The Amount Of Time It Takes To Foreclose Will Double Beginning January 2014 - Nov 2013

Terry Jessop & Bitner Newsletter

Issue 3, November 2013

In the wake of the economic meltdown of 2009, Congress enacted legislation intended to prevent such a catastrophe from ever happening again. Although there was blame enough to go around (particularly for dishonest debtors and their real estate counterparts who, for a fee, were happy to help unqualified borrowers obtain super-sized loans), Congress directed its ire at the financial sector based on the premise that lenders were the primary bad actors which caused the crisis. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, an 850-page behemoth covering virtually every aspect of the consumer lending industry. The Dodd-Frank Act created the Consumer Financial Protection Bureau, an administrative agency given broad power to enact sweeping regulations. As tasked, the CFPB issued a flurry of new regulations which will take effect in January 2014, including amendments to Reg X, which relates to the Real Estate Sales Practices Act.

Good News and Bad News

The amendments impose new mandates for consumer mortgage loans, from new disclosures at loan inception to servicing guidelines and requirements for dealing with troubled borrowers. The good news is that the CFPB granted an exemption to "small servicers" from many of these amendments. The CFPB defines a "small servicer" as one who owns and services fewer than 5,000 mortgage loans. The bad news is that there are still some provisions that apply to all servicers, large and small. The most significant is the new foreclosure restriction. Beginning in January, 2014, all lenders and servicers are prohibited from initiating any foreclosure, either judicial or non-judicial, unless or until: (1) the borrower is more than 120 days delinquent; (2) the foreclosure is based on a due on sale clause; or (3) the servicer is joining the foreclosure action of a subordinate lienholder. (This restriction does not apply to home equity lines of credit.) The Act gives a debtor the right to file a lawsuit against a lender who violates these provisions and to recover damages, attorney's fees and costs. If you are a lender considering foreclosing any delinquent loans, it would be wise to begin before this new restriction kicks in.

The Practical Effects of Dodd-Frank

In practice, this amendment not only delays all residential foreclosures, it doubles the time it takes to foreclose in Utah, from four months to eight! Meanwhile, the delinquent debtor can remain in the home without making payments or even maintaining the property. According to the CFPB, there is method to the madness. The "pre-foreclosure" period is designed to allow a borrower and lender to explore loss mitigation options as alternatives to foreclosure. While this sounds nice, it is likely that the pre-foreclosure period will only delay the inevitable in most cases. The hope is that a lender will find a way to work within a debtor's budget. But if a lender forecloses, it is often because the debtor has no significant budget and cannot repay the loan. This puts the lender in a difficult position with limited options. The lender can either allow the debtor to remain in the property for substantially less than is owed, or wait out the extended foreclosure period while attempting to prevent the debtor from defacing or destroying the property.

Review Your Procedures

There are several other new amendments which also apply to small servicers. A review of your policies and procedures to ensure you are in compliance with these new amendments may help avoid unnecessary and costly legal battles later on. Feel free to contact us to set up a review.

©Terry Jessop & Bitner November 2013