Under the narrower standard, if a small city only has one qualified newspaper, the publisher could charge whatever price it wanted for publishing legal notices because it would have a captive market. There is no Minnesota statute capping what newspapers can charge for such publications.

In the past few years, borrowers’ attorneys have been bringing court actions challenging foreclosures to promote the use of a narrower standard for selecting newspapers. They have been taking advantage of vague and undefined terms in related publication statutes to tie up properties in litigation. For example, one applicable statute, Minnesota Statutes Section 331A.03, requires that public notices be published in newspapers likely to give notice in the “affected area” or “to whom it is directed.” Unfortunately, neither of these terms is defined in any Minnesota statute or case law. The “affected area” for a foreclosure notice could be just the mortgaged parcel, its neighborhood, the city in which the mortgaged parcel is located, or its county. Also the “persons to whom foreclosure notices are directed” could be construed as just the borrowers, potential bidders, sheriffs conducting the sales, etc.

After persuasive prompting, bills were introduced in the Minnesota legislature to address the growing problem with the publication statutes. This new law, to be codified as Minnesota Statutes Section 580.033, now explicitly provides that a county-based standard for selecting newspapers for publishing foreclosure notices is proper. The new statute clearly provides that “publication of the notice of sale shall be sufficient if it occurs in a qualified newspaper having its known office of issue located in the county where the mortgaged premises, or some part thereof, are located.” This new statute also allows a foreclosing party to publish in a qualified newspaper having its known office of issue located in an adjoining county. However, the foreclosing party then has a higher standard to meet because the newspaper must also establish that a “substantial portion of the newspaper’s circulation is in the county where the mortgage premises, or some part thereof, are located.”

This clarifying new statute allows foreclosing parties to avoid having to contend with the vague standards of Section 331A.03 and provides greater certainty and predictability in selecting appropriate newspapers to publish foreclosure notices. It should also help in avoiding the litigation that resulted from the past applicability of an unclear statutory section to mortgage foreclosure.

The Minnesota legislature also added a curative statute under Minnesota Statutes Section 582.25 related to foreclosure notice publications. These statutes cause various errors to automatically “cure” with the passing of time, so the issues can no longer be raised to overturn a completed foreclosure. In this case, any errors made by a foreclosing party in complying with the new publication statute will automatically “cure” after one year has passed from the date of the expiration of the redemption period.

The new laws will be effective for all cases where the Notice of Pendency for Foreclosure is recorded on or after July 1, 2015. These notices of pendency are recorded prior to the time of the commencement of the foreclosure proceedings, which is the date of first publication.

The new publications statute will benefit parties seeking to foreclose mortgages by advertisement, as well as title companies insuring the transactions, since it creates more certainty in the laws governing these proceedings. By assuring a broader standard for selecting qualified newspapers, the new publication statute also helps to ensure that newspapers publishing legal notices will operate in a competitive environment, so that foreclosing parties can select qualified newspapers not only by location but also by factoring in pricing and quality of product among a larger pool of qualified newspapers.

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Minnesota Legislature Adds to Mortgage Reinstatement Requirements

Posted By USFN, Monday, May 11, 2015
Updated: Friday, September 25, 2015

May 11, 2015

 

by Brian H. Liebo
Usset, Weingarden & Liebo, PLLP – USFN Member (Minnesota)

Working with the Minnesota legislature through the Minnesota Bankers Association, this author’s firm was able to significantly alter a piece of legislation that would have otherwise created large difficulties and delays for mortgage servicers seeking to foreclose mortgages in Minnesota.

In a recent case, the federal district court in Minnesota held that a mortgage servicer must provide a reinstatement quote to a requesting borrower within twenty-four hours of the request under Minnesota Statutes Section 580.30. That statute was silent on the deadline for providing reinstatement figures to requesting borrowers. In this legislative session, the Minnesota legislature introduced a bill to amend the statute (in response to the federal case) to provide a longer response time than twenty-four hours.

However, the original bill introduced in the legislature still only gave mortgage servicers a total of three days to provide reinstatement figures following a borrower’s request. Further, this original bill did not address which alternatives would be available if a mortgage servicer needed more than three days’ time to respond to a reinstatement inquiry, including the scenario of a borrower faxing a request late on a Friday night. As a result, the original bill would have effectively required that the mortgage servicer completely stop pending foreclosures altogether in situations where they were unable to provide borrowers with reinstatement quotes within three days of the request.

Additionally, the original bill did not contain any language allowing mortgage servicers to postpone foreclosures in order to provide reinstatement figures if they were unable to meet the three-day deadline. Moreover, the original bill did not restrict the amount of times that a borrower could submit reinstatement quote requests. Thus, borrowers seeking to disrupt and delay foreclosure proceedings could repeatedly submit reinstatement requests under the original bill.

Upon seeing the original bill language and recognizing its troublesome implications, Usset, Weingarden & Liebo, PLLP (UW&L) reached out to the parties involved in negotiating the terms of the original bill. Both the Minnesota Bankers Association and Legal Aid were receptive to UW&L’s concerns and accepted verbatim the “safe harbor” language that the law firm submitted. That language provides the following: “If the amount necessary to reinstate the mortgage was not mailed to the mortgagor within three days of receipt of the request, no liability shall accrue to the party foreclosing the mortgage or the party’s attorney and the foreclosure shall not be invalidated if the mortgage reinstatement amount was mailed by first class mail to the mortgagor at least three days prior to the date of the completed sheriff’s sale.” This language was carried into the final bill version passed into law.

Based on this new language, mortgage servicers will have far more breathing room in complying with borrower requests for reinstatement figures, and will also have the option to postpone sheriff’s sales, where necessary, to give this information, without having the entire foreclosure invalidated for doing so. Borrowers will also be assured of getting reinstatement figures prior to the sheriff’s sale. Mortgage servicers can now provide reinstatement quotes within three days of a request, or ensure that they convey a reinstatement quote at least three days before the date of the final sheriff’s sale as an alternative (and can postpone the original sale to accomplish this). The reinstatement quotes must be effective for seven days or until the foreclosure sale, whichever occurs first.

In a related development, the legislature also adopted into these bills additional language drafted by this author’s firm for another statute. This language will be an additional curative statute provision under Minnesota Statutes Section 582.25. These provisions cause various errors to automatically “cure” with the passing of time, so that the issues can no longer be raised to overturn a completed foreclosure. In this particular situation, any errors made by a foreclosing party in connection with publishing or mailing notices for postponements of sheriff’s sales will automatically “cure” after one year has passed from the date of the expiration of the redemption period.

Finally, these bills contain a provision simply clarifying that if a borrower postpones a sheriff’s sale under Minnesota Statutes Section 580.07, subdivision 2 (for five or eleven months, whichever is applicable, in exchange for a five-week redemption period), and the related foreclosure is stopped and then restarted, the new redemption period is not permanently five weeks for any future foreclosures, unless the bankruptcy stay provision of the statute applies.

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Colorado State Legislature Passes Bill for E-Sales

Posted By USFN, Monday, May 11, 2015
Updated: Friday, September 25, 2015

May 11, 2015

 

by Larry Castle
The Castle Law Group – USFN Member (Colorad)

On April 21, 2015, the Colorado State Legislature passed House Bill 15-1142. The bill offers the opportunity to have electronic public trustee nonjudicial foreclosure sales through either the internet or other electronic medium. The law becomes effective on September 1, 2015. There are very few particulars contained within the new statute.

What we do know is that there is an additional fee of no more than $60, authorized by the statute to be added to the total public trustee fees for the use of the electronic sale process. This further fee must be paid by the foreclosing party prior to the sale.

We also know that the only requirements outlined in the bill are that the combined notice of sale and rights to cure and redeem sent by the public trustee to all interested parties, must identify: the electronic address for the sale; the location of computer workstations that will be available to the public; and how the public is to obtain instructions on accessing the sale and submitting bids. Furthermore, the combined notice must provide a statement that the bidding rules will be posted on the internet, or other electronic medium used to conduct the sale, at least two weeks prior to the sale date.

