D R A F T FOR DISCUSSION ONLY UNIFORM FORECLOSURE BY POWER OF SALE ACT NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS FEBRUARY, 000 UNIFORM FORECLOSURE BY POWER OF SALE ACT WITH PREFATORY NOTE AND REPORTER S NOTES Copyright 000 By NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS The ideas and conclusions set forth in this draft, including the proposed statutory language and any comments or reporter s notes, have not been passed upon by the National Conference of Commissioners on Uniform State Laws or the Drafting Committee. They do not necessarily reflect the views of the Conference and its Commissioners and the Drafting Committee and its Members and Reporters. Proposed statutory language may not be used to ascertain the intent or meaning of any promulgated final statutory proposal.
DRAFTING COMMITTEE ON UNIFORM FORECLOSURE BY POWER OF SALE ACT CARL H. LISMAN, Pine Street, P.O. Box, Burlington, VT 00, Chair LANI LIU EWART, Suite 100, Alii Place, Alakea Street, Honolulu, HI 1 REED L. MARTINEAU, P.O. Box 000, Exchange Place, Salt Lake City, UT 1 ROBERT L. McCURLEY, JR., P.O. Box 1, Tuscaloosa, AL LEWIS BART STONE, 1 Park Avenue, New York, NY 1, Enactment Plan Coordinator WILLIS E. SULLIVAN, III, P.O. Box, 1 Tyrell Lane, Boise, ID 01 DALE WHITMAN, University of Missouri-Columbia, 1 Hulston Hall, Columbia, MO, Reporter EX OFFICIO JOHN L. McCLAUGHERTY, P.O. Box, Charleston, WV, President JOHN P. BURTON, P.O. Box 1, Suite 1, 1 E. Marcy Street, Santa Fe, NM 01, Division Chair AMERICAN BAR ASSOCIATION ADVISOR PAMELA SMITH BELLEMAN, P.O. Box, Richmond, VA 1- EXECUTIVE DIRECTOR FRED H. MILLER, University of Oklahoma, College of Law, 00 Timberdell Road, Norman, OK 01, Executive Director WILLIAM J. PIERCE, Roxbury Road, Ann Arbor, MI, Executive Director Emeritus Copies of this Act may be obtained from: NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS E. Ontario Street, Suite 0 Chicago, Illinois 0
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1 1 1 1 1 1 1 1 0 1 0 1 0 1 Uniform Nonjudicial Foreclosure Act Prefatory Note In 1 the National Conference of Commissioners on Uniform State Laws adopted the Uniform Land Transactions Act (ULTA). ULTA covered numerous aspects of real property law, but a major portion of it was devoted to security interests in land. In 1, the Conference split these mortgagerelated provisions off into a separate act, the Uniform Land Security Interest Act (ULSIA). No state has adopted either ULTA or ULSIA. The present draft seeks to accomplish two things: first, a further separation of the foreclosure provisions of ULTA and ULSIA (i.e., USLIA Part ) into a distinct foreclosure statute, and second, an extensive revision of those foreclosure provisions. Revision is appropriate because of a number of changes in the field of mortgage foreclosure law that have occurred since the drafting of ULTA in the early 10s. These changes include considerable development by the courts of the constitutional concept of due process of law as applied to foreclosures; an expansion of the secondary mortgage market to include large numbers of conventional and commercial mortgages; a vast advance in the securitization of both residential and commercial mortgages; and the publication of the Restatement (Third) of Property: Mortgages in 1. A few states have adopted power of sale foreclosure statutes in recent years, but there are still about twenty states that have not done so. This act is offered in the belief that non-judicial foreclosure can be both fair to borrowers and efficient from the viewpoint of lenders, and hence a superior form of foreclosure for all of the affected parties. The delays and inefficiency associated with foreclosure by judicial action are costly. They increase the risks of vandalism, fire loss, depreciation, damage, and waste. The resulting costs raise the cost of private mortgages and significantly erode the economic value of government subsidy programs involving mortgages. They add to the portfolio of foreclosed properties held by secondary mortgage market investors and government lenders, insurers, and guarantors of mortgages. The availability of a uniform, less expensive, and more expeditious foreclosure procedure will ameliorate these conditions, and will facilitate the sale and resale of secured real estate loans. The desirability of nonjudicial foreclosure is emphasized i
1 1 1 1 1 1 1 1 0 1 0 1 0 1 by the successful implementation of two federal statutes that permit the U.S. Department of Housing and Urban Development to foreclose by power of sale the mortgage loans it holds. See Multifamily Mortgage Foreclosure Act, 1 U.S.C.A. 01-1, adopted in ; Single Family Mortgage Foreclosure Act, 1 U.S.C.A. 1-, adopted in 1; regulations applicable to both acts at C.F.R..1 -.1. Features of the present draft Why nonjudicial foreclosure? The fundamental premise of this Act is that, in the great majority of cases, judicial involvement in foreclosure is unnecessary, simply because there is no dispute between the debtor and creditor. The note and security agreement are indeed valid, the payments are indeed in default, and the debtor typically has no defense to foreclosure. Of course, there are exceptional cases in which a defense exists and deserves to be heard, but it makes little sense to force all foreclosures into court because a small fraction of them involve disputes of law or fact. Using the time of judges and the machinery of the courts to conduct foreclosures is therefore often a misallocation of public funds as well as a waste of the secured creditor s resources. Foreclosure is intended to accomplish two discrete purposes: (1) to evaluate the collateral and () to liquidate it. Evaluation is necessary in order to determine whether the lender has a surplus (to be distributed to the debtor and junior lienors) or a deficiency (to be demanded from the debtor and others who are personally liable on the debt). Liquidation is necessary because the lender, in nearly all instances, is not in the business of owning real property and does not want to retain the collateral for the long term. However, there is no overarching principle that requires the evaluation and liquidation functions to be accomplished in a single process. Indeed, a persuasive case can be made that when both functions are done at once, as in the case of the traditional auction sale, both are likely to be done inefficiently. See Debra Pogrund Stark, Facing the Facts: An Empirical Study of the Fairness and Efficiency of Foreclosures and a Proposal for Reform, 0 U. Mich. J. L. Reform, - (1). Types of foreclosure. In recognition of these facts, this draft gives lenders the opportunity (although not the duty) to bifurcate the evaluation and liquidation functions. It provides for three methods of foreclosure, and permits ii
