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Reexamining Non-Judicial Foreclosures

posted by Adam Levitin

Katie Porter's posts and scholarship about illegal fees tacked on by mortgage servicers to defaulted mortgages raise an interesting question:  why aren't states reconsidering non-judicial foreclosure?  Non-judicial foreclosure is generally faster and cheaper than judicial foreclosure, which is a good thing, at least for the foreclosing lender as it reduces loan losses.  And as Karen Pence has shown, there is a reduced supply of credit in states with judicial foreclosure.  But as the name implies, non-judicial foreclosure lacks court oversight, and this raises the possibilities for abuse.

[UPDATED LINK 3.4.08 at 5:06pm]

As Katie has noted in her scholarship, it seems probable that illegal fees are even more likely in non-judicial foreclosures than in situations where there is court supervision, be it judicial foreclosure or bankruptcy.  If illegal fees are a pervasive problem--and Katie's work suggests that they are--then we should really think about crafting procedures that protect against these fees.  Katie's work, which looks at fees in bankruptcy cases, shows, judicial oversight alone is not a solution to illegal fees, but it seems like a sine qua non for correcting the problem; it is hard to imagine how non-judicial foreclosures could be changed in order to ensure effective monitoring against illegal fees.  There is a policy balance to be struck between ensuring cheap and available credit and ensuring fairness in lending.  Studies like Katie's should be starting a conversation about where that balance should lie, and I think part of it is considering whether the benefits of non-judicial foreclosure outweigh the abuses. 


THANK YOU for raising this issue, Professor. I've long been saying that non-judicial foreclosures need to be either completely abolished or somehow overseen. Unfortunately, the only solution that I have been able to come up with to date is the creation of a "housing court" system nationally. Whether this further burdens our court systems or not I'm not sure.

I DO know that non-judicial foreclosures are only helping the lenders, servicers, foreclosure mills and auction houses to make money hand over fist. In fact, to date, despite the industry mantra that foreclosures COST a note holder on average $50k, I have yet to see that figure broken out in any manner. From my personal experience, I have seen zero proof that ANY entity -other than the borrower - loses anything in the foreclosure process ESPECIALLY if the borrower's note has been securitized. There are simply too many insurance policies covering potential losses for anyone to actually LOSE money in the process. I've seen scenarios where double, triple even quadruple dipping on insurance claims are possible if all of the entities are kept in the dark and not communicating.

And yes - New Hampshire IS a non-judicial foreclosure state...

SECTION 5. Chapter 45 of the General Statutes is amended by adding a new Article to read:
"Article 10. "Mortgage Debt Collection and Servicing.

"§ 45-90. Definitions.
As used in this Article, the following definitions apply:
(1) Home loan. – A loan secured by real property located in this State
used, or intended to be used, by an individual borrower or individual
borrowers in this State as a dwelling, regardless of whether the loan is
used to purchase the property or refinance the prior purchase of the
property or whether the proceeds of the loan are used for personal,
family, or business purposes.
(2) Servicer. – A 'servicer' as defined in the Real Estate Settlement
Procedures Act, 12 U.S.C. § 2605(i). A licensed attorney, who in the
practice of law or performing as a trustee, accepts payments related to
a loan closing, default, foreclosure, or settlement of a dispute or legal
claim related to a loan, shall not be considered a servicer for the
purposes of this Article.
"§ 45-91. Assessment of fees; processing of payments; publication of statements.
(a) A servicer must comply as to every home loan, regardless of whether the loan is considered in default or the borrower is in bankruptcy or the borrower has been in bankruptcy, with the following requirements:

(1) Any fee that is incurred by a servicer shall be both:
a. Assessed within 45 days of the date on which the fee was
incurred. Provided, however, that attorney or trustee fees and
costs incurred as a result of a foreclosure action shall be
assessed within 45 days of the date they are charged by either
the attorney or trustee to the servicer.

b. Explained clearly and conspicuously in a statement mailed to
the borrower at the borrower's last known address at least 30
days after assessing the fee, provided the servicer shall not be
required to take any action in violation of the provisions of the
federal bankruptcy code.

