LIABILITY AFTER FORECLOSURE – WHICH BOX TO CHECK?

Two innocent looking disclosures, but who knows the evil that lurks within.
Loan Estimate:

Liability after Foreclosure Taking this loan could end any state law protection you may currently have against liability for unpaid debt if your lender forecloses on your home. If you lose this protection, you may have to pay any debt remaining even after foreclosure. You may want to consult a lawyer for more information.

Regulation:
Section 1026.37(m)(7) requires the Loan Estimate to include, if the purpose of the credit transaction is to refinance an extension of credit, a brief statement that certain State law protections against liability for any deficiency after foreclosure may be lost, the potential consequences of the loss of such protections, and a statement that the consumer should consult an attorney for additional information, labeled “Liability after Foreclosure.”
Issues:
The disclosure is required:

  • For a refinance, and is not allowed for any other transaction.
  • Even though state law may or may not provide any protection against liability for any deficiency after foreclosure, and a refinance may or may not impact any protection against liability for any deficiency after foreclosure.

Closing Disclosure:

Liability after Foreclosure If your lender forecloses on this property and the foreclosure does not cover the amount of unpaid balance on this loan,
__  state law may protect you from liability for the unpaid balance. If you refinance or take on any additional debt on this property, you may lose this protection and have to pay any debt remaining even after foreclosure. You may want to consult a lawyer for more information.
__  state law does not protect you from liability for the unpaid balance.

Regulation:
Section 1026.38(p)(3) requires the Closing Disclosure to include a brief statement of whether, and the conditions under which, the consumer may remain responsible for any deficiency after foreclosure under applicable State law, a brief statement that certain protections may be lost if the consumer refinances or incurs additional debt on the property, and a statement that the consumer should consult an attorney for additional information, under the subheading “Liability after Foreclosure.”
Commentary:
According to the Official Interpretation if the creditor forecloses on the property and the proceeds of the foreclosure sale are less than the unpaid balance on the loan, whether the consumer has continued or additional responsibility for the loan balance after foreclosure, and the conditions under which liability occurs, will vary by State. If the applicable State law affords any type of protection, other than a statute of limitations that only limits the timeframe in which a creditor may seek redress, § 1026.38(p)(3) requires a statement that State law may protect the consumer from liability for the unpaid balance.
Issues:

  • The disclosure is needed on all Closing Disclosures.
  • You should check:
    • The first checkbox if State law affords any type of protection against liability for any deficiency after foreclosure, other than a statute of limitations.
    • The second checkbox if State law does not afford any type of protection against liability for any deficiency after foreclosure
  • Possible State law protections include:
    • Broad Protection – An equity loan must be without recourse for personal liability against each owner and the spouse of each owner, unless the owner or spouse obtained the extension of credit by actual fraud.
    • Limited Protection – If the court determines that the fair market value is greater than the sale price of the real property at the foreclosure sale, the persons against whom recovery of the deficiency is sought are entitled to an offset against the deficiency in the amount by which the fair market value, less the amount of any claim, indebtedness, or obligation of any kind that is secured by a lien or encumbrance on the real property that was not extinguished by the foreclosure, exceeds the sale price.
    • Statute of Limitations (Not protection) – If the price at which real property is sold at a foreclosure sale is less than the unpaid balance of the indebtedness secured by the real property, resulting in a deficiency, any action brought to recover the deficiency must be brought within two years of the foreclosure sale.

CFPB Unofficial Clarification:

  • “State laws that limit the amount of deficiency that a creditor may collect in an anti-deficiency judgment are considered anti-deficiency laws for purposes of this disclosure. These state law anti-deficiency protections may limit the amount of the deficiency that a creditor may collect, based on factors such as, for example, the difference between the outstanding debt and the fair market value of the property at the time of the foreclosure.”
  • “Generally, if the state anti-deficiency laws could apply at the time of a foreclosure, but whether or not it will apply is unknown, the creditor should disclose that as an anti-deficiency protection that may apply. The rule does not require creditors to predict future facts and circumstances, and whether an anti-deficiency law ultimately applies to a loan may indeed depend on facts and circumstances that would not be known until there is a foreclosure.This may include facts such as the fair market value or appraised value at the time of foreclosure, or whether the property is owner occupied at the time of the foreclosure. Section 1026.38(p)(3) requires a disclosure to the consumer that a state anti-deficiency law may apply to the loan, that is, whether it could apply at some future date. If it could, then the first box on the form should be checked with the caveat that the consumer should consult an attorney for more information.”

Conclusion:
Only include the Liability After Foreclosure on the Loan Estimate if the transaction is a refinance.
The disclosure is required on every Closing Disclosure. To assure the correct box is checked on the Closing Disclosure work very closely with bank counsel to determine the amount of protection against liability for any deficiency after foreclosure, if any, afforded by State law.
Special thanks to David Boneno, General Counsel of the Louisiana Bankers Association, for bringing these issues to my attention, for being a soundboard, and for consistently providing outstanding guidance to the members of the Louisiana Bankers Association.

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