1 1 1 1 1 1 1 1 0 1 0 1 0 1 the secured creditor to elect the method to be used. The first is conventional foreclosure by means of an auction sale. Here both evaluation (by means of the high bid at the sale) and liquidation (by means of a foreclosure deed to the high bidder) are combined. The second method authorized by this draft is foreclosure by negotiated sale. Such a sale will be consummated in much the same way as other real property sales; the property may be listed by a real estate broker and advertised extensively. This is usually a very effective way of liquidating the property, but has not been used in this country in the past as a method of evaluating the property for purposes of foreclosure because of concern about the potential for collusive price-setting between the secured creditor and the purchaser. In the procedure authorized in this Act, however, that concern is eliminated because the debtor and any junior interest-holders can simply disapprove the sale if they are dissatisfied with the price, and their disapproval will force the creditor to abandon the negotiated sale and resort to a different method of foreclosure. In many cases, however, it is believed that the price will appear adequate to those parties and they will permit the sale to proceed. The third foreclosure method authorized by this draft is foreclosure by appraisal. This method accomplishes only the first function of foreclosure, namely the evaluation of the collateral. It does not liquidate the property, but rather leaves it in the hands of the secured creditor, who will have the burden of liquidating it after the foreclosure is completed. To offset the lender s approximate costs in holding and marketing the property, the lender is required to distribute as the foreclosure amount only 0% of the first $1 million of the property s appraised value, and % of the excess value above $1 million. These percentages are consistent with available empirical data on lender losses from foreclosed property acquired by credit bid at conventional foreclosure sales. Foreclosure by appraisal incorporates several safeguards to ensure the integrity of the appraisal s result. The lender selects the appraiser, but the appraiser must meet reasonable professional standards of qualification and cannot be related to the lender. In addition, a debtor or junior interest-holder who is dissatisfied with the appraisal s results can seek a judicial determination of value, which will then be applied in substitution of the value fixed by the appraiser. It is believed that with all three of these foreclosure iii
1 1 1 1 1 1 1 1 0 1 0 1 0 1 methods, sufficient protections have been included to assure the legitimate interests of debtors and junior interestholders. However, at this point the drafting committee has not made a commitment to ultimate adoption of any foreclosure method except the auction sale. The other two methods are presented here in an attempt to demonstrate their functionality and to expose them to comment, but with the recognition that the drafting committee may not see fit to adopt them. Irrespective of the method of foreclosure selected by the secured creditor, the foreclosure cannot occur less than 0 days after the giving of the original notice of foreclosure. During this period, any person whose interests will be extinguished by the foreclosure has the right to redeem the collateral from the security interest, but must pay the accelerated balance due in order to do so. The residential debtor concept. This draft preserves, with some changes, the residential debtor concept employed (and termed the protected party ) in ULTA and ULSIA. It recognizes two classes of debtors: residential debtors and everyone else. Residential debtors are assumed to need additional legal protections from foreclosing creditors that are not essential to other persons. Residential debtor includes both a person who has an owner-occupied home on which a security interest exists, and anyone who is personally liable on an obligation that is secured by the home of the obligor or someone related to the obligor. Home is used here as a shorthand for residential real property, which must not be larger than ten acres nor contain more than four dwelling units. Thus, residential debtor encompasses not only the usual consumer borrowers on home mortgage loans, but also relatives who guarantee their loans and purchasers who take homes subject to, or with an assumption of, existing mortgages. Four specific protections are provided for residential debtors in this draft. The first relates to the notices of default and foreclosure that must be sent to secured creditors. In general, debtors may agree to receive notice by any reasonable means, including electronic mail or facsimile. However, residential debtors are entitled to written notice, either delivered in person or transmitted by mail or other courier service, and they may not waive their right to such notice. This provision recognizes that other forms of communication are not as reliable, particularly in residential settings. iv
