For more information contact: Matt Swenson 651-297-8406

HOUSE BRIEFS

FORECLOSURE CRISIS RESPONSE: REMEDIES WORKING GROUP FINAL REPORT

Executive Summary

Minnesota, like the rest of the country, is facing a mortgage foreclosure crisis of proportions not seen since the Depression. Although last session the Minnesota Legislature passed what is widely regarded as the strongest anti-predatory lending law in the nation, there is universal recognition that more needs to be done to provide relief to homeowners and tenants.
In the summer of 2007, Representative Joe Mullery convened a wide-ranging group of affected stakeholders. Out of that meeting, five working groups were created, led by a bi-partisan group of legislators from both the Minnesota Senate and the Minnesota House of Representatives, to develop legislative proposals for the 2008 session. . One of those groups was the Remedies Working Group, which was charged with enhancing tools for borrowers to save their homes from foreclosure and enhance protections against predatory lending.
Led by Representatives Joe Mullery and Bob Gunther and Senators Linda Scheid and Ray Vandeveer, the Remedies Working Group was comprised of metropolitan cities and counties, representatives form the banking and mortgage industries, private attorneys, nonprofit agencies, advocacy groups, a law school professor, and a representative from the Minnesota Attorney General’s Office.
The group offers a set of 16 policy proposals, in the form of draft 2008 legislation, that:
Pre-foreclosure Process Proposals
· Improves notice to homeowners.
· Modifies the Pre-foreclosure process to facilitate early intervention by foreclosure prevention counselors.

Foreclosure Process Proposals
· Modifies the foreclosure process to reduce costs to homeowners.
· Clarifies which liens attach to homestead properties.
· Reinstates the procedure for Sheriff’s execution sales on personal property.
· Establishes allowable costs collectable upon redemption.
· Prevents waste and deterioration of properties during redemption period.
· Establishes interest rate during redemption period.
Civil and Criminal Enforcement Proposals
· Enhances remedies for discriminatory practices.
· Enhances prosecution of mortgage fraud.
· Provides mortgage debt tax forgiveness.

Manufactured Home Proposals
· Revises the repossession process regarding manufactured homes by providing improved notice and increasing the time period for reinstatement.
· Provides protections against predatory lending to manufactured home borrowers.



Introduction
The 2007 Minnesota Legislature enacted what is considered to be the strongest anti-predatory lending law in the country. Though justifiably proud of their achievement, legislators understood that the enactment of that law was the first step in a series of actions necessary to address the exploding mortgage foreclosure crisis.
During the past six months, a group of dedicated individuals undertook a bipartisan and cross-sector collaborative effort to develop responses to the crisis. Five Working Groups, each addressing a different aspect of the foreclosure crisis, were formed. Actively participating in one or more of the groups were State Representatives and State Senators, the Minnesota Attorney General’s office, State agency personnel, county and local government staff, nonprofit sector representatives, members of the financial community, landlord representatives, members of the academic community, and consumer advocates.
The groups were charged with developing proposals designed collectively to provide comprehensive relief to the victims of the crisis and to prevent further devastation to families, further deterioration of neighborhoods, and further erosion of property values and community and economic stability. The five working groups were:
· Foreclosure Data Committee – charged with examining ways to make foreclosure data more complete and accessible, and to develop a statewide data information system to provide a central repository for mortgage and foreclosure information;

· Foreclosure Prevention Working Group – charged with looking at ways to increase resources for foreclosure prevention counseling efforts;

· Renter Working Group – charged with increasing rights of tenants who are forced to vacate as a result of a foreclosure of an owner or investor’s property;

· Remedies Working Group – charged with enhancing tools for borrowers to save their homes from foreclosure and to enhance protections against predatory lending; and

· Vacancy Working Group – charged with helping municipalities address the myriad problems associated with the raft of vacancies and abandonments brought on by the avalanche of foreclosures.

This report presents the findings and recommendations of the Remedies Working Group.

Background

The United States is in the midst of a foreclosure crisis. The New York Times reports that “[m]ore than one million properties are expected to enter foreclosure this year." The crisis has been called “a national nightmare.” Approximately 14% of the more than 7.2 million subprime loans are in default. The number of defaults is predicted to grow substantially in 2008.
Minnesota is suffering the ravages of the crisis, which include financial ruin, displacement of families, increased homelessness, lower property values, increased crime and vandalism, and devastated communities. In the Twin Cities Metropolitan Area, there were over 11,000 sheriff’s sales in 2006. More than 20,000 sheriff’s sales are projected for 2007, representing an 83% increase over the previous year.
In Greater Minnesota, foreclosures increased 48% between 2005 and 2006. They were projected to increase 84% between 2006 and 2007. In all, between 2005 and 2007, an estimated 15,000 Greater Minnesota families will have lost their homes.
The crisis shows no signs of abating any time soon. While foreclosure rates are difficult to predict, one indicator of future foreclosure activity is the number of interest rate resets. A Federal Reserve Board of Minneapolis estimate indicates that 40% of adjustable rate subprime loans and 10% of near-prime loans (also known at “Alt A loans”) in Minnesota will reset to a higher interest rate by October 2008, with an additional 22% of subprime and 60% of near-prime resetting sometime thereafter.

