August 1, 2018

by Richard M. Nielson
Reimer Law Co.
USFN Member (Kentucky, Ohio)

The Reenactment
President Trump signed Senate Bill 2155 (The Economic Growth, Regulatory Relief and Consumer Protection Act) on May 24, 2018. The primary purpose of this bill was to revise significant portions of the Dodd-Frank Act, which was originally passed in 2010.

One of the ancillary provisions in this legislation was a repeal of the sunset provisions of The Protecting Tenants at Foreclosure Act of 2009 (PTFA or Act). The PTFA was initially enacted in 2009 with a sunset of the law’s provisions in 2012. Prior to its expiration in 2012, the sunset provision was extended to 2014. No legislation passed in 2014 to further extend the legislation, so the PTFA expired at that time. This new legislation resurrected the Act effective June 23, 2018 without any further sunset provision.

Mortgage servicers and REO companies had to deal with the issues created by the PTFA when it was initially enacted, so most have some experience in this regard. However, many have likely changed their rules since it sunset, and there are always new people in the industry. Accordingly, a refresher on eviction law in general, and how reenactment of the PTFA effects it, should prove helpful.

PTFA vs. State Law
Historically, the creation of a landlord and tenant relationship, the rules governing that relationship, the process for evicting tenants, and the interplay of those rules with the foreclosure statutes have been matters of state and municipal law. These laws and customs vary significantly from jurisdiction to jurisdiction. The reenacted PTFA has once again created certain minimum rights that are afforded to some tenants throughout the country.

After the PTFA was first enacted, a number of states adopted their own version of the Act providing similar, or more generous, benefits. In addition, many cities enacted ordinances granting tenants additional rights. When the PTFA sunset in 2014, purchasers of foreclosed property were once more free to deal with tenants as state law permitted. This left some jurisdictions with state and local rules similar to the PTFA, but others with virtually no comparable requirements. With the resurrection of the Act, mortgage investors, servicers, REO companies, and their attorneys must (again) alter their policies, procedures, and forms to ensure compliance with the terms of the federal law.

PTFA’s Objective
The general purpose of the PTFA is to provide legitimate tenants, who are living in properties that are going through the foreclosure process, with some protection from a sudden eviction. There are situations where tenants could be paying fair market value rent to a property owner while, unbeknownst to the tenant, the owner is in foreclosure. In those unfortunate situations the tenant might not know anything about the foreclosure until the purchaser at the foreclosure sale actually attempts to gain possession of the house. The tenant may then have very little time to react to the situation. The PTFA attempts to standardize how the new owner deals with those legitimate tenants in foreclosed properties and provide some minimum protection for those who might be harmed.

The Terms of the PTFA
Under the terms of the Act all “Bona Fide Tenants” (BFTs) in residential property must be given a minimum of 90 days’ notice before eviction proceedings can begin.

An occupant is not a BFT under the Act if they are the mortgagor, or if they are a child, the spouse, or a parent of the mortgagor. However, the occupants could be considered a BFT if they are another type of relative of the mortgagor — such as a sibling, an aunt, or an uncle.

If any occupant is not one of the excluded relationships, they are a BFT if they became a tenant through an “arm’s length transaction” and if they pay an amount that is not “substantially below” the “fair market rent.”

If the occupant is a BFT and meets the arm’s length and fair market tests, then the new owner must honor the terms of the lease. This would include giving them at least 90 days’ notice, but more if the lease term is longer.

Processing a Potential PTFA Claim
As soon as legal title to the property transfers to the new owner, the applicability of the PTFA must be considered. The new owner should make all reasonable attempts to determine if the property is occupied. If the property is in fact occupied, then the owner must try to find out the identity of each occupant, how they may be related to the former owners, and the terms of any lease they may have. If the property is occupied by multiple parties, it is possible that some occupants may be BFTs and others may not. To the extent state laws or municipal ordinances provide more generous rights to occupants, and to the extent a tenant might be protected under bankruptcy law or the Servicemembers Civil Relief Act, the owner must consider those issues as well.

Unless the new owner can conclusively determine that no individual who is potentially entitled to PTFA benefits (or other state and local benefits) occupies the property, the new owner should send a notice to all potentially entitled occupants. At a minimum, the notice should advise the occupants of the new owner and start the time period on the 90-day notice if applicable. Other disclosures may need to be in the notice, and some items will vary from state to state.

Once a potential BFT notifies the new owner of the existence of a lease (either oral or written) then the owner must consider whether the terms as described constitutes a true “arm’s length transaction,” and whether the alleged rent payment is “substantially below” a “fair market rent.” Each of these questions is very fact-specific, so there is a fair amount of judgment involved in the decision making process. It is best to look at the totality of the circumstances in every situation. The person making the decision must consider the practical differences between each city and state in coming to a reasonable conclusion. Moreover, the resulting decision may, in part, be based upon a servicer’s or REO vendor’s risk tolerance.

Assuming it is concluded that the occupant should be treated as a BFT, the new owner must honor all of the terms of the lease. They may not pick and choose which terms are enforceable. At a minimum, the BFT is entitled to a 90-day notice to vacate, but if the written lease calls for a longer term, that term must be honored.

It is worth noting that there is an exception to this rule: the new owner may cancel the lease if they intend to occupy the home as their primary residence. However, the owner would still need to provide the tenant with at least 90 days’ notice to vacate the premises. In addition, if the lease involves government-subsidized rent payments, other issues may need to be addressed.

If the Occupant is a Tenant, Does that Mean the Owner is a Landlord?
If the occupant is determined to be a tenant under the terms of the PTFA, is the new owner in fact a landlord for all purposes? In other words, does the new owner have to accept rent; and do they have to undertake any of the other obligations and affirmative duties set forth in the lease or placed upon landlords by state and local law? Further, does this mean that the new owner has to potentially register as a landlord in the city where the property is located?

These are all risk issues not addressed by the PTFA. Many states and municipalities have codes requiring landlords to provide certain notices and maintain properties to a specified standard. What if the property was not up to those standards when the new owner took possession? Does the new owner need to undertake those repairs? If someone is injured on the property, is the new owner “responsible” as a landlord? Some laws require landlords to provide sufficient amounts of heat and water as well as security and safety. Is the new owner subject to those requirements as well? What if the prior owner held a security deposit from the tenant? Is the new landlord responsible for returning those funds?

The resurrection of the PTFA brings back these — and numerous other — issues that will continue to be litigated. It also reestablishes many risk and regulatory challenges that those who handle REO properties will need to address promptly.

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