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Student Loan Law: 18.2.6 Due Process Challenges

This section examines due process challenges to administrative wage garnishments, tax intercepts, and benefit offsets. Not only do these collection actions offer far less process than a court proceeding, the Department—and even a guaranty agency—can conduct its own hearing and seize wages, tax refunds, and benefit payments without first obtaining a court order.

Student Loan Law: 9.1 Overview

Federal student loan collection powers have grown so much over time that the government rarely sues borrowers, opting instead for an array of extra-judicial collection tools.1 This chapter describes the extra-judicial collection tools available to the government, as well as borrowers’ protections against these tools. As with all federal student loan collections, there is no statute of limitations on these extra-judicial collection tools.2

Student Loan Law: 17.1 Overview

This chapter examines the problem of predatory school conduct from a consumer protection perspective. Unfair and deceptive school practices are a tremendous source of financial harm and loss of opportunity for student borrowers. Predatory schools—eager to take advantage of billions of dollars that flow to students via federal student aid—have exploited federally-funded student assistance programs. Predatory school conduct has historically been a problem concentrated within the for-profit (or “proprietary”) higher education sector.

Student Loan Law: 17.2.2.2.3 Limits on incentive compensation

PPAs also require schools to agree to certain “incentive compensation” rules, which prohibit paying recruiters for enrollments on a per-student basis.49 This provision is meant to curb the risks that recruiters will sign up poorly qualified students who will derive little benefit from the subsidy and may be unable or unwilling to repay federally guaranteed loans—or that they will use unfair or high-pressure tactics to push people to enroll.

The current regulations require schools to agree that:

Student Loan Law: 2.6 Disbursement of Federal Student Loans

Before disbursement, a school must notify a student of the amount of funds that they can expect to receive under each federal government program and how and when those funds will be disbursed. The notice must indicate which funds are from subsidized loans and which are unsubsidized, if relevant.233

Home Foreclosures: 6.4.2.2 Default Based on Failure to Refinance

While failure to make timely payments under the mortgage is the most common cause of acceleration and foreclosure, any default under the terms of the mortgage can result in foreclosure. Unique to the Section 502 direct loan program is the requirement that the Rural Housing Service may require that a borrower refinance using private credit if it determines that the borrower has the ability to secure private financing and, thus, is no longer eligible for Section 502 assistance.

Home Foreclosures: 6.4.2.3 Administrative Challenges to Acceleration of Section 502 Direct Loans

The decision of the RHS to accelerate a borrower’s loan, or any decision adverse to the borrower, can be contested by requesting either an informal review by the Centralized Servicing Center, mediation, or a formal appeal with the National Appeals Division.418 Borrowers can challenge acceleration of a Section 502 direct loan if they have not been informed of all the servicing options available to them and if the agency fails to develop a reasonable servicing strategy with the borrower.419 Simila

Home Foreclosures: 6.4.2.4 Foreclosure Defense Based on RHS’s Failure to Comply with Servicing Guidelines

The failure of the RHS to properly service Section 502 direct loans in accordance with the applicable regulations is a defense to foreclosure.445 Courts have refused to foreclose on Section 502 direct loans when the borrower was not informed of a servicing option they qualified for under the regulations; was improperly denied a servicing option; was dissuaded from applying for an option; or was not informed of their right to appeal a denial of the option or other adverse decision.

Home Foreclosures: 6.4.3.1 Introduction

The Rural Housing Service’s (RHS) Section 502 Single-Family Housing Guaranteed Loan Program provides loans, through private lenders, to eligible low- to moderate-income borrowers in rural areas.447 The status of a loan as participating in the RHS guaranteed loan program is often not obvious. The loan documents and recent account statements may not reflect the guarantee status. It may be necessary to review loan closing documents, particularly the borrower’s HUD-1 statement, for reference to RHS insurance coverage.

Home Foreclosures: 6.4.3.2 Foreclosure of Section 502 Guaranteed Loans

Lenders must be approved to participate in the Section 502 guaranteed loan program and agree to service the loans in accordance with the agency’s regulations.448 They must service the loan in a reasonable and prudent manner as they would service a portfolio of non-guaranteed loans, following industry standards and the agency’s guidelines.449 The statute, regulations and Loss Mitigation Guide make clear that lenders are mandated to use loss mitigation options whenever feasible to avoid foreclosur

Home Foreclosures: 6.5 Debts Owed to the Federal Government

When loans guaranteed by FHA/HUD, the VA, or RHS are foreclosed, borrowers typically end up with a debt owed to the federal agency that originated the loan or paid out the insurance claim to a private lender. These debts can be for significant sums. RHS, for example, typically adds to the deficiency debt sums for the “recapture” of subsidies for interest reduction it paid out during the life of the loan.469 Debts owed to federal agencies can be assigned to the Treasury Department for further collection action.