Overview of Minnesota’s Current Foreclosure Process

Because much of the efforts of the Remedies Working Group focused on the legal process by which foreclosures are effected, a review of the current foreclosure process is presented below.
The process begins with a notice of default, and ends with the expiration of the time period (“the redemption period) within which a homeowner may avoid the foreclosure and loss of the home. The foreclosure process can start as early as 30 days after a borrower misses a mortgage payment. Once delinquent, the lender empowers an attorney to begin the foreclosure process by assigning Power of Attorney. Typically, after 90 days or three missed payments, lenders begin aggressive actions to recoup past due payments and lay the groundwork to foreclose on the property.
A lender (the “mortgagee”) may institute a formal, legal foreclosure action in one of two ways. The most common is to place an advertisement in the newspaper – this method is known as “foreclosure by advertisement.” Alternatively, a mortgagee may file an action in court – this method is known as “judicial foreclosure.”
After a certain time period (shorter if foreclosure by advertisement is used, longer if judicial foreclosure is chosen), the property is sold at auction conducted by the local Sheriff – this step in the process is known as “the Sheriff’s sale.” Until the Sheriff’s sale, a homeowner (the “mortgagor”) has the right to pay the default amount plus fees and allowable costs and reinstate the mortgage, stopping the foreclosure process. This period is known as “the reinstatement period.” The duration between the notice publication in the newspaper and the scheduling of the foreclosure sale varies, ranging generally from 56 to 70 days.
If the homeowner does not reinstate, the Sheriff’s sale ensues. The county Sheriff or Sheriff’s deputy conducts the foreclosure sale between 9:00 a.m. and sundown at a public place, usually the Sheriff's office. Anyone may bid at the sale, and the property is sold to the winning bidder. After the Sheriff’s sale, the winning bidder receives a “certificate of sale.”
Following the sale, the homeowner may occupy the property and has the right to “redeem” the property by paying the bid amount along with interest and additional fees and costs established by statute. The homeowner also has the right to sell the property during this period. The period within which a homeowner may redeem (known as “the redemption period”) varies, but the majority of foreclosures have a six month redemption period. (A homeowner may be entitled to a twelve-month redemption period if certain conditions obtain.) If the property is abandoned, the redemption period may be reduced to five-weeks.
If the homeowner does not redeem the property by the end of the redemption period, any junior creditor has the right to redeem the property for seven days, after which the property’s ownership transfers to the holder of the certificate of sale, generally the lender.
Perhaps the key deficiency in Minnesota’s current foreclosure timeline is the lack of any mechanism to identify borrowers who are in default earlier in the process and encourage them to obtain foreclosure prevention counseling prior to escalating costs and penalties, and ultimate loss of the home. While loss mitigation tools exist to help borrowers avoid foreclosure, many borrowers do not know that their lenders provide such alternatives. Current notice requirements fail to reach delinquent homeowners early enough in the process.
Figure 1 illustrates the foreclosure process in Minnesota from default through redemption

period.

Figure 1: The Foreclosure Process in Minnesota


Pursuant to Minnesota Statutes, section 47.20, subdivision 8, lenders send delinquent borrowers a default letter 30 days after failure to make the first payment. In addition, lenders are required to send what is commonly known as the HUD notice (i.e., a notice required by rules promulgated by the United States Department of Housing and Urban Development) to borrowers after 45 days delinquency. This notice provides referral information to HUD-approved counseling programs. Pursuant to Minnesota Statutes, section 580.041, at least four weeks before the scheduled sheriff’s sale, the lender is required to inform the borrower of the State hotline as part of the Foreclosure Advise Notice.
Homeowners are in default often as a result of some crisis, such as loss of employment or a medical catastrophe. Professionals in the field report that homeowners facing foreclosure frequently experience fear and denial, and frequently ignore communications from lenders, even if those communications are offerings of foreclosure prevention assistance referrals. Further, some percentage of homeowners facing foreclosure consists of persons with low literacy. This group is particularly difficult to reach and engage. The current process and timeline fails to adequately address the realities of homeowners in crisis. Concrete evidence shows that homeowners who seek foreclosure counseling and assistance early in the foreclosure process have a significantly greater chance of either saving their home and equity or obtaining proper guidance as to how and when to dispose of the property and, if any equity exists, perhaps retain some of it to make the transition to their next living arrangements easier.
Figure 2 (see next page) identifies the federal and state notice requirements.













Figure 2: Typical Foreclosure Timeline in Minnesota
Note: This timeline is approximate & timeframe varies by lender.


The Remedies Working Group Activity

The working group met seven times between October, 2007 and January, 2008. The group divided itself into four subcommittees to work on proposals in the following manner:

· Pre-Foreclosure Subcommittee
This subcommittee addressed issues from the time of borrower delinquency to the filing of the Notice of Pendency.

· Foreclosure Process Subcommittee
This subcommittee addressed issues from the time of filing the Notice of Pendency through the expiration of the redemption period.

· Civil Remedies and Criminal Enforcement Subcommittee
This subcommittee considered additional protections to prevent predatory practices.

· Manufactured Homes and Default Subcommittee
This subcommittee considered additional protections to protect manufactured homeowners in default.

Sixteen legislative proposals emerged from these subcommittees that are offered as recommendations from the Remedies Working Group. They are presented below. In addition, a few other proposals were put forward and discussed, but consensus on these was not achieved. These too are discussed below.

PRE-FORECLOSURE CONSENSUS PROPOSALS

Pre-Foreclosure Overview

The early stage of delinquency includes the period beginning when the borrower has missed a payment and ending when the notice of foreclosure is served. This is known as the prefiling stage. Across the country this period in the foreclosure process has been an area of innovation. Intervention at this stage has shown to effectively reduce foreclosures. Reaching borrowers in this phase is critical because the borrower has not accumulated a large outstanding balance and, thus, has more options available to resolve the delinquency.
In order to address a homeowner’s delinquency through financial counseling before the foreclosure process begins, the group proposes that Minnesota’s foreclosure process include a better mechanism to provide for the comprehensive outreach efforts and counseling services especially during the period of early delinquency and prefiling stage, when the greatest number of options are available to prevent foreclosure and preserve the equity of homeowner.
Early Delinquency Interventions: A Missed Opportunity

