LawPulse

New consumer-friendly rules, effective May 1, are designed to make the foreclosure process more fair and reduce the backlog of cases.

In an attempt to avoid a "foreclosure crisis" in our state courts, the Illinois Supreme Court has adopted three new rules governing foreclosure mediation programs, pleading requirements, and a lending institution's duty to mitigate losses with homeowners who are delinquent in paying their mortgage bills.

The rules were originally to go into effect on March 1, but the court has pushed that date back to May 1, 2013, apparently so its Special Committee on Mortgage Foreclosures can determine whether they should be applied retroactively to previously filed cases pending in courts throughout the state.

Oak Brook-based foreclosure defense attorney Matthew H. Hector, who is a senior associate with Sulaiman Law Group Ltd., said he welcomes the new rules and hopes the court will opt to enforce them retroactively.

"These rules have very serious implications for someone going through the foreclosure process," Hector said. "When I read them, my first question was whether they would be applied retroactively, but we'll have to wait a little longer to get that answer."

Retroactive or not, rules 99.1, 113, and 114 are scheduled to go into effect this spring to help alleviate a "drastic increase in mortgage foreclosure cases and the resultant burden on judicial circuits throughout the state," according to the committee comments that accompany Rule 99.1.

Circuits must offer court-approved mediation

Rule 99.1 allows judicial circuits to establish court-approved foreclosure mediation programs, and it will force lending institutions to notify foreclosure defendants of the availability of such programs. The lenders will also have an obligation to participate in those programs when requested by a defendant.

"Each judicial circuit faced a foreclosure crisis and began adapting its court procedures to most effectively administer the foreclosure proceedings," the committee comments say. "The intention of this rule is to incorporate more consistent elements in [foreclosure mediation] programs throughout the state while also allowing flexibility for changing conditions with mortgage foreclosure filings in the future."

Lenders must attach original mortgage note to complaint

Hector said Rule 113 includes a new twist on an old pleading requirement and places a higher burden on banks and other lending institutions when they commence foreclosure proceedings against a borrower. Lenders were already required to attach to their foreclosure complaints a copy of the underlying mortgage note, but starting on May 1 the attached note must be identical to the original version as it appeared on the day the lawsuit was filed.

"Section 1504 of the [Illinois Mortgage Foreclosure Law] says you need to attach a copy of the note, and there's a [rebuttable] presumption that the documents attached are true and accurate copies," Hector said. Under the old rule, it would be a defendant's burden to argue and prove defects or omissions on the face of the attached note if such issues were relevant to the defense.

Hector said such defects frequently become an issue in proceedings where, for example, the bank that filed the foreclosure action is not the same bank named on the note that was attached to the complaint. Under new Rule 113(b), the banks are essentially "locked in" to the content of the note as it appeared when attached to the pleadings.

"Rule 113(b) adds an extra procedural roadblock to section 1504 of the IMFL," Hector said. "In many cases, the note attached to the complaint fails to prove standing for the bank that filed the suit. A year later, the bank might file a new copy of the note that finally shows how it got to be in their hands rather than in the hands of some prior lender.…Rule 113(b) is trying to solve this problem, because the bank now has to attach the note exactly the way it looked on the day the action was filed - they shouldn't be able to come back a year later to redeem standing if it wasn't apparent on the face of the note they attached to the original complaint."

The new Rule 113 addresses, among other things, the affidavit a lender must attach to its pleadings whenever it seeks summary or default judgment, Hector said. The rule expands the information that must be included in the lender's affidavit, and forces the party filing the lawsuit to testify about how it obtained first-hand knowledge of the business and finances of the homeowner.

The lender must attach copies of all relevant documents it used in preparing the affidavit, including records the plaintiff bank may have received from any other lenders that previously owned the note. Then, Hector said, the plaintiff must explain how and why the underlying documents are considered to be "business records" within the meaning of the law.

"Right now, banks just sort of recite the term of art that establishes a business record - they state the legal standard, as if it's the facts, but they don't give you the who, what, when, why and how the documents actually qualify as business records," Hector said.

Notice of default judgments to all defendants

There are several other new and valuable provisions in rule 113, but Hector said two other highlights deal with mandatory notice to defendants of certain actions taken by the court. Plaintiffs will now be required to send notice of default judgments to all defendants within five days of the court's order of default.

"This is really important because it's not currently required for every defendant - just those defendants who have answered or otherwise appeared," Hector said. "You have 30 days to vacate a default judgment, so knowing when that time started to run is very important."

Rule 113(f) will now require that all defendants - not just those who have appeared in the case - be provided with notice at least 10 days prior to any scheduled sheriff's sale of the subject property.

"We obviously don't know yet how the courts will treat these new rules," Hector said, "but my belief is if you failed under 113(f) to send timely notice of a sheriff's sale to all defendants, you could argue under [735 ILCS 5/15-1508] that justice was not otherwise done, or perhaps even that the sale was unconscionable."

Lenders must inform borrowers about loss mitigation

According to Hector, the new Rule 114 is designed to force lenders to become more active in the loss-mitigation aspect of foreclosure litigation. The rule will require all lenders to at least attempt to inform borrowers of the various kinds of free legal services they can seek, and the lenders will have to participate in such programs before they will be entitled to a final judgment.

The rule will require lenders to provide an affidavit stating they have identified all loss-mitigation programs available within the county in which the property is located, and the steps the lender took to offer those options to the borrower. Hector said the affidavit must also describe the status of any such loss-mitigation efforts.

"These programs are basically things that the banks have already agreed to, but now the bank has an obligation to look into it for each borrower before they foreclose," Hector said. "If they don't comply with Rule 114, foreclosure courts are empowered to stay the case or deny the entry of a judgment pending the bank's evaluation of the homeowner for loss-mitigation programs."

Hector said Rule 114 is a valuable protection for borrowers, but it will only apply to those defendants who have filed an appearance in the case, or who have filed an answer that has not been stricken by the court.

"Now, the number-1 rule is to show up," Hector said. "File an appearance, or file an answer and hope it isn't stricken, but pay the darn appearance fee. Borrow the money if you have to, because once you take that affirmative step, the banks have to consider you for loss mitigation. This is the most borrower-friendly rule we have, now."

Tough balancing act

When the court first adopted these new rules on February 22, it issued a written statement explaining the procedures its court-appointed Special Committee on Mortgage Foreclosures has taken to study the "foreclosure crisis" in Illinois. The 14-person committee, comprised of judges, bankers and their lawyers, a public-interest attorney, a law professor and the head of the Consumer Protection Division of the Illinois Attorney General's office, promulgated rules "aimed at mitigating abuses and uncertainty in mortgage foreclosures, and helping those who face the loss of their homes by imposing several requirements on mediation programs and lenders seeking to foreclose."

Although the seven supreme court justices unanimously adopted the proposed rules, the effort was spearheaded by Justice Mary Jane Theis. According to the court's written statement, Theis applauded the committee for the tough balancing act it performed in promulgating rules that will help protect homeowners with financial problems, while also providing lenders with a clear set of procedures to follow with foreclosure litigation.

"Some of the provisions in these rules are controversial in their specific worlds, whether it be finance and lending or in public interest and consumer law. No side got everything it wanted," Theis said in the court's statement. "There can be no win-win in a process that is as painful to homeowners as foreclosure. But the process should be fair. These rules remedy or mitigate questionable practices such as robo-signing; speed up the process to hopefully shorten the blight on communities through boarded-up homes, and provide a certainty that will enable foreclosed homeowners to examine loan modification options or proceed on a new path."