As this blog is being written, the Tennessee legislature is attempting to make it easier for banks and mortgage holders to foreclose on your real estate in Tennessee. They are attempting to do this by reducing the amount of notice required before foreclosing on your real estate or home. Here's how it works:

Most mortgages in Tennessee are actually deeds of trust. This is a legal device that allows the lien on your property to be held by a trust. The trustee or substitute trustee (usually one law firm handles the original loan and deed of trust when you bought the house or refinanced and a different law firm handles the foreclosure sale, hence the "substitute" trustee) is allowed to sell the real estate/home if the borrower/homeowner violates the terms of the trust upon 20 days' "public notice." Missing one or more payments on the promissory note and security agreement is normally the event(s) which triggers the default clause and causes the creditor/mortgage to try to sell the property at foreclosure to get their mortgage loan paid back with the sale proceeds.

In simpler terms, if you don't pay your house payments, the creditor will try to sell your house to pay your debt to him. Historically, home ownership in the United States has been a symbol of the American Dream, and the law courts and legislatures have provided protections to land owners before their real estate can be taken from them and sold.

The most fundamental protections for property owners are the 5th and 14th amendments of the U.S. Constitution, which require "due process of law," as well as the Tennessee Constitution. The U.S. Supreme Court has ruled that "due process of law" requires "notice and an opportunity to be heard" before someone can take away your property. So before your house can be sold at a foreclosure sale and taken away from you, you are entitled to be notified that someone is trying to take away your property and you have a right to an "opportunity to be heard" to express why they should not be allowed to take your property.

However, your "opportunity to be heard" can be waived in the deed of trust you signed when you obtained the loan on the property. Tennessee is one of only 5 states that allow foreclosure sales of real estate with no court overseeing the process. The law of Tennessee allows the borrower (you) and the lender (mortgage company, bank, individual, etc.) to enter an agreement whereby your real estate can be sold without a court being involved, as long as proper "notice" is given. I do want to be clear that a borrower/consumer can still challenge an effort by the lender to foreclose on real estate, despite language in the deed of trust. It is necessary, however, for the property owner challenging the foreclosure to sue the lender and request that a court issue a restraining order to stop the foreclosure sale while the issues are being determined. From a practical standpoint, the burden shifts to the property owner to establish to the court that legitimate grounds exist to challenge the defendant and that irreparable harm will occur if the foreclosure is not stopped. In addition, legal fees for matters such as these (temporary restraining orders, injunctionary relief, etc.) are normally expensive. Also, surety bonds are required in many cases as well as court costs and filing fees, all expenses a property owner facing foreclosure is hardly prepared to undertake.

Under Tennessee state law, "notice" of a lender's intent to foreclose pursuant to powers granted by a deed of trust is satisfied if 20 days' notice is given to the property owner by "publication in a newspaper of general circulation" in the county in Tennessee where the property is located.

The publication is normally the advertisement in the classified ads of a local newspaper, with titles like "Notice of Substitute Trustee's Sale." They usually take up a couple of columns of newsprint and somewhere in the fine print are the property address and the last property owner of record. The legal description is included with the metes and bounds, degrees of angles defining the property lines, and other arcane language and terms of art specific to property surveys. The idea is that a property owner has an opportunity to see the notice of sale and take steps to keep the property, perhaps by negotiating an agreement with the trustee over the deed of trust, filing a lawsuit to obtain a temporary restraining order, or filing a bankruptcy to invoke the automatic stay and stop the foreclosure.

In rural areas of Tennessee, notice by publication is effective since local residents regularly read these notices in their local county newspaper. They routinely call the property owner to make sure the owner knows that their house is about to be sold at foreclosure sale. The property owner has likely already received several letters from the mortgage company advising of a default in the note and deed of trust and a letter identifying the time, date, and place for the foreclosure sale by the time the first notice is published in the newspaper. Nonetheless, my experience is that the "concerned" neighbor has kept many a home from being sold at a foreclosure sale. In more urban areas, the property owner is more likely to be contacted by real estate agents and speculators, attorneys sending letters to the property owner soliciting Chapter 13 bankruptcy business, or other third parties who don't personally know the debtor.