(2) All amounts received by a servicer on a home loan at the address
where the borrower has been instructed to make payments shall be
accepted and credited, or treated as credited, within one business day
of the date received, provided that the borrower has made the full
contractual payment and has provided sufficient information to credit
the account. If a servicer uses the scheduled method of accounting, any regularly scheduled payment made prior to the scheduled due date shall be credited no later than the due date. Provided, however, that if any payment is received and not credited, or treated as credited, the borrower shall be notified within 10 business days by mail at the borrower's last known address of the disposition of the payment, the reason the payment was not credited, or treated as credited to the account, and any actions necessary by the borrower to make the loan current.

(3) Failure to charge the fee or provide the information within the
allowable time and in the manner required under subdivision (1) of
subsection (a) of this section constitutes a waiver of such fee.

(4) All fees charged by a servicer must be otherwise permitted under
applicable law and the contracts between the parties. Nothing herein is
intended to permit the application of payments or method of charging
interest which is less protective of the borrower than the contracts
between the parties and other applicable law.

"§ 45-92. Obligation of servicer to handle escrow funds.
Any servicer that exercises the authority to collect escrow amounts on a home loan held or to be held for the borrower for insurance, taxes, and other charges with respect to the property shall collect and make all payments from the escrow account, so as to ensure that no late penalties are assessed or other negative consequences result. The
provisions of this section shall apply regardless of whether the loan is delinquent or in default unless the servicer has a reasonable basis to believe that recovery of these funds will not be possible or the loan is more than 90 days in default.

"§ 45-93. Borrower requests for information.
The servicer shall make reasonable attempts to comply with a borrower's request for information about the home loan account and to respond to any dispute initiated by the borrower about the loan account, as provided in this section. The servicer shall maintain, until the home loan is paid in full, otherwise satisfied, or sold, written or
electronic records of each written request for information regarding a dispute or error involving the borrower's account. Specifically, the servicer is required to do all of the following:

(1) Provide a written statement to the borrower within 10 business days of receipt of a written request from the borrower that includes or
otherwise enables the servicer to identify the name and account of the
borrower and includes a statement that the account is or may be in
error or otherwise provides sufficient detail to the servicer regarding
information sought by the borrower. The borrower is entitled to one
such statement in any six-month period free of charge, and additional
statements shall be provided if the borrower pays the servicer a
reasonable charge for preparing and furnishing the statement not to
exceed twenty-five dollars ($25.00) The statement shall include the
following information if requested:

a. Whether the account is current or, if the account is not current,
an explanation of the default and the date the account went into

b. The current balance due on the loan, including the principal
due, the amount of funds (if any) held in a suspense account,
the amount of the escrow balance (if any) known to the
servicer, and whether there are any escrow deficiencies or
shortages known to the servicer.

c. The identity, address, and other relevant information about the
current holder, owner, or assignee of the loan.

d. The telephone number and mailing address of a servicer
representative with the information and authority to answer
questions and resolve disputes.

(2) Provide the following information and/or documents within 25
business days of receipt of a written request from the borrower that
includes or otherwise enables the servicer to identify the name and
account of the borrower and includes a statement that the account is or may be in error or otherwise provides sufficient detail to the servicer regarding information sought by the borrower:

a. A copy of the original note, or if unavailable, an affidavit of lost

b. A statement that identifies and itemizes all fees and charges
assessed under the loan transaction and provides a full payment
history identifying in a clear and conspicuous manner all of the
debits, credits, application of and disbursement of all payments
received from or for the benefit of the borrower, and other
activity on the home loan including escrow account activity and
suspense account activity, if any. The period of the account
history shall cover at a minimum the two-year period prior to
the date of the receipt of the request for information. If the
servicer has not serviced the home loan for the entire two-year
time period the servicer shall provide the information going
back to the date on which the servicer began servicing the home
loan. For purposes of this subsection, the date of the request for
the information shall be presumed to be no later than 30 days
from the date of the receipt of the request. If the servicer claims
that any delinquent or outstanding sums are owed on the home
loan prior to the two-year period or the period during which the
servicer has serviced the loan, the servicer shall provide an
account history beginning with the month that the servicer
claims any outstanding sums are owed on the loan up to the
date of the request for the information. The borrower is entitled
to one such statement in any six-month period free of charge.
Additional statements shall be provided if the borrower pays the
servicer a reasonable charge for preparing and furnishing the
statement not to exceed fifty dollars ($50.00).