1 1 1 1 1 1 1 1 0 1 0 1 0 1 Second, the cure period allowed to debtors to reinstate their loans without acceleration is ordinarily thirty days after a notice of default is given. This period may be reduced by agreement of the parties to as little as ten days, but only if no debtor is a residential debtor. Third, the qualifications for appraisers under Section 0 (foreclosure by appraisal) differ for residential real property than for nonresidential property. These distinctions are imposed simply because of the different skills involved in these two types of appraisals. Fourth, an optional provision, (c), precludes the entry of deficiency judgments against residential debtors. Deficiencies may still be asserted against guarantors and sureties who are related to such debtors. Systems of notice. Power of sale foreclosure statutes presently in effect may be divided into one-notice and twonotice systems. In a two-notice system, the secured creditor typically is required to send a notice of default, and after the passage of some time period, a second notice of foreclosure. Depending on the state, the first notice may or may not coincide with an acceleration of the debt. If it does not, the period between the first and second notices (or some part of that period) may be thought of as a cure period, during which only arrearages need be paid to put the loan back on stream. The present draft imposes a two-notice system. Debtors are given a notice of default and a 0-day period to cure arrearages before a notice of foreclosure may be given to them. This time period may be reduced to ten days by agreement for nonresidential debtors, and is reduced to ten days for all debtors if a prior notice of default has been given and cure made within the previous twelve-month period. No provision is made in this draft for giving the notice of default to junior lienholders, irrespective of whether the debtor is a residential debtor. The drafting committee may wish to consider whether junior lienholders should also be entitled to such a notice, so that they can cure arrearages in order to stave off foreclosure. In addition to these two notices, all affected parties will receive further warning that the foreclosure is about to occur. In the case of foreclosure by auction, a copy of the advertisement of the sale must be sent to them (although it may be included with the notice of foreclosure). If foreclosure is by negotiated sale, the affected parties must be given a notice informing them of the date and price of v
1 1 1 1 1 1 1 1 0 1 0 1 0 1 the proposed sale. In the case of foreclosure by appraisal, they will receive notice of the appraisal report. Due process: notice and hearing. When a governmental entity forecloses a mortgage, it is reasonably well established that it must comply with the demands of the Due Process Clause, including the giving of notice reasonably calculated to inform those whose rights are affected, and the provision of a hearing at which such persons may present defenses to the foreclosure. Whether these protections are also required when a private creditor forecloses is not settled. However, irrespective of the requirements of Due Process, fundamental fairness would seem to demand that all persons whose rights may be destroyed by a foreclosure should have advance notice of the proceeding and the opportunity to show why it should not go forward. This draft therefore provides (in Sections 0 and 0) for notice to all those whose property rights are put at risk by a foreclosure. It also provides, in Section, an opportunity for any other person who wishes to receive notice of the foreclosure to file a request for such notice in the public records. In addition, this draft provides debtors and other affected parties (Section 0) the right to an informal meeting with a responsible representative of the secured creditor at a convenient location to present reasons why the foreclosure should not go forward. This meeting, which will be held only if it is affirmatively requested, has two objectives. The first is to guard debtors against the fundamental unfairness of a mistakenly-conducted foreclosure that is legally improper. The second is to ensure that foreclosure under this Act is compliant with the Due Process Clause when a governmental agency forecloses. While the hearing requirements of Due Process are not entirely clear, it is believed that a meeting by the debtor with a responsible representative of the governmental agency can satisfy them. It might be argued that the informal meeting process created by this draft is unnecessary because a debtor or junior lienor can always bring an action to enjoin an improper foreclosure. However, this step requires a good deal of affirmative effort by the plaintiff the retaining of counsel, typically at significant cost, and the pursuit of the litigation. It is not clear that this option satisfies the demands of Due Process, nor that it is adequate to protect unsophisticated debtors. vi
1 1 1 1 1 1 1 1 0 1 0 1 0 1 Judicial intervention. In a great majority of cases, foreclosures under this Act are expected to proceed without judicial involvement. However, there are a number of situations in which a party may seek and obtain the intervention of a court. For example, a party who believes that there has been no default under the security agreement may seek a judicial review of that issue. Similarly, a party who objects to the correctness of the appraisal in a foreclosure by appraisal may seek a court determination of fair market value. A court may also be asked to postpone a foreclosure, to determine the priority of competing security interests, to direct foreclosure in bulk or by parcels, to marshal assets by directing the order in which parcels should be sold, or to direct the order of distribution of the proceeds of a foreclosure. In these situations the court serves as a safety valve, guarding against improper or overreaching actions by the foreclosing creditor. Omitted parties. Mortgage law uniformly holds that a person who is not made a party to a judicial foreclosure is not bound by it, and such a person s interest survives the foreclosure. However, in foreclosures by power of sale, there is little legal authority as to the effect of failure to provide notice to holders of junior interests. This draft explicitly provides that holders of junior interests are not bound if they are not given notice; hence, their position is like that of an omitted party in a judicial foreclosure. With respect to tenants under leases junior to a mortgage, a further issue arises: may a tenant who has been omitted purposely (because the lender wishes to preserve rather than destroy the tenant s lease) intervene in the foreclosure for the purpose of getting the lease terminated? Case law on this point is about evenly divided. The position of this draft is that the tenant may not do so. In other words, a foreclosing lender under this draft has the choice of whether to destroy or preserve individual junior leases, a right sometimes referred to as pick and choose. Redemption. In general, mortgaged property may be redeemed in either of two ways: by equitable redemption before foreclosure, and by statutory redemption after foreclosure. All states recognize equitable redemption, but only about half of the states have statutes permitting redemption after foreclosure. This draft recognizes the fundamental right to equitable redemption until the date of foreclosure, but does not make any provision for statutory redemption. While statutory post-sale redemption vii
