Summer 2001
A professional publication issued by
Cohn, Goldberg & Deutsch, LLC
Serving the legal needs of lenders and servicers throughout Maryland and the Disctrict of Columbia.
DISTRICT OF COLUMBIA OVERHAULS FORECLOSURE LAW
The Office of Banking and
Financial Institutions and the Metropolitan Washington Planning
and Housing Association, cosponsored the formation of the D.C.
Mortgage Foreclosure Task Force. The task force accomplished
a massive overhaul of the District of Columbia's nearly century
old foreclosure law. What resulted is, the Predatory Lending
Protections and Mortgage Foreclosure Improvements Act of 2000,
which was signed by Mayor Anthony Williams on December 15, 2000,
and was presented to Congress on February 3, 2001. The
thirty (30) day legislative period ran at the end of March 2001.
Regulations were published in the D.C. Register for a thirty
(30) day comment period on July 27, 2001, and the law will take
effect upon passage of the comments period. As a result of
technical defects in the legislation, it was unclear as to what
the actual effective date would be, however, on August 31, 2001,
Emergency Rules were promulgated in order to clarify this
ambiguity. Now September 1, 2001 is the effective date for those
provisions dealing with loan originations, where the application
or acceptance of that loan took place on or after that date.
Similarly, October 1, 2001 is the effective date for those
provisions governing foreclosures, where the notice of
commencement was recorded on or after that date.
Initially, it should be noted that
certain loans have been exempted from various parts of the
legislation, because of concerns that this legislation might
"chill" lending in the District of Columbia and slow the
foreclosure process. Specifically, "purchase money" and
"prime" loans have been exempted. Prime loans include loans
originated under government agency programs such as the Department
of HUD, FHA, Veterans Administration and the D.C. Housing Finance
Agency. Additionally, all loans originated and underwritten
pursuant to a fully documented loan program of Fannie Mae or
Freddie Mac, purchased by Fannie Mae or Freddie Mac and serviced
under such fully documented loan programs, are also exempt.
Finally, exempt loans also include commercial loans, reverse
mortgages, construction loans, certain home equity loans and first
and second loans created simultaneously where the average "home
loan adjusted rate" for both loans is equal to or less than the
"home loan reference rate". Although these loans are exempt
from the predatory loan provisions of the new law, all loans are
subject to the new foreclosure
procedures.
Under the new law, a breach
letter is now required by statute, even if the deed of trust note
contains a waiver of notice of acceleration. All notices
must be sent by certified mail, return receipt requested AND by
regular mail AND by any other method set out in the deed of trust.
Note-owners wishing to foreclose a deed of trust, must now
also produce the original note. In the event that the
note-owner cannot produce the original note, an additional notice,
including a lost note affidavit, must be forwarded to the borrower
and owner of the secured property indicating that the note is lost
and that a request for the foreclosure sale will be made within 14
days. The lost note affidavit shall include an
indemnification of appropriate parties in the event that the note
was assigned and the particular commencement of foreclosure
proceedings was in error. A bond may also be necessary if
deemed appropriate by a court after a request by the borrower or
owner.
All loan instruments that are
recorded among the land records more than 60 days after the
effective date of the Act, must have an attached information form.
If this form is not attached, the foreclosure must be conducted
judicially. This information form acknowledges several facts,
including whether the instrument secures a "home
loan."
Under the new legislation,
residential loans may be reinstated three times within a 12-month
period by either the borrower or owner, or paid off, at any time
prior to the commencement of the foreclosure sale auction.
Reinstatement quotes must be provided within three business days
of receipt of a request and the quote must be good for 14 days.
Subordinate lien holders can also reinstate once in any 12-month
period.
Notices of commencement of
foreclosure must now include all relevant documents the homeowner
will need to seek professional help. All notices that are
served on the borrower are to be accompanied by copies of the note
or the lost note affidavit, pay-off amount itemized, reinstatement
amount itemized, fees and costs statement itemized, a statement as
to whether or not the property is a "home loan", a soldiers' and
sailors' disclosure and the legal basis of the noteholder's
entitlement to power of sale foreclosure. Notices must also
be accompanied by a title search in the form of an ALTA
commitment, not more than 60 days old, payment instructions,
available sources of help, definitions of "predatory lending" and
"home loan" and the circumstances under which one is entitled to
judicial foreclosure. The notice itself, must also state the
amount of the "challenge payment".
A
notice must be recorded among the land records, mailed to the
borrower(s) and owner(s), and to any subordinate interest
holder(s), at least 45 days in advance of the foreclosure auction
of residential property having an assessed value of $1 million or
less. Additionally, a copy of the notice must be personally
served, at least 40 days in advance of the foreclosure auction,
upon the owner, if the owner can be found at the property.
For other types of property, the notice need only be
recorded, and mailed, 30 days in advance, and personal service is
not required. If the owner cannot be found at the property,
then service of the notice upon a person who is of proper age, who
is related to the owner, and who resides at the property, will
suffice. In the absence of a person of proper age who is
related to the owner and who resides in the property, service can
be effectuated by posting. Before posting can be utilized,
at least two personal service attempts on different days of the
week and at different times must be attempted. No notice
need be sent to spouses joining in for the sole purpose of
conveying their dower rights, if they otherwise have no personal
liability.
The new law also
provides that the noteholder's rights to a deficiency may be
limited if the property has a fair market value greater than the
foreclosure sales price. A credit is given against the amount
owed, to the extent the fair market value exceeds the auction
price. A deficiency action may be brought within two years of the
foreclosure sale.
