Defaulted Loans: Florida State Laws, Federal Laws and Federal Regulations
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When a lender holds a defaulted loan there are several issues that need to be considered before initiating a foreclosure. Lenders must ensure compliance with all relevant State and Federal laws and regulations to preserve their remedies for recovery. Additionally, specific Federal regulations may also apply and provide additional requirements for lenders holding VA loans or FHA loans, or provide protections for service members.
Florida State Laws
Lenders holding defaulted loans will first need to consider relevant Florida laws prior to beginning any foreclosure proceedings. Foreclosures are a state law proceeding first and foremost. The most relevant area where state law will apply is for procedure and Chapter 702, Florida Statues, provides the procedural framework for initiating a foreclosure action. Lenders can learn more about the nuances contained in each Section by reviewing our blogs on specific foreclosure topics.
However, an overlooked area where Florida law will apply is in contracts, especially considering lenders will often include a provision in their loan documents requiring them to provide borrowers notice of the default and an opportunity to cure. Under Florida law, contracts are construed in accordance with their plain language, as bargained for by the parties. Konsulian v. Busey Bank, N.A., 61 So. 3d 1283, 1285 (Fla. 2d DCA 2011). Prior to foreclosure, lenders are required to abide by the rights provided to borrowers in the loan documents. Should lenders fail to follow the terms of the contract, foreclosures will be disallowed.
Federal Laws and Regulations
Though foreclosure remains a state law proceeding, Federal laws and regulations must also be considered. Once a loan is in default, the Dodd-Frank Wall Street Reform and Consumer Protection Act provides specific protections for consumer debtors. Title 12 of the Code of Federal Regulations (“C.F.R.”) Section § 1024.39 requires a lender to establish or make good faith efforts to establish live contact with a delinquent borrower no later than the 36th day of a borrower’s delinquency, and again no later than 36 days after each payment due date, so long as the borrower remains delinquent. Promptly after establishing live contact with a borrower, the lender shall inform the borrower about the availability of loss mitigation options, if appropriate.
Furthermore, a lender is required to provide a delinquent borrower written notice no later than the 45th day of the borrower’s delinquency and again no later than 45 days after each payment due date so long as the borrower remains delinquent. Such notice shall include:
- A statement encouraging the borrower to contact the servicer;
- The telephone number to access lender personnel assigned and the lenders mailing address;
- If applicable, a statement providing a brief description of examples of loss mitigation options that may be available from the servicer;
- If applicable, either application instructions or a statement informing the borrower how to obtain more information about loss mitigation options from the servicer; and
- The Web site to access either the Bureau of Financial Protection list or the HUD list of homeownership counselors or counseling organizations, and the HUD toll-free telephone number to access homeownership counselors or counseling organizations.
Additionally, Title 12 C.F.R. Section § 1024.41 prohibits lenders from initiating foreclosure until the borrower is more than 120 days delinquent. It is important to note that these Dodd Frank protections only apply to residential loans, as similar protections are not provided to commercial borrowers.
Specific Federal Regulations
FHA loans are loans insured by the Federal Housing Administration (FHA), which can be issued by an approved lender. An FHA-insured mortgage is considered delinquent any time a payment is due and not paid. An FHA-insured mortgage is considered in default when the borrower is 30 days late in making a payment. Pursuant to Title 24 C.F.R. Section § 203.467, lenders are required to provide notice of default to the Department of Housing and Urban Development, by reporting from a previous month all loans that are at least 30 days delinquent.
Prior to initiating a foreclosure, lenders must attempt to contact borrowers to see if they qualify for loss mitigation alternatives. Should loss mitigation fail to resolve the issue, lenders may initiate foreclosure on an FHA-insured loan when three monthly installments are due and unpaid, and must initiate foreclosure when six monthly installments are due and unpaid, according to Title 24 C.F.R. Section § 203.331. Additionally, Title 24 C.F.R. Section § 203.356 requires lenders to give notice to the Secretary of Housing and Urban Development within 30 days after the initiation of foreclosure proceedings. Lenders are also required by statute to exercise reasonable diligence in prosecuting the foreclosure proceedings.
VA loans are loans made by lenders to qualifying service members. Frequently, VA loans arise when the borrower seeks to purchase a home and the VA guarantees a portion of the loan to allow the lender to provide better terms. Should the loan fall into default, lenders must pay particular attention to Title 38 of U.S. Code Section § 3732 and Title 38 C.F.R. Section § 36.4350, considering both the Secretary of Veterans Affairs and the borrower are liable for payment on the note.
Title 38 of U.S. Code Section § 3732 provides the relevant procedure that must be followed to collect the guaranteed portion due on the loan from the Secretary. Once a VA loan is in default, lenders are required to notify the Secretary of such default. The Secretary may then elect to pay the lender a portion of the guarantee necessary to cover the payment. Additionally, lenders are required to notify the Secretary of the default before commencing any suit or foreclosure. After providing notice, the Secretary has the option to pay the unpaid balance plus accrued interest and receive an assignment of the loan.
Title 38 C.F.R. Section § 36.4350 provides the relevant procedure that must be followed to collect from the borrower. Lenders are required to employ collection techniques which provide flexibility to adapt to the individual needs and circumstances of each borrower. Lenders are first required to establish contact with the borrower by telephone concurrently with the initial late payment notice. Should the lender fail to establish contact with the borrower, the lender is then required to send a letter within 30 days following the default, which states that the loan is in default, identifies the total amount due, emphasizes the importance of taking action, and provides information on how the borrower can contact the lender.
In the event the borrower has failed to make payments within 75 days after the missed payment, lenders are also required to send a second letter prior to initiating any foreclosure actions. This letter must provide the lenders contact information, emphasize the risks associated with delinquency, identify the VA contact information, and provide loss mitigation options available to the borrower such as modification, short sales, or a deed in lieu of foreclosure. Should the lender’s efforts remain unsuccessful, the lender may then pursue a foreclosure.
Special regulations also apply when the borrower is in military service. Title 24 C.F.R. Section § 203.345 provides that if the borrower is a person in the military service then the lender may, by written agreement with the borrower, postpone for the period of military service and three months thereafter any part of the monthly payment which represents amortization of principal. The agreement shall contain a provision for the resumption of monthly payments after such period in amounts which will completely amortize the debt within the maturity as provided originally. Additionally, Title 24 C.F.R. Section § 203.346 provides for the postponement of foreclosure and prohibits lenders from commencing foreclosure during any period of time the borrower is in military service.
Lenders holding defaulted loans must adhere to State and Federal laws to ensure they preserve their rights to initiate a foreclosure and avoid running afoul of servicing regulations. Additionally, depending upon the factual circumstances unique to the lender and the loan, specific Federal regulations may apply for FHA Loans, VA Loans, or to loans held by service members. Failure to comply with applicable laws can carry substantial risks for the lender.