The Protecting Tenants at Foreclosure Act of 2009 expired on December 31, 2014. Now it is back and it is permanent. The law limits the rights of new owners of foreclosed properties from evicting tenants after a foreclosure, and was passed as a result of widespread hardships after the collapse of the mortgage markets. By 2014, it was felt that such protections were no longer necessary. But the law has been revived. On May 24, 2018, President Trump signed into law a bill which contained major rollbacks to the Dodd Frank Act. It ALSO revived the Protecting Tenants at Foreclosure Act of 2009 and makes it permanent.
Tenants cannot be evicted after a foreclosure, and can stay until the expiration of their lease term. The only exceptions are if the rent is dramatically below market (whatever that means) or if the tenant is closely related to the borrower. It provides protections to bona fide tenants in foreclosed properties where the foreclosed mortgage is a ?federally related mortgage loan? (a very broad category of mortgage loans as defined in the federal Real Estate Settlement Procedures Act (?RESPA?)).?An amended version of the Tenants Protection Act?is available here. ?A sample letter for tenants and advocates to use to implement the Tenants Protection Act is available here.
Are Commercial Loans Covered?
An important question for lenders, mortgage holders and servicers is whether the Tenants Protection Act is limited to residential one- to four-family mortgage loans, or whether commercial loans are covered.? The answer is that some commercial loans are covered; where a loan is made to an individual or entity to purchase or improve property which is one- to four-family residential property, the Tenants Protection Act provisions for notice and eviction must be followed, even if the borrower took the applicable mortgage loan for a commercial purpose.? Commercial purpose loans that meet the definition of ?federally related mortgage loans? must comply with the Tenants Protection Act.
A ?federally related mortgage loan? is any loan (other than a temporary loan such as a construction loan), which is secured by a first or subordinate mortgage on real property that is designed to be a one- to four-family residential property (including condominiums and manufactured homes), and the property has to be located in a U.S. state.? Refinancings and purchase money mortgages are included.? The mortgage loan (1) must be made by a lender that is either federally regulated or its deposits are insured by the Federal Government; (2) is insured, guaranteed or supplemented by the Federal Government; (3) is made in conjunction with?programs administered by HUD or by another federal agency; (4) is intended to be sold to Fannie Mae, Ginnie Mae or Freddie Mac; (5) is made by a ?creditor? as defined by the Consumer Credit Protection Act (15 USC ?1602(f)) and that creditor makes or invests in $1,000,000 worth of residential real estate loans per year; (6) is a reverse mortgage made by one of the aforementioned lenders; (7) is an installment sales contract for residential one- to four-family residential property.
Protecting Tenants at Foreclosure Act of 2009 Basics
As a refresher, the Tenants Protection Act requires immediate successors in interest to foreclosed properties, including banks that take title to property after foreclosure, to provide a notice to vacate to any bona fide tenant at least ninety (90) days prior to evicting those tenants as a result of foreclosure.? In the event a foreclosure does take place, the Tenants Protection Act requires the successor owner of foreclosed property to honor any existing leases with renters until the end of the lease terms.? Protection is not available for the former mortgagor, the mortgagor?s spouse, child or parent.? A ?bona fide? lease is the result of an arm?s-length transaction, and the rent has to be fair market value or government subsidized.? The Tenants Protection Act also provides Section 8 tenants in foreclosed properties certain protections.
Dodd-Frank Clarifies When Prior Notice of Foreclosure Occurs
A major change in the Tenants Protection Act brought about by Dodd-Frank concerns the interpretation of the provision that allows bona fide tenants of foreclosed properties to continue to reside at the property for the remaining term of the lease executed with the former owner only if that lease was entered into ?as of the date of foreclosure?.? Prior to the amendment found in Dodd-Frank, it was unclear when the ?date of foreclosure? occurred.? If the cut-off period began when foreclosure notices were sent, borrowers and tenants could no longer enter into leases that would have to be honored once the foreclosure notices were mailed and advertised.? Thus, under the prior version of the Tenants Protection Act, a foreclosing owner would take the position that leases entered into AFTER the date the foreclosure notice was mailed were not effective, and the foreclosing owner would not have to honor those leases.
Dodd-Frank changes all that by clarifying the phrase and explaining ?For purposes of this section, the date of a notice of foreclosure shall be deemed to be the date on which complete title to a property is transferred to a successor entity or person as a result of an order of a court or pursuant to provisions in a mortgage, deed of trust or security deed.???? Unfortunately, ambiguity remains.? While Dodd-Frank clarifies that ?notice of foreclosure? does not mean any correspondence or advertising undertaken by the mortgagee leading up to the foreclosure sale, it leaves the post-foreclosure timeframe unclear.? Put more simply, Dodd-Frank shifts the ambiguity from pre-foreclosure sale to post-foreclosure sale.? This is due to the use of the term ?complete? in the new definition, i.e., what does ?complete title? mean?
Debate is already underway as to whether ?complete title to a property is transferred to a successor? occurs at the time of the foreclosure sale or at the time of recording of the foreclosure deed.?? In Bankruptcy Courts, Judges who have opined on the issue of when the foreclosure sale is final from a bankruptcy perspective find that the foreclosure is final when the gavel goes down completing the auction, and the purchase and sale agreement is executed by the buyer.? On the other hand, there is an argument that the buyer at foreclosure who tenders a deposit and signs the purchase agreement only has equitable title; no legal title passes until the foreclosure deed is tendered to the buyer.? Still another interpretation is made by the foreclosing owner who seeks to evict any holdover borrowers or tenants from the property after foreclosure. ?Post-foreclosure property owners are going to have to watch out for borrowers and mortgagors whose properties are in the process of foreclosure, as they could enter into lease agreements with tenants AFTER the foreclosure sale date, but before the foreclosure deed goes on record, and the foreclosing owner would be required by law to honor those lease and tenancy agreements.
In sum, post-foreclosure property owners must give ninety (90)-day pre-eviction notices to bona fide tenants, but the date on which that notice has to be given will now be later in the process — on or after the date the foreclosure deed is recorded.? Ninety (90)-day notices sent on behalf of the servicer during the foreclosure process will no longer satisfy the Tenants Protection Act.? Post-foreclosure property owners should do everything they can to ensure that foreclosure deeds are recorded expeditiously after a foreclosure sale to cut off the rights of mortgagors from entering into new lease agreements with?bona fide tenants so that the new owner does not have to contend with honoring the terms of those new lease agreements.
Further, since bona fide leases survive the foreclosure until the end of their term, the tenants have state law based remedies for violations of the tenants’ rights against successors in interest in foreclosed properties. Nativi v. Deutsche Bank National Trust Company, 223 Cal. App. 4th 261 (2014).