Whipped into a mob-like frenzy by mainstream media reports of a foreclosure crisis and subprime crime, legislatures across the country and the U.S. Congress have reacted by enacting what is promoted by the various solons as curative and/or rescue legislation.
North Carolina, with its proud reputation as a leading crusader for consumer advocacy, wasn't about to be left out – and it was not.
The North Carolina General Assembly considered several bills aimed at ensuring that homeowners in North Carolina were assured of government-funded programs to assist in refinancing their way out of mortgage loans they could not afford, access to legal assistance to fight foreclosure on their existing loan, consumer-friendly foreclosure procedures and governmental oversight of mortgage servicers.
Led by an effective lobby from consumer advocacy groups and the North Carolina Commissioner of Banks (COB), three bills were ultimately signed by the governor. These laws became effective in part in October and will be effective in full on Jan. 1, 2009.
This legislation continues the steady march that began in the last session of the General Assembly towards transforming North Carolina from a non-judicial power of sale foreclosure state to a judicial sale state.
The three new statutes amend Chapter 45, the North Carolina law governing power of sale foreclosure procedures, and create a new statute called the Emergency Program to Reduce Home Foreclosures.
The latter requires pre-foreclosure notice to the borrower and pre-foreclosure reporting to the office of the COB and the Administrative Offices of the Court (AOC) for certain subprime loans, and gives the COB the right to extend the time within which a foreclosure on certain subprime loans can be filed for up to at least 30 days,
This law also requires the clerk of courts to find that all notice provisions of the new law have been complied with at the time of the foreclosure hearing, and extends the licensing statutes to mortgage servicers such that mortgage servicers will be required to obtain licensure from the COB and comply with an eye-popping checklist of duties and obligations to borrowers.
The changes to the North Carolina foreclosure procedure – and especially the new laws pertaining to mortgage servicer licensing and subprime loans – are broad and sweeping in their scope and effect. What follows is a thumbnail sketch of what servicers and other interested parties will find in the three new laws.
Pre-foreclosure notice
H.B.2623 enacts the Emergency Program to Reduce Home Foreclosures. This statute is directed at foreclosure procedures for subprime loans originated between Jan. 1, 2005, and Dec. 31, 2007.
"Subprime" is defined by statute, but in an effort to assist mortgage servicers, the statute also requires the COB to publish a chart stating the appropriate interest-rate triggers. The COB was required to publish the chart by Oct. 1.
At least 45 days prior to filing a notice of hearing in a foreclosure proceeding on a primary residence encumbered by a subprime loan covered by this statute, a servicer must first send a written notice by mail to the borrower informing the borrower of the availability of resources to avoid foreclosure and include – among other information – an itemization of all past-due amounts and an itemization of the charges necessary to bring the loan current.
In this mailing, the servicer is also required to provide notice that the borrower may have options other than foreclosure; the address, telephone number and contact information for the mortgage servicer or its agent that is authorized to attempt to work with the borrower to avoid foreclosure; the name, address, telephone number and contact information for at least one U.S. Department of Housing & Urban Development (HUD)-approved counseling agency in North Carolina; and the address, telephone number and contact information for the consumer complaint section of the office of the COB.
In addition to the pre-foreclosure notice, a subprime servicer must file a notice in an electronic format with the AOC. The filing must state the name and address of the borrower against whom the subprime lender or servicer intends to foreclose and the date the required notice was mailed to the borrower.
This filing must be electronically transmitted to the AOC within three business days of the date that the servicer mailed the notice to the borrower. (The pre-foreclosure notice to the borrower and the filing with the AOC are referred to hereinafter as the pre-foreclosure notices.)
Additional information may be requested from the mortgage servicer to enable the COB and/or the State Home Foreclosure Prevention Project – an agency to be established by the COB – to review the mortgage loans and seek solutions to avoid foreclosure.
The statute gives the COB the power to delay any foreclosure filing on a covered mortgage loan for an initial period up to 30 days from the earliest date that the foreclosure could have been filed after sending the pre-foreclosure notice to the borrower.
The statute states the following: "If the commissioner reasonably believes, based on a full review of the loan information, the mortgage servicer's loss mitigation efforts, the borrower's capacity and interest in staying in the home and other appropriate factors, that further efforts by the State Home Foreclosure Prevention Project offer a reasonable prospect to avoid foreclosure on primary residences, the commissioner shall have the authority to extend one time under this article the allowable filing date for any foreclosure proceeding on a primary residence by up to 30 days."
Court database
Additionally, any foreclosures filed on subprime loans as defined by this statute on or after Nov. 15 must contain a certification by the filing party that the pre-foreclosure notices were sent.
The clerk of courts – the judicial officer who generally makes the determination as to whether or not a foreclosure may proceed – will be given access to the AOC pre-foreclosure database to confirm that the appropriate filings were made. The failure to file the pre-foreclosure notices will be cause for the clerk to dismiss any foreclosure proceedings and assess the cost incurred by the borrower in defending the foreclosure proceeding against the party filing the foreclosure.
To ensure that the clerk checks the pre-foreclosure database, the foreclosure statute has also been amended to require the clerk to make a finding of fact that the pre-foreclosure notices were sent. In addition, a party filing the foreclosure must certify at the time of filing that the servicer complied with all pre-foreclosure notice prerequisites.
The COB hopes that this new law will minimize those instances where foreclosures are filed against borrowers who have been unable to obtain information about their loan in a timely manner so as to avoid foreclosure.
In addition, the COB seeks to identify those borrowers who have a reasonable chance of saving their homes with help from the several existing and new programs designed to aid in this effort.
The COB does not intend to delay foreclosure in situations where there is no reasonable alternative or where the borrowers seek delay simply for the purpose of delay. It is the COB's stated intention to provide a service for deserving homeowners and assist a lender in avoiding a real estate owned property. This statute becomes effective Nov. 1 and expires Oct. 31, 2010.