For electronic sales only, the statute is amended to allow the holder of the evidence of debt, through its attorney, to submit both a minimum and maximum bid. Neither the holder nor its attorney needs to physically attend the sale in order to competitively bid. By statute, the electronic bid will be increased in increments incorporated into the electronic program used by the public trustee. The foreclosing party will not be able to set the incremental increases of the bid. It is important to note that Colorado statute also requires that the foreclosing party bid based upon the fair market value of the property, less reasonable costs of sale. Additionally, there will continue to be a post-sale right of redemption for junior lienholders. The redemption amount is the bid amount, plus allowable expenses from the sale date to the redemption date.

It is important to note that the new statute specifically states that the county, the officer, as well as employees of the county or officer acting in their official capacity in preparing, conducting, and executing an electronic sale are not liable for the failure of any device that would prevent a person from participating in the electronic sale process.

The legislature did not provide any guidance regarding the rules for the electronic sales, leaving that to the public trustees. This may create the possibility for each county public trustee (who may choose to have electronic sales) to design different rules and methodologies, as well as use different technologies.

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Utah: 2015 Legislative Action

Posted By USFN, Monday, May 11, 2015
Updated: Friday, September 25, 2015

May 11, 2015

 

by Scott Lundberg
Lundberg & Associates – USFN Member (Utah)

2015 was a fairly quiet legislative year in Utah, as it relates to legislation with an impact on mortgage servicers.

However, Senate Bill 0120 (Regulation of Reverse Mortgages) will be of special interest to default servicers, while on the other hand, House Bill 0227 (Real Estate Amendments) addresses only origination. Both bills are effective May 12, 2015.

Senate Bill 0120 (Regulation of Reverse Mortgages) — enacts the Utah Reverse Mortgage Act, Utah Code sections 57-28-101, et seq. It sets forth requirements for reverse mortgages in Utah and addresses the treatment of reverse mortgage loan proceeds, priority, foreclosure, and lender default. It contains a safe harbor for lenders making reverse mortgages insured by the U.S. Department of Housing and Urban Development, if they comply with the requirements found in 12 U.S.C. Section 1715z-20 and 24 C.F.R. Part 206.

With respect to foreclosure, the bill requires that the servicer give a borrower written notice of the default, and provide at least 30 days after the day on which the borrower receives the notice to cure the borrower’s default. This requirement will necessitate a change in the breach or demand letters for servicers that currently allow 30 days from the day that the letter or notice is sent.

House Bill 0227 (Real Estate Amendments) — amends a number of provisions relating to real estate. The principal areas of interest (to mortgage servicers) in the bill are: (a) modification of licensing requirements; (b) affirmative disclosure requirements associated with the lending process; and (c) prohibited conduct for those engaged in the business of residential mortgage loans.

Another bill, House Bill 0221, which would have changed the procedure for foreclosure of owners association assessment liens from nonjudicial to judicial, was introduced in the 2015 session but did not leave committee.

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State-by-State: Washington: Foreclosure Mediation

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Susana Chambers (Davila)
RCO Legal, P.S. – USFN Member (Arkansas, Oregon, Washington)

This article appeared in the USFN e-Update (April 2015 ed.) and is reprinted here for those readers who missed it.

Washington’s Foreclosure Fairness Act (FFA) was enacted in 2011 as an amendment to the Washington Deed of Trust Act, RCW § 61.24, the statutory guidance for nonjudicial foreclosure in Washington State. The FFA established a foreclosure mediation program (Mediation Program), which is administered by Washington’s Department of Commerce (Commerce). Commerce reports annually to the legislature on the performance and results of the Mediation Program.

Looking Back – Best Practices Established: Over the last three years, foreclosure mediation “best practices” have emerged as a result of more than 6,300 mediation referrals in the state. Beneficiaries with organized mediation groups who regularly employ these best practices generally experience success in the Mediation Program.

By now, most beneficiaries have successfully adapted to the Washington foreclosure mediation program, and the beneficiaries’ attorneys often find that the bank mediation representative on the phone is familiar with the mediation process in Washington. However, avoidable delays still occur, resulting in additional mediation sessions and unnecessarily elongating foreclosure timelines. To avoid these delays and the inevitable expense of additional attorneys’ fees and mediation costs associated with them, beneficiaries should consider the following best practice suggestions:

 

  • Assign the same underwriter for the loss mitigation review who will also be available to attend the mediation session. This continuity provides stability to the mediation process and is consistent with federal rules regarding a specific point of contact.
  • Beneficiary representatives participating in mediation should be familiar with the loan investor’s guidelines and be prepared to explain, in detail, the reason for a denial for modification, or other loss mitigation option. It was the legislature’s intent that the foreclosure mediation provide transparency for the borrower; this includes clearly explaining any denial for loss mitigation options and providing the applicable investor guidelines to the mediation parties.
  • Beneficiaries should promptly review borrower applications for loss mitigation upon receipt and stay in close contact with their attorney’s office about incomplete documentation, so that the financial package does not become stale-dated. Consistent with the Consumer Financial Protection Bureau’s Regulation X, beneficiaries should already be notifying the borrower (within five business days of receipt of their financial package) of any missing information needed to complete the financial package. (12 CFR § 1024.41.)
  • During the mediation session, beneficiaries should request a private caucus with their attorney if they are unsure of how to respond to a legal question during the mediation session.


Beneficiaries who utilize these suggested practices generally experience more success in the Mediation Program, such as: fewer mediation sessions, shortened foreclosure timelines, less risk of a “bad faith” finding from the mediator, and reduced likelihood of litigation.

Looking Back – Commerce’s Annual Report: In October 2014, Commerce published its third annual report to the legislature on the status and progress of the Mediation Program. Commerce reported that from July 2011 through June 2014, it had received 6,319 referrals to mediation. Of the mediation referrals, Commerce deemed 88 percent of them eligible for mediation, and they were then assigned to one of the 126 approved foreclosure mediators in the state.

Now that the Mediation Program has been in existence in Washington for nearly four years, the results of the program have become clear; of the 4,059 mediated cases reported by Commerce:

 

 

  • 883 resulted in agreements where the borrowers stayed in their homes through modification of the loan, repayment of the arrears, or reinstatement of the loan;
  • 248 resulted in agreements where the borrowers did not keep their homes — such as a pre-foreclosure sale, deed-in-lieu of foreclosure, or cash for keys;
  • 1,359 mediations resulted in no agreement between the parties; and
  • 1,569 did not occur. The majority of these mediation cases were closed because an agreement was reached between the parties before the mediation occurred — primarily, the borrower was offered, and accepted, a loan modification.

Borrowers were found to have mediated “not in good faith” more often than a beneficiary. Commerce reported that there were 362 cases where the borrower did not mediate in good faith, and 199 cases where the beneficiary did not mediate in good faith.

The failure of a beneficiary to mediate in good faith constitutes a defense to the nonjudicial foreclosure action and may be a violation of the Consumer Protection Act, RCW § 19.86. A borrower's failure simply allows the beneficiary to move forward with the nonjudicial foreclosure, but does not result in any other legal consequence to the borrower.

Looking Forward – The Foreclosure Fairness Fund: For each Notice of Default issued on owner-occupied residential real property in Washington, the beneficiary is required to pay a $250 fee into the Foreclosure Fairness Fund (Fund). This is commonly referred to as a “foreclosure tax.” The money deposited into the Fund is allocated amongst several groups as provided by RCW § 61.24.172:

 

 

  • 71%: Housing Finance Commission — goes to Homeowner Counseling.
  • 18%: Department of Commerce — goes to Program Implementation and Administration.
  • 6%: Office of the Attorney General — goes to Consumer Protection.
  • 3%: Department of Financial Institutions — goes to Education and Outreach.
  • 2% Office of Civil Legal Aid — goes to Homeowner Legal Representation.