Minnesota is a recognized leader in the area of nonprofit default intervention programs, and has a well-established statewide infrastructure to address foreclosures. Minnesota also implements community based outreach strategies that target highly impacted areas with a significant number of at-risk households. Finally, Minnesota provides a state hotline and requires lenders to notify delinquent borrowers that foreclosure prevention services exist as part of the advice notice. These interventions are effective; after Minnesota mandated notice of the hotline, calls increased by 60 percent.
However, these outreach and intervention services are only effective when homeowners in default are connected to them early in the process. The existing foreclosure process does not adequately encourage borrowers to pursue these services sufficiently early in the process. To capitalize on these existing assets and services, the statutes governing the foreclosure process must provide better incentives for the borrower to access these programs earlier in the delinquency.
In addition, while most loan servicers actively engage in borrower contact strategies, actual contact with borrowers remains difficult. Programs that rely solely on lender referrals to delinquent borrowers are not able to serve the estimated one-half of delinquent borrowers who often do not communicate with, or are fearful of, the lender. Innovations such as outbound calling facilitated by a designated third party can greatly expand borrower contact rates. Modification of the existing foreclosure process can better facilitate such proactive efforts.
To address these deficiencies in the process, the group arrived at consensus concerning the following two proposals designed to:

1. Improve the notice to homeowners to provide better information regarding the foreclosure process and how to obtain foreclosure prevention assistance.

2. Involve an authorized third party early in the process to increase borrower contact rates.

3. Structure the foreclosure process to promote/require borrowers to seek counseling earlier in the process.





1. Improve Foreclosure Notice to Homeowners

The Issue: Under Minnesota law (Minn. Stat. § 580.041), homeowners in default are provided with a foreclosure advice notice. Changes in the administration of foreclosure prevention counseling services and experience with both the current crisis and working with distressed homeowners warrant an update of the notice.

The Proposal: Amend Minn. Stat. § 580.041, subd. 2, to update the existing homeowner notice to provide more useful information about the foreclosure process and about how to access available foreclosure prevention counseling services.


2. Third Party Outreach

Goal: Involve third party foreclosure counselors at an early stage to increase borrower contact rates.

Issue: Distressed homeowners are frequently afraid to respond to letters and phone calls from their lenders, even though the lender may be able to assist with financial workout arrangement with the borrower. A third party, such as a counseling agency, can often provide vital assistance during this time.

Proposal: Amend Chapter 580 to require lenders or their agent to: (1) notify an identified Statewide counseling agency of an early stage delinquency prior to filing the notice of pendency; and (2) send an Option to Decline Counseling letter contemporaneously with the 30 day default notice.

Description of Third Party Outreach Proposal
State law requires a lender to send a default notice to a delinquent borrower. Under the proposal, in a foreclosure by advertisement, lenders will now be required to include three items together with the default notice:
1. A list of authorized Minnesota Foreclosure Prevention Counseling Agencies consistent with the HUD notice;

2. An “Option to Decline Counseling” document; and

3. An explanation of the foreclosure process.

The name and contact information for the homeowner will be provided to a designated third party – an authorized Minnesota Foreclosure Prevention Assistance Program counseling agency – unless the homeowner returns the signed Option to Decline Counseling document to the lender within three weeks of mailing. If the homeowner does not opt to decline, within the following week the lender will forward the homeowner’s contact information to the agency, which in turn will aggressively seek to contact and work with the homeowner and the lender to avoid foreclosure or ensure the most favorable outcome for the homeowner considering the individual circumstances.
Rationale for Third Party Outreach Proposal
Minnesota currently requires lenders to notify delinquent borrowers that foreclosure prevention services exist by providing information regarding the Statewide hotline. This notification is not effective with delinquent borrowers who are ill-informed and fearful of the foreclosure process and who often find it difficult or impossible to understand and accept the dire condition in which they find themselves. This proposal complements existing outreach strategies in order to reach the borrowers who are often difficult to contact.
In a recent market study on foreclosure avoidance research conducted by Freddie Mac, more than half of the borrowers in foreclosure proceedings had no contact with their lender. In addition, these borrowers are unaware of the many options available to them if they are struggling to make a mortgage payment. Among delinquent homeowners who admit to having difficulty in paying their mortgage, 68% self report that they have personally tried to contact their mortgage lender directly to discuss their difficulties. Conversely, a sizable portion (31%) acknowledges that they have not contacted their lender directly. This population of borrowers is also unaware of services available to a person having trouble with their mortgage.
Borrowers behind on their mortgages are unsure of where to turn for help and are frequently afraid to contact their loan servicer for assistance. Most loan servicers attempt to reach borrowers, but all too often those attempts are unsuccessful.
Outbound calling by an independent third party has greatly expanded borrower contact rates for participating servicers. Pilot programs across the country have demonstrated that involving an independent third party counseling agency to make contact with the borrower vastly increases the percentage of borrowers reached and dramatically improves successful workouts.
Notification of a third party can save both lenders and homeowners costs and prevent foreclosures. In addition, connecting the homeowner with a counseling program before information about the foreclosure becomes public (which occurs at the notice of pendency recording, will ensure that the first contacts with the homeowner are those of a reputable counseling agency, and not a scam artist such as an equity stripper. This first contact will also allow the counseling agency to contact the homeowner before the flood of calls, and will thus enable them to be more effective that the predators.
Respecting the need for borrower privacy protections, the foreclosure process needs to provide for an opportunity for borrowers to decline counseling. Under this proposal, a borrower will be offered the option to decline counseling. If the borrower does not decline, the lender will provide contact information to an authorized foreclosure counseling agency. The agency can then use this contact information to target outreach in coordination with its local partners across the state. Efficiencies will also be achieved in that the data sent to the foreclosure attorney as part of the Power of Attorney and Notice of Default can serve as the same data necessary to inform the authorized third party counseling agency.
Finally, connecting the homeowner with an authorized foreclosure prevention counseling agency before information about the foreclosure becomes public (which occurs when the notice of pendency is recorded) will ensure that the first contacts with the homeowner are those of a reputable organization that is established to serve the homeowner, rather than an unscrupulous scam artist seeking to take advantage of the homeowner’s desperation and strip the equity from the homeowner.
Procedures such as the one recommended by the group have been in place in several jurisdictions around the country. Examples of some of these programs include:
· Pennsylvania: Lender provides notice to borrower that if the homeowner does not contact a counselor within seven days, the counseling agency will call the homeowner three times. If the homeowner contacts the counseling agency, there is an automatic stay on the foreclosure proceedings of 60 days.
· Atlanta: The Consumer Credit Counseling Service of Greater Atlanta utilizes a sophisticated technology platform to transmit data between partners and has achieved program efficiencies in order to operate and provide services like a call center.
· Indiana: Momentive Consumer Credit Counseling Service of Central Indiana provides a Helpline, similar to the one operated by the Minnesota Homeownership Center, that serves as a centralized system for statewide foreclosure prevention services and referrals.
· North Carolina: Under a pilot program operated by the Self Help Credit Union Secondary Market Partnership, mortgage servicers send letters informing delinquent customers that they will be contacted by a housing education program and Self Help also initiates telephone contact with an emphasis on early intervention.