1 1 1 1 1 1 1 1 0 1 0 1 0 1 occasionally benefits a debtor or junior lienor, it is believed that in the aggregate such parties are disadvantaged by the depression in foreclosure bid prices that results from the uncertain title status introduced by statutory redemption. Title from foreclosures. No matter which method of foreclosure is employed, this draft provides that completion of the foreclosure process raises a presumption of compliance with the notice, advertising, and other procedural requirements of this act. This presumption is conclusive in favor of good faith purchasers for value of the collateral. However, the presumption does not make foreclosure titles impregnable. The reason is that defects outside the scope of the Act may exist. For example, the debtor may not have had good title to the collateral when the security interest was given; the security agreement itself may be a forgery or otherwise void; or the debtor may not in fact have been in default on the secured obligation. The extent to which such defects will cause a court to set aside a sale, even when the property has passed to a bona fide purchaser, is left to other law. Deficiency liability. In general, this draft permits recovery of deficiencies by the foreclosing creditor and by sold-out junior lienholders (assuming, of course, that the obligation is a recourse debt). However, an optional subsection prohibits deficiency judgments against residential debtors. A deficiency judgment is available to the foreclosing creditor, no matter which of the three methods of foreclosure is used. However, if the foreclosure is by auction, deficiency liability is limited by the fair market value concept. Any person against whom a deficiency is sought may seek a court determination of the property s value as of the date of foreclosure, and the amount thus determined is substituted for the foreclosure sale proceeds in calculating the deficiency. This procedure recognizes that auction foreclosure sales often do not bring a price that approximates the market value of the property, and it encourages foreclosing creditors to make efforts to generate interest among potential bidders. No similar fair market value determination is available or needed in the case of foreclosure by negotiated sale or by appraisal. Note on the terminology of foreclosure. The term foreclosure is often used in modern practice in a sense that is inconsistent with its historical origins. In its inception in England, what was foreclosed was the debtor s equity of redemption that is, by foreclosure the debtor viii
1 1 1 1 1 1 1 1 0 1 0 1 0 1 was precluded from redeeming his or her land from the mortgage. Thus, one did not, properly speaking, foreclose a mortgage, but rather foreclosed the equity of redemption. Today, however, terms foreclose a mortgage or foreclose a deed of trust are in common use and introduce no apparent confusion. This Act follows the modern pattern, and refers to foreclosing a security interest in real property and any accompanying personal property. Other issues. There are several possible provisions that the drafting committee may wish to consider adding to this draft. The list of such possibilities below is based in part on the very thorough article by Professor Roger Bernhardt, ULSIA s Remedies on Default Worth the Effort?, Conn. L. Rev. 01 (1).! Choice of law. Mortgage foreclosure has traditionally been considered a real proceeding, and therefore inevitably governed by the law of the state in which the real property is located. Should this view be reconsidered?! Preforeclosure remedies. This draft simply leaves to other law such preforeclosure remedies as receiverships, mortgagees in possession, and enforcement of assignments of rents. These remedies have been the subject of recent legislation and litigation in many states. Should a uniform foreclosure act deal with them?! FNMA/FNMLC uniform instruments. This draft makes no express reference to the secondary market s uniform instruments. The cure period provisions of Section 0 are compatible with those instruments, but nothing is said about them. Should it be?! Alternative dispute resolution. This draft says nothing about the possibility of a mediated or arbitrated settlement in lieu of foreclosure. Should these possibilities be covered explicitly? Conceivably, there could be an additional form of foreclosure: foreclosure by arbitration. Would additional references to ADR be helpful?! Bankruptcy. The mortgagor who files bankruptcy, often on the eve of foreclosure, is a staple of modern real property practice. However, this draft make no express reference at all to bankruptcy. Are there references or substantive provisions that should be added on this topic?! Nonmonetary obligations. While most mortgage obligations are monetary, occasionally mortgages are given to secure nonmonetary duties. In such cases, it is necessary to ix
reduce the obligation to a monetary equivalent, and this is likely to require the intervention of a court. Hence, a nonjudicial form of foreclosure such as provided by this Act probably is not practical. Should the draft expressly exclude nonmonetary obligations from its coverage? x