As of June 30, 2014, a total of $15,908,275 had been deposited into the Fund. The highest amount of quarterly deposits into the Fund was during the second quarter of 2013, a total of $2,097,750. Since then, deposits into the Fund have dramatically dropped. For the second quarter of 2014, the total deposits were $916,500, less than half of the deposits reported in that same quarter, the year before. As the funding of the Mediation Program continues to drop, the public resources available to support the program will also decrease.

Looking Forward – Exemption from the Mediation Program: Besides the decreasing budget of the Fund, RCW § 61.24.174, provides some beneficiaries an exemption from the foreclosure tax if they certify that they are FDIC-insured institutions, and that they issued less than 250 notices of default in the preceding year. As of January 31, 2015, over 200 beneficiaries appeared on the exemption list — nearly double the number exempted from mediation in 2011. As foreclosures are anticipated to continue declining, more beneficiaries will become eligible to be exempted from mediation, further shrinking the number of beneficiaries participating in the foreclosure mediation program, and further reducing the foreclosure tax paid to Commerce.

Conclusion: The FFA, amended three times since its implementation in 2011, does not include a sunset date for the Mediation Program. As foreclosures continue to decline throughout the nation, the long-term viability of the Mediation Program in Washington remains questionable for fiscal and practical reasons.

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REDEMPTION: Michigan: Statutory Changes

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Jessica Rice
Trott Law, P.C.
USFN Member (Michigan)

The legislature was very busy in 2014. The good news is that some of the bills that were passed, pertaining to Michigan’s foreclosure by advertisement statute, turned in a different direction than has been seen over the past six years or so. The enacted bills seek to clean up the foreclosure by advertisement statute and, more importantly, offer greater protections to foreclosing lenders.

Michigan is a redemption state, where borrowers typically enjoy the benefit of a six-month redemption period. This time frame can vary in limited circumstances, but for the most part, six months is the norm. Historically, the redemption period has been a time when the mortgagor is entitled to retain possession of the property, may lease it out, or may even sell it and redeem the foreclosure sale. While this is still true, enactment of the above-mentioned bills brought about changes to the redemption statute that provide purchasers at the foreclosure sale with greater rights to protect their interest in the property during the redemption period.

Inspections
More specifically, the amended redemption statute now contains a provision wherein the purchaser may inspect the exterior and interior of the property periodically during the redemption period. If the property is found to meet certain requirements under this new provision, then the revised statute goes further to allow for the commencement of summary proceedings to seek possession of the property.

While this may seem like a fairly straightforward change, it is a significant departure from past practice. The statute outlines a very specific process that must be followed in order to proceed with the inspections. The statute requires the purchaser to send multiple letters to the property in order to be able to proceed with an interior inspection. The first of these letters serves as informational under MCL 600.3237. This letter must set forth the name and contact information for the purchaser at the foreclosure sale, the date and the amount of the foreclosure sale, as well as the redemption expiration date. The letter also provides the information contained in MCL 600.3238 regarding the purchaser’s rights to an inspection, in addition to the requirements and procedures for proceeding with it. This letter further establishes a rebuttable presumption regarding liability for damages for failure to allow the inspection, or failure to notify the purchaser if the property is going to be surrendered.

As for the subsequent letters called for under the statute, there are specific requirements for these, too. The focus of these letters is on the actual inspections, including the scheduling, results, and any follow-ups as permitted by the statute. Given the nature of these letters, it is recommended that foreclosing lenders use their local presence, such as property preservation specialists and brokers, to send the letters as they will be the parties conducting the inspections and assessing the property.

Evictions

The statute also allows for the commencement of eviction proceedings. This is permissible under the statute if an inspection is unreasonably refused, or if damage to the property is imminent or has occurred. It is important to note that the term “unreasonably refused” is not defined in the statute. Accordingly, it is likely that there will be issues with the interpretation of this term between foreclosing lenders and borrowers. If that becomes the case, the determination as to whether an inspection was unreasonably refused will need to be made by the presiding judge. Unlike the lack of a definition for “unreasonably refused,” MCL 600.3238(11) provides a list of what is considered “damage” under this statute, but it is important to note that this is not an exhaustive list.

Similar to the inspection process, there are very specific measures that must be met before beginning an eviction. The statute provides that before the eviction can proceed, the purchaser must send another notice advising the mortgagor of the intent to commence the eviction action if the damage, or condition causing the belief that damage is imminent, is not repaired or corrected within seven days after receipt of the notice. This certainly is open to interpretation because the foreclosing lender may have a different opinion than the mortgagor as to whether the damage has been repaired. If this issue arises, it is wise to consult with local counsel to determine the best course of action. The statute also indicates that the foreclosing lender can work with the mortgagor to create procedures, or a timeline, to repair the damage. If the repairs are made in accordance with those timelines, the eviction may not proceed. Here again, this is open to interpretation. Conversely, if the mortgagor does not repair the damage within seven days or by the agreed-upon timeline, a determination can be made as to whether it is advisable to proceed with filing an eviction action in the local district court.

Once it is decided to start an eviction action, it is important that the complaint includes detailed information as to the nature of the action and the findings at the property. This could include, but is not limited to, copies of the required letters that were sent to the property pursuant to the statute, as well as affidavits and photos reflecting the inspection findings from the inspectors.

It is likely that there could be a difference of opinion between the parties at the eviction hearing as to repairs and/or whether an inspection was unreasonably refused. This is further reason as to why it is imperative that the judge is aware of the statute and that all necessary information is presented to the court. Ultimately, if at the eviction hearing the court grants a judgment for possession in favor of the purchaser, the right of redemption is extinguished and title in the property vests to the purchaser. This is a significant departure from prior practice in that the borrower would be divested of his redemption rights prior to the expiration of the typical six-month statutory redemption period.

As with any change, there are likely to be hiccups. Because this is a substantial shift from a longstanding history of closely-guarded redemption rights in Michigan, it can be anticipated that there will be resistance. There are, also, likely going to be some risks in proceeding under the terms of this new provision. This is due to the fact that the revised statute tends to contradict the traditional notions of the mortgagor’s rights during the redemption period, and any type of infringement on those rights could be construed as a violation. Therefore, it will be crucial for purchasers to comply with all of the requirements of the statute. It is also possible that judges may not yet be familiar with these changes, and may be hesitant to divest borrowers of their redemption rights during the redemption period. To help ensure that any potential issues are mitigated, all options and any best practices should be discussed with local counsel before proceeding under this provision of the revised statute.

Abandoned Properties
While these changes certainly offer greater protections to foreclosing lenders, something to keep in mind is that this provision is not applicable to abandoned properties. Rather, the Michigan foreclosure by advertisement statute includes sections that specifically pertain to abandoned properties. If a particular property has been abandoned, the redemption period can be shortened once certain requirements are met. Local counsel will be able to assist with this process in the event that the property is abandoned, as defined by the applicable statutory sections during a foreclosure by advertisement.

Conclusion
When used properly, the changes to the foreclosure by advertisement statute will benefit foreclosing lenders by protecting their interests in foreclosed properties during the redemption period. These additional protections should help prevent damage to properties. In those situations where damage has occurred and is not appropriately rectified, a lender now has recourse to seek to obtain possession of the property much sooner than has ever been permissible. While it is important to proceed cautiously and to seek guidance from local counsel, these changes are most certainly a change for the better.

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REDEMPTION: Alabama: Ad Valorem Tax Sale Redemption

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Jeff G. Underwood
Sirote & Permutt, P.C.
USFN Member (Alabama)

Benjamin Franklin once said, “An investment in knowledge pays the best interest.” When it comes to investing, nothing will pay off more than educating oneself. An investment opportunity in Alabama, in which local residents and out-of-state investors regularly participate, involves annual ad valorem property tax sales.

Alabama ad valorem taxes are paid in arrears. Taxes become due October 1 for the previous year and are delinquent if unpaid by December 31, subject to penalties and interest. The state is comprised of 67 counties, and each will conduct a tax sale for unpaid taxes, usually in late April or early May of the following year. The current vested owner is provided notice of the sale, and notice is given for three successive weeks in a newspaper of general circulation for the county where the property is situated. The sale occurs on the prescribed date within the legal hours of operation.