Nonconsensus Proposals
Two other proposals to achieve early intervention by foreclosure prevention counseling agencies failed to achieve consensus because of concerns raised by several group members. The nonconsensus proposals are discussed below.
Encourage Counseling by Deferring the Sheriff’s Sale
As an incentive to encourage homeowners to seek the assistance of foreclosure prevention assistance services, this proposal would establish an automatic deferral period triggered by the demonstration that the homeowner is actively working with a counseling agency to address the delinquency. If a homeowner meets with a counselor and is actively negotiating a workout, sale, short sale, deed in lieu, or other strategy, the foreclosure counselor will send a Notice of Ongoing Counseling to the party conducting the foreclosure. Upon receipt of that notice, the Sheriff's sale can take place no earlier than 120 days after the notice of pendency has been recorded (currently the time period between the notice of pendency and the sheriff's sale encompasses somewhere between 56 days and 70 days). The concept behind the proposal is to create a window of time for the counselor and homeowner to work with the lender to evaluate and negotiate a strategy for the homeowner.
Concerns have been raised about this proposal because it would lengthen the entire foreclosure process, potentially increasing the costs of foreclosure and lending in general to borrowers and communities. Pointing out that Minnesota’s process is already long compared with other states, some members expressed concern about any extension of the process.
Require Mediation

Under this proposal, creditors would be required to serve a mediation notice on the homeowner and on an appropriate State agency or appointed agency that provides the opportunity to enter into a mediation process to resolve the debt with the lender. Service of the notice would trigger an automatic stay of foreclosure actions.
Minnesota has already faced a mortgage foreclosure crisis affecting the agricultural sector and used a similar mechanism to address that problem. An innovative and successful response to the previous agricultural crisis was created in Chapter 583 of the Minnesota Statutes, which has been used for two decades to work out issues similar to the current residential mortgage foreclosure crisis.
Appropriate modifications could be made to extend the mediation provisions currently applying only to agricultural properties to residential mortgages. Utilizing the existing model would necessitate little modification of the existing foreclosure process. Additionally, the existing foreclosure counseling system may also be adopted so that foreclosure counselors can facilitate workout and loan modification discussions on behalf of homeowners.
Some members disfavored this approach, noting that, while modeling a program to assist residential homeowners on one that has been successful in an agricultural crisis had merit, differences between farmers and homeowners raised concerns about the replicability of the farmer-lender mediation program in a home mortgage setting. According to those who voiced concerns about the workability of such an approach, the most significant difference between farmers and residential homeowners is that the farmer has assets, such as equipment and land, that can be liquidated to provide more readily available resources to become current on their mortgage. Additionally, the group preferred an approach that encourages, rather than mandates, action. This proposal may warrant additional discussion if the other recommendations do not help alleviate the foreclosure crisis.
FORECLOSURE PROCSS CONSENSUS PROPOSALS
The group evaluated the current foreclosure process from the recording of the notice of pendency to the end of the redemption period with an eye toward protecting the rights of the homeowner, facilitating redemption when possible, and reducing fraud and deceptive practices. The group subscribed to the principle that when redemption would not be possible by the homeowner, promoting the preservation of the property and facilitating its sale by the homeowner were critical. The following ten proposals amend and modernize the current foreclosure process.
Amendments to Chapter 580


1. Reduce Publication Costs on Homeowners

The Issue: Minnesota Statutes, section 580.03 requires notice be published for six consecutive weeks. The published notice consists of the legal description of the property, the amounts owed on the mortgage, and the date of the sheriff’s sale. Publication of the notice adds significant costs to the foreclosure (as much as $2,000), but does not provide the homeowner with any real benefit. The six-week published notice requirement was intended to garner public interest in the property at the sheriff’s sale. However, the desired effect is seldom if ever achieved because of the long redemption period after the sheriff’s sale, among other factors. The high cost of the foreclosure process makes redemption by the homeowner more unlikely and provides no real benefit. Additionally section 580.03 requires that when a Sheriff’s sale is postponed, the notice of postponement must be published, and publication must continue until the sale. This publication further adds to the costs of redemption and also provides no real benefit.

The Proposal: Reduce the number of weeks a published notice is required under Minnesota Statutes section 580.03 from six to three. Further, eliminate the requirement that a postponement of the sheriff’s sale be published under Minnesota Statutes section 580.07.

Discussion: The group sought to strike a balance by reducing the number of weeks that the notice was to be published. The group also considered doing away with the publication altogether or requiring that the notice be published in an electronic form, but believed that it was important to preserve the essential format of foreclosure by publication by continuing to require some publication of the notice.


2. Short Sales (Allow Sheriff to Accept Less than Full Amount Due for Redemption)

The Issue: The current language in Minnesota Statutes section 580.23, subdivision 1, does not specifically allow the Sheriff to accept a sum less than the full amount due for redemption. When a homeowner owes more on the mortgage than the current market rate value of the property, the lender will sometimes authorize the homeowner to sell the property for less than the amount due. This practice is commonly called a short sale. Short sales can be beneficial to lenders, homeowners and communities because they promote the rapid turn-over of the property, and prevent deterioration and vacancy. A short sale can also reduce some costs for the lender, and can be beneficial to the homeowner’s credit.