ARTICLE 1 GENERAL PROVISIONS SECTION 1. SHORT TITLE. This [Act] may be cited as the Uniform Nonjudicial Foreclosure Act. 1 1 1 1 1 1 1 1 0 1 SECTION. DEFINITIONS. In this [Act]: (1) Acceleration means a notice sent or other action taken by the secured creditor that makes all obligations secured by a security agreement immediately due. () "Aggrieved party" means a party entitled to a remedy and includes the debtor, the secured creditor, a person having an interest in the real property that will be affected by foreclosure, and a purchaser or prospective purchaser at a foreclosure. () "Agreement" means the bargain of the parties as found in their language and by implication from other circumstances. () "Collateral" means the real property subject to a security interest. The term also includes any personal property covered by the security agreement. () Common interest community means real property with respect to which a person, by virtue of ownership of a unit, is obligated to pay for real property taxes, insurance premiums, maintenance, or improvement of other real property described in a declaration. Ownership of a unit does not 1
1 1 1 1 1 1 1 1 0 1 include holding a leasehold interest of less than [0] years in a unit, including renewal options. () "Contract" means all of the legal rights and obligations resulting from the parties' agreement as affected by this [Act] and other applicable rules of law. () "Conveyance" means a transfer of real property other than by will or operation of law. () "Creditor" includes an unsecured creditor, a secured creditor, and a trustee in bankruptcy or other person who represents the interests of creditors. () "Debtor" means a person who owes payment or other performance of an obligation secured under a security agreement, whether absolute or conditional, and whether or not the agreement imposes personal liability on the debtor. If the debtor and the owner of the real property securing the obligation are not the same person, the term means the owner of the real property in any provision of this [Act] dealing with collateral and the person or persons obligated in any provision dealing with an obligation. The term includes both where the context requires. () "Deed" means a record, other than a lease or security agreement, that by its terms conveys title to an interest in real property. () Default means a failure to comply with the debtor s duties under a security agreement.
1 1 1 1 1 1 1 1 0 1 (1) Expenses of foreclosure means the reasonable costs incurred by a secured creditor in connection with a foreclosure for mailing, advertising, title insurance binder or report (Section 0(a)), attorney s fees to the extent provided in the security agreement and permitted by law, appraisal fees in the case of a foreclosure by appraisal, and the fee of the person conducting the sale in the case of a foreclosure by auction. (1) Mailing address means: (A) for a person who has executed a security agreement or a guaranty, assumption agreement, or other document in connection with a security agreement that was delivered to the secured creditor or is in the secured creditor s possession, the address, if any, specified in that document or, if the secured creditor has received notice of a more recent address, that address; (B) for a person not described in subparagraph (A) but who is identified from examination of the public records in [the office of the county recorder], the address, if any, specified in the recorded document or, if the secured creditor has received notice of a more recent address, that address. (C) for a person not described in subparagraph (A) or (B), who is a tenant, subtenant, or leasehold assignee in possession of all or part of the real property collateral,
1 1 1 1 1 1 1 1 0 1 the street address of the apartment or other unit possessed by the person, with the envelope marked To Tenant Residing at: ; (D) if the sources described in subparagraphs (A) through (C) do not disclose a mailing address, the street address of the real property collateral; (E) the address, if any, determined pursuant to Section. (1) "Organization" means a corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government; governmental subdivision, agency, or instrumentality; public corporation; or any other legal or commercial entity. (1) "Party" means a person who engages in a transaction or makes an agreement governed by this [Act]. (1) "Person" includes an individual and an organization. (1) "Residential debtor" means: (A) an individual who owns residential real property in which a security interest exists, all or a part of which the individual occupies or intends to occupy as a residence within two years after acquisition of ownership; and (B) a person obligated, primarily or as a surety, on an obligation secured by residential real property if, at the time the obligation is incurred, that person is related
1 1 1 1 1 1 1 1 0 1 to an individual who occupies or intends to occupy all or a part of the real property as a residence within two years after acquisition of ownership. (1) "Real property" means any estate or interest in, over, or under land, including minerals, structures, fixtures, and other things that by custom, usage, or law pass with a conveyance of land though not described or mentioned in the contract of sale or instrument of conveyance; and, if appropriate to the context, the land in which the interest is claimed. The term includes the interest of a landlord or tenant, and an interest in a common interest community unless under other law of this State that interest is personal property. (1) Record, used as a noun, means information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. (0) "Record," used as a verb, means to take the actions necessary to perfect an interest in real property under [the recording act of this State]. (1) "Residential real property" means, in relation to a residential debtor, real property not used primarily for agricultural or commercial purposes and containing no nonresidential uses for which the debtor is a lessor, and which (A) contains not more than [ten] acres, improved or
1 1 1 1 1 1 1 1 0 1 intended by its owner to be improved by not more than [four] dwelling units or (B) is a unit in a common interest community. () "secured creditor" means a lender, seller, or other person who has the right to foreclose a security interest. The term includes an agent, trustee, or other person who represents the person having the right to foreclose. () "Security agreement" means a mortgage, deed of trust, security deed, contract for deed, land sales contract, lease intended as security, or other contract or conveyance that creates or provides for an interest in real property to secure payment or performance of an obligation, whether by acquisition or retention of a lien, a lessor s interest under a lease, or title to the real property. The term includes the obligation being secured whether or not it is embodied in a separate record. The term includes a lien on real property created by a record to secure an obligation owed by an owner of the real property to an association in a common interest community or under covenants running with the real property. () "Security interest" means an interest in real property which is intended to secure payment or performance of an obligation. Comment