Normally, one of three scenarios occurs: (1) the property owner pays the taxes at sale or prior thereto; (2) there are no bidders at the tax sale, and the land subject to the delinquent ad valorem taxes is sold to the state of Alabama (State); or (3) the land subject to the delinquent ad valorem taxes is purchased by a third-party investor.

Redemption — The property owner, or his mortgagee of record, has three years from the date of the tax sale in which to redeem the taxes, or risk a tax deed being issued in the name of the purchaser at the tax sale.

Tax redemption where the land from a tax sale has been sold to the State is fairly routine. The property owner or mortgagee requests a redemption application from the county and pays the amount due to the county revenue commissioner’s office when submitting the completed application. The county will then issue a redemption certificate to the redeeming party.

Where the property is sold to a party other than the State, the process is as follows: A tax purchaser can “bid in” excess funds (overbid) and the county may compute the statutory interest (12 percent per annum) based upon the total amount (taxes plus overbid) and refund the overbid to the tax purchaser separately; or, the redeeming party may be forced to pay the amount, including taxes, accrued interest, penalties, and the overbid amount. The redeeming party would make a separate application to the county for a refund of the overbid post-tax sale redemption.

Procedures Changed — Prior to November 19, 2013, the tax redemption procedure where the property was sold to a party other than the State was similar to that where the property was sold to the State. Pursuant to Ex parte Foundation Bank (In re CMC Properties, LLC v. Emerald Falls, LLC), 146 So. 3d 1 (Ala. 2013), the Alabama Supreme Court ruled that the redeeming party must present verification to the county that the tax purchaser has been reimbursed for any hazard insurance premiums paid by the tax purchaser on a residential structure located on the property with interest at 12 percent per annum, as well as for the value of all preservation improvements made on the property with interest at 12 percent per annum.

Redemption Affidavit — The Alabama Department of Revenue crafted a redemption affidavit for use by the various counties. The affidavit must be executed, before a Notary Public, by both the property owner (or the mortgagee if the property has been foreclosed) and the tax purchaser. For the most part, counties will allow each signatory to execute a separate form, but at least one county requires both signatures to be affixed to one affidavit. In addition, counties will generally provide the original tax redemption application and affidavit forms simultaneously, so that signatures can be obtained. Some counties, however, apply a different standard and require the fully executed and notarized redemption affidavit to be submitted before the county will release the redemption application. Unfortunately, this can create unnecessary delays.

Prior to November 2013, there were very few investors that took advantage of Code § 40-10-122(b) and (c). The potential for abuse by certain investors in determining the value of the “preservation improvements” is a distinct possibility. Should the redeeming party disagree with the value of those improvements, Alabama law provides a mechanism for determining the value.

Valuation of Preservation Improvements — Alabama Code § 40-1-122(d) requires the redeeming party to make a written demand upon the tax purchaser for a statement of the value of all permanent or preservation improvements made since the tax sale. The tax purchaser has 10 days from receipt of that demand to provide his list of improvements. Within 10 days of receipt of that response, the proposed redemptioner shall either accept the value so stated by the purchaser, or appoint a referee to ascertain the value.

The redemptioner shall notify the tax purchaser of his disagreement and inform the tax purchaser of the appointed referee’s name. Within 10 days of the receipt of this notice, the tax purchaser shall also appoint a referee and provide the redemptioner with that person’s name. Within 10 days of their appointment, the two referees shall meet and confer on a just award. If the two referees cannot agree, they will jointly select an umpire. A majority vote shall be made within 10 days after the umpire’s selection; that award is final between the parties.

The costs and timelines associated with redeeming tax properties, where the property has been sold to a party other than the State, will be decidedly higher as a result of the Foundation Bank decision. Many more investors will take advantage of the preservation improvements valuation component of the law where properties have been foreclosed and tax purchasers are allowed to take possession of a vacated property.

These tax purchasers could perform so-called “improvements” at exaggerated costs and place renters/occupants in the property. This would cause delays in redeeming the property and in evicting the occupants. Further, the tax purchaser could elect to not cooperate in executing the redemption affidavit, thus holding up the redemption process even more. By doing so, the current owner or mortgagee would suffer the additional costs and expenses associated with the referee/umpire settlement process, as well as having statutory interest continue to accrue during the disputed period of time.

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Post-PTFA: Washington

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by LaRee L. Beck
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

In Washington (upon the PTFA’s expiration), the notice requirements afforded tenants, following foreclosure of an occupied premises, are outlined in Revised Code of Washington (RCW) 61.24.146 and 61.24.060. Washington law differs from the PTFA in that a determination as to a tenant’s “bona fide” status is not required because “tenant” is more loosely defined.

Pursuant to the Residential Landlord-Tenant Act, RCW Chapter 59.18, a tenant is defined as “any person who is entitled to occupy a dwelling unit primarily for living or dwelling purposes under a rental agreement.” The tenant is only afforded 60 days’ written notice to vacate the premises. It is entirely within the new owner’s discretion to negotiate a new rental agreement with the existing tenant, or simply terminate his or her tenancy. RCW 61.24.060(2) sets forth how the notice to the tenant is to be given, and includes specific language that must be included in the written notice to vacate. All notices are to be sent by first-class mail and either certified or registered mail, return receipt requested.

If the occupancy status of the parties residing on the premises is unknown, it is best to include language in the notice to vacate referencing the new owner’s right to possession on the twentieth day following sale (for non-tenant situations) per RCW 61.24.060(1), in addition to the tenant’s notice language as described above. For foreclosure sales that occurred prior to the PTFA’s sunset date — December 31, 2014 — it may be advisable to use a combination notice, which states that the PTFA may apply to the occupant’s tenancy, and includes the alternate 90-day notice-to-vacate language of the PTFA, as well as a request for additional documentation from any purported tenant.

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Post-PTFA: Oregon

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Colin Mackenzie
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

After the sunset of the PTFA on December 31, 2014, Oregon’s notice requirements for tenants after the foreclosure of an occupied property reverted to the pre-PTFA notice requirements. Because Oregon’s previous, and now current, rules only applied to trustee sales, the method of foreclosure now determines the notice requirements for tenants.

Oregon Revised Statutes (ORS) 86.782(6)(C) outlines the notice requirements that apply if property purchased at a trustee sale includes a dwelling unit subject to the Oregon Residential Landlord-Tenant Act (ORS chapter 90), and the individual that occupies the property is a bona fide tenant. If the bona fide tenancy is month-to-month or week-to-week, or the purchaser intends to occupy the property as a primary residence, the tenant must be provided a 30-day notice to vacate. If the bona fide tenancy is a fixed term tenancy, the tenant must be provided a 60-day notice to vacate.

ORS 86.782(h) defines a “bona fide tenancy” in essentially the same terms as the PTFA, meaning that: (1) the tenancy was an arms-length transaction that occurred before the date of the foreclosure sale; (2) the tenant is not the mortgagor or the child, spouse, or parent of the mortgagor; and (3) the rent paid was not substantially less than the fair market rent for the property.

Additionally, a separate written notice of the change in ownership must be provided to all occupants within 30 days after the date of sale, and before or concurrently with service of a written termination notice. The contents of the notice of change in ownership are outlined in ORS 86.782(5)(b) and (d), and include information about the tenants’ rights to notice prior to an eviction action, as well as information about where to obtain legal and other assistance. If the notice of the change in ownership is not sent within 30 days after sale, the new owner is automatically deemed to be the tenant’s new landlord, and is saddled with the duties and obligations that follow. It is recommended that the notice of change in ownership be sent as soon as possible following a trustee sale.

