"Beware of Tenant’s Rights Upon Foreclosure"

Banking Alert

The National Low Income Housing Coalition estimates that 40% of individuals losing their homes in foreclosures are renters.  West Virginia banks may not be aware that in 2009, as part of its response to the housing crisis, Congress passed The Protecting Tenants at Foreclosure Act of 2009 (the “Act”), which protects tenants from immediate eviction upon foreclosure of loans secured by a lien on residential real property.  The Act became effective on May 20, 2009 and will expire on December 31, 2012.  The primary purpose of the Act is to ensure that tenants facing eviction from a foreclosed property have adequate time to find alternative housing.

The Act only applies to foreclosures on loans secured by a lien on residential real property (including a refinancing of any secured loan on residential real property) that are subject to a bona fide lease or tenancy entered into before the notice of foreclosure.  A lease or tenancy is considered bona fide under the Act only if:

  • the tenant is not the mortgagor;
  • the tenant is not the parent, spouse or child of the mortgagor;
  • the lease or tenancy is the result of an arms-length transaction; and
  • the lease or tenancy requires rent that is not substantially less than fair market rent for the property or the unit’s rent is reduced or subsidized due to a federal, state or local subsidy.

Under the Act, the immediate successor in interest at foreclosure on residential property (referred to as the “new owner”) must provide any tenant with a notice to vacate at least 90 days before the effective date of the notice.  In addition, the new owner must allow tenants to occupy the property until the end of the lease term.  This means that during the term of the lease, the tenant has a right to remain on the property and cannot be evicted, except for actions that constitute good cause.  If the lease ends in less than 90 days, the new owner may not evict the tenant without giving the tenant a minimum of 90 days notice.  The only exceptions to the rule that the tenant may not be evicted (except for good cause) during the term of the lease are (i) when the new owner will occupy the property and (ii) when there is no lease or the lease is terminable at will under state law.  However, even when these exceptions apply, the new owner may terminate the tenancy only if the new owner has provided the tenant with at least 90 days prior notice to vacate. 

The Act does not affect the requirements for termination of any federal or state subsidized tenancy and does not affect any state or local law that provides longer time periods or other protections for tenants. 

The new federal notice requirements under the Act could significantly change the procedures a bank follows when it assumes a lease in a foreclosure on residential property in the typical situation where the rights of the lessee are subordinate to the bank’s lien.  Current requirements for eviction under West Virginia law provide that in order to evict a tenant, a landlord must provide the tenant with advance written notice of eviction.  The amount of notice required varies depending on whether there is a written lease.  If there is an enforceable  written lease, the landlord is required to provide at least the amount of notice stated in the lease.  If, as in the case of most  foreclosures, there is not an enforceable written lease, West Virginia law currently provides that a landlord must provide prior notice of eviction at least one full rental period in advance. Under the new Act, the bank will not be able to terminate the lease immediately but will be required to give the tenant at least 90 days notice and/or honor the lease term. 

The Act has also resulted in increased regulatory scrutiny. The regulatory agencies have indicated that as a result of the Act they will take the following actions:

  • The Federal Reserve, as part of its consumer compliance examination, will evaluate an institution’s awareness of the Act, its efforts to comply and its responsiveness to addressing implementation deficiencies. 
  • The OCC has advised national banks to adopt policies and procedures to ensure compliance with the tenant protection provisions of the Act.  The OCC will evaluate national bank compliance in the course of its supervisory process.
  •  The FDIC examiners will monitor and enforce compliance with the requirements of the Act in the same manner as other consumer protection laws and regulations.

West Virginia banks should review the Act and be sure their lenders and legal counsel acting as trustees are aware of the Act’s prior notice requirements.  Banks may also want to adopt internal policies and procedures to ensure compliance with the prior notice requirements of the Act.