The issue of unknown heirs filing bankruptcy or being of existence during the foreclosure process has presented itself as an area of potential concern for the mortgage default Industry. The good news: no law, whether it be federal bankruptcy law or state law in Tennessee or Georgia, imposes a duty on lenders and their attorneys to search for heirs all over the world. However, the bad news is that since no foreclosure or bankruptcy statute contemplates this issue, it leaves open the possibility for costly litigation in the future.

 Therefore, we advise lenders take preventative measures at the outset of the foreclosure.   

In the past few months, the Consumer Financial Protection Bureau ("CFPB") has been releasing bulletins on various aspects of Regulation X ("RESPA") and Regulation Z ("TILA").    As we lead up to the January 10, 2014 effective date of the recent amendments to RESPA and TILA, the CFPB released an advisory on how mortgage servicers are to handle service transfers.  For many in the mortgage default industry, service transfers have become a daily occurrence.   In light of the National Mortgage Settlement Agreement ("NMS"), many of the largest servicers had to transfer servicing of loans to other servicers.  Parts of the NMS also dealt with the issues of service transfers occurring during loss mitigation.   This combination of having to transfer large amounts of loans to new servicers and heightened loss mitigation requirements led the CFPB to issue a bulletin on February 11, 2013 clarifying issues pertaining to service transfers.   While the effects of the amendments to RESPA and TILA won't take effect until next year, the bulletin advises that servicers should consider implementing many of the new rules as soon as possible in advance of the deadline.   A copy of the Bulletin is available here.

The main focus of the bulletin is to ensure that the borrowers are not harmed by the transfer of servicing of their home loans.  The risk factors evaluated include what policies and procedures are in place during the transfer, so that unnecessary delays in loss mitigation do not occur.  The biggest risk for servicers during these transfers is the interruption (or, in a worst case scenario, cessation) of loss mitigation with the borrower.   The CFPB bulletin details several points of information that they will require from servicers during a transfer, including numbers, volume, training of staff, processes and procedures and troubleshooting. 

What servicers and the attorneys involved in the transfers should take away from this bulletin is that there will be an increased scrutiny on their internal service transfer processes.  While these revisions won't be in effect officially until next year, servicers should be following these procedures currently as good practice.  Not being properly prepared in service transfer situations can lead to litigation and unnecessary publicity for 'dropping the ball' in loss mitigation situations.  As attorneys for the servicers, we must be vigilant and try to prevent any situations of communication breakdowns between the servicers during the transfer.  Calls from borrowers showing conflicting letters or deadlines should be red flags that are escalated immediately.   Service transfers can be a confusing time for all parties involved, but it doesn't have to be.  By creating the plans and policies now, servicers can get a head-start on the looming amendments and improve general business practices as a whole. 

In evictions, dealing with tenant occupied properties can bring some unique issues ultimately prolonging the path to possession for the purchaser at the foreclosure sale. Under the Protecting Tenants at Foreclosure Act, tenants living in properties sold at foreclosure are entitled to additional protections that may allow them to continue to occupy the property under a valid lease agreement. Here, I will discuss an overview of some of those protections, ways to make possession of the property a priority for the new owner, and some unique tenant situations our firm has seen recently.

The Protecting Tenants at Foreclosure Act was enacted in 2009 to protect tenants who entered into leases with landlords who later lost their home to foreclosure. The act requires the purchaser at the foreclosure sale, or the new owner of the property, to provide the current tenant with ninety days notice to vacate the property. Furthermore, if the tenant has a valid lease and is a bona fide tenant, then the tenant will be granted the right to stay in the property throughout the term of the lease. A tenant is only qualified as a bona fide tenant if the tenant is not the former mortgagor or a child, spouse, or parent of the former mortgagor, the lease is the result of an arm's length transaction, and the rental value for the lease is not substantially less than fair market rent for the property.   

When evaluating a lease to determine its validity and bona fide status of the tenant, a good starting place is with fair market rental value. Fair market rental value can be evaluated by pulling comparable rental values of similar properties and then presented to the court with an expert witness who may testify to the calculated fair market rental value of the property. If the rent is substantially below the proven fair market value, then the lease is not valid. This is a determination for a the court. Next, it is also important to look at the relationship between the former mortgagor. For instance, if the tenant is a parent or child of the former mortgagor, then the tenant is not a bona fide tenant who is entitled to protection under the Protecting Tenants at Foreclosure Act. Additionally, a former mortgagor who is also the tenant on the lease is not a bona fide tenant. Finally, the lease should be evaluated as an "arm's length transaction" as well.

When dealing with tenants and leases, we have seen some interesting issues arise. For instance, the former owner and landlord entered into a lease agreement with a former spouse and allowed their minor child to reside in the property. In this instance, a former spouse is not the same thing as a spouse under the protecting tenant's act. Additionally, the child was a minor child and was not listed as a tenant on the lease. This would appear to be a bona fide tenant , despite the close relationship. Another unique situation is when several rooms are rented out in a house, with separate leases for each unit. This makes it particularly hard to gain full possession of the property for the new owner because it is effectively four separate eviction cases and all tenants may not respond in the say way. In instances such as these, alternatives to a traditional eviction may be important options to explore.

As a preemptive effort or alternative to a full eviction to gain possession of a property when tenants are the known occupants, a Move Out Agreement, also known as a Cash for Keys agreement, can be very successful. This agreement will offer the occupant an amount of money as relocation assistance in exchange for an agreed upon move out date. Often, tenants are receptive to this assistance. This agreement is mutually beneficial as it allows the tenants the assistance necessary to move and often cover a deposit at a new residence as well as gaining possession of the property for the new owner at a much earlier date than going through a full eviction process or allowing occupancy for the full lease term.