Judicial foreclosures in Oregon operate under a different set of statutes than nonjudicial trustee sales. Neither ORS chapter 88 (foreclosure of mortgages) nor ORS chapter 18 (which contains the procedures for sheriff’s execution sales) provides any additional protections to tenants after a sheriff’s execution sale. Since the PTFA sunset, the same rules apply to both tenants and former owners following an execution sale; neither are provided any additional protection, and both may be evicted using Oregon’s eviction procedures any time from the date of sale, forward.

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Post-PTFA: North Carolina

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Lanée Borsman
Hutchens Law Firm
USFN Member (North Carolina)

Unlike some other states, the North Carolina legislature did not enact a statutory framework similar to the PTFA. As a result, post-foreclosure eviction notices included a combination of state and federal requirements. NCGS § 45-21.29 requires that a ten-day notice to vacate be sent to any parties remaining in possession. Since the occupancy status of those parties was usually unknown, that notice also incorporated the required notices under PTFA for bona fide tenants. If it was discovered that the occupant was a bona fide tenant, the PTFA protections and time frames would be followed. If not, the state rules would govern and the ten-day notice would apply.

The expiration of the PTFA should simplify the eviction notice procedure by eliminating the dual, or “combo platter,” notices in North Carolina. Once all of the cases in the pipeline have worked their way through the system, it should be back to the old way in North Carolina, servicers and investors willing — and the only combo platters we’ll be looking for, contain seafood.

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Post-PTFA: Minnesota

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015 

 

by Kevin Dobie
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

Although the federal PTFA expired on December 31, 2014, the PTFA requirements and tenant protections continue in this state, pursuant to Minnesota Statutes section 504B.285 subdivision 1a. The tenant notice requirements for foreclosure properties in Minnesota started in 2008. The first version of the statute called for a two-month notice. In 2010, after the enactment of the PTFA, the Minnesota legislature changed the statute to mirror the 90-day requirements in the PTFA, with two further requirements. In addition to the PTFA requirements, the Minnesota statute provides that: (1) the 90-day notice must be given to any tenant — not just a bona fide tenant; and (2) a tenant (or a bona fide tenant) is required to pay rent to the foreclosure purchaser and abide by all terms of the lease.

In 2013, the Minnesota legislature deleted the December 31, 2014 sunset provision in the state statute. Therefore, foreclosure purchasers must provide the notice requirements and honor bona fide leases for the foreseeable future. Accordingly, asset managers should continue to investigate whether the occupants are tenants and advise eviction counsel as soon as possible. Law firms and asset managers sending notices should reference the state statute rather than the PTFA; but, in general, the question of whether the PTFA applies to foreclosures completed before December 31, 2014 (or leases entered into before that date) is irrelevant.

In Minnesota, foreclosure purchasers must continue sending the 90-day notices for tenants, and must continue honoring bona fide leases. As for non-tenant occupants, there is no notice requirement; and foreclosure purchasers may commence eviction actions immediately after the redemption period expires.

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Post-PTFA: Look to the States (At Least for Now)

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Kevin Dobie
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

On March 13, 2015, the “Permanently Protecting Tenants at Foreclosure Act of 2015” (H.R. 1354) was introduced. The legislation proposes to permanently extend the Protecting Tenants at Foreclosure Act of 2009. The bill was referred to the House Committee on Financial Services.

For the past several years, the federal Protecting Tenants at Foreclosure Act of 2009, Pub. L. No. 111-22, §§ 701-704, 123 Stat. 1660 (PTFA), has provided protections for certain bona fide tenants facing eviction. The PTFA expired on December 31, 2014, and asset managers will have to look to the state requirements for eviction actions.

In case you missed it, the PTFA required purchasers of foreclosure properties to send a 90-day notice to vacate to bona fide tenants prior to commencing an eviction action. The PTFA also compelled these purchasers to let certain tenants occupy the property for the duration of a bona fide lease; provided the lease was executed prior to the date the complete title was transferred to the foreclosure purchaser. (With one exception: a purchaser occupying the property as a primary residence could terminate the lease with a 90-day notice.)

Because the PTFA required action by foreclosure purchasers, the expiration of the PTFA has led to some uncertainty as to whether its provisions apply to foreclosures completed before the expiration date. It is fairly clear that the expiration of the PTFA means that its provisions no longer apply; nevertheless, many asset managers continue to mandate the 90-day notices for foreclosures completed before the expiration date. Adding to the complexity is the fact that most states have their own requirements for sending notices to quit prior to an eviction action. Reconciling the competing notice requirements requires a state-by-state analysis.

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Post-PTFA: California

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Charles E. Katz
Northwest Trustee Services, Inc.
USFN Member (California, Oregon)

The California Civil Code of Procedure (CCP) contains a framework that is essentially identical to the PTFA. Specifically, CCP § 1161b provides that a tenant/subtenant in possession of a rental housing unit under a month-to-month lease, or periodic tenancy at the time the property is sold in foreclosure, shall be given 90 days’ written notice to quit before the tenant/subtenant may be removed from the property. The section does not apply if any party to the note remains in the property as a tenant, subtenant, or occupant.

In addition to the rights mentioned above, tenants/subtenants holding possession of a rental housing unit under a fixed-term residential lease (entered into before transfer of title at the foreclosure sale) shall have the right to possession until the end of the lease term, and all rights and obligations under the lease shall survive foreclosure, except that the tenancy may be terminated upon 90 days’ written notice to quit if any of the following conditions apply:


• The purchaser or successor in interest will occupy the housing unit as a primary residence.
• The lessee is the mortgagor or the child, spouse, or parent of the mortgagor.
• The lease was not the result of an arms-length transaction.
• The lease requires the receipt of rent that is substantially less than fair market rent for the property, except when the rent is reduced or subsidized due to a federal, state, or local subsidy law.

CCP § 1161b is currently slated to sunset on December 31, 2019.

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Post-PTFA: Alaska

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Mark Skolnick
RCO Legal-Alaska, Inc.
USFN Member (Arkansas, Oregon, Washington)

Alaska law makes no distinction between tenants and former owners in terms of the “notice to vacate” to which they are entitled. As such, with the sunset of PTFA, there is no state equivalent. The statute is AS 09.45.090, which defines “unlawful holding by force” and divides the situation into cases to which the Landlord Tenant Act applies and those to which it does not. Foreclosures usually fall in the second category, but both subsections read very similarly and further subdivide each category into subcategories based on the reason the tenancy is being terminated: failure to pay rent (7 days); violation of lease provision (10 days); deliberate infliction of substantial damage (24 hours); use for illegal purpose (5 days); or termination of an estate at will, expiration of lease term, or without the consent of the landlord and without a lease or agreement (0 days).

The number of days mentioned is the amount of time the occupant has to vacate after being served a written notice to quit. Default servicers typically see the zero days’ category, because after the foreclosure, the occupancy would be without a written lease or agreement and without the consent of the landlord. However, due to the lack of clarity in the law, as well as the courts’ historic concern for tenants being evicted unbeknownst to them for lack of notice by their foreclosed landlords, the courts have settled on 7-14 days as the appropriate time to allow for holdover tenants to vacate.

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Legal Issues Update: TILA Rescission Claims: U.S. Supreme Court Clarifies

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Jessica L. Blanner
and Brian H. Liebo
Usset, Weingarden & Liebo, PLLP
USFN Member (Minnesota)

In 1968, Congress first enacted the Truth in Lending Act (TILA) to help consumers avoid uninformed use of consumer credit, and to require disclosures to protect consumers against unfair or hidden credit billing terms. [See, 15 U.S.C. § 1601.] To that effect, TILA grants borrowers the right to rescind a loan in certain circumstances. Borrowers have an unconditional right to rescind a loan within three days following the loan’s consummation. After the three days, borrowers may rescind only if the lender failed to satisfy TILA’s disclosure requirements [15 U.S.C. § 1635(a), (f)].

However, this conditional right to rescind expires “three years after the date of consummation of the transaction or upon sale of the property, whichever comes first.” § 1635(f). Subsequent to the events that transpired in the below-discussed case, Congress transferred the rule-making authority under TILA to the Consumer Finance Protection Bureau. [See, Dodd-Frank Wall Street Reform and Consumer Protection Act, §§ 1061(b)(1), 1100A(2), 1100H, 124 Stat. 2036, 2107, 2113.]

