Lenders Beware: Recent Changes in Foreclosure Laws

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The number of foreclosures is staggering.  The Oregon legislature and Congress have responded by imposing additional requirements on lenders foreclosing on homeowners.   The most recent changes in the law require lenders to consider residential property owners’ requests for loan modifications and provide additional notices to tenants renting property that is being foreclosed.  Lenders should be aware of these new requirements and should be careful to comply with them.

Loan Modifications.  Prior to or concurrently with filing the notice of default, the lender must mail to the owner by both first-class and certified mail with return receipt requested a danger notice with certain specific requirements.

The law now also requires the lender to provide the owner a loan modification form in addition to the danger notice.  If the owner returns the modification form to the lender within 30 days, the lender must in good faith process the owner’s request.  The lender must notify the owner as soon as practicable but no later than 45 days after receiving the modification form whether the owner’s request has been approved or denied.  The lender may require that the owner provide additional information related to the owner’s request for a loan modification to determine if the loan can be modified.  If the owner timely requests a meeting with the lender, the lender or its agent must meet with the owner either in person or by phone before the lender or its agent responds to the owner’s request to modify the loan.  

The lender must also file an affidavit in the county where the property is located demonstrating that it followed this process.  If the lender does not comply with these provisions it is prohibited from foreclosing.

These new provisions require lenders to consider loan modifications “in good faith” and respond to owners as provided above.  What constitutes “good faith” is unclear.  The circumstances a lender may or may not consider and what exposure, if any, a lender might have for not approving a loan modification are also unclear.  At a minimum, lenders should carefully document loan modification decisions.  These new loan modification requirements will create additional hurdles to foreclosing on residential property and will require lenders to spend additional time to consider any loan modification requests.

Notice to Residential Tenants.  There are new notices that foreclosing lenders must give to tenants of residential property.  Tenants are given the greater protection offered by either the federal law or state law.  Under the federal Protecting Tenants at Foreclosure Act of 2009, if a tenant is occupying a residential dwelling as a bona fide tenant, federal law requires at least 90 days’ written notice before requiring the tenant to vacate the premises.  This provides greater notice to tenants than is typically required to terminate a month-to-month lease arrangement, essentially putting tenants in a better position than they were in with the original owner.

If the tenant is renting the property under a fixed term lease (for example, a six-month or one-year term) the new owner will be required to honor the lease and allow the tenant to stay in the home until the expiration of the lease term unless the buyer of the foreclosed property wants to move in and use the property as a primary residence.  In that circumstance, the buyer can give written notice to the tenant and require the tenant to vacate after 90 days even if the fixed term tenancy has more than 90 days left in its term.  These notices cannot be issued until after a foreclosure sale and title has transferred.

A tenant may be able to demonstrate it is a bona fide tenant by either providing the lender a written rental agreement or by providing other proof such as receipts for rent the tenant paid.  A tenancy shall only be considered bona fide if: (1) it is with someone other than the borrower or the child, spouse or parent of the borrower, (2) it is the result of an arm’s-length transaction, and (3) requires the tenant to pay fair market rent for the property (unless subsidized due to a federal, state or local subsidy).

In order to evict a tenant in a foreclosure situation a landlord must comply with both state and federal law; however, under no circumstances may a property owner in Oregon evict a residential tenant without obtaining an order of eviction from the court.  

The items listed in this article are a summary only of some of the recent changes in the law and does not cover the many specific provisions that lenders must comply with in order to foreclose on real property.

Heather J. Hepburn and Brian Gingerich are attorneys in the Central Oregon office of Northwest regional law firm Schwabe, Williamson & Wyatt, focusing their practices in the areas of business law, including general business advice, commercial litigation, business sales and acquisitions, finance and securities, entity formations, and real estate transactions. Hepburn can be reached at 541-749-4073 or hhepburn@schwabe.com. Gingerich can be reached at 541-749-4046 or bgingerich@schwabe.com.

This article is intended for informational purposes only and is not intended to serve as legal advice regarding specific matters nor should it be construed as a legal opinion. Use of this article does not establish an attorney-client relationship between you and Schwabe, Williamson & Wyatt. The information in this article should not be used to replace the advice of a licensed attorney.

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