(3) Promptly correct errors relating to the allocation of payments, the
statement of account, or the payoff balance identified in any notice
from the borrower provided in accordance with subdivision (2) of this
section, or discovered through the due diligence of the servicer or
other means.

"§ 45-94. Remedies.
In addition to any equitable remedies and any other remedies at law, any borrower injured by any violation of this Article may bring an action for recovery of actual damages, including reasonable attorneys' fees. The Commissioner of Banks, the Attorney General, or any party to a home loan may enforce the provisions of this section. With the exception of an action by the Commissioner of Banks or the Attorney
General, at least 30 days before a borrower or a borrower's representative institutes a civil action for damages against a servicer for a violation of this Article, the borrower or a borrower's representative shall notify the servicer in writing of any claimed errors or disputes regarding the borrower's home loan that forms the basis of the civil action. The notice must be sent to the address as designated on any of the servicer's bills, statements, invoices, or other written communication, and must enable the servicer to identify the name and loan account of the borrower. For purposes of this section, notice
shall not include a complaint or summons. Nothing in this section shall limit the rights of a borrower to enjoin a civil action, or make a counterclaim, cross-claim, or plead a defense in a civil action. A servicer will not be in violation of this Article if the servicer
shows by a preponderance of evidence that:

(1) The violation was not intentional or the result of bad faith; and

(2) Within 30 days after discovering or being notified of an error, and
prior to the institution of any legal action by the borrower against the
servicer under this section, the servicer corrected the error and
compensated the borrower for any fees or charges incurred by the
borrower as a result of the violation.

"§ 45-95. Severability.
The provisions of this Article shall be severable, and if any phrase, clause, sentence, or provision is declared to be invalid or is preempted by federal law or regulation, the validity of the remainder of this section shall not be affected thereby. If any provision of
this Article is declared to be inapplicable to any specific category, type, or kind of points and fees, the provisions of this Article shall nonetheless continue to apply with respect to all other points and fees."

SECTION 6. Sections 4 and 5 of this act become effective April 1, 2008. All other sections of this act are effective when it becomes law.
In the General Assembly read three times and ratified this the 1st day of August, 2007.

s/ Beverly E. Perdue
President of the Senate
s/ Joe Hackney
Speaker of the House of Representatives
s/ Michael F. Easley

Now you're just teasing me, Attorney Gardner... ;)That IS NC state law and not federal, correct?

I wonder if there is any way I can just cut/paste that into the NH RSAs...

Would you believe that those with wisdom up here have effectively exempted mortgage and banking related issues from NH Consumer Protection laws completely and any discrepancies now come under the purview of the NH Banking Department? Homeowners are totally screwed up here now... Have been for a year or three I think....

I have filed a suit in federal district court in Sacramento regarding non judicial foreclosures. This should not be allowed especially if the lender is a national bank which is an instrumentality of the federal government. I have done a lot of research on the subject. Because there is a symbiotic relationship between the national banks and the federal government, the application of the non judicial forclosure should be a violation of procedural due process and equal protection under the 5th Amendment and strictly prohibited. See Burton v Wilmington Parking Authority, 365 U.S 715. Also,Easton v. Iowa, 188 U.S. 220 and Osborn v Bank of United States, 9 Wheat 738. The government has done nothing to remedy this situation. Our Government should have been a shield protecting us. Instead they have been a sword against the consumer.
You can email me at [email protected]

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