For many years, it has been the practice within the Eighth Circuit that when a mortgage company was notified by borrowers that they intended to rescind their mortgage, the borrowers had to not only notice their intent within three years of the loan closing, but actually had to commence a lawsuit within the three-year time frame. Failure to do both actions within three years was tantamount to a waiver of the right to rescind according to district court judges. A recent decision by the U.S. Supreme Court has definitively established the law for this issue for all jurisdictions across the nation.

Earlier this year, the Supreme Court reversed the judgment of the Eighth Circuit Court of Appeals, and held that borrowers exercising their right to rescind a mortgage transaction under TILA need only provide written notice to the lender within the three-year period, and need not commence an actual lawsuit within that three-year period. Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015).

This action originated in Minnesota, after the borrowers refinanced their home by borrowing $611,000 from Countrywide Home Loans, Inc. on February 23, 2007. Exactly three years later, on February 23, 2010, the borrowers mailed a letter of rescission to the lender, alleging TILA violations. The lender denied the rescission request, and the borrowers filed suit on February 24, 2011. The borrowers contended that their TILA claims were timely because they sent a notice of rescission on February 23, 2010. The U.S. District Court for the District of Minnesota rejected the borrowers’ arguments and granted the lender’s motion for judgment on the pleadings to dismiss the claims, holding that a suit for rescission filed more than three years after the loan’s consummation is time-barred (even if the borrowers mailed a notice of rescission within the three years). Jesinoski v. Countrywide Home Loans, Inc., 2012 U.S. Dist. LEXIS 54811 (D. Minn. Apr. 19, 2012). The Eighth Circuit Court of Appeals affirmed the district court’s judgment on the pleadings in favor of the lenders. Jesinoski v. Countrywide Home Loans, Inc., 729 F.3d 1092, 2013 U.S. App. LEXIS 18757 (8th Cir. 2013).

In a unanimous opinion written by Justice Scalia, the Supreme Court reasoned that while Section 1635(f) explains “when the right to rescind must be exercised, it says nothing about how that right is exercised.” Jesinoski v. Countrywide Home Loans, Inc., 574 U.S. __ (2015). The Court also explained that Section 1635(a) does not explicitly provide that a lawsuit is required for a rescission, and concluded that a borrower only needs to provide written notice to a lender in order to exercise the right to rescind within the three-year time frame.

The Supreme Court reversed the judgment of the Eighth Circuit and remanded the case for proceedings consistent with its opinion. Notably, the Supreme Court did not consider whether the lender had in fact satisfied TILA’s disclosure requirements. Instead, the Supreme Court reasoned that since the only thing that the borrowers must do (to exercise the right to rescind) is to provide written notice within three years, the lower courts erred in dismissing the borrowers’ complaint.

The decision settles a circuit split on this question. While the Supreme Court’s holding appears borrower-friendly, the ruling is narrow, in that it solely addresses a notice-timing issue. Mailing a notice of rescission within three years of consummating a loan is sufficient to exercise the right to rescind, and a party seeking to rescind is not required to actually file a lawsuit within that three-year time period to preserve a rescission claim.

As a practice pointer, mortgage servicers should carefully monitor all borrower correspondence for timely loan rescission claims and properly address those notices, even if the borrowers have not yet filed lawsuits to enforce mortgage rescission rights.

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California Rent/Eviction Control Ordinances: A "Taking" or a Legitimate Exercise of Police Power?

Posted By USFN, Tuesday, May 5, 2015
Updated: Friday, September 25, 2015

May 5, 2015

 

by Kayo Manson-Tompkins
The Wolf Firm
USFN Member (California)

This article is an overview of rent control and just cause eviction ordinances, touching on how they can affect the ability of a lender to proceed with a “normal” post-foreclosure eviction. This summary is not intended to be an extensive or exhaustive review of the nuances of any particular city’s ordinances.


Synopsis
California has approximately ten cities subject to either a rent control ordinance and/or an eviction control ordinance. The rent/eviction control cities are Berkeley, Cotati, East Palo Alto, Los Angeles, Oakland, San Diego, San Francisco, San Jose, Santa Monica, and West Hollywood. The primary purpose of rent control ordinances is to limit or prohibit rent increases; however, a large portion of these cities also restrict the grounds to evict tenants. There are, of course, other requirements in some of the cities such as registering rental units, providing special notices, or obtaining a business license.

A case can be further complicated by California habitability statutes when there are abatement orders issued by the city for violations of building codes and/or occupancy of illegal units. For instance, Los Angeles evictions are additionally complex if the existing tenants are paying rent into the Rent Escrow Account Program, codified by Los Angeles Municipal Code §§ 162.00, et al., while repairs are completed pursuant to an abatement notice of some kind.

In order for lenders to evict after a foreclosure sale in California, they must follow the requirements of California Code of Civil Procedure (C.C.P.) § 1161a(b)(3), § 1161b and § 1161c. However, these statutes do not preempt rent control or eviction control ordinances. Where evictions are concerned, California law specifically states, “Nothing in this section is intended to affect any local just cause eviction ordinance. This section does not, and shall not be construed to affect the authority of a public entity that otherwise exists to regulate or monitor the basis for eviction” (C.C.P. § 1161b). This statement allows eviction controls to still function.

Rent control, in and of itself, is not an issue in most post-foreclosure cases since the owner is usually not renting. The restriction of rent is not considered a "taking," because each ordinance generally has a provision allowing for a just and reasonable rent increase. There have been other cases where a local rent control has been found unconstitutional for a specific reason, but the ordinance is usually amended to reflect a change that would allow the regulatory scheme to continue. The greater issue in a post-foreclosure unlawful detainer is eviction control, which was created to prevent landlords from evicting a tenant without cause in order to decontrol a unit.

The initial intent of eviction control was to prevent a landlord from evicting a tenant in good standing, in order to place a new tenant in the unit and charge a higher monthly rent. [Birkenfeld v. Berkeley, 17 Cal. 3d 129 (1976)]. To further this ideal, various cities enacted eviction control ordinances, some stricter than others, that would set forth the grounds where an eviction can proceed, or where the landlord has a “just cause” to evict. Here, the question shifts from rent control to eviction control. Are these ordinances considered a “taking” by state or federal law?

Constitutionality
California rent control provisions are a valid exercise of a city’s police power within that city’s own jurisdiction pursuant to the California Constitution, which states “A county or city may make and enforce within its limits all local, police, sanitary, and other ordinances and regulations not in conflict with general laws” (Cal. Const., Art. XI § 7). The scope of this police power is subject to displacement by general state law where the charter or ordinance purports to regulate a field fully occupied by state law. [Birkenfeld v. Berkeley, 17 Cal. 3d 129 (1976)].

For example, the Costa-Hawkins Rental Housing Act preempts rent control provisions purporting to restrict the rental rates for dwelling units where the property has a certificate of occupancy issued after February 1, 1995, where the dwelling unit is already exempt pursuant to a local exemption, or where title of the dwelling unit is separate and alienable from the title to any other unit (Cal. Civ. Code § 1954.52). As such, some condos, single-family residences, and newly-constructed properties are not subject to rent controls. Costa-Hawkins does not regulate evictions, nor does it purport to exempt any dwelling unit from eviction controls.

As of the publishing of this article, rent control and eviction control ordinances continue to operate, with a few exceptions, and have not been found unconstitutional under federal law. One exception, for example, would be if an Indian reservation is on land that is exclusively regulated by the federal government, in which case that land would be exempt from local rent control or just cause ordinances. [25 U.S.C. § 415(a); 25 C.F.R. § 1.4]. Another federal exemption from rent control would be federally-assisted housing such as a HUD-insured mortgage where federal regulations empower HUD to preempt a municipal ordinance’s rent ceiling (24 C.F.R. §§ 246.5, et seq.), but only if it jeopardizes HUD’s economic interest. [Sea Castle Apartment, Ltd. v. Santa Monica Rent Control Board, 228 Cal. App. 3d 1540, 1546; 279 Cal. Rptr. 672, 675 (1991)].