The Proposal: Amend Minnesota Statutes .section 580.23, subdivision 1, to allow the Sheriff to accept a specific sum less than the full amount due for redemption by the mortgagor when authorized to do so in writing.


3. Judgment Creditor Redemptions

The Issue: Under current practice, most junior creditors intending to redeem wait until the last hour of the last day of the redemption to record notices of intention to redeem. This practice causes confusion both to the Sheriff and to homeowners. The Sheriff has to determine the priority and the correctness of multiple notices of intention to redeem and usually is asked to issue a certification of redemption the following day. The homeowner sometimes attempts to work out sale / buyback (or leases with options to purchase) with the lender or another financier after the redemption period.

The Proposal: Amend Minnesota Statutes section 580.24 to create reasonable restrictions on creditor redemption. The amended language would require that judgment creditors file an intention to redeem with the county recorder and registrar of titles one week before the end of the redemption period. This change allows the owner enough time to react to the notices of intent to redeem, and allows for junior creditor redemptions to still take place.

Discussion: Requiring the notices of intention to redeem to be recorded earlier allows disputes about priority or correctness of the liens to be identified with adequate time to discuss and resolve them. This change will benefit the officer issuing the redemption. In addition, the earlier recording allows homeowners who are arranging post-redemption workout transactions to know what junior creditors are pursuing an interest in the property and take those amounts into consideration in planning their workout.


4. Preserve the Right to Redeem when Lien Priority is Disputed

The Issue: Current law (Minn. Stat. § 580.28) does not have a provision to allow a party to preserve their right to redeem when the priority of liens is in dispute, but provides this right to other claims.

The Proposal: Amend Minnesota Statutes section 580.028 to allow disputes over the priority of liens to deposit the amount for which the mortgaged premises were sold with the Sheriff to preserve their right to redeem while the dispute is litigated.


5. Response to Request for Payoff Amount During Reinstatement Period

The Issue: Obtaining payoff amounts from lenders and servicers in a timely manner during the reinstatement period is difficult. Delays increase costs to homeowners.

The Proposal: Amend Minnesota Statutes section 580.30 to create a process whereby, upon written request, the Sheriff may request specific reinstatement information from the holder of the mortgage or their legal representative.

Under the proposal, this information is required to be provided to the Sheriff within seven days of the date of the request. The information obtained by the Sheriff will include:

· The current payoff amount.
· An itemized schedule of the current amounts necessary to reinstate the mortgage.
· The identity of the person or entity with authority to act on behalf of the holder of the mortgage or the holder’s legal representative.

When the sheriff receives a request closer to the sheriff’s sale than seven days, the information will be requested and the holder of the mortgage will attempt to provide it before the sheriff’s sale. Failing to provide the information will not delay the sheriff’s sale.

Discussion: Under the current statute, costs – including the amount due on the mortgage and the interest, insurance, delinquent taxes, costs of publication and service, attorney’s fees, along with any additional costs – mount when a homeowner is able to obtain financing to reinstate. Determining precisely the exact amount of the reinstatement can therefore be complex and difficult. Minnesota has a variety of programs and strategies to assist homeowners to reinstate their mortgages, and the promotion of these programs was deemed by the group to be a laudable goal. Group members, including foreclosure counselors, related the futility in attempting to
obtain a payoff amount occurs with regularity. They shared stories of panicked homeowners having such difficulty obtaining the total payoff amount that they eventually lost the opportunity to reinstate when the home was sold at the Sheriff’s sale. (Once the Sheriff’s sale occurs, reinstatement is no longer an option, and the homeowner must obtain substantially greater funding to pay the remaining debt on the note, plus penalties).

The group considered whether it would be appropriate to require a timely response for requests for a reinstatement amount directly from homeowners, foreclosure counselors, homeowner’s attorneys, or other parties. This idea raised a number of privacy concerns, had the potential to put an undue burden on the lender to respond to many parties. This idea also seemed difficult to enforce. Instead, the Sheriff is a neutral third party who already facilitates many aspects of the foreclosure process and it seemed logical to allow the Sheriff to request this information from the lender. Having the Sheriff request this information also allowed for an easy enforcement mechanism, the postponement of the Sheriff’s sale.


Amendments to Other Chapters/Sections


1. Clarify the Types of Liens that Can Attach to the Homestead

The Issue: There is a lack of clarity concerning which types of liens attach to the homestead pursuant to a valid homestead waiver. Current language could be interpreted broadly to allow waivers in situations in which they were not previously allowed.

The Proposal: Amend Minnesota Statutes section 510.05 (Limitation on Liens to Homestead Properties) to clarify that only certain specific liens attach to the homestead pursuant to a valid homestead waiver. The amendment makes clear that attorney liens attaching pursuant to Minnesota Statutes section 481.13 may not attach to homestead property.







2. Reinstate the Procedure for Sheriff’s Execution Sales on Personal Property

The Issue: The amendments to Chapter 550 made last session specified procedures for Sheriff’s execution sales on homesteads, but inadvertently deleted the procedure for execution sales on personal property.

The Proposal: Amend Minn. Stat. Chapter 550 to restore the former personal property language setting the procedure for sheriff’s execution sales on personal property.


3. Allowable Costs Collectable Upon Redemption

The Issue: Because current law (Minn. Stat. § 582.03) is vague as to allowable costs upon redemption, calculating an accurate redemption amount is difficult. This vagueness has resulted in questionable charges to the homeowner, including appraisals and broker price opinions. These additional costs, while typically in amounts less than would warrant litigation, add significant costs to the redemption. The vague language and lack of penalties have combined to create an area of the law that is susceptible to questionable practices.

The Proposal: Clarify Minnesota Statutes section 582.03 to clearly set forth the costs collectable upon redemption, the affidavit of allowable costs, and create a penalty for excessive costs.


