In a nonjudicial foreclosure, the third party who normally handles the foreclosure process is called a "trustee." In theory, a foreclosure trustee is a neutral party, but the lender or loan servicer usually chooses the trustee, who is often affiliated with the lender or the lender's attorney.
Few states have laws addressing the neutrality of foreclosure trustees. So, trustees generally look out for lenders' rather than borrowers' interests in foreclosures because they have a financial incentive to do so.
A lender usually requires a borrower to sign either a mortgage or a deed of trust in a home loan transaction. This document creates a security interest in the borrower's property. When you give a lender a security interest in your property, the property becomes collateral for the debt.
Lenders in some states, like Ohio and New York, use mortgages to create security interests in properties. Lenders in other places, like California and Oregon, use deeds of trust or a similar-sounding document. For example, in Georgia, the document that gives a lender a security interest in a property is called a "Security Deed."
Mortgages and deeds of trust tend to have many of the same general provisions. For example, most mortgages and deeds of trust require the borrower to have homeowners' insurance and maintain the property in good condition.
Also, both mortgages and deeds of trust give the lender the ability to sell the home through a process called "foreclosure" if the borrower fails to make payments or breaches the contract in some other way.
While mortgages and deeds of trust are similar in many ways, one significant difference between these documents is the parties involved. A deed of trust usually has three parties: the borrower, the lender, and a trustee. A mortgage involves only two parties: a borrower and a lender.
The other major difference between mortgages and deeds of trust is how the foreclosure process works. Mortgages are ordinarily foreclosed judicially (though not always), while deeds of trust are often foreclosed nonjudicially.
The trustee comes into play if you fall behind in loan payments and go into foreclosure. Again, in states where lenders use deeds of trust or a similar instrument containing a power of sale clause, a lender may foreclose out of court in a process called a "nonjudicial foreclosure." A trustee typically manages the nonjudicial foreclosure process.
Depending on state law, a trustee might be an individual, like an attorney, or a business entity, like a bank or a title company. Sometimes, state law limits who may act as a trustee in specific ways.
Trustees are frequently companies established specifically for the purpose of handling the various requirements during the foreclosure process. Some companies that act as foreclosure trustees have the word "service" or "services" in their company name. But even if a foreclosure trustee company uses the word "services" in its name, trustees are not loan servicers.
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 about the foreclosure, how much they need to pay to reinstate the loan, and to whom the money is owed. If the trustee isn't local, it can be difficult, if not impossible, for borrowers to get in contact with the trustee and have a chance at saving their homes and stopping the foreclosure.
Generally, the original trustee appointed in the deed of trust won't handle a foreclosure if you fall delinquent in payments. So, the loan servicer will appoint a new trustee (a "substitute trustee") to manage the foreclosure process.
Often, a notice of substitution of trustee gets filed in the land records shortly before a foreclosure starts. So, if you get a copy of a document appointing a substitute trustee, a foreclosure could be about to begin.
Trustees are supposed to act as impartial administrators in nonjudicial foreclosures. The trustee isn't supposed to advocate for either side and generally must use diligence and fairness when conducting the foreclosure.
But because the lender usually chooses the trustee, who might also be affiliated with the lender or the lender's attorney, trustees often have a financial incentive to represent the lender's interests in a foreclosure.
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're a homeowner facing foreclosure from an improper trustee, you might 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.
But it might give you some extra time to stay home.
Check your state's statutes to determine if your state has a law restricting who may act as a foreclosure trustee. For more information on how to locate your state's laws, see our Laws and Legal Research page. You can also get this information by talking to a local foreclosure lawyer.
Keep in mind that any given foreclosure or legal situation has many potential claims and defenses. A lawyer can tell you all possible defenses that might be available in your particular situation.