Conclusion
For the time being, these rent control and eviction control ordinances do impact the lender’s ability to proceed with a normal post-foreclosure eviction within the limited number of cities having these ordinances. The ordinances are viewed as a valid exercise of a city’s police powers within its jurisdiction. Rent control is not considered a “taking,” nor is it considered an unauthorized exercise of judicial power; therefore, except as indicated above, rent control is not preempted by either state or federal law.

Although eviction control continues to function as a valid exercise of police power, California law states that “[a] contract must be so interpreted as to give effect to the mutual intention of the parties as it existed at the time of contracting, so far as the same is ascertainable and lawful” (Cal. Civ. Code § 1636). California courts have held that in accordance with the foregoing, there is an implied covenant in every contract barring the parties from acting in such a way that would deprive a party of the benefits of a contract. [Floystrup v. City of Berkeley Rent Stabilization Board, 219 Cal. App. 3d 1309, 1318 (1990)]. With that in mind, this article ends with a query: Why then are lease agreements, renewed in perpetuity by eviction control ordinances in limited California cities, allowed to exist?

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South Carolina Supreme Court Reviews Equitable Subrogation

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Reginald P. Corley and Ronald C. Scott
Scott & Corley, P.A. – USFN Member (South Carolina)

The Supreme Court of South Carolina recently clarified the state’s position on the doctrine of equitable subrogation. In its ruling, the Supreme Court discussed the general principles of equitable subrogation, as well as defined what constitutes actual notice to a party seeking this relief. [Independence National Bank v. Buncombe Professional Park, LLC, Case No. 2013-000915].

Equitable subrogation essentially allows one party who pays off the claim or debt owned/held by another party to take the position of the payee. In this particular case, a bank refinanced a first mortgage and was attempting to use the doctrine of equitable subrogation to claim first mortgage priority over the existing “second” mortgage holder.

The facts of the case involve the refinance of a commercial transaction. The petitioner, Independence National Bank, held a first mortgage on property owned by the respondent, Buncombe Professional Park, LLC. The bank agreed to refinance the first mortgage with the LLC. David DeCarlis was the sole member of the LLC, and also held a “second” mortgage on the property. An attorney was hired to conduct the mortgage closing transaction. The attorney represented both the bank and the LLC, which is a common practice in South Carolina in non-adverse transactions (although not typical in a commercial transaction). The attorney had actual notice of the “second” mortgage held by DeCarlis, but didn’t communicate the existence of the mortgage to the bank. The attorney also did not obtain a release, satisfaction, or subordination of this mortgage.

The bank filed a foreclosure action alleging equitable subrogation. In order to be equitably subrogated to the original mortgage, the bank must show, among other factors, that it did not have actual notice of the DeCarlis mortgage. At the trial level, the Master in Equity ruled in the bank’s favor. The LLC appealed, and the South Carolina Court of Appeals reversed the Master in Equity’s decision, holding that the attorney was the bank’s agent, and the attorney’s actual knowledge of the DeCarlis mortgage constituted actual knowledge to the bank. The South Carolina Supreme Court reversed the appellate court’s decision, ruling that the attorney’s actual notice only constituted constructive notice to the bank.

Citing numerous cases, the Supreme Court held that the bank’s constructive notice did not defeat a claim for equitable subrogation. Therefore, the bank’s 2007 mortgage was equitably subrogated and was determined to have priority over DeCarlis’s 2006 mortgage.

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Michigan Court of Appeals Upholds Land Bank Statute in Kent County Case

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Scott Neal
Orlans Associates, P.C. – USFN Member (Michigan)

In a decision entered on December 18, 2014, the Michigan Court of Appeals upheld a ruling by the lower court to dismiss a lawsuit by a group of investors against the Kent County Land Bank Authority (KCLBA), in regards to obtaining title to tax foreclosed properties.

There were various legal and procedural claims in this case, including collateral estoppel, Fourteenth Amendment due process, notice, quiet title actions, and so on; but the defining point of the case involved statutory compliance. The group of investors, referred to in the opinion as the 3830 G parties, contended that Michigan law [specifically MCR 211.78m and MCL 124.755(6)], required the properties in question to be auctioned off at a tax foreclosure sale. The 3830 G parties argued that the KCLBA obtained title to the properties in violation of these laws, by being allowed to buy these properties directly from Kent County after Kent County had bought them from the Kent County Treasurer, which had obtained title to the properties via tax foreclosure.

The court found that the laws in question only required the properties to be offered at a tax foreclosure sale if the foreclosing governmental unit retained possession of the properties. In this case, the foreclosing governmental unit, the Kent County Treasurer, did not retain possession, but sold the properties to Kent County, which then sold them to the KCLBA.

The 3830 G parties attempted to use Rutland Township v. City of Hastings (1982) to argue that the transaction was a “ruse” because the KCLBA funded Kent County’s purchase of the property from the treasurer, making Kent County a “straw man.” The court rejected this argument because Rutland was factually dissimilar, and the defendants in Rutland admitted that their actions were specifically done to take property without approval of the township or State Boundary Commission; whereas the defendants in the current case acted for the health, safety, and welfare of the community.

This decision will uphold the right of Michigan land banks to continue their activities for the public good and urban renewal, promoting positive investment in the state’s great cities. It affirms the right of the land banks to continue operating as they have been for the past 15 years since the first land bank was started in Flint.

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Michigan: Expunging Deeds and Quiet Title Actions

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Jeffrey T. Goudie
Orlans Associates, PC – USFN Member (Michigan)

The case discussed here illustrates the importance of monitoring evolving foreclosure case law. In Trademark Properties of Michigan, L.L.C. v. Fannie Mae (Mich. App. No. 313296, Nov. 18, 2014), the Court of Appeals held that an affidavit based upon a reversed COA opinion could not expunge a sheriff’s deed or revive a foreclosed mortgage.

MERS foreclosed a condominium mortgage on May 11, 2010. Fannie Mae purchased the property at a sheriff’s sale on May 11, 2010 and recorded the sheriff’s deed ten days later. The property was never redeemed. The condominium association foreclosed on its lien for non-payment of assessments, and purchased the property at the sheriff’s sale on February 15, 2011, with a final redemption date of August 15, 2011. On August 9, 2011, the lender for MERS recorded an affidavit to expunge the sheriff’s sale to Fannie Mae. The affidavit averred that the sheriff’s deed was void ab initio, based on Residential Funding Co, LLC v. Saurman, 292 Mich. App. 321 (2011). [In Saurman, the COA had held that a mortgagee had no right to foreclose by advertisement under MCL 600.3204(1)(d) because it was not the noteholder with a property interest.] The condominium association then filed a quiet title action, arguing that the affidavit could not revive a foreclosed mortgage.

The Court of Appeals held that since the Michigan Supreme Court had reversed Saurman almost a year earlier, MERS’s contention that its mortgage interest still encumbered the property failed. The court also held that the Saurman reversal meant that the foreclosure had extinguished the MERS mortgage, and the association had the superior interest in the property.

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Maine: Supreme Judicial Court Reviews Notice of Default

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Santo Longo and Randall S. McHugh
Bendett & McHugh, P.C. - USFN Member (Connecticut, Maine, Vermont)

On February 26, 2015, the Maine Supreme Judicial Court issued a decision in CitiMortgage, Inc. v. Chartier, 2015 Me. 17 (2015), which narrowly interpreted notice of default provisions commonly found in many Maine residential mortgages. The court held that the notice of default, sent to the mortgagor by the servicer, did not comply with relevant provisions in the mortgage. This judicial decision will likely make proceeding to foreclosure in Maine more difficult, and will adversely impact many cases that have already been filed.