1 1 1 1 1 1 1 1 0 1 0 1 0 1 Introduction to definitions. American law recognizes that many different interests can be created in real property, and that many different sorts of documents can be employed to make those interests security for debts and other obligations. This Act makes nonjudicial foreclosure available to virtually all consensually secured parties, no matter what interest in land has been made the collateral for the obligation and no matter what the nature of the instrument creating the security interest. Such conventional terms as mortgage and mortgagor are not used in this Act, since they could easily be construed as having a limiting effect on the Act s coverage of security interests. Instead, this Act employs a set of terms that have no common law or statutory roots tying them to a particular form. In place of terms such as mortgage, contract for deed, trust deed, etc., this Act substitutes the general term security agreement (see paragraph ()). In place of mortgagor or installment purchaser this Act substitutes debtor defined in paragraph (). In place of mortgagee, or vendor, this Act substitutes secured creditor (see paragraph ()). Instead of enumerating the various types of real property interest, such as fee estate, leasehold, and the like, that can be used as security, this Act substitutes collateral as defined in paragraph (). The interest in the collateral which is conveyed by the debtor to the creditor or which is retained by the creditor is defined as a security interest and not as a lien or as title. Hence, it is irrelevant under this Act whether a state follows the lien theory or title theory of mortgage law. 1. Acceleration may be accomplished by the secured creditor s sending a notice to the debtor or taking other action that, under applicable law, makes the entire secured obligation due. If a cure of a default is made under the provisions of Section 0, any acceleration is set aside. A notice of foreclosure given under Section 0 automatically causes an acceleration.. Aggrieved party is taken from ULSIA Section (1).. Agreement is taken from ULSIA Section (). It includes full recognition of usages in real property business, the parties course of dealing and course of performance, the surrounding circumstances, and any agreement permitted under this Act to displace a state rule of law. Agreement refers to the agreement in fact. The word contract, defined in paragraph (), refers to the legal obligation resulting from an agreement. Whether an agreement has legal consequences is determined by this Act
1 1 1 1 1 1 1 1 0 1 0 1 0 1 if applicable and otherwise by the general law of contracts.. Collateral includes all of the personal property and all of the interests in land which are subjected to a security interest. All of these interests in land are subsumed under the term defined in paragraph (1) as real property.. Common Interest Community. This definition is taken from the Uniform Common Interest Ownership Act. It encompasses condominiums, cooperatives, and planned communities that include common areas supported by the payments of individual owners.. Contract. See comment to agreement above.. Conveyance. This term is intended to include any method of lifetime transfer of an interest in real property other than by operation of law. Since a real property security interest creates an interest in land, a mortgage or other security interest is a conveyance. Similarly, if the creditor assigns her or his claim secured by the security interest and his interest in the real property of the debtor, the assignment is a conveyance. Acts sufficient to effect a transfer or conveyance are determined by applicable law. The term thus covers all of the different methods of effecting a voluntary and involuntary inter vivos transfer. See paragraph () for definition of a deed. Where this Act states a rule applicable both to lifetime transfers and to transfers by will, the term transfer is used.. Creditor includes both the person by whom the secured obligation is initially enforceable, and also any transferee or any representative of that person. If a person acts through an agent, the creditor is the principal.. Debtor. In most cases the person who is personally obligated to pay the secured debt and the owner of the real property securing the debt will be the same person at the inception of the transaction. However, the owner may later transfer the real property subject to the security interest. In that case the definition of debtor includes the transferee where the section refers to rights in the real property and, depending on the context, means either the person personally obligated or the person owning the real property in which there is a security interest. In addition, debtor covers guarantors, sureties, accommodation makers, and other persons who are absolutely or conditionally liable on the secured debt. Hence, the
