Federal Laws Affecting Foreclosure

If you're facing financial hardship and you're behind on your loan's monthly payments, you're not alone. Understandably, facing foreclosure is as stressful as facing eviction. Worrying about the bank taking your condominium and selling it to the highest bidder is unpleasant. Even worse, it's unfair to hear that your house was sold in a trustee's sale for a sale price below its market value. Foreclosure laws allow mortgage lenders to foreclose on residential real property. But they must follow real estate laws before they can take away foreclosed properties.

You may wonder if a bank can really take your home away, even if you have a good excuse. There are things you can do to slow down the process, especially if it seems so sudden. A lender or loan servicer who breaks the law or discriminates against you may face legal consequences. There are also special events, such as pandemics, that can justify your financial hardships.

While the foreclosure process is determined through state laws, federal laws also provide regulations and limits intended to protect homeowners. These include:

• Bankruptcy Laws
• Soldier and Sailors Relief Act
• Parts of the Dodd-Frank Act
• Real Estate Settlement Procedures Act (Regulation X)

For example, judicial foreclosures may be less common in California state courts. This is because California allows nonjudicial foreclosures. But regardless of whether the foreclosure is judicial, the process itself may be preempted by federal law. This is because federal laws apply across all 50 states. They're often applied with priority over state law unless a state law offers more protection.

Bankruptcy Laws Protecting Homeowners

The filing of any bankruptcy action automatically stays (or "puts on hold") a foreclosure proceeding, regardless of type. At that point, whether the stay will be lifted depends on whether the mortgagor has equity in the mortgaged property.

If the bankruptcy is asking for a discharge of all debts, however, the mortgage holder may either:

1. Foreclose the property (if there is no significant equity); or
2. Sell it through bankruptcy court

If the bankruptcy has been filed under a Chapter 11 petition, the bankruptcy court may "terminate, annul, modify or condition such stay" either:

1. For cause, including the lack of adequate protection of an interest in property of the mortgage holder; or
2. If the mortgagor does not have equity in the property, and the property is not necessary for an effective reorganization

In a straight bankruptcy petition asking for a discharge of all debts, a mortgage holder may be allowed to foreclose. If there's equity in the property, the property may be sold by the bankruptcy court.

Soldier and Sailors Relief Act To Protect Military Members

The Soldiers and Sailors Relief Act of 1940 gives special protection to mortgagors on active duty. It applies to servicemembers in the armed forces who executed mortgage loans before they went into service. The Act provides that a service person can apply to a court to set aside a default judgment leading to a foreclosure action.

A mortgage holder initiating a foreclosure action must first provide written notice of the action. If the action is against a mortgagor who fails to answer the foreclosure complaint, the bank must file an affidavit with the court. The affidavit must state that the mortgagor is not on active duty in the armed services.

If the mortgagor is in the armed forces, they must be present or represented at the foreclosure hearing. That means foreclosure by power of sale is not available. A court may find that the mortgagor's ability to meet the terms of the mortgage has been affected by their military service. Here, the court can stay the foreclosure action as long as the person is in active duty service.

Dodd-Frank Act's Protection of Consumers

In response to the financial crisis of 2008, Congress acted to protect consumers. Title X of the Dodd-Frank Act established the Consumer Financial Protection Bureau (CFPB). It's an independent agency that monitors and regulates how consumer financial products are offered and serviced. Among other protections, the CFPB implemented new procedures to provide struggling homeowners with better access to foreclosure avoidance tools. These regulations also require loan services to make good faith efforts to contact homeowners when they miss payments before initiating a foreclosure.

For more information, check out the CFPB's page on foreclosure avoidance. More foreclosure resources are available through the U.S. Department of Housing and Urban Development (HUD), which promotes housing equity.

Real Estate Settlement Procedures Act (Regulation X)

Codified as 12 CFR Part 1024 is the Real Estate Settlement Procedures Act (RESPA). RESPA allows a borrower to ask their lender to delay or terminate a foreclosure sale. This is permitted if the borrower has the potential to pursue loss mitigation options. Loss mitigation options are ways pathways lenders can take to help property owners avoid foreclosure. Examples include:

• Loan modification
• Forbearance
• Short sales

RESPA also allows you to make a written request for information to your mortgage servicer. They may be obligated to correct errors before they can proceed with foreclosure.

A Foreclosure Attorney Can Help

As a borrower, you have legal rights that protect the real estate you call your home. If you're behind on your mortgage payments and facing a foreclosure sale, don't delay. A foreclosure attorney can give you legal advice to help you stand up to your mortgage servicer.