The language in the mortgage itself required the “Lender” to send the notice of default. Furthermore, the mortgage defined “Lender” as “Cornerstone Home Loans” and “any person who takes ownership of the Note and this Security Instrument” [emphasis added]. Cornerstone was the original lender and had previously sold the loan and assigned the mortgage. The court held that because the same entity did not own both the note and the mortgage at the time the servicer sent the notice, the notice was invalid. In fact, the court’s holding means that because the note and the mortgage were not owned by the same entity when the notice of default was sent, no “Lender” other than Cornerstone existed (as that term is defined in the mortgage) and, consequently, no party other than Cornerstone could have sent a valid notice of default at that time.

In the wake of Chartier, servicers and lenders seeking to foreclose Maine mortgages will need to ensure that ownership of the note and ownership of the mortgage are united in a single entity before a notice of default is sent; and that the notice is sent by, or on behalf of, that entity. What this means is that for loans with similar mortgage provisions, the mortgage will need to be assigned to the owner/investor before the notice of default is mailed. For pending mortgage foreclosures where the notice of default did not comply with the terms of the mortgage, it is anticipated that some of those pending cases will ultimately be dismissed, or the courts may enter judgments for the defendants. Because the Chartier holding is so recent, it is too early to tell how aggressive Maine’s lower courts will be when applying the high court’s reasoning (in that case) to pending foreclosure actions.

Importantly, the relevant language found in the mortgage in Chartier is also found in the standard residential mortgage form used throughout Maine. As a result, the number of cases affected will be significant. The impacts of Chartier are something servicers and lenders, who are foreclosing mortgages in this state, will want to monitor, and respond appropriately.

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Connecticut: Bankruptcy Court Reviews Whether a State Court Can Award Committee for Sale’s Fees and Costs during a Pending Bankruptcy Case

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Jeffrey M. Knickerbocker
Bendett & McHugh, P.C. – USFN Member (Connecticut, Maine, Vermont)

A bankruptcy court in the District of Connecticut has held, again, that it is not a violation of the automatic stay of Bankruptcy Code Section 362(a) for a state court to award committee fees and costs while a bankruptcy is pending. [In re Tasillo (Piecuch v. Tasillo), 2015 Bankr. LEXIS 11, (Case No. 14-21683, Jan. 5, 2015)].

In Connecticut, if a foreclosure sale is ordered by the state court, the state court will appoint an attorney (referred to as a “Committee of Sale”) to conduct the sale. In the course of the sale, the committee must, among other tasks, hire an appraiser, conduct a title search, advertise in the newspaper, and field phone calls from prospective buyers. Typically, in each sale, there are thousands of dollars of costs that the committee must pay out of his/her own funds until the court approves the fees and costs. Once the court approves the fees and costs, the plaintiff, as required by statute, must pay them. In the past, if a bankruptcy is filed prior to the sale, committees would file a motion with the state court to be paid for the fees and costs incurred up until the filing of the bankruptcy. Once the court ordered the fees to be paid, the plaintiff would pay them. Last year, a judicial decision by the Connecticut Court of Appeals changed that procedure.

In Equity One, Inc. v. Shivers, 150 Conn. App. 745, 93 A.3d 1167 (2014), the Connecticut Court of Appeals found that ordering committee fees, when a bankruptcy case was pending, was a violation of the automatic stay. Based on the Shivers opinion, Connecticut courts have been denying committees’ motions for fees when a bankruptcy is pending. In the Tasillo state court action, the court appointed Gregory W. Piecuch, Esq. to be the committee to sell the subject property. The debtor, Robert Tasillo, was the defendant in the foreclosure action in which the state court had appointed Piecuch. After Tasillo filed a voluntary chapter 13 bankruptcy petition, Piecuch filed a motion with the state court to have his fees and costs paid, which was denied based on Shivers.

After the state court’s denial of his motion for fees, Piecuch filed a “Motion for Relief from the Automatic Stay or Motion to Determine That the Automatic Stay Does Not Apply” with the bankruptcy court. U.S. Bankruptcy Judge Dabrowski held that the automatic stay does not apply to the motions for committee fees and, notably, the bankruptcy court specifically referenced the Shivers decision. In light of Shivers, Judge Dabrowski also reviewed earlier bankruptcy court decisions (including one of his own), still finding their reasoning more persuasive than that of Shivers.

Accordingly, in Connecticut, it appears that the law on whether a state court can grant a motion for committee fees and expenses, while a bankruptcy stay is in effect, is unsettled. Although the state appellate court has held that it is not allowed, the recent bankruptcy court ruling in Tasillo says otherwise.

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Massachusetts Bankruptcy Court Holds That Homestead Protection is Available for Certain Home Offices

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Thomas J. Enright
Partridge Snow & Hahn LLP – USFN Member (Massachusetts)

The U.S. Bankruptcy Court for the District of Massachusetts recently issued a decision in the case of In re Catton, shedding light on the Massachusetts homestead statute and its application to home offices. The Massachusetts homestead statute, found at Mass. Gen. Laws c. 188, permits an owner to declare a homestead on a “single-family dwelling, including accessory structures appurtenant thereto” for the purpose of protecting it from the debtor’s creditors up to a certain amount. In Catton, the trustee objected to the debtor’s claim of a homestead exemption on his home, due to the fact that the property also served as the debtor’s insurance agency office. Because the municipal tax assessor described the property as an “office” and taxed the property at a split tax rate, and the debtor’s own appraiser described the property as a “two unit mixed use property,” the trustee contended that the Massachusetts homestead statute was unavailable to the debtor.

In examining the applicability of the homestead statute to the debtor’s property, the bankruptcy court noted that the “point where a single family dwelling with a self-contained commercial use crosses the line from residential to commercial and thus becomes ineligible for homestead protection is not identified in the [homestead] statute,” and recognized that no Massachusetts court had yet appeared to have tackled this issue. Ultimately, the bankruptcy court adopted an approach focusing on “predominance” and determined that a fact-intensive, case-by-case inquiry into the predominant use of the property was necessary in deciding the applicability of the homestead statute.

In holding that the predominant use of the debtor’s property was residential, the bankruptcy court observed that over sixty percent of the property’s square footage served as the debtor’s dwelling. Additionally, the property was zoned such that a home occupation is only permitted where the commercial use is “clearly incidental and secondary to the use of the premises for residential purposes.”

©Copyright 2015 USFN and Partridge Snow & Hahn LLP. All rights reserved.
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South Carolina: Default Mitigation Management Portal

Posted By USFN, Thursday, April 9, 2015
Updated: Wednesday, September 23, 2015

April 9, 2015 

 

by Andrew A. Powell
Scott and Corley, P.A. – USFN Member (South Carolina)

One of the bankruptcy judges for the District of South Carolina (Judge John Waites) recently issued new Chamber Guidelines for cases assigned to him. As part of these guidelines, effective April 10, 2015, all loss mitigation negotiations must occur under the Default Mitigation Management (DMM) portal. The DMM portal is an electronic interface that allows servicers and borrowers to exchange documents and communicate about loss mitigation. Barring a court order stating otherwise, the DMM portal will be the exclusive method for loss mitigation review. Furthermore, as part of these new procedures, the bankruptcy court must enter an order prior to the commencement of any loss mitigation review between the servicer and the borrower.

These guidelines provide that creditors/servicers have an affirmative duty to update the court of any and all non-DMM loss mitigation developments. Therefore, if your company solicits borrowers for loss mitigation, it is recommended that you contact your local bankruptcy counsel to ensure that the court is being properly and timely updated. Failure to abide by these new requirements could result in sanctions from the bankruptcy court.

Please note that this new procedure only affects loans that are involved in bankruptcy cases assigned to Judge John Waites. These changes do not apply to all South Carolina bankruptcy cases. Specifically, and at this time, bankruptcy cases assigned to Judge Helen Burris or Judge David Duncan do not require the use of the DMM portal and will not be affected by these new guidelines. A copy of Judge Waites’s Chamber Guidelines may be found here.

©Copyright 2015 USFN and Scott & Corley, PA. All rights reserved.
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