The Impact of the New Federal Financial Reform Legislation on Post-Foreclosure Evictions

By: Larry R. Rothenberg, Esq.

President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, (the “Dodd-Frank Act”) in reaction to the financial crisis.  In furtherance of the stated objective of insuring financial stability, the Dodd-Frank Act, which is effective immediately, imposes requirements for oversight and regulation of activities such as appraisal activities, mortgage resolution and modification, etc.

Tucked into the Dodd-Frank Act is an Amendment to the Protecting Tenants at Foreclosure Act of 2009 (“PTAF”).  That amendment may greatly increase the number of leases and tenancies that can qualify for protection under the PTAF, to the detriment of REO owners.

Since 2009, the PTAF provided protection to tenants who entered into bona fide leases or tenancies prior to the “notice of foreclosure.”  In order to qualify as a bona fide lease or tenancy, the tenant could not be the mortgagor, or the child, spouse, or parent of the mortgagor, and the lease or tenancy must have been the result of an arms-length transaction for rent that is not substantially less than fair market rent for the property, unless the rent is reduced or subsidized due to a federal, state or local subsidy.

The term “notice of foreclosure” was not defined in the PTAF, and was therefore ambiguous.   Did it mean the lis pendens date, which in Ohio is the date the foreclosure complaint was filed, or did it mean the date of service of the summons on the mortgagor, the date the notice of the sale was filed in the case, the date the notice of the sale was served on the mortgagor, the date of the sheriff’s publication of the sale, the date of the court’s entry of the order confirming the sale, or even actual notice of the foreclosure to the tenant?

In any event, the REO owner acquired title to the property subject to the rights of a “bona fide tenant” under a bona fide lease or tenancy entered into prior to the date that the particular judge would deem to be the “notice of foreclosure.”  In order to recover possession of the property through legal action, the REO owner was required to provide a qualifying tenant with written notice, at least 90 days prior to the effective date of the notice, to vacate the premises.

The Dodd-Frank Act’s amendment to the PTAF clarifies the ambiguity to a large extent by stating:  “For purposes of this section, the date of a notice of foreclosure shall be deemed to be the date on which complete title to a property is transferred to a successor entity or a person as a result of an order of a court or pursuant to provisions in a mortgage, deed-of-trust, or security deed.”

Therefore, it can no longer be argued, for example, that the PTAF is only applicable to leases or tenancies entered into prior to the lis pendens date.  While some ambiguity still remains, the PTAF as now amended, will likely be interpreted to apply to leases or tenancies entered into any time prior to the recording of the sheriff’s deed or other conveyance resulting from the foreclosure.  In other words, the PTAF will now apply to a tenant, other than the mortgagor, or the child, spouse or parent of the mortgagor, who enters into a lease or tenancy even after the sheriff’s sale, and probably even after confirmation of the sheriff’s sale, until the sheriff’s deed is recorded, as long as the lease or tenancy appears to be an arms-length transaction for an amount not substantially less than fair market rent, unless subsidized.

The amendment does not provide an express exception even if the tenant had actual knowledge of the foreclosure proceedings, as long as the lease or tenancy otherwise qualifies.  This opens the door wider than before to potential fraudulent leases or tenancies through the use of straw-man tenants or others, as a strategy to significantly delay the REO owner from recovering possession of the property.  It may be difficult to prove that such a lease or tenancy was not an arms-length transaction.  “Strategic renting” may now join “Strategic defaults” in our lexicon.

It is also unclear as to whether this change will be imposed retroactively to pending eviction actions or those not yet commenced, where the sheriff’s deed was recorded prior to the Dodd-Frank Act.  Although ordinarily, statutes such as this would provide only prospective relief and not be applied retroactively, the clear intent of the Dodd-Frank Act can easily influence a court to interpret the prior ambiguity in the PTAF more favorably to the tenant.

The Dodd-Frank Act also creates a HUD sponsored program to provide funding for legal assistance not only to mortgagors in default, but to tenants at risk of eviction as a result of a foreclosure.  This will enable tenants, to a much greater extent than in the past, to retain attorneys to engage in legal proceedings to delay or prevent the REO owner’s from gaining possession of the property.

As originally enacted, the PTAF contained a sunset provision terminating the Act on December 31, 2012.  The Dodd-Frank Act extends the sunset provision to December 31, 2014.

For a copy of the original PTAF, go here.

For a copy of the Dodd-Frank Act’s Amendment to the PTAF, go here.

If you have any questions or would like to discuss this issue in more detail, please contact Larry Rothenberg at 216-685-1135 or via email at lrothenberg@weltman.com. Larry is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., L.P.A. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania and Michigan.