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Mortgage servicers and their clients have been working with a population of defaulted loans in the hundreds of thousands for the better part of the last seven years. Now, as regulatory and statutory changes have extended timelines for completion of foreclosure, a once rare occurrence is now becoming more commonplace – the barring of foreclosures due to the running of the statute of limitations.
In the past, lenders and mortgage servicers typically moved to foreclose promptly upon default. However, in the aftermath of the mortgage crisis, lenders and mortgage servicers have a backlog of delinquent loans in their portfolios. This backlog, combined with an ever-increasing regulatory burden to make sure all possible loss mitigation options have been exhausted and dual tracking has not occurred, means that it now can take months or even years after a borrower stops making payments before a foreclosure is initiated. Thus, many mortgage loans can remain in default for years before a foreclosure is initiated or re-activated. As a result, many borrowers’ attorneys are now asserting the statute of limitations as a defense to foreclosure actions.
In certain jurisdictions, the laws are clear. For example, Texas has a limitations period of four years from acceleration of the mortgage debt, Nevada has a statute of limitations of six years, and in Maryland, a foreclosure action pursuant to a deed of trust is an equitable in rem action and is not subject to a specific statute of limitations. However, in those states where statutes of limitations are not so clear, litigation is popping up to determine (1) whether the statute of limitations applies to foreclosures at all, and, if so, (2) what is the appropriate statute of limitations period, and when does it start to run? Additional questions arise if an earlier foreclosure is cancelled or dismissed. In general, the statute of limitations will still apply to any subsequent foreclosure—the foreclosure may be restarted, but the restart would have to occur within the statute of limitations time period.
Florida, New York, and New Jersey, states with standard foreclosure timelines in excess of three years, have seen actions filed to determine what triggers the statute of limitations. Is it the borrower’s initial default, or do subsequent payments by the borrower trigger a new tolling period? Actions are also being filed where the initial foreclosure was dismissed by the court without prejudice, and the restarted foreclosure action is asserted to be barred by the statute of limitations.
Mortgage servicers, lenders, and investors need to be aware of the statute of limitation rules and restrictions in each jurisdiction governing their loans. Failure to closely monitor statute of limitations issues could result in the inability to foreclose on a defaulted loan, as well as potential litigation for alleged unfair debt collection practices.
Locke Lord has a dedicated team of compliance and litigation attorneys who have significant experience handling various aspects of consumer finance. Locke Lord attorneys regularly advise financial institutions on regulatory compliance matters, new product development and represent clients in regulatory enforcement matters, class actions and various lawsuits in the U.S. and abroad. Visit Locke Lord’s Consumer Finance Regulatory Practice Group website or contact the author with questions or for more information.