As interest rates increase, the lending community is expecting an uptick in collection proceedings. As part of the collection process, lenders will need to send default notices to borrowers informing borrowers of the default and how to cure. It is imperative for those default notices to contain the appropriate and necessary information as required by the loan documents and the law.
Legal Requirements for a Notice of Default
In Minnesota, residential mortgages often, and sometimes must,1 contain a provision requiring the bank to provide borrowers who have fallen behind on payments with a notice of default. This is a prerequisite to initiating foreclosure proceedings. For some mortgages, the law provides certain information which must be provided to the borrower within a notice of default, including:
a) the nature of the default;
b) the action required to cure it;
c) the date by which it must be cured;
d) notice that failure to cure may result in acceleration;
e) a statement informing the borrower of their right to reinstate after acceleration; and
f) a statement informing the borrower of their right to bring a court action to claim any defense or to deny the default.2
At the federal level, the law divides mortgage foreclosure requirements into separate categories for single-family dwellings3 and multifamily dwellings.4 While both chapters differ slightly on what information is specifically required in a notice of default, they each were passed with the purpose of creating a uniform federal foreclosure remedy for their respective dwelling types on loans held by the Secretary of Housing and Urban Development (“Secretary”), or loans which secure obligations of the Secretary.
Under federal law, for both single and multifamily dwellings,
a lender must include the following information in a notice of default:
1) the names of the Secretary, the original mortgagee, and the original mortgagor;
2) the street address or description of the security property;
3) the date of the mortgage, the office where the mortgage is recorded, and the liber number and folio or other description of the location of recordation of the mortgage;
4) the nature of the default and the acceleration of the debt;
5) the date, time, and location of the foreclosure sale;
6) a statement that the foreclosure is being conducted pursuant to the applicable chapter of Title 12 of the United States Code;
7) the types of costs to be paid by the purchaser upon transfer of title; and
8) the amount and method of deposit required at the foreclosure sale, and the time and method of payment of the balance of the foreclosure purchase price.5
For single family dwellings only, a notice of default must also include the name and address of the foreclosure commissioner, the date the notice is being issued, and any other terms of the foreclosure sale or information that the Secretary deems necessary.6
How Financial Institutions Can Best Inform Borrowers of Default
Both Minnesota state and federal law only require a notice of default to include the name of a lender. Yet sometimes, it is best to go beyond the minimum legal requirements to ensure the borrower understands their rights and obligations under the mortgage. First, make sure the notice follows the requirements of the mortgage and applicable law, whether it be state or federal. It is vital for a lender to strictly comply with the applicable notice of default requirements in the event a foreclosure is necessary.7
Next, the notice should include not only the name of the lending institution, but the direct contact information for the individual or department handling the foreclosure or loss mitigation. This provides the borrower an opportunity to contact the lender to verify their default and cure the default. Communication is key to prevent a lender from devoting excess resources toward collecting on a defaulted loan where the default is only temporary, and the borrower will soon be caught up on payments. Additionally, in the event that a foreclosure proceeding is needed, any communication from the borrower to the lender will prevent the borrower from using the affirmative defense that they lacked notice and an opportunity to cure their default.
Finally, the notice should go beyond merely providing the borrower with a means to contact the lender. The notice should actively encourage communication between the borrower and lender to determine the best option to move forward while avoiding foreclosure and exploring other options available to the borrower. A change in work status, health issues, or other short-term economic changes may lead a borrower to fall behind on payments. While these events may lead to a temporary inability to pay, they should not prevent the borrower from catching up, nor should they sever the relationship between the parties. Ideally, a lender who demonstrates an understanding of the borrower’s situation will generate more business from that borrower. Even if it does not directly lead to more business, finding alternative solutions for a temporary nonpayment prevents lenders from investing additional time and resources into a default that will be cured as soon as the borrower returns to normalcy.
1 Minn. Stat. § 47.20, subd. 8(3) (requiring a lender to give the borrower a written notice of default for mortgages on real property to noncorporate borrowers with an original principal amount of less than $100,000).
3 Defining “single family mortgage” as a mortgage that “covers property on which there is located a 1- to 4-family residence” that is either (i) held by the Secretary of Housing and Urban Development under title I or II of the National Housing Act, or (ii) secures a loan obligation of the Secretary under section 1452b of Title 42 as it existed before repeal. 12 U.S.C. § 3752(10).
4 Defining “multifamily mortgage” as a mortgage held by the Secretary of Housing and Urban Development pursuant to either (A) section 608 or 801, or Title II or X, of the National Housing Act; (B) section 312 of the Housing Act of 1964, as it existed immediately before its repeal by the Cranston-Gonzalez National Affordable Housing Act (“CGNAHA”); (C) section 202 of the Housing Act of 1959, as it existed immediately prior to its amendment by section 801 of the CGNAHA; (D) section 202 of the Housing Act of 1959, as amended by section 801 of the CGNAHA; and (E) section 811 of the CGNAHA.
5 12 U.S.C. §§ 3706(a)(1)-(8) and 3757(3)-(10).
6 12 U.S.C. § 3757(1)-(2), (11).
7 Papes v. CitiMortgage, Inc., 2013 WL 2149883 (Minn. Ct. App. 2013).