4. Response to Request for Payoff Amount During Redemption Period

The Issue: Obtaining payoff amounts from lenders and servicers in a timely manner during the redemption period is difficult. Delays increase costs to homeowners.




The Proposal: Amend Minnesota Statutes section 582.03 to create a process whereby upon written request the sheriff may request an affidavit of allowable costs from the holder of Sheriff’s certificate or certificate of redemption or their legal representative.

· This information is required to be provided to the sheriff within seven days of the request.
· If the holder of the sheriff’s certificate or certificate of redemption fails to respond to the Sheriff’s request within seven days, then the Sheriff may calculate a redemption amount and issue a certificate or redemption for that amount pursuant to section 580.23.
· If the affidavit of allowable costs is not provided more than one business day before the expiration of the redemption period, then at any time one business day or less before the expiration of the redemption period, the Sheriff may calculate a redemption amount pursuant to section 580.23.

Discussion: See discussion under Response to Request for Payoff Amount During Reinstatement Period proposal (pps. 21- 22 above).


5. Prevent Waste and Deterioration of Properties During Redemption Period

The Issue: Neighborhoods and cities have expressed frustration with the effects of the foreclosure crisis, including deteriorating, damaged, and vacant buildings. Vacant buildings are associated with higher crime rates and lower property values for existing homeowners. Lenders are currently able to take steps to prevent waste, but have expressed concern about exactly what they are able to do under Minnesota Statutes section 582.031 to preserve foreclosed properties. The current practice for many lenders is to conduct monthly inspections on foreclosed properties.

The Proposal: Amend Minnesota Statutes section 582.031 to add additional language to allow the holder of the Sheriff’s certificate to take actions to keep the premises from falling below minimum community standards for public safety and sanitation and make reasonable periodic inspections.
Discussion: Creating a standard for foreclosed properties tied to community standards and allowing only reasonable periodic inspections would provide a middle ground between requiring specific lender actions, and the current statute, which is vague as to the action that is allowed.


6. Interest Rate During Redemption Period

The Issue: The ability to determine the full redemption amount has long frustrated Sheriffs’ departments, foreclosure counselors, and homeowners seeking to redeem. Current law (Minn. Stat. § 580.023) provides that the interest rate for the redemption period is that which is stated on the mortgage debt, and if not, is provided at the rate of six percent. It is difficult to determine what the interest rate is because it is not provided where the Sheriff’s department can easily obtain it in calculating the full redemption amount.

The Proposal: Amend Minnesota Statutes section 580.23 and 581.10 to provide that the interest rate will be fixed on the date of the Sheriff’s Sale and will be stated in the Sheriff’s Certificate and operable throughout the redemption period. Additionally amend Minnesota Statutes, chapter. 550 to make the interest rate for redemptions from mortgage foreclosures by action and judgment execution sales the same as interest rates on foreclosures by advertisement, so all three types of foreclosures will be consistent. Mortgage foreclosure by action uses the chapter 550 judgment execution sales procedures, so by amending chapter 550, mortgage foreclosure by action is also amended.

CIVIL REMEDIES AND CRIMINAL ENFORCEMENT CONSENSUS PROPOSALS
This subcommittee explored whether additional civil and criminal law legislation to protect homeowners from predatory or discriminatory practices was feasible. Mortgage lending is a highly complex transaction and can be susceptible to unethical practices, as is evident in the proliferation of predatory loans with rates, terms and conditions unfavorable to borrowers that has, to a significant degree, led to the present mortgage foreclosure crisis.
Many questionable lending practices have been curtailed through last year’s enactment of some of the most comprehensive anti-predatory lending laws in the country. While these laws provide numerous protections for borrowers, several proposals to further protect Minnesotans have been identified by the group. Those proposals are discussed below.

1. Enhanced Remedies for Discriminatory Practices

The Issue: Minnesota’s primary vehicle for preventing discrimination is the Minnesota Human Rights Act. This Act has a one-year statute of limitations, which is one year shorter than the Federal Fair Housing Act’s statute of limitations. Legal practitioners note that the behaviors that may give rise to an action are identified beyond the one-year period, and thus leave claimants with little or no recourse to address the injustice done.

Further, punitive damages for discriminatory practices under the Minnesota Human Rights Act are capped at $8,500 (almost the amount available in conciliation court). Virtually all other statutes allowing punitive damages use existing standards for awarding punitive damages. (See Minn. Stat. § 549.20.)

The Proposal: Amend Minnesota Statutes section 363A.28 to extend the statute of limitations to two years to mirror federal law and amend Minnesota Statutes section 363A.29 allow the award of punitive damages to be determined under existing statutory standards.
Discussion: Numerous studies have demonstrated that people of color are more likely to be victims of predatory lending practices than their white counterparts, and are more likely to receive higher-cost and risky loans. The truncated statute of limitations for claims under the Minnesota Human Rights Act makes it unlikely that a homeowner will be able to seek out an attorney, work with that attorney to develop a case, and have the case filed within the statutory period. Often discriminatory lending practices come to light only after the homeowner becomes delinquent on the mortgage and the associated lending practices begin to be questioned, which may occur well after the statute has run.

There are numerous statutes that provide for punitive damages, but few that cap awards. While some caps are low, others are substantial. While state and local governments are immune to claims for punitive damages, there is no cap at all on a variety of other claims, including claims filed by a plaintiff ranging from violation of privacy rights by a financial institution and release of animal an animal “lawfully confined for science, research, commerce, or education,” to retaliatory discharge by an employer and the illegal performance of a genetic test on an employee or prospective employee by an employer.

The group could identify no rationale for limiting the amount of punitive damages for discriminatory practices to such an arbitrarily low amount.




2. Enhancing Residential Mortgage Fraud Prosecution

The Issue: Under current law (Minn. Stat. § 609.822, subd. 3), prosecutors report that they are hampered in their prosecution of mortgage fraud due to the limit of two years on the maximum sentence of imprisonment.

The Proposal: Amend Minnesota Statutes section 609.822, subd. 3, to allow prosecutors more flexibility to determining the charge so as to facilitate more effective enforcement of the law.