Most importantly,
borrowers or owners have the right to request that a foreclosure
be held judicially (the "challenge"), if a residential lien
instrument does not have a properly completed information form as
mentioned above, if the loan is a "home loan" alleged to have
included terms in violation of the predatory loan provision, or
the lien instrument specifies judicial foreclosure or is otherwise
limited to judicial foreclosure under the Law. The request
must also be accompanied by a name and address where a summons for
an expedited hearing can be served, and include a description of
any alleged violation of the predatory lending law. During the
challenge period, the borrower must provide reasonable evidence of
a certificate of insurance, and pay by the fifth business day of
each month, one-twelfth of the annual premiums for insurance and
property taxes plus any delinquent taxes including interest and
penalties. Additionally, the borrower must pay by the fifth
business day of every month, one-half of 1 percent of the lesser
of the maximum principal amount of the note, less the origination
and discount points and fees charged at origination.
These payments must be maintained for six months while
the court hearing is pending.
Upon
receiving a request for a judicial foreclosure, the Trustee may
notify the requesting party that he intends to seek an expedited
hearing. If the Trustee fails to make a "good faith effort"
at filing the appropriate pleadings within the earlier of five
business days after receiving written notice that more than 10
business days have elapsed since receiving the trustee's notice
and that they have not been served with any notice of an expedited
hearing; or 20 business days after sending the notice of the
Trusteešs decision to seek an expedited hearing, then the lender
will be deemed to have accepted the request for a judicial
foreclosure and may not thereafter seek an expedited hearing or
pursue a power-of-sale foreclosure without court approval or the
written consent of the borrower and owner. Except in the case of
delay caused by a debtor's bankruptcy, or other circumstances
beyond the noteholder's control, if the expedited hearing is not
held within six months of the trusteešs election to seek an
expedited hearing, the borrower may cease making the
above-required payments. This is also true where the trustee
elects judicial foreclosure, or is mandated by court order to do
so. Alternatively, if the borrower does not make the required
payments, the trustee may cancel the request for judicial
foreclosure after sending written
notice.
Upon the filing of the
appropriate pleadings and motion, the court shall schedule an
expedited hearing, at which time the court will determine whether
or not the borrower or owner's request for judicial foreclosure
shall be granted. A judicial foreclosure is commenced by the
filing of a petition to foreclose the lien instrument. If the
court determines that the lien instrument did not secure a "home
loan," that there was no violation of the predatory lending law,
that the lien instrument does not otherwise require judicial
foreclosure, and that the information form was attached to the
recorded instrument as required, the court, unless the secured
party desires to continue with the judicial foreclosure, shall
give the trustee permission to thereafter pursue a power of sale
foreclosure, without sending new notices of
foreclosure.
Advertisement requirements
have also changed. They must now contain specific
information and run once a week on the same business day for three
successive weeks prior to the foreclosure auction. The first
publication shall be not less than 15 days prior to the auction,
and the last publication shall not be more than one week, nor less
than one day, prior to the auction. Property having an assessed
value of more than $1 million must be advertised for four
successive weeks, and the first publication may not be less than
22 days prior to the sale.
Foreclosure
sales must occur between 10:00 A.M. and 5:30 P.M. and can be held
at the property, the auction gallery of a licensed D.C.
auctioneer, or at any generally accessible commercial location.
Generally, 5-percent deposits, based on the accepted sales price,
must be utilized unless the property has an assessed value of more
than $500,000, in which case a sliding scale is provided up to 10
percent. A foreclosure sale is presumed valid unless the price
obtained at auction is grossly inadequate.
Postponement
procedures have also been established. The Trustee may
postpone a sale one time for no more than 14 days. The
postponement must be announced at the time and place of the
original sale, or written notice must be sent at least 7 days
before the new date and there must be one additional publication.
The Owner and Trustee may also mutually agree to up to three
postponements, each of which may be for no more than 14 days.
If the total of postponements exceeds 30 days, there are
additional notice and publication requirements, including a
requirement that the person bearing the cost of the postponement
be identified. If the foreclosure sale is cancelled before
the sale, the servicer must have an affirmative agreement from the
borrower/owner to pay the costs and must obtain these costs.
If these costs are not collected, the statute states that
they cannot be charged. If the foreclosure sale is cancelled
after the sale, for any reason other than reinstatement, the
noteholder must bear all costs.
Upon
conclusion of the foreclosure proceeding, an auditor will be
assigned for which a fee of $300 must be paid, provided the
property has an assessed value of less than $1 million. If the
value is greater than $1 million, the fee is $600. Within 90 days
of the foreclosure sale, a submission, which includes
documentation showing note ownership, validity of deed of trust
and priority, must be made to the auditor. The auditor must
also receive documentation showing proper compliance with the
required foreclosure procedure and the proposed distribution of
proceeds and the amount of deficiency claimed, if any. If
the auditor does not receive the items in a timely manner, the
sale becomes voidable. The auditor has 15 business days from
receipt of all of the Trustees' submittals to issue a report.
If the auditor approves the procedure, the foreclosure sale
is valid and non-voidable, except for "fraud and gross error".
Title may not be transferred until the auditor has recorded
this report. If no auditor's report has been issued after 30
days, then title may be transferred. Finally, the deed must
be executed within 30 days of the auditor's report and be recorded
within 30 days of its execution.
Procedures have been established for exceptions, which may be
filed as a "Plea of Title" in the evictions hearing, provided the
borrower has reached retirement age as of the time of the issuance
of the notice of foreclosure or where the borrower is mentally
incapacitated. This provision may effectively cause major
delays in the already slow eviction process in the District of
Columbia.
We will keep you posted as to any final revisions in
this law as well as to its final effective date.
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