States’ rights are considered as American as mom and apple pie. But most agree that on some issues, uniformity across state lines is crucial. For both businesses and consumers, consistency in state laws can help reduce costs (as with a firm trying to comply with varying and contradictory statutes) and improve decisionmaking (as with a person understanding his consumer rights).
Over the years, a big part of the job of preserving the delicate balance between state and federal powers has fallen to a low-profile but enormously important group of state-government-appointed lawyers, judges, and legislators. Collectively, they are known as the Uniform Law Commission (ULC). Since its formation in 1892, the ULC has prepared more than 250 uniform laws for possible adoption by the states. Its most prominent accomplishment is the Uniform Commercial Code, which governs scores of commercial transactions and contracts in most states.
Now, the ULC is taking on the mess that is the foreclosure crisis.
In June of this year, the ULC’s Drafting Committee on Residential Real Estate Mortgage Foreclosure Process and Protections met for the first time to discuss drafting an “overlay” to state laws governing the foreclosure process.
It’s an interesting intersection of commercial and property law. States have traditionally guarded property law very closely. Given the inertia that is built into the legal system—where precedent tends to rule the day—the challenge of bringing some uniformity to the practice of foreclosing on mortgages in different states is substantial.
The 24 topics discussed at the Committee’s first meeting can be grouped into three categories: alternatives to foreclosure, borrowers’ rights in foreclosure, and the mechanics of foreclosure. All three could affect consumers in major ways, which makes it all the more disappointing that the initial round of comments drew fewer consumers’ voices than one would optimally want in drafting policy.
1. Alternatives to foreclosure include loan modifications, short sales, deeds in lieu of foreclosure, and relocation assistance (also known as Cash for Keys programs). Many states have established foreclosure mediation programs in which these options are discussed. During mediation, the lender may agree to modify the terms of the loan to allow the borrower to remain in the house, or, when that is not possible, the borrower and lender may settle on a graceful exit. The devil is in the particulars of each state program. Some involve judicial supervision; others allow borrowers to opt in or out of the programs. The Committee plans to address how these programs should fit into the foreclosure process. The consumer impact is clear: Mediation may determine whether the borrower stays in her home, walks away, or is forced to leave—no matter which state the house is located in.
2 Borrowers’ rights raise a number of issues: What kind of notice should borrowers receive before foreclosure? A newspaper listing? Regular mail? In-person delivery? Should the borrower’s right to cure or re-instate a defaulted loan be addressed? If so, how? How should courts be involved in the confirmation of foreclosure sales? How should post-sale redemption work? From the consumer’s perspective, the way notice, cure, confirmation, and redemption issues are addressed may affect the amount of time and money spent on courtroom wrangling.
3. With foreclosure mechanics, the consumer impact isn’t as immediately obvious. For example, the question of who can commence a foreclosure and whether that person needs a complete chain of assignments to foreclose seems at a glance to lack a consumer angle—until you realize that many borrowers raise these issues as defenses against foreclosure. This is an issue we know about today primarily because of the “robo-signing” scandal that led to sanctions from the Federal Reserve and a general settlement between the largest servicers and the attorneys general of 49 states.
Questions over who can initiate foreclosures have prompted discussions on whether the uniform law should create or prepare for a national electronic mortgage and note registration system. The current version—the Mortgage Electronic Registration System (MERS)—has been controversial, in part because of confusion over whether it should be able to commence foreclosure proceedings. Since the foreclosure crisis began, use of MERS has substantially declined, amid criticism from consumer and community advocates and court orders barring MERS from filing foreclosure actions.
But that is not to say that a national electronic registration system would not have value. Rather, it highlights the importance of improving the legal infrastructure for transferring mortgages and notes. A new system, operated by a trusted intermediary with the right incentives for compliance with the law, may improve market efficiency. This, in turn, may benefit both lenders and consumers by providing certainty about who has the right to collect payments and foreclose on real estate collateral.
Fast-tracking vacant and abandoned housing through the process is another foreclosure mechanism with divergent implications for consumers, depending on where they live. That’s especially true in cases when the home is vacant and abandoned; borrowers and neighborhoods don’t benefit from a long and protracted foreclosure process, and neither do lenders. But fast-tracking is not uniformly available or easy to secure. Lack of fast-tracking can harm entire neighborhoods because vacant and abandoned properties decay and are vandalized during the lengthy foreclosure process. On the other hand are legitimate concerns about the potential for improper use of expedited foreclosures, perhaps when a property has not truly been abandoned by its owner. The Committee must consider these issues as it crafts the uniform law.
There are many additional, more technical aspects of the foreclosure law that the Committee is still determining whether or how to address, all of them important to different stakeholders in the realm of housing finance and ownership. The Committee is in the early stages of the process. As it decides on its approach to the issues, a model law will be drafted and eventually presented for adoption by the full Commission; then the process of introducing bills in the individual states will start.
But, to be blunt, the process needs more input. Approximately 60 people attended the first Commission meeting, including representatives of large residential mortgage originators, government-sponsored enterprises that purchase residential mortgages, financial institutions’ trade associations, banking regulators, state attorneys general, and consumer advocates. But consumers were under-represented, and that needs to change.
Experts who work with these laws every day know the pragmatic impact that changing a single word can have: A “may” becomes a “shall”; an “and” becomes an “or.” In the Committee’s future meetings, more expert input from all viewpoints would be extremely useful in ensuring that the proposed draft makes sense for all stakeholders. In fact, the Committee has specifically called for more consumers to weigh in on the proposed “overlay” to state laws governing the foreclosure process. Not only will a broad spectrum of voices help produce a better proposal, but state legislatures are more likely to adopt laws that have been vetted by all parties.
Let your voice be heard:
During the drafting process, the Committee holds open meetings at which it solicits citizens’ input and feedback. Sign up to follow this Committee and be notified of future meetings on its webpage.