Tuesday, June 2, 2009

Amending foreclosure laws to require lender to negotiate and reduce the amount borrower must pay per month

Requiring Lender to Negotiate with Borrower before Foreclosure
(March 17, 2009).
TN Attorney General Opinions
Opinion Number: 09-28

Opinion may be found at the TBA website:

"Current foreclosure laws do not require the lender to negotiate with a borrower before selling property at foreclosure.  Any change imposing this requirement with respect to a loan agreement entered into before the effective date of the act is subject to challenge under the Contract Clauses of the United States and Tennessee Constitutions. Any change that substantially impairs an existing contractual relationship must be made pursuant to a significant and legitimate public purpose.  Further, the adjustment of the rights and responsibilities of the contracting parties resulting from the change must be based upon reasonable conditions and be of a character appropriate to the public purposes justifying adoption of the change.  The constitutionality of a negotiation requirement would depend on the burden it places on the lender’s right to exercise the foreclosure remedy.  For example, we think a court would find the requirement unconstitutional if it enables the borrower indefinitely to delay the lender’s right to foreclose and sell the property.  The change could be defensible if the requirement to negotiate is clearly defined and restricted, does not change the terms of the mortgage, and does not delay foreclosure." Id..

"Any statute reducing the amount a borrower must pay a lender while good faith negotiations are in progress is subject to the same analysis.  Again, the defensibility of such a measure would depend on its particular terms.  We think, however, that such a measure is vulnerable to a challenge that it violates the state and federal Contract Clauses.  Such a measure imposes a heavy administrative burden on a lender to ascertain the borrower’s income.  Further, it changes the underlying terms of the mortgage and provides incentive for the borrower indefinitely to delay foreclosure.  For these reasons, we think a court could well conclude that this change would impair the lender’s contract in violation of the Contract Clauses of the United States and Tennessee Constitutions, if applied retrospectively." Id.