QUESTION
We are
foreclosing on a residential property that has tenants in it. We have sent this
to our outside counsel to work on, but our compliance department wants to know what
are the issues that we can anticipate.
Our question is this: if we are foreclosing on a residential property where a tenant
is still there, what types of regulations should we consider?
ANSWER
One place to
start is to review the Protecting Tenants at
Foreclosure Act (PTFA), which applies to a foreclosure involving any of the
following:
- A federally related mortgage, as defined by RESPA, which means a loan (other than temporary financing) made by a federally related creditor and secured by a one- to four-family residential real property;
- A dwelling; or
- Residential real property.
The PTFA
applies to every foreclosure on property that includes a dwelling occupied by a
tenant, regardless of whether the loan is for a consumer or commercial purpose
and whether the dwelling is real or personal property. It applies regardless of
the number of dwelling units are on the property. The law applies to
foreclosures on loans secured by one- to four-family dwellings, multi-family
properties, and apartment buildings.
Purchasers
of this property will need to consider the PTFA, because it protects a tenant if state or local law
allow the purchaser to terminate the tenants lease or tenancy after a
foreclosure sale. The purchaser must:
- Give any tenant a 90-day notice to vacate before evicting the tenant.
- Honor the terms of a bona fide lease or tenancy on the property, unless the purchaser intends to occupy the property as his or her primary residence.
Note the term “bona
fide” – the PTFA protects bona fide tenants from having their lease
eliminated, unless the purchaser intends to occupy the property as his or her
primary residence.
A
tenant is bona fide if:
- The tenant is not the mortgagor or the child, spouse, or parent of the mortgagor.
- The tenant entered into the lease or tenancy in an arm’s-length transaction before the date on which complete title to the property transferred to the buyer.
- The rent is not substantially less than fair market rent for the property, or if it is, the rent is reduced or subsidized due to a federal, state, or local subsidy, including but not limited to a Section 8 housing assistance payment contract.
The PTFA
does not preempt state or local laws if those laws afford the tenant more
stringent or additional protections, and, indeed, there are 10 states that
provide the same or more protections.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group