Sprinkled throughout all three recent bills are changes to Chapter 45, the North Carolina statute that regulates power of sale foreclosures. In addition to the change mentioned above – which requires the clerk to find that the party seeking foreclosure has sent the pre-foreclosure notices – there are two other material changes to the provisions of Chapter 45.
First, a new section included in H.B.2463 directs the clerk of courts to suspend a foreclosure proceeding for a period of 60 days if notified by the COB to do so. This provision becomes effective as to all pending and new foreclosure proceedings Jan. 1, 2009.
H.B.2623 also amends Chapter 45 to require a certification in the foreclosure filing that the pre-foreclosure notices were sent. It also requires the clerk of courts to find from the evidence presented at the foreclosure hearing that the pre-foreclosure notices were sent and that all requisite time periods have elapsed. These changes become effective Nov. 1.
Getting licensed
If other recent changes to the foreclosure law were designed to protect borrowers from allegedly bad servicer practices, then H.B.2463, which requires the licensure of mortgage servicers, is protection on steroids.
Passed by the General Assembly and signed by the governor in an election year during which every mainstream news medium blasted mortgage servicers, H.B.2463 is the result of a perfect storm of an election year, sensational one-sided news reporting and sympathetic legislators.
The bill became effective in part Oct. 1 and will become effective in its entirety on Jan. 1, 2009. Upon the effective date, it will be necessary for a mortgage servicer to be either licensed or exempt in order to service mortgage loans in North Carolina.
The statute sets out specific exemptions. Exempt persons include any agency of the federal, state or municipal government servicing mortgage loans and any bank, savings institution, credit union, subsidiaries or employees of any of those entities.
The COB has also stated that it was not the intention of the COB to require individual employees of a non-exempt servicing shop to obtain licenses – even though the new bill arguably requires it. It is anticipated that the bill will be clarified by declarations issued by the COB.
Inasmuch as licensing for a non-exempt servicing entity will be required, a non-licensed and non-exempt servicer will find it very difficult – if not impossible – to foreclosure a delinquent loan in North Carolina.
The most troubling aspect of the bill is set out in the sections detailing a mortgage servicer's duties and prohibited activities.
Included among the statutory duties which a mortgage servicer will owe to a borrower are to:
- safeguard and account for any money handled for the borrower;
- follow reasonable and lawful instructions from the borrower;
- act with reasonable skill, care and diligence;
- maintain a current schedule of costs and fees charged to borrowers;
- at the request of the COB, provide the commissioner with details of the servicers' activities in North Carolina including, the number of mortgage loans serviced, the type and characteristics of such loans, the number of serviced loans in default, a breakdown of 30-, 60- and 90-day diligences, information on loss mitigation activities, and information on foreclosures commenced in the state;
- disclose to a borrower upon acceptance of an assignment of a loan for servicing the following information: any information required by RESPA, a schedule of fees and costs, a notice that the servicer is licensed by the COB and that complaints about the servicer may be submitted to the COB, and any notices required under Chapter 45; and
- act in good faith to inform the borrower of the facts concerning a default and, if the borrower replies, negotiate with the borrower to attempt a workout.
Disciplinary consequences
As defined by the bill, prohibited activities for servicers include:
- failure to comply with Chapter 45;
- failure to give notice to borrower of obtaining forced placed insurance;
- refusing to reinstate a delinquent loan upon a tender of payment made timely in a sufficient amount to pay all past due payments based upon the last written statement received by the borrower; and
- initiating a foreclosure proceeding without having first mailed a notice to the borrower at least 45 days before the foreclosure is initiated that sets out details concerning the default, the amount to reinstate and other information as previously discussed.
The bill also grants disciplinary and enforcement powers to the COB for violation of the Licensure Act. All of the typical disciplinary actions for licensed professionals, including the right to revoke a license or disqualify a servicer from holding a license and imposing civil penalties are reserved to the COB.
Also included in the disciplinary authority granted to the COB, however, is authorization for the COB to stay any foreclosure at any point in the foreclosure process if the COB finds that "a material violation of law has occurred in the origination or servicing of a loan then being foreclosed or then delinquent in threat of foreclosure, and that the putative violation would be sufficient in law or equity to base a claim or affirmative defense which would effect the validity or enforceability of the underlining contract or the right to foreclosure."
"Upon notice from the COB, the clerk of courts must suspend the foreclosure proceeding for 60 days from the date of the notice from the COB," the bill's text states. "The COB is also required to notify the servicer, if known, and provide the servicer with an opportunity to cure the suspected violation or provide the information to rebut the evidence of the suspected violation."
If the servicer is able to convince the COB that the violation either is cured or did not exist, then the COB will notify the clerk to allow the foreclosure to proceed.
The bill is silent as to the standard which the COB will use to conclude that a material violation has occurred such that a foreclosure should be stopped, or how the servicer will proceed in its efforts to rebut the presumption. What is clear is that the COB will have the authority to stop any foreclosure for at least 60 days.
When this bill becomes effective on Jan. 1, 2009, the COB's power to stay a foreclosure for 60 days will apply to all pending foreclosures as of that date as well as any foreclosure filed thereafter.
A servicer's world changed dramatically in North Carolina beginning on Oct. 1. What began in the mid 1970s as a fairly simple and rarely contested proceeding in North Carolina has now developed into full-scale litigation with expensive consequences for failing to strictly comply with newly created duties, obligations and processes.
H. Terry Hutchens focuses on creditors' rights, civil litigation and business law with North Carolina-based Hutchens, Senter & Britton PA. He can be contacted at thutchens@hsbfirm.com or (910) 864-6888.
