If you are a struggling homeowner facing a nonjudicial foreclosure, state law often determines who can act as a trustee and conduct the foreclosure proceedings. In some states, the foreclosing trustee must be a resident in the state or have business offices in the state. Yet some lenders use national banks to act as trustees, even though those trustee don't meet state requirements. Recently, two states (Utah and Washington) made clear that a national bank cannot act as a trustee when foreclosing in their states.
Read on to learn more about the trustee’s role in a nonjudicial foreclosure and how you can fight the foreclosure if the trustee is not authorized to conduct foreclosures in your state.
(To learn the ins and outs of the foreclosure process, visit our Foreclosure Center.)
If your loan is secured by a deed of trust, which is typical in certain states, the foreclosure will probably be nonjudicial. In a nonjudicial foreclosure, the lender can foreclose without going to court so long as the deed of trust contains a power of sale clause.
(To learn more about nonjudicial foreclosures, visit Nolo's Judicial v. Nonjudicial Foreclosure page.)
(To find out if you live in a state that permits nonjudicial foreclosures, check our Summary of State Foreclosure Laws.)
Deeds of trust, like mortgages, pledge real property to secure a loan. A deed of trust involves three parties:
The deed of trust gives the trustee the authority to foreclose and sell the home to pay off the loan balance at the request of the lender if the borrower defaults (fails to make payments). The trustee is legally required to act as a neutral party on behalf of both the lender and the borrower while conducting foreclosure proceedings in good faith and in accordance with the law.
Generally, the trustee who is originally named in the deed of trust will not be the trustee that conducts the foreclosure. The foreclosure trustee, who is chosen by the lender, will first record a “Substitution of Trustee” or “Appointment of Successor Trustee” that appoints the new entity as the trustee in place of the original trustee listed on your deed of trust when you first closed the loan. Once the successor trustee is appointed, it will carry out the nonjudicial foreclosure.
Your state’s law sets out the procedural requirements for nonjudicial foreclosures. If any step in the foreclosure process violates the nonjudicial foreclosure statutes, the validity of the foreclosure may be challenged.
(Learn more in our Fighting Foreclosure in Court area.)
State law can limit who may act as a foreclosure trustee. In many cases, the state requires the trustee to have some type of presence in the state. Below are some examples of limits states have put on trustees.
The reason for putting these types of restrictions on who may act as a foreclosure trustee is simple. Foreclosure trustees must provide information to homeowners on how they can stop their foreclosure, how much they need to pay to reinstate the loan, and to whom the money is owed. If there is no local trustee, it can be difficult, if not impossible, for borrowers to get in contact with the trustee and have a shot at saving their homes and stopping foreclosure.
(To get information about options to avoid foreclosure, see our Alternatives to Foreclosure area.)
In a case in Utah, Federal National Mortgage Association v. Sundquist, the Utah Supreme Court ruled that a national bank (ReconTrust) did not have authority to conduct foreclosures in the state because it did not meet the qualifications of a trustee under Utah law.
As noted earlier, Utah law states that attorneys and title insurance companies may conduct nonjudicial foreclosures in the state. ReconTrust did not meet the qualifications of a trustee under Utah law, but instead relied on the argument that because it is registered with the Office of the Comptroller of the Currency as a national bank, federal law preempted state law thereby providing it the authority to foreclose.
The Utah Supreme Court disagreed and stated that ReconTrust is subject to the laws of Utah when conducting nonjudicial foreclosures in that state. Since Utah banks cannot act as foreclosure trustees in Utah, neither can national banks. (Read more in our article National Bank Cannot Conduct Nonjudicial Foreclosures in Utah.)
Also, ReconTrust has stopped conducting nonjudicial foreclosures in Washington for similar reasons. The company did not have an office in Washington, even though state law requires it. As a result, the Washington Attorney General’s office accused the company of not following state requirements and filed suit. ReconTrust has since settled the case and is no longer doing business in the state of Washington. (Read more in our article National Bank Cannot Conduct Nonjudicial Foreclosures in Washington.)
Lenders have the legal right to foreclose if you don’t make your payments, but they must follow the law when it comes to foreclosure procedures. You are well within your legal rights to make sure the trustee has the proper authority to conduct the foreclosure.
If you are a homeowner facing foreclosure from an improper trustee, you may be able to bring your foreclosure to a halt, if only temporarily, by challenging the trustee’s authority to foreclose. Ultimately, the lender could restart the foreclosure after hiring a proper trustee to foreclose, so raising this issue won’t stop the foreclosure forever. However, it may provide you with some extra time to stay in your home.
(Learn about how to fight a nonjudicial foreclosure in our article How to Fight a Foreclosure in Court: Nonjudicial Foreclosure.)
(To find out if your state has a law restricting who may act as a foreclosure trustee, check your state’s statutes. For more information on how to locate your state’s laws, see our Laws and Legal Research area and our State Law Resources page.)
Any given foreclosure or legal situation has many potential claims and defenses. It is recommended that you seek the advice of local counsel or a legal aid organization to explore all possible defenses that may be available in your particular situation.
(To learn more about different foreclosure defenses, see our Fighting Foreclosure in Court area.)