3. Provide Mortgage Debt Tax Forgiveness

The Issue: Homeowners in foreclosure whose debt is discharged are currently taxed on that debt forgiveness as income by the Minnesota Department of Revenue. This liability presents a barrier to short selling, an otherwise favorable option for homeowners.

The Proposal: Amend Minnesota Statutes sections 290A.03 subd. 15, 290.01, subd. 31, and 290.01, subd. 19 to extend Congress’ exceptions for property owners who have a foreclosure sale on their primary residence between January 1, 2007 and January 1, 2010 to state income taxes.


Consensus Proposal for Inclusion Elsewhere

Increasing Usury Tool Cap Limits
Minnesota law provides that extensions of credit in the amount of $100,000 or more, or any written extension and other written modification of the written contact, are exempt from the usury provisions of Chapter 334. Loans under this statute may be made without limitation as to purpose, term or rate of interest, and the only limitation on amount is that there must be a contract for a loan in the amount of $100,000. Most often this provision has been used by nontraditional lenders, frequently in contract for deed transactions, to effect predatory lending practices. The cap of $100,000 is outdated given today’s home property values.
The group reached consensus that a legislative proposal was advisable to amend Minnesota Statutes section 334.01, subd. 2, to raise the minimum loan amount necessary to use this usury statute for a person not included in the definition of a traditional lender. Such amendment would not only increase limits consistent with current property values but serve as a strong tool against predatory lending in contract for deed transactions, where traditional lenders are rarely involved.

Proposals Warranting Further Development

Several proposals surfaced that did not achieve consensus but that may warrant further

development and consideration. These proposals are discussed below.

1. Specific Regulation of Advertising of Adjustable Rate Mortgages

The Issue

The question of whether Minnesota needs additional regulation of advertising of adjustable rate mortgages was discussed in this working group. There remain both valid reasons to provide additional regulation of certain types of advertising, and legitimate concerns about whether such regulation is necessary and would serve to actually benefit consumers. Members questioned whether additional efforts to provide enforcement of our current regulations would not provide the same benefits. The question of what the appropriate balance is and how to appropriately craft legislation was one that this group did not have an adequate amount of time to answer.

Discussion

Current regulation of advertising includes:

· Uniform Deceptive Trade Practices Act: Minn. Stat. 325D.44
· False Statements in Advertising Act: Minn. Stat. 325F.67
· Prevention of Consumer Fraud Act: Minn. Stat. 325F.68-70
· Federal Trade Commission Act: 15 U.S.C. §§ 41-58
· Regulation Z contains advertising regulations for open end credit (12 CFR 226.16) and closed end credit (12 CFR 226.24).

Minnesota currently has three broad statutes that regulate advertising. In addition, the Federal Trade Commission Act (FTC Act) provides additional regulations on advertising including prohibiting the “unfair or deceptive acts or practices.” According to the Comptroller of the Currency (OCC), the FTC Act includes the regulation of practices involving “fraud, misleading conduct, or material omissions of information concerning costs, risks, or other terms and conditions may violate the prohibition against deception. ” Violations of the FTC Act would subject a national bank or its operating subsidiary to supervisory action by the OCC.
A Case for Additional Regulation

The strength of the three primary consumer protection statutes (Consumer Fraud Act, Deceptive Trade Practices Act, and False Statement in Advertising Act) and the FTC Act are their breadth and flexibility. The original drafters recognized that conduct changes, and that the primary consumer protection statutes have to be broad enough to respond to those changes. The breadth and flexibility, however, are also the statutes’ weakness. Claims brought under these broad statutes are very time intensive and resource intensive. Not that they shouldn’t be brought, but the breadth and flexibility creates fact-issues that cannot often be resolved by a simple motion for summary judgment with the court. If you have limited resources, this creates a major obstacle for enforcement or taking multiple enforcement actions. In contrast, a technical or conduct specific statute can be litigated quickly. The existence of a technical hook means that law enforcement agencies and others can feel more comfortable dedicating resources to the case, because there is a clear legal violation and a way for the case to resolved efficiently
Current Minnesota law (Minn. Stat. § 47.206) is an existing mortgage/rate advertising statute, which could be amended to better address predatory lending practices or questionable advertising techniques. (See suggested amendments to Minn. Stat. § 47.206 which creates a technical statute to address the advertisement of adjustable rate mortgages.
Concerns with Additional Regulation

Members who believed additional regulation is unnecessary argue: (1) there are already many advertising laws in place; (2) that more emphasis should be placed on enforcement of existing laws; and (3) Federal law (specifically Regulation Z, found at 12 C.F.R. § 226), which contains advertising regulations for open end credit (12 C.F.R § 226.16) and closed end credit (12 C.F.R § 226.24), preempts state laws to the extent of inconsistency.





2. Imposition of FHA Loss Mitigation Requirements

The Issue

Advocates believe encouraging or requiring lenders to restructure and modify existing loans is an essential element in combating the current crisis. One idea to achieve that goal – to impose FHA loss mitigation requirements as a prerequisite to nonjudicial foreclosure – surfaced but did not gain traction or consensus.
Discussion:

The concept advanced is intended as a method to require a rational analysis of available loss mitigation options prior to the filing of a notice for a Sheriff’s Sale. Given the depressed real estate market, the number of people with negative equity, and the number of people with potential to stay in their homes provided that there is a substantive loan modification, the FHA guidelines are a logical touchstone. The FHA guidelines are tested and familiar. Therefore, the software programs, boilerplate letters, and internal policies at major servicers and lenders already exist in order to comply.

