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. So, trustees typically look out for lenders—rather than borrowers—in foreclosures because they have a financial incentive to do so.
Few states have laws addressing the neutrality of foreclosure trustees. North Carolina, though, passed a law in 2017 with the goal of ensuring a trustee's neutrality. The law prohibits an attorney from serving as a trustee while simultaneously representing the lender.
Read on to learn more about the duties of a foreclosure trustee and about the North Carolina law that prohibits an attorney from both conducting the foreclosure and representing the lender's interests.
In a home loan transaction, a lender typically requires a borrower to sign either a mortgage or a deed of trust. This document creates a security interest in the borrower’s property. (When you give a lender a security interest in your property, this means the property acts as collateral for the debt.)
Lenders in some states use mortgages, other use deeds of trust. Lenders in certain states, like Ohio and New York, use mortgages to create a security interests in properties. In other states, like California and Oregon, lenders use deeds of trust or a similar-sounding document. In Georgia, for example, the document that gives a lender a security interest in a property is called a "Security Deed."
Mortgages and deeds of trust contain comparable terms. Mortgages and deeds of trust tend to have many of the same general provisions (clauses). 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 major difference between these documents is the parties involved. A deed of trust has three parties: the borrower, the lender, and a trustee. A mortgage, though, only involves 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 usually foreclosed judicially, while deeds of trust are often foreclosed nonjudicially.
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. For example, in Washington, foreclosure trustees must have a physical presence in the state by maintaining an office in the state with telephone service at such address.
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. The trustee manages the foreclosure process.
Trustees are supposed to act as an impartial administrator in a nojudicial foreclosure. The trustee is not 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 somehow), trustees often have a financial incentive to represent the lender’s interests in a foreclosure.
State law often limits who may act as a foreclosure trustee—for example, state law might say only attorneys may act as trustees—but most states don’t address whether the trustee may be connected to the foreclosing lender. North Carolina, though, tackled this issue in 2017.
As of late 2017, North Carolina law prohibits an attorney who acts as trustee from also representing the lender while initiating a foreclosure proceeding. (N.C. Gen. Stat. § 45-10). Prior to this change, a lender often could rely on its attorney to simultaneously conduct the foreclosure and represent the lender’s interests. Now, though, a North Carolina nonjudicial foreclosure must involve both a trustee and lender’s counsel, which should, in theory, ensure that the trustee is truly neutral.
If you’re currently facing a North Carolina foreclosure and the lender’s attorney is acting as both the trustee and counsel for the lender, consider talking to a local foreclosure attorney. The foreclosure might be defective.
Also, technically, a lender’s attorney could potentially use a separate entity—like a trustee company—that it owns to act as a trustee without violating North Carolina law because the company, not the attorney, is the trustee. (The statute prohibits an "attorney" from serving in both capacities.) If you're facing a nonjudicial foreclosure in North Carolina and your lender takes this approach, again, consider talking to a foreclosure attorney. A lawyer might be able to fight the foreclosure by arguing that this arrangement violates the intent and spirit of the law.
If you’re facing a nonjudicial foreclosure in another state and have questions about the trustee’s role in the process, consider talking to a local foreclosure attorney where you live.