The notice is clearly necessary and there is little debate over that. The 20-day notice period is also not an issue. The issue is whether the mortgage holder (creditor) has to publish it just once or three (3) times for successive weeks as the current Tennessee law requires.

Publishing the foreclosure sale advertisement can be misleading because it is not unusual for a notice to be published, the arrears on the mortgage to be brought current, and the advertisement pulled and not published again. The three successive publications act to provide an uninterrupted warning prior to the property owner losing the home/property to a foreclosure sale. Regrettably, many newspapers require the mortgage company to buy all 3 weeks of advertisement as a package. If a bankruptcy is filed, the mortgage company/bank should cease further publication of the sale or else risk sanctions for violations of the automatic stay of 11 U.S.C. Section 362. Hopefully, competition amongst newspapers for foreclosure advertising will prompt enterprising ad departments to sell foreclosure advertising notices on a per publication (weekly) basis.

A federal law that comes into play with notice of a foreclosure sale is the Fair Debt Collection Practices Act (FDCPA). The FDCPA is a law that regulates debt collectors and their conduct in attempting to collect debts. This law applies to collection agencies, lawyers, and practically any third party who is collecting a debt for another person or entity, say a hospital. This act does not apply to those collecting a debt for themselves. For example, if the hospital uses their own employees to try to collect a debt, they would most likely not be subject to the FDCPA. However, if they authorized or assigned the account to a collection agency to collect the debt, both the collection agency and hospital would be under the jurisdiction of the FDCPA.

An effort by a mortgage company (bank/individual) to foreclose on your home is considered an "effort to collect a debt." The mortgage company or bank would be subject to the FDCPA, but the individual who holds a mortgage on your home would not be subject to the FDCPA if they tried to handle the foreclosure themselves.

Mortgage companies, banks, loan servicing companies, etc. are normally organized and operate as a corporation, limited liability company (LLC) or some other type of artificial person organized under state law. Corporations, LLCs, etc. cannot represent themselves. An attorney must represent them. The president or chief executive officer (CEO) cannot represent the corporation. They would be practicing law without a license (a crime in Tennessee).

Since an attorney must represent a mortgage company or bank, they are always subject to the FDCPA. Therefore, if you miss payments on your mortgage and the mortgage company/bank declares a default, you would normally first receive a letter from the mortgage company/bank giving you notice of the default. At that point, the mortgage company/bank would still be using "in house" collection efforts (their own people) and they would not be subject to the FDCPA. However, if you were unable to resolve the default in payments with the mortgage company/bank and they turned the matter over to a lawyer, the requirements of the FDCPA would kick in. Thus, any correspondence you received from the lawyer would notify you that their letter was "an attempt to collect a debt" and if you did not dispute the validity of the debt in writing within 30 days, then a legal presumption would arise that the debt is valid. This is very important, because if you fail to dispute the debt in writing and you are later sued, the creditor does not have to prove the validity of the debt. The creditor has in effect shifted the burden of proof to you to prove the debt is invalid.

Proving the validity of the debt can be expensive and problematic for the creditor if you dispute its validity. The business records are hearsay without the custodian of those business records, and if the custodian of the records is in another state, there may be significant travel costs to bring the custodian to court in Tennessee.

Even more potentially troublesome for the holder of your mortgage is identifying whom the custodian even is. As astonishing as this may sound, with the securitization of mortgages over the last decade, efforts at spreading risk to thousands of different entities have created legal black holes where ownership right may be more a matter of faith than substance. If your mortgage has been sold into a pool of other mortgages, you have the right under the Real Estate Settlement Procedures Act (RESPA) to request any and all documents related to the origination of your loan, any later transfers on assignment of any or all of the rights attached to that mortgage, and an accounting associated with the costs and servicing of such transfers. A request for such documents could form the basis for a dispute or questioning of the validity of a debt secured by your deed of trust.

To be continued...