MANUFACTURED HOUSING CONSENSUS PROPOSALS

Manufactured Housing in Minnesota Overview

According to the most recent census, 4% of the population of Minnesota lives in manufactured homes. There are nearly 50,000 manufactured homes in manufactured home parks in Minnesota. Manufactured home parks provide more affordable housing than Rural Development units and project-based HUD units combined, without any form of subsidy. In addition to homes in manufactured home parks, nationally two thirds of manufactured homes on privately owned land, and 80% of new manufactured homes in Minnesota are placed on land that is not in a manufactured home park.
The average household income for people living in manufactured homes in Minnesota is under $30,000. In the Twin Cities metropolitan area, 66% of the people living in manufactured homes are low income or very low income. Additionally, 87% of the manufactured homes in Minnesota are owner-occupied, and as of the last census, 8% of the homeowners were people of color.
The average cost of a new manufactured home is $64,900. Although there are many negative stereotypes associated with manufactured housing, according to HUD, the quality of the housing on average exceeds the quality of other forms of affordable housing. Nationally, manufactured housing 23% of homeownership growth among low-income people.
The Issues

Insufficient Time to Reinstate
Unlike traditional site built homes, many manufactured homes are ineligible for traditional mortgages. This is due, in large part, to the fact that Minnesota law classifies manufactured homes as personal property. Instead of traditional mortgages, manufactured home owners have chattel or personal property loans. These loans lack the protections that exist for mortgages. Instead, manufactured home loans fall under the Minnesota Manufactured Home Repossession Security Act.
Figure 1 illustrates the repossession process for manufactured home loans in Minnesota from default through repossession. The repossession process can start immediately after a borrower misses a loan payment. The process is initiated by sending a notice of default. The borrower then has 30 days to become current on the loan. If the borrower is unable to cure the default the lender has the ability to file an action for repossession of the home. Once the 30 day default period has elapsed, the homeowner has no further right to cure the default. Additionally, there are no redemption rights for manufactured home owners. Minnesota’s current repossession time line does not allow homeowners sufficient time to access resources to cure a loan default and prevent repossession of their home.
Figure 1: The Repossession Process in Minnesota

Missed Payment At any time after a missed payment the lender can issue a 30 day notice of default If the homeowner does not cure the default in 30 days the lender may file an action for repossession, homeowner has no further right to cure or redeem
Undetermined 30
Period Days

Currently, the only notice requirement is a 30 day default notice. The current process does not provide any information related to borrower counseling, not does it sufficiently specify the contents of the notice.
Lack of Borrower Protections
In 2007, Minnesota became the leading state in terms of protections afforded against predatory mortgage loans. Those protections, however, do not cover manufactured park home owners because they obtain chattel (personal property), not mortgage, loans. However, many of the same subprime lenders offer very similar subprime loans, with many of the same predatory terms that the Minnesota Legislature made illegal or otherwise severely restricted last session.
Although a manufactured home is not considered real property for lending purposes, a manufactured home, undeniably, is more akin to a site built home than it is to a piece of chattel, such as an automobile. These structures are people’s homes, and as such the owners deserve appropriate protection to provide every opportunity to preserve their stability and lives.
The Proposals
Two proposals emerged from the group to assist manufactured home owners. One modifies the repossession statutes affecting manufactured homes. It provides for increased notice that offers greater specificity as to where manufactured homeowners in default can access counseling and services to ensure greater access to available resources increase the likelihood that they can save their homes. The second adapts, where applicable, the loan protections enacted last year, as well as the loan protections that were previously in statute, to manufactured home park loans.




Reference Documents

National Governor’s Association Issue Brief, State Strategies to Address Foreclosures, September 2007

NeighborWorks America, Financial Institutions and Foreclosure Interventions, Innovative Partnerships and Strategies to Better Serve Borrowers in Default, November 2007

Hennepin County Foreclosure Task Force, Report October 2007

Greater Minnesota Housing Fund and HousingLink, Foreclosures in Greater Minnesota, A Report Based on County Sheriff Sale Data, July 2007

Policy Lab, Analyzing Elements of Leading Default-Intervention Programs, June 2005

Minnesota Foreclosure Prevention System Capacity Building Initiative, December 2007

Freddie Mac, Foreclosure Avoidance Research, 2005

APPENDIX A

Members of the Foreclosure Remedies Working Group

Legislative Leads
The Honorable Bob Gunther State Representative
The Honorable Joe Mullery State Representative
The Honorable Linda Scheid State Senator
The Honorable Ray Vandeveer State Senator

Group Coordinator:
Darielle Dannen Volunteer Lawyers Network

Lead Practicing Attorney:
Jim Neilson Babcock, Neilson, Mannella, LaFleur & Klint

Members:
David Anderson Affinity Title
David R Anderson All Parks Alliance for Change
Jill Alverson Hennepin Predatory Lending Task Force
Erin Anderson Minnesota ACORN
Bonnie Balach Minneapolis Community Planning and Economic Development
Darlynn Benjamin Congressman Keith Ellison’s Office
Ann Burkhart University of Minnesota Law School
Barb Carr City of St. Paul
Amanda Daeges Minnesota Bankers Association
Susan Dioury Minnesota Association of Realtors
Kevin J. Dunlevy Beisel & Dunlevy
Ron Elwood Legal Services Advocacy Project
Eric Ewald Mortgage Bankers Association of Minnesota
Tom Fabel Hennepin County Attorney
Shannon Guernsey Minnesota Housing Partnership
Amber Hawkins Mid-Minnesota Legal Assistance
Mara Humphrey Minnesota Credit Union Network
Mark Ireland Foreclosure Relief Law Project
Margaret Kaplan All Parks Alliance for Change
Pat Martyn Minnesota Mortgage Association
Brandon Nessen Minnesota ACORN
Aaron Neumann Congressman Keith Ellison’s Office
Chuck Parsons Moss & Barnett
Ken Salzberg Hamline University School of Law
Sharon Sayles Belton Independent Community Bankers of Minnesota
Dave Snyder Jewish Community Action
Daniel Tyson Best & Flanagan
John Villerius Hennepin County
Lawrence Wilford Wilford & Geske
Michael Wilhelmi City of St. Paul
James Wilkinson Housing Discrimination Law Project
Benjamin Wogsland Minnesota Attorney General’s Office