When we are young, we hate conformity. When we get old, we like consistency. If you are old, or just old at heart, you may appreciate the latest effort of the Uniform Law Commission (ULC) to draft a model statute that, if adopted, could bring consistency to foreclosure procedures across the United States.
A Project by the Banks, For the Banks?
The ULC recently released the first draft of the Residential Real Estate Mortgage Foreclosure Process and Protections Act. The draft brought howls of protest from some consumer advocates, who believe that any attempt to override existing state foreclosure laws is fundamentally misguided. Those same advocates fear that the project is by the banks and for the banks and designed to undermine fundamental protections for distressed homeowners.
Whether or not Darth Vader and his stormtroopers are destined to make an entrance at the next committee meeting is a topic for another post. For now, those inclined to sharpen their pitchforks should consider that the committee includes members like law professor and former legal aid attorney Alan White and Martha Walters, a former labor attorney and current Justice on the Oregon Supreme Court. Neither can be fairly characterized as a homeowner-hating crony of the banking industry. They may also want to read the draft, which will surely ruffle many feathers but hardly comes with an ominous sound track.
So without weighing in for now on the good, the bad, and the ugly, what does the Act do and how it does it compare to current Oregon law?
Revises the Foreclosure Process for Residential Property
The Act would apply only to judicial and nonjudicial foreclosures of residential real property commenced after the effective date. Residential real property is defined as any property with one to four units that the owner intends primarily for personal, family, or household use at the time the mortgage is entered into. Presently in Oregon, whether a trust deed is “residential” is not determined until the time of the default, a more difficult standard to enforce.
Requires Mandatory Pre-Foreclosure Notices
Lenders would be required to send homeowners a 30-day notice of default and intent to accelerate before any foreclosure or other legal action could be commenced. That requirement is already standard in most Oregon trust deeds. Among other things, the notice would have to describe “the specific basis for asserting that the foreclosing party has the right to foreclose” and the homeowner’s right to request a copy of the note and any assignments of the trust deed. The requirement is taken from the servicing standards imposed by the national foreclosure settlement.
Lenders would have to separately mail notice of the homeowner’s right to mediate, discussed further below. Both notices would have to be sent by mail and, if the servicer has an email address for the homeowner, emailed.
Modifies the Right to Cure Before Sale
Under current Oregon law, a homeowner has until 5 days before the actual sale date to cure the default. Under the Act, the homeowner would have until 1 day before the initial sale date to cure but the deadline would not be extended if the sale is postponed. Unlike current Oregon law, attorney fees and foreclosure costs included in the amount of cure would not be capped.
Proposes Mandatory, Pre-Foreclosure Mediation for All
The committee has engaged in considerable hand-wringing about whether to include a mediation requirement or merely to suggest “best practices” for mediation. The current draft contains a broad concept with little detail, but generally it adopts the best practices of the most successful programs.
The lender would be required to give a notice of mediation before the lender could commence a nonjudicial or judicial foreclosure or other legal action to enforce the note. Currently in Oregon mediation only applies to pending nonjudicial foreclosures creating a massive loophole that has so far stymied the program.
Mediation would be automatically scheduled so that homeowners would have to opt out rather than opt in. Jurisdictions that have converted to opt out mediation have substantially higher participation rates than opt in jurisdictions.
Both parties would be required to mediate in good faith, though no remedy for non-compliance is included. The parties would be required to address key issues relevant to avoiding foreclosure and the lender would be barred from passing its mediation fees on to the homeowner.
Importantly, lenders would be barred from commencing a foreclosure until the mediation process is concluded.
Clarifies Who Can Foreclose—The (Dark) Heart of the Matter
In what will undoubtedly prove to be the most objectionable article, the Act addresses who may foreclose and how that right must be established in judicial and nonjudicial foreclosures.
For non-negotiable notes, the owner of the note has the right to foreclose. For negotiable notes, any person entitled to enforce the note under Article 3 of the Uniform Commercial Code (UCC) will have standing. Those consumer advocates who believe that the foreclosing party must be both an owner of the note and a person entitled to enforce it will object. For those on the fence or who disagree, it may be more concerning that the UCC requires possession to enforce the note but the Act does not. If an agent forecloses on behalf of a principal that has possession, that is good enough according to the drafters. That provision arguably deserves closer scrutiny from the committee.
In a judicial foreclosure, the Act requires the lender to allege and prove facts that establish the right to foreclose. The lender must attach either a copy of the note or a lost not affidavit to the complaint. Homeowners who contest authenticity could still request to see the original.
In a nonjudicial foreclosure, the lender must set forth facts establishing the right to foreclose in an affidavit included with the notice of default. According to a drafters’ comment, the affidavit must “identify and describe all necessary assignments and substitutions,” though that requirement is not found in the Act itself.
If it is unclear whether the note is negotiable or non-negotiable (and therefore which facts the lender must establish), the lender can assert facts that would support a right to foreclose under either or both standards. Inexplicably, the Act does not require that the lender attach a copy of the note to the affidavit, a serious oversight.
The Mortgage Follows the Note, But Assignments Are Out the Window
The Act expressly incorporates the traditional “mortgage follows the note” rule, but the comments seem to endorse the Restatement view that parties can agree to sever the note and mortgage.
In what should prove to be a hotly debated policy choice, the drafters do not require recorded assignments of the mortgage. The drafters implicitly acknowledge that eliminating the requirement in states that currently require it will be controversial, but argue that any assignments will be identified in the affidavit or complaint rendering the recording requirement superfluous.
In Oregon, the recording requirement has been under assault by the mortgage industry since the failure to record assignments became the most effective defense to nonjudicial foreclosures. While there is nothing per se objectionable about allowing lenders to establish the right to foreclose nonjudicially by recorded affidavit, the draft proposal falls far short by failing to expressly require that all assignments (including those by operation of law) be set forth in the affidavit and that a copy of the note or a lost note affidavit be attached.
Unfortunately, even if there is a reasonable middle ground, Oregon seems unlikely to embrace it. Lenders have never expressed a willingness to accept anything less than a complete evisceration of the recording requirement in Oregon. Consumer advocates who have spent years fighting MERS battles seem equally determined to stand their ground. While a well-designed affidavit requirement could satisfy the reasonable concerns of both sides, it seems unlikely that a thoughtful conversation about it will take place any time soon.
Although we will not review them in this post, the Act contains additional provisions relating to the advertisement, confirmation, and effect of a foreclosure sale. The Act also addresses deeds in lieu of foreclosure, abandoned properties, and condo and homeowners’ association liens.
The committee will meet again in Washington D.C. on November 2 and 3 to review and discuss the draft Act. Information about the committee, its members, and the upcoming meeting are available at the Uniform Law Commission website. The draft of the Act is available here.
Photo by Bandita