Buried deep in the 40-plus pages of “Servicing Standards” that are part of the recently announced global foreclosure settlement agreement (the “Agreement”) are two bullets on a topic that could impact thousands: tenants’ rights.
Specifically, the Agreement requires subject servicers to: (1) comply with all applicable state and federal laws governing the rights of tenants living in foreclosed residential properties; and (2) develop and implement written policies and procedures to ensure compliance with such laws.
Just what does compliance with the applicable state and federal laws entail? First and foremost, notice. Under the federal Protecting Tenants at Foreclosure Act (12 U.S.C. §§ 5201 et seq.), a tenant of foreclosed residential property is entitled to receive notice at least 90 days before being required to vacate the property. Similar state laws generally require the same notice period, prescribe the exact form that the notice must take and the method of its delivery, and also provide penalties for failure to give the required notice. Both the Protecting Tenants at Foreclosure Act and similar state laws condition the rights of a successor in interest to foreclosed property, requiring such a party to let a bona fide tenant finish out the term of his or her lease, unless the party intends to occupy the property as his or her principal residence. Separate notice requirements may apply to property for which a foreclosure action has been filed and for property which has been sold at a foreclosure sale.
Thus, at a minimum, for servicers to develop policies and procedures to ensure compliance with federal and state tenant protection laws will require identifying the specific requirements of each law (which, in the case of notice laws, include timing, scope, method of delivery, and format). Keeping in mind that each state law varies with regard to the penalties for noncompliance with notice requirements, a one-size-fits-all approach will not suffice.
Second, servicers need to be mindful that compliance with state and federal laws is not limited to the notice requirements described above. For instance, under the New Jersey Foreclosure Fairness Act, a person who has filed a complaint in a foreclosure action on residential property or who takes title to such property following the filing of a foreclosure complaint may not make any communication to induce the tenant to vacate the property, except for a bona fide monetary offer (i.e., “cash for keys”), or to pressure a tenant to accept such an offer during the pendency of a foreclosure proceeding (or for one year after transfer of title following such a proceeding).
Many states and municipalities also have enacted laws and ordinances requiring lenders to maintain vacant or tenant-occupied properties. To fulfill their obligations under such laws, lenders and servicers may be required to maintain the exterior and grounds of such properties (removing debris, maintaining landscaping and pools), ensure that vacant properties do not become nuisances (because of criminal activity or the accumulation of trash), and otherwise comply with local property maintenance standards.
Third, for REO properties, servicers will need to understand landlord-tenant laws both at the state and local level. Rental limitations arising under local zoning laws or homeowner and condominium association rules could either prohibit a lease or limit the number of occupants. If the servicer is implementing a rent-to-own program (as leaseback offers in connection with deeds in lieu of foreclosure are gaining popularity), a host of additional issues would come into play. According to recent guidance from the Federal Reserve Board, the rental of REO properties could also implicate landlord licensing and registration requirements, protections under the Servicemembers Civil Relief Act and anti-discrimination laws (such as the Fair Housing Act and the Americans with Disabilities Act), and the property oversight of third-party vendors used to manage properties. Although this guidance is addressed to banking organizations subject to the Federal Reserve’s oversight (such as state member banks, bank holding companies, non-bank subsidiaries of bank holding companies, savings and loan holding companies, non-thrift subsidiaries of savings and loan holding companies, and U.S. branches and agencies of foreign banking organizations), the enumerated laws are not so limited in their application.
Although the Agreement’s standards apply only to five servicers (and their affiliates), the application of these provisions will be much broader if the expectation is true that the standards are the baseline for consideration of national standards. Furthermore, given their inclusion in the Agreement, tenants’ rights may be an area to which state regulators pay increased attention, making compliance by all parties subject to these provisions more important. The issues raised above are only examples, and by no means an exhaustive list, which indicates the amount of effort that may be required to ensure compliance with applicable laws.