1 1 1 1 1 1 1 1 0 1 0 1 0 1 term debtor often describes more than one person. A person who has given a security interest, but has later transferred all of his or her interest in the real property and has been released from personal liability on the secured obligation, is no longer a debtor.. Deed. The deed is the instrument by which a freehold estate is transferred during the transferor s life. The formal requirements for validity of a deed are not determined by this Act, but by the other law of this state.. A default is a non-compliance with the duties imposed by the security agreement (which includes the secured obligation as well; see paragraph ()). See also Section 0, which provides for notice of default to the debtor. 1. Expenses of foreclosure include the direct costs of foreclosure, but do not include items not directly related to foreclosure, such as payment of property taxes, insurance premiums, or repairs. However, under other applicable law a secured creditor may have the right to expend money on the latter items and add the expenditure to the balance of the obligation secured by the security agreement. See Restatement (Third) of Property: Mortgages. (1). All expenses of foreclosure, including attorney and appraisal fees, are limited to reasonable amounts, and may also be limited by other specific laws of this state. 1. Mailing address is the address to which various notices must be mailed by secured creditors. 1. Organization should be read in connection with the definition of a person. Organization is intended to include all legally recognized persons other than individuals. 1. Party is intended to be a general term covering persons engaging in transactions, whether they are individuals or organizations. It includes persons acting through agents. 1. Person. See Comment to organization. 1. Residential debtor. This term is used as a rough synonym for consumer. A residential debtor is, in essence, a person who owns and occupies a home in which a security interest exists. Such persons are regarded as needing protections from the acts of creditors that other borrowers do not need. The requirement that the individual must intend to occupy the property within two years after
1 1 1 1 1 1 1 1 0 1 0 1 0 1 acquisition is intended to accommodate a person who purchases land with the expectation of constructing a home on it. 1. Real property. This term refers to the legal relationship or interest a person has against the world with respect to an object, the physical land. It includes common law estates, both freehold and nonfreehold, as well as rents, servitudes and other interests which are not estates because they do not carry with them the right of possession of the land. The term is also used, if the context warrants, to refer to the physical object (the land) in which these interests may exist. Leaseholds are defined as real property for the purposes of this Act, even though for other purposes of state law (e.g., decedents estates) they may be regarded as personal property. Interests of cooperative apartment owners are not considered real property under this definition if they are regarded as personal property by other law of this state. Even though rents are regarded under this Act as real property, the procedures of this Act cannot be employed by a creditor to reach or obtain rents prior to the time of foreclosure; see paragraph (b)(). However, a foreclosure under the Act will pass title to the rents accruing after the time of foreclosure; see Section 1. 1. A record is defined to include electronic documents as well as those written on paper. 0. To record is defined to incorporate the requirements of this state s existing recording act. 1. Residential real property is an essential term in defining residential debtor (paragraph 1). Unless it is part of a common interest community, residential real property may not exceed ten acres in size. It must have a dwelling on it, or must be intended by its owner to be improved with a dwelling in the future. It may not contain more than four dwelling units, and the residential debtor must occupy or intend to occupy one of them as a residence. The owner of residential real property may rent one of the dwelling units to a tenant who will reside there, but may not rent any part of it to a tenant for a nonresidential purpose.. Secured creditor includes a seller of real property who retains a lien or title to the real property sold for the purpose of securing the price, and also includes a person, such as an institutional lender, whose claim arises initially from a cash loan. It further
1 1 1 1 1 1 1 1 0 1 0 1 0 1 includes anyone to whom the right to payment or performance of the secured obligation is assigned or transferred. Secured creditor is defined in terms of the right to enforce the obligation, not in terms of holding the security interest. Ordinarily the security interest will automatically follow the obligation, unless the two are intentionally separated. See Restatement (Third) of Property: Mortgages. (1). For example, Fannie Mae routinely holds the promissory notes representing the loans it acquires, but has the corresponding mortgages held in the names of its servicers for convenience in foreclosing. Under the definition in this Act, a servicer acting on behalf of Fannie Mae would be the secured creditor.. Security agreement. This definition recognizes that the title given to a document by its parties does not necessarily indicate whether it is a security agreement. The test is whether it creates a security interest. See Comment to security interest below. The caption or title and the precise form of the document are irrelevant. It does not matter whether the document is in the form of a contract or a conveyance of an interest in land, nor whether the security interest is created by granting or by retaining it. The security agreement includes the terms of the obligation it secures, which is typically a promissory note. Hence, whether a particular term of the parties agreement (such as an acceleration clause or a due-on-sale clause) is stated in the note or in the mortgage is immaterial. A lien created to assist in the enforcement of owners obligations in common interest communities or under covenants running with land is a security agreement under this Act and can be foreclosed under its provisions. On the other hand, not all instruments that create or transfer interests in real property do so for the purpose of security. For example, most deeds, space leases, and ground leases are given for the purpose of granting the economic benefits of the conveyed interest to the recipient, not for the purpose of securing performance of an obligation of the grantor. If this is the case, these transactions are not security agreements and this Act does not affect them. See Section.. Security interest. As indicated in the preceding comment, security interests can arise from documents labeled in a variety of ways. Mortgages, leases, deeds, and contracts may all create security interests. A security interest arises when a person who holds an interest in real property conveys it to another person to secure an obligation owed to that person.
