Under the Dodd-Frank Act, a homeowner usually must be more than 120 days behind on mortgage payments before a loan servicer (on the lender's behalf) can start a foreclosure. During the waiting period, the homeowner can submit a loss mitigation application asking for an accommodation that would allow the owner to stay in the home.
Once a complete loss mitigation application is received, the servicer must review that application before starting the foreclosure process.
Why Homeowners Facing Foreclosure Need Additional Protection
The foreclosure laws in some states allow a bank to sell a home quickly at a foreclosure auction and in some cases, without much notice to the foreclosed owner. The speed of such processes can leave owners with inadequate time to request and receive assistance that might help them stay in the home. Frequent errors by loan servicers can cause the process to be even more chaotic.
In 2014, homeowners facing foreclosure received some long-overdue relief. To lessen the impact on distressed homeowners, the Dodd–Frank Act instituted new rules aimed at curbing loan servicer abuses.
One important rule precludes lenders from immediately starting state foreclosure actions, thereby giving homeowners more time to get back on their feet.
The Dodd-Frank Act Slows the Foreclosure Process
Under the Dodd-Frank Act, a servicer usually can't start a foreclosure action on a borrower's principal residence until mortgage payments are more than 120 days past due.
For instance, suppose that state law allows a lender to hold a foreclosure sale 60 days after publishing a notice of default. (An owner “defaults” on a mortgage by failing to keep payments current.) Under the Dodd-Frank Act, the bank must first wait until the payment is more than 120 days overdue. After the period elapses, the servicer can follow the state foreclosure law by publishing the notice of default and selling the home at auction 60 days later.
To determine how much time you’ll have in your home, check the laws of your state.
Exceptions: When Foreclosure Can Begin Sooner
The 120-day rule doesn't apply in the following situations:
- If the borrower violated a due-on-sale clause. (Many loan contracts contain a “due-on-sale” provision, which states that if the borrower transfers the property's title to a new owner, then the lender may accelerate the full loan balance. When a lender accelerates the loan, you have to repay the entire loan balance otherwise, a foreclosure will begin. Though, federal law restricts the enforcement of a due-on-sale clause in some circ*mstances.)
- When the servicer is joining the foreclosure action of a superior or subordinate lienholder.
A Loss Mitigation Application Could Extend the Waiting Period
The borrower can submit a loss mitigation application (requesting, for instance, a loan modification) during the 120-day waiting period. If the owner submits a completed application before the servicer starts the state foreclosure process, the servicer can't foreclose until the following occurs:
- the borrower doesn’t qualify for, or rejects, the lender’s loss mitigation options, or
- the borrower accepts a loss mitigation offer but fails to fulfill its requirements.
Understanding Judicial and Nonjudicial Foreclosure
A lender can use one of two foreclosure types depending on the state law: judicial foreclosure or nonjudicial foreclosure. All states allow for judicial foreclosure, which is a process that requires the lender to seek court approval before selling a home at auction. Some states give the servicer the additional option of proceeding with a streamlined nonjudicial foreclosure that doesn’t require court involvement.
Here’s how both work.
Judicial Foreclosure
The bank must wait until payments are more than 120 days delinquent before filing a legal complaint (the court document that starts a lawsuit) with the court. The lender might be required to wait longer to file the suit if the homeowner submits a loss mitigation application.
If the bank wins the lawsuit, the court will issue a judgment allowing the lender to sell the home at auction.
Nonjudicial Foreclosure
A creditor using the nonjudicial foreclosure process will follow procedural steps outlined in state law instead of filing a lawsuit with the court. However, under the Dodd-Frank Act, the lender must wait until the 120-day waiting period elapses (or until a review of the loss mitigation application is complete, whichever occurs later) before making the first notice or filing under state law foreclosure requirements.
In a nonjudicial foreclosure, the first notice or filing is typically the earliest document that’s recorded in the land records, like a notice of default, or published to start the foreclosure process. The servicer can then sell the home after complying with the requirements outlined in the state’s foreclosure law.
Talk to a Lawyer
If you’re facing foreclosure and the lender or servicer hasn't followed the law (or you’re not sure if the bank complied with all federal and state requirements), contact a foreclosure attorney.
