FORECLOSURE: Ready, Set, Go?
The process is widely followed, prudent, tried and true: a home loan falls sixty (60) days past due, Bank counsel is asked to, and sends out, a thirty (30) day demand letter, the customer does not respond and Bank counsel is directed to proceed with foreclosure ASAP – full speed ahead! - Or maybe not.
On January 17, 2013, the Bureau of Consumer Financial Protection issued a final rule effective January 10, 2014, implementing laws regarding the servicing of federally related mortgage loans. The final rule, including commentary, is a robust 750 plus pages in length and, as noted, has been effective now for approximately one month.
Little publicized language within the final rule (and somewhat lost in the verbiage) is 12 C.F.R. 1024.41(f) which states as follows: “a servicer cannot make the first foreclosure notice or filing for any judicial or non-judicial process until the borrower is more than one hundred twenty (120) days delinquent”.
The commentary thereon states that the first notice or filing refers to any document required by law to be filed with a court, entered into a land record or provided to a borrower.
The purpose of this one hundred twenty (120) day waiting period, according to the commentary, is to provide a borrower with sufficient time to submit to the Bank a complete loss mitigation application. Note well that, under the final rule, there are further limitations on foreclosing when a borrower has submitted a loss mitigation application and the same is pending.
In any event, the commentary makes clear that this one hundred twenty (120) day waiting period preempts state law to the extent that such laws (which include both Illinois and Missouri laws) permit filing a foreclosure or sending a notice earlier than one hundred (100) days after default.
In sum and to be clear, a lender is now prohibited from proceeding ahead with a foreclosure on any loan that is secured by a first lien on residential real property until one hundred twenty (120) days has lapsed from the date the loan first becomes past due.
But what actions exactly must be forestalled or delayed while the one hundred twenty (120) day waiting period runs? Clearly, with a judicial foreclosure, the filing of a mortgage foreclosure complaint, the recording of a notice of foreclosure or the publishing of a notice of foreclosure in a newspaper is barred.
Similarly, with a non-judicial foreclosure, publication of the notice of sale would have to wait.
Beyond this are there other limitations? What about the Bank sending out its own notices of delinquency or the thirty (30) day demand letter or, in Illinois, mailing out the thirty (30) day Grace Period Notice?
The final rule states that the one hundred twenty (120) day waiting period applies to the servicer making the “first notice or filing required by applicable law for any judicial or non-judicial foreclosure process”. The key is: is it required by “applicable law”.
If a demand letter is only required by the loan documents themselves, as opposed to “by law”, then sending out the same would not be prohibited and, thus, could be done within the one hundred twenty (120) day waiting period.
That is fine - BUT HOLD ON: Doesn’t Illinois law require, before a mortgage foreclosure can be initiated on a home loan, that a servicer send a “Grace Period Notice” to a mortgagor once the loan is thirty (30) days in default? Yes, such notice is required “by law” as a prerequisite to foreclosing on residential property unless the customer either has abandoned the property or filed bankruptcy.
SO DOES THAT MEAN THAT THE GRACE PERIOD NOTICE CAN NOT BE SENT UNTIL THE HOME LOAN IS ONE HUNDRED TWENTY (120) DAYS PAST DUE? YES!
A LENDER MUST WAIT UNTIL A HOME LOAN IS ONE HUNDRED TWENTY (120) DAYS PAST DUE BEFORE SENDING OUT THE GRACE PERIOD NOTICE UNLESS THE PROPERTY IS ABANDONED OR THE CUSTOMER HAS FILED BANKRUPTCY IN WHICH CASE THE GRACE PERIOD NOTICE NEED NOT BE SENT AT ALL.
So, the question becomes: how is a Bank to proceed? The following time line, for an Illinois home loan foreclosure is suggested:
- Send out any internally generated notices of the loan being past due for up to one hundred twenty (120) days after default.
- If the loan is still in default, send out one hundred twenty (120) days after default, both the thirty (30) day demand letter (through Bank counsel) and the Grace Period Notice.
- If the borrower does not respond, direct legal counsel, one hundred fifty (150) days after default, to proceed with foreclosure.
TO SUMMARIZE: Banks need to make sure the “new” one hundred twenty (120) day waiting period is honored on home loans as regulators will certainly be looking at this issue as and when examinations occur. Further, and worse still, borrower’s counsel will likely raise this issue to slow or halt a foreclosure altogether if a Bank is found to have “jumped the gun”.
The foregoing is not intended to be legal advice, but rather, to provide accurate information regarding banking law and regulatory matters. For more information, please contact any member of our banking practice group: James A. Rapp ( jrapp@srnm.com ), William M. McCleery, Jr. ( wmccleery@srnm.com ), Michael A. Bickhaus ( mbickhaus@srnm.com ), Ted Niemann ( tniemann@srnm.com ), Alok Patel ( apatel@srnm.com ), or Joseph Ott ( jott@srnm.com ) at (217) 223-3030 or visit us on the web at www.srnm.com. We invite and welcome all questions and comments.