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Consumer Banking and Payments Law: 3.6.6 The Acceptor’s Obligation

Even though the drawer and the drawee bank have obligations to each other based on their contract and UCC Article 4, the drawee bank is not obligated on a particular check until it accepts the check by signing the check.281 Because of this lack of liability by the drawee, sometimes the payee will want the drawer to pay with a check that the drawee bank has already agreed to pay.

Consumer Banking and Payments Law: 3.7.2.1 Introduction

A bank with which a customer has a checking account can charge the customers’ account only if the check is “properly payable.”294 “Properly payable” means that the customer has authorized the payment and the payment violates no agreement between the customer and the bank.295 If a check is not properly payable and the bank pays it anyway, the bank must re-credit the customer’s account unless the bank can resist re-crediting the account by asserting subrogation rights, which are addressed in

Consumer Banking and Payments Law: 3.7.2.2.1 In general

A check may not be properly payable if the drawer’s signature is missing or forged. The essence of a checking account is that the drawee bank follows the orders of the depositor to pay money out of the account. When the drawer signs a check, the drawer is ordering the drawee bank to make the payment indicated in the check.

Home Foreclosures: 5.5.2.1 Generally

Although foreclosure procedures vary considerably from state to state, most require that the foreclosing party serve one or more notices upon the borrower before a valid sale can take place. The most common notices that state laws require are notice of a right to cure, which may include information about loss mitigation contacts and options, notice of acceleration or default, and notice of the foreclosure sale itself. These notices may be mandated by statute or by the terms of the parties’ loan documents.

Home Foreclosures: 5.5.2.2 Right to Cure and Loss Mitigation Notices Required by Statutes and Agency Regulations

Certain states have long-standing statutory requirements for service of a notice informing the borrower of a time frame and procedure for exercise of a right to cure a default before formal steps are taken to foreclose.190 In recent years, several states added to their foreclosure procedures specific new notice requirements to inform borrowers in default of options to be considered for loss mitigation.191 Over a dozen states have enacted statutes mandating some form of preforeclosure mediation o

Home Foreclosures: 5.5.2.4 Notice of Sale

Nearly all state foreclosure laws, whether they are in effect in judicial or non-judicial foreclosure states, require that a notice of the specific foreclosure sale date be served on the borrower.231 This requirement is in addition to advertising duties that give notice of the sale to the general public.232 The notice must identify the date and location of the sale.

Home Foreclosures: 5.6 Default: Waiver and Estoppel

The terms of the note and mortgage or deed of trust generally will define what constitutes default by the homeowner and gives the lender the right to accelerate, or to claim that the remaining payments are due at once.

Home Foreclosures: 5.7 Other Procedural Defenses

Like foreclosure procedures, procedural defenses to foreclosures will vary from state to state, and can only be determined by reference to state statutes and case law. In general, in states that require a legal proceeding to foreclose, service of process and other procedural requirements must be met as in any other case.313 Foreclosure pleadings may be subject to rules set by case law or rule.314 Similarly, rules may require that relevant documents be attached to the complaint.

Home Foreclosures: 5.8.1 Overview

Due process requires that deprivation of a significant property interest be preceded by both adequate notice and a meaningful opportunity for a hearing.329 Foreclosure by power of sale would seem to violate this standard in two ways: personal notice of a foreclosure sale is not required in all states,330 and most states which permits power of sale foreclosure do not require a hearing before a judge prior to foreclosure.

Home Foreclosures: 5.8.2 Participation by State Official

In some states, statutory foreclosure procedures require the participation of a state official for the proper conduct of the foreclosure.335 In these states, a strong argument may be made that the involvement of the state official constitutes state action for due process purposes. A number of courts have reached this conclusion.336

Home Foreclosures: 5.10.1 Overview

Due on sale clauses are common contract provisions which give a lender the option to immediately call due, or accelerate, a real estate secured loan when the borrower sells or transfers all or part of the security to a third party.368 Almost all consumer mortgage loans contain such a provision in the note or security instrument.

Home Foreclosures: 5.10.2 Federal Exemptions

Under the Garn-St Germain Act, and regulations issued by the former Office of Thrift Supervision (OTS) pursuant to the statute,377 valid due on sale contract provisions are enforceable by lenders, subject to nine specific exemptions.378 The Act provides that a lender may not enforce a due on sale clause with respect to residential real property upon:

Home Foreclosures: 5.10.3 Intra-Family Transfers

As is evident from the earlier list of exempt transfers, federal law aims to protect intra-family transfers from triggering acceleration. These include transfers to the borrower’s relative on the borrower’s death, transfers to the borrower’s children and spouse,381 and transfers resulting from a marriage dissolution or property settlement.

Home Foreclosures: 5.10.4 Exemption for “Window Period” Loans

The Garn-St Germain Act also created complex exceptions for states which restricted the enforcement of due on sale clauses prior to the effective date of the Act.384 In order to protect the reasonable expectations of borrowers in these “window period” states, the Act provided that state restrictions would continue for three years after the effective date of the Act, or until October 15, 1985.385 The Act also authorized window period states to continue these restrictions beyond the three year per

Home Foreclosures: 5.10.5 Foreclosure Based on a Payment Default Not Barred

Lenders quite commonly sit back after a transfer and do not attempt to foreclose, even when the due on sale clause might authorize it. However, when a loan falls into payment default, the lender accelerates the loan and initiates the foreclosure process. If the foreclosure is based on the monetary default, and not the intra-family transfer, Garn-St Germain arguably does not prevent the sale.

Home Foreclosures: 5.12.1 Overview

A trustee under a deed of trust, or a mortgagee under a mortgage, has a duty to exercise good faith and diligence in conducting a foreclosure sale of property.420 The lender must protect the rights of the mortgagor under the terms of the power of sale.421 The mortgagee or trustee must remain at arm’s length with the buyer,422 must conduct the sale fairly and limit expenses within reasonable bounds,423

Home Foreclosures: 5.12.2 Enjoining a Foreclosure Sale When There Is Sufficient Equity in the Property to Satisfy the Mortgage Debt

Prior to a sale, a homeowner with substantial equity may be able to enjoin a foreclosure to allow a sale on the open market. A foreclosure sale is virtually guaranteed to bring no more than the balance due on the note.429 A sale on the open market, however, should allow the homeowner to retain some of the equity in the property. Such a sale presents no risk to the lender; it will be paid in full from the sale proceeds.

Home Foreclosures: 5.13.1 State and Local Responses to the 2007 Foreclosure Crisis

The subprime foreclosure crisis that grew with unprecedented severity beginning in 2007 created momentum for state and local governments to look anew at foreclosure relief options. Several states enacted laws that added time and notice requirements to existing foreclosure procedures.438 Other states enacted statutes that increased protections for homeowners at risk of foreclosure of high-cost home mortgages.439

Home Foreclosures: 5.13.2.1 Generally

Since 2008, fourteen states and the District of Columbia have enacted statutes that require lenders and servicers to participate in some form of negotiations with a homeowner prior to foreclosure. Certain statutes require lenders to participate at the homeowner’s option. Others mandate that both parties participate, regardless of a formal request from the homeowner. In most instances, a third party supervises the loss mitigation discussions.