Home Foreclosures: 6.6.1 The Government As Foreclosing Mortgage Holder

Due process requires adequate notice and a meaningful opportunity for a hearing prior to deprivation of a significant property interest.473 A foreclosure by power of sale of a mortgage held by the federal government would seem to violate this standard, because personal notice of a foreclosure sale is not required in all states,474 and no state that permits power of sale foreclosure requires a court hearing prior to foreclosure.

Home Foreclosures: 6.6.2 Due Process Requirements

Once state action has been established, due process protections apply. Exactly what this protection means for borrowers, however, is not entirely clear. Generally, due process requires notice reasonably calculated to apprise interested parties of the pendency of the action,488 and a pre-deprivation hearing aimed at establishing the validity of the underlying claim.489 In light of the Supreme Court’s decision in Mennonite Board of Mission v.

Home Foreclosures: 12.1.3 The Basics: Foreclosure of a Junior Mortgage or Deed of Trust

When a junior mortgage is foreclosed, the buyer at the foreclosure sale receives only the rights in the property that the borrower conveyed to the junior mortgagee upon executing the loan documents. These rights consist of an equity of redemption—the right to pay off the junior mortgage debt and redeem the property from the junior mortgage. Foreclosure of the junior mortgage extinguishes this redemption right of the borrower.

Home Foreclosures: 12.1.4 The Borrower’s Rights in the Property After Foreclosure of a Junior Mortgage

At common law, foreclosure of a junior mortgage has a severe impact on all the borrower’s rights in the property. According to common law, upon foreclosure of a junior mortgage, the borrower loses all rights in the property.18 The purchaser at the junior mortgage foreclosure sale can proceed to evict the borrower and take possession of the property. If there is substantial equity in the property, the purchaser is incentivized to pay off the first mortgage and acquire unencumbered title to a valuable asset.

Home Foreclosures: 12.2.1 General

The statutes of limitations that apply to foreclosure of mortgages vary greatly from state to state. Section 5.3.1, supra, outlines the wide range of time frames that are in effect, depending on the jurisdiction and the event that triggers the running of a limitation period.

Home Foreclosures: 12.2.2 The Statute of Limitations for Individual Installments

When a mortgage or deed of trust has not been accelerated, a limitation period typically runs from the due date of each individual unpaid installment.26 For example, New York’s statute of limitations for mortgages is six years. An individual installment that came due and remained unpaid for six years with no acceleration of the loan can no longer be collected in a legal action.27 This principle can be particularly important in defending against a second mortgage foreclosure.

Home Foreclosures: 12.2.3 Statute of Limitations After Acceleration

As discussed in § 5.3.2, supra, acceleration of a mortgage loan cancels the borrower’s right under the contract to pay off the loan in installments. Acceleration makes the entire loan balance due immediately. An acceleration also triggers the running of the statute of limitations for the entire obligation.

Home Foreclosures: 5.3.2 When Does the Statute of Limitations Begin to Run?

Once the appropriate statute of limitations has been identified, the next step is to ascertain whether and when the limitation period began to run. Different events can trigger the running of a statute of limitations for foreclosure. The important ones are: the default in making an installment payment when contractually due; the acceleration of the entire debt; and the maturity date for completing all scheduled payments. Any of these events may start the limitation period running.

Home Foreclosures: 5.3.4 What Is the Effect of Expiration of the Statute of Limitations on the Underlying Debt?

As discussed above, expiration of the statute of limitations can be an affirmative defense to a judicial foreclosure or a basis to enjoin a non-judicial sale. Aside from these defensive uses, expiration of a limitation period may also serve as a ground to remove a mortgage as an encumbrance on the homeowner’s property. Like many aspects of the relationship between statutes of limitations and mortgages, the availability of this option is heavily dependent on the peculiarities of each state’s property laws.

Home Foreclosures: 12.2.4 Statute of Limitations After the Loan Maturity Date

When a mortgage loan reaches its contractual maturity date, the effect is much like acceleration. Any balance remaining unpaid is due immediately, and the borrower has no contractual right to pay off the debt in installments. If an unpaid balance remains at the scheduled maturity date, the lender must commence foreclosure before the applicable limitation period expires.