1 1 1 1 1 1 1 1 0 1 SECTION. SCOPE (a) Except as otherwise provided in subsection (b), this [Act] applies to, and authorizes the nonjudicial foreclosure of, every form of security interest in real property if the debtor has agreed in substance, in the security agreement or otherwise, that: (1) the security interest may be foreclosed under the provisions of [this Act]; or () the security interest may be foreclosed by nonjudicial process exercised by the secured creditor. (b) This [Act] may not be used to foreclose or enforce: (1) a construction lien, judgment lien, tax lien, or other nonconsensual lien created by statute or operation of law; () a landlord's lien unless the parties expressly agree that this [Act] applies; () a vendor's or vendee's lien unless the lien is created by an express agreement; () an interest arising from an agreement not to convey or encumber real property; () a security interest in property in a common interest community if under other law of this State that property is personal property; or () a security interest in rents or proceeds, or an interest arising from an agreement for appointment of a 1
1 1 1 1 1 1 1 1 0 1 0 1 receiver, except that rents or proceeds of the collateral accruing and becoming due after the time of foreclosure are the property of the person acquiring title to the collateral by the foreclosure (Section 1). (c) This [Act] does not preclude or govern foreclosure or other enforcement of security interests in real property by judicial action or other processes authorized by law in this state. A secured creditor may not take an action in pursuance of foreclosure under this [Act] while a judicial proceeding is pending to foreclose the same security interest or to enforce the same secured obligation. However, foreclosure under this [Act] may proceed even if a judicial proceeding is pending for appointment or supervision of a receiver of the collateral, or for collection or sequestration of rents or other proceeds from the collateral. Comment This section extends the reach of this Act to all types of consensual security interests in real property. The caption of the document is irrelevant, so long as it creates a security interest in real property and contains a reference to nonjudicial foreclosure as required by subsection (a) of this section. Even an absolute deed may be foreclosed under this Act if it was given to create a security interest in land, as determined by applicable law. This act does not specify the circumstances or methods by which a security interest may be created; those matters are left to other law. The foreclosure provisions of this Act are available only if they are expressly agreed to by the debtor. That agreement will ordinarily be part of the security agreement itself, but a subsequent agreement will also be recognized. 1
1 1 1 1 1 1 1 1 0 1 0 1 0 1 The agreement may either be by reference to the Act itself (e.g., This mortgage may be foreclosed under the [State] Power of Sale Foreclosure Act ) or by reference to the concept of the Act (e.g., This mortgage may be foreclosed by a nonjudicial procedure exercised by the mortgagee or This mortgage may be foreclosed by exercise of a power of sale by the mortgagee ). The agreement need not contain a precise reference to this Act, but need only refer to its fundamental concept, nonjudicial foreclosure. The exclusions from the coverage of the Act stated in Subsection (b) are intended to carve out security interests that are nonconsensual (judgment, tax, and construction liens) or are so far removed from ordinary real property financing transactions that the parties would probably not expect a mortgage foreclosure statute to apply to them unless their agreement warned of its application. The latter rationale applies to landlords, vendors, and vendees liens. In general, liens to assist in enforcement of covenants against owners in common interest communities (see ()) or other covenants running with land, may be enforced under this Act. However, subdivision (b)() of this section excludes the foreclosure of association liens on cooperative units if they are considered personal property, as is true in some states. Security interests in rents or other proceeds generated by real property are outside the scope of this Act. Secured creditors may employ a variety of methods for enforcement of those interests in various states, including the direct taking of possession of the funds by the secured creditor; this Act does not add to or detract from those methods. (c) preserves the existing authority of the courts to foreclose mortgages and other real property security interests. Nonjudicial foreclosure under this Act is simply an option available to secured creditors, and they may resort to judicial foreclosure if they wish. In some states other processes, such as strict foreclosure, are authorized by law and may continue to be used after adoption of this Act. In some states special statutory provisions govern the termination of installment land contracts (contracts for deed). A state adopting this Act may wish to consider whether foreclosure of such contracts should be excluded from its coverage, or alternatively whether the statute providing for termination of installment contracts should be repealed. The final sentence of subsection (c) is intended to 1
1 1 1 1 1 prevent secured creditors from harassing debtors with a foreclosure by nonjudicial process when a judicial foreclosure or an action on the debt is pending. However, judicial proceedings for appointment of a receiver or for collection of rents and proceeds are not inconsistent with foreclosure under this Act, and may be pursued simultaneously with foreclosure against the real property under this Act. This Act does not impose a one-action rule, prohibiting commencement of an action on the debt when it is secured by real property, as is found in a few states. But it does prohibit simultaneous pursuit of a foreclosure the Act and an independent action on the debt. In addition, if a foreclosure under this Act is completed against a residential debtor, optional subsection (c) exempts that person from any further liability for a deficiency. 1 1 1 0 1 0 1 SECTION. PERSONAL PROPERTY If a security agreement covers both real property and personal property, the secured creditor may proceed under this [Act] as to both the real property and personal property. Comment Mortgages and other security agreements that chiefly affect real property often contain terms encumbering some items of personal property as well. It is permissible for lenders to employ this Act to foreclose on the real property, and to use other procedures consistent with Article of the Uniform Commercial Code to realize on the security of the personal property. However, a lender may, at its option, sweep the personal property into a real property nonjudicial foreclosure under this Act. Any argument that such a foreclosure fails to satisfy the requirements of Article for disposition of collateral is eliminated by this section. SECTION. VARIATION BY AGREEMENT. (a) Except as otherwise provided in subsections (b) and (c), the parties to a security agreement may not vary by 1