If you purchase a foreclosure home and there is a tenant on the property you should provide them with the 90 day notice as soon as possible. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. No. 111-203, 124 Stat. 1376, 2204 (2010)) amended the Protecting Tenants at Foreclosure Act of 2009 (“PTFA”) to further define the date of notice of foreclosure as the date which complete title to the property is transferred; therefore, a new owner must have the Certificate of Title before providing a 90 day notice to a tenant. While determining if the tenant has a “bona fide” tenancy, it is good practice to provide the 90 day notice immediately once the Certificate of Title is issued.
It is important to understand that there are people who are taking advantage of the PTFA. Some homeowners will create a lease that is largely in favor of the tenant and charge a minimal rent rate and rent the property to friends or family. The PTFA has addressed this in the Act. It makes clear that it only provides protection to certain types on individuals residing on the property. The PTFA specifically states:
The protections of this law apply to tenants under a “bona fide” lease or tenancy. A lease or tenancy is “bona fide” only if: (1) The mortgagor or a child, spouse, or parent of the mortgagor under the contract is not the tenant; (2) The lease or tenancy was the product of an arm’s-length transaction; (3) The lease or tenancy requires the receipt of rent that is not substantially less than fair market rent or the rent is reduced or subsidized due to a federal, state, or local subsidy.
(Pub. L. No. 111-22, Div. A, Title VII, 123 Stat. 1632, 1660-62 (2009)).
If you are thinking about purchasing a property at a foreclosure sale, it is really important to do adequate research to determine if there is anyone residing on the property because tenants do have protections under the PTFA. Be aware too that if you purchase a property that someone resides in, it may take extra time and money to evict or eject the tenant. On the flip side, if you are looking to rent the home you purchased, you may end up with a great tenant who is ready to pay you rent, without having to do any more work on your own!
1. What is the Dodd-Frank Act? It is a law passed in 2010 and named after Barney Frank, a former congressman from Massachusetts and Christopher Dodd, a former senator from Connecticut, who sponsored the law. The law’s primary purpose was to address the excesses in the marketplace which led to the real estate bubble and subsequent collapse, and specifically, to provide legislation that would eliminate the taxpayers bailing out “too big to fail” banks and financial institutions.
2. What is in the law? The scope of the law is enormous. The law itself is 848 pages and the regulations interpreting and enforcing the law are in excess of 14,000 pages. Congress was not only concerned about taxpayer bailouts but was also concerned with “predatory lending” to consumers. As a result, banks, financial institutions and even individuals who lend money to consumers and take as security a mortgage on a primary residence are covered by the law.
3. How does the law affect real estate locally? Banks and other financial institutions have huge regulatory burdens to overcome to assure that the loans which are made satisfy the criteria established in the law. Sanctions for violations of the law are extremely punitive and for the most part, banks will err on the side of caution when deciding whether to make a loan to a customer on a primary residence. The net result is higher bank fees and fewer loans made as a result of the regulatory costs and thresholds placed on banks.
4. How does the law affect individuals? Sellers financing the sale of their own property are covered under the rule. Thus, if you are representing an owner who is willing to hold the mortgage on the sale of his or her property, you must make sure the attorney or title company closing the transaction is aware of the regulations of Dodd-Frank. In short, one who owns property can finance the sale of 3 properties on any one 12 month period. However, the seller must not have constructed the home under contract, the financing must be fully amortizing (no balloon mortgages!) and the loan must have a fixed interest rate or an adjustable interest rate with “reasonable” lifetime limits on rate increases. The rule is better if the seller is only financing one home in a 12 month period as the mortgage can contain a balloon provision.
5. What if I want to finance the purchase of a residence from my child or other family member? You can’t do it. The type of financing is not allowed under Dodd-Frank.
6. What are the sanctions for a violation of Dodd-Frank? There are several but one is a $1,000,000.00 a day fine.
7. What are exemptions or ways to avoid Dodd-Frank? Forget about it-there aren’t any absent conventional financing, financing through a mortgage broker or complying with the limited owner financing rules mentioned above.
This Article was sponsored by the Bay Area Real Estate Council (BAREC) and written by Richard “Rick” A. Miller. Rick, a Board Certified Real Estate Lawyer, is a Board member of BAREC and a Managing Partner at Miller, Crosby & Miller, P.A., 2323 South Florida Avenue, Lakeland, FL 33803. Rick may be reached at (863) 688-7038.