Indiana Task Force Seeks Mortgage Foreclosure Reform

As a result of the recent economic downturn and the explosion in the number of mortgage foreclosure lawsuits, many have questioned the foreclosure process currently employed by Indiana courts. This growing concern led to the formation of a task force coordinated by Indiana Attorney General Greg Zoeller, and the task force is seeking immediate reforms and proposed best practices.

In early January 2011, Zoeller filed documents with the Indiana Supreme Court asking that the Court impose new procedures developed by the task force to ensure that borrower's legal rights are fully protected and mortgage lenders follow the law. The task force included the attorney general's office, judges, Supreme Court staff, legal services attorneys and private practice attorneys for mortgage lenders. The attorney general's office filed the recommendations, called "Mortgage Foreclosure Best Practices," that included all of the task force proposed guidelines and added warnings to clarify other legal requirements. The Supreme Court is expected to soon decide whether to adopt the proposals as requirements that mortgage lenders must follow in foreclosure lawsuits.

The proposed best practices developed by the task force and submitted to the Supreme Court would require a mortgage lender seeking foreclosure to submit the original signed mortgage note and proof of chain of title supporting the lender's right to enforce the note. Courts would also be required to send a notice to the borrower setting forth the borrower's right to a settlement conference with the lender, and the judge would be prohibited from taking final action until the settlement conference report has been filed with the court. The proposed best practices would prohibit the mortgage lender from asking the borrower to waive his or her legal right to a settlement conference, and permit the court to impose monetary sanctions against a lender who fails to comply with the required procedures.

The task force seeks to require the mortgage lender to show, by verified affidavit, that the lender complied with federal requirements concerning borrowers' legal rights during foreclosure, including reasons for a denial of modification of the mortgage loan or other steps to avoid financial loss. The proposal would prohibit a court from ordering a home foreclosure if the borrower is being evaluated for a loan modification under the Federal Home Affordable Modification Program or other similar federal programs.

The Indiana attorney general's office has clearly stated that it is concerned with mortgage lenders attempting to foreclose on distressed homeowners by filing foreclosure documents that are unverified, unauthenticated or riddled with errors, and that every effort should be made by the courts to encourage resolution of debt rather than foreclosure. If adopted by the Supreme Court, the proposed best practices developed by the task force will require courts in Indiana to follow the recommended practices and reforms. The ability of lenders or their assignees to take evidentiary shortcuts in the process would now be subject to immediate court scrutiny.

On a related note, Indiana has joined many other states in an investigation into fraudulent and illegal practices in the mortgage-servicing industry. The multi-state investigation was sparked by admissions by some mortgage lender employees that foreclosure documents were signed without review, and documents were filed without proper authentication. The investigation, led by the Iowa attorney general's office, is ongoing.

Henry Efroymson is the chair of the Bankruptcy and Creditor/Debtor Disputes Practice Group. Breadth of experience and client service are the hallmarks of Efroymson’s practice. Concentrating his practice in loan workout, creditor/debtor disputes and bankruptcy for over 28 years, he helps guide small, medium and large businesses through the complexities of financial distress.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice.  The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.