Tennessee foreclosure statutes: Lenders, take note

Lenders, take note.  Two new statutory provisions were signed into law that affect foreclosure procedures and a lender’s efforts to establish a deficiency judgment.

A new notice requirement for foreclosures of owner-occupied principal residences goes into effect July 1, 2010.  Creditors seeking to foreclose on a deed of trust, mortgage or other lien on a one-to-four family residence that is the debtor’s principal residence now must send a “Notice of Right to Foreclose” in advance of publication of the notice of foreclosure sale.  The Notice must provide contact information for the creditor or its servicer, as well as information regarding federal loan modification programs that may be available to the debtor.  This Notice must be sent to the principal debtor, and also must be sent to any co-debtor or guarantor living at a different address than the principal debtor.  The Notice must be sent separately, by regular mail, at least 60 days prior to the first publication of a notice of foreclosure sale, and the foreclosure sale must then take place within 12 months from the sending of the Notice.  A limited number of exceptions apply, including judicial sales, sales by bankruptcy trustees, and sales after a bankruptcy court has granted relief from the automatic stay.  A sample notice is included in the body of the statute, which illustrates the potentially onerous nature of the notice requirement.

Creditors also face new restrictions on their ability to establish deficiency judgments for both commercial and residential loans.  The new statutory provision, effective September 1, 2010, states that a creditor is entitled to a deficiency judgment for the total amount of the debt, plus costs of the foreclosure, less the fair market value of the property at the time of sale.  No mention is made of interest accruing on the debt after the date of foreclosure.  The presumption is that the foreclosure sale price is the fair market value.  However, the debtor may dispute the amount of the deficiency by showing the foreclosure sale price was materially less than the fair market value.  This statute generally codifies the Lost Mountain Development Co. v. King decision, 2006 Tenn. Ct. App. LEXIS 810.  The statute also imposes a two-year limitations period for bringing a deficiency action.  The statute expressly does not prohibit bringing suit prior the foreclosure sale, and in light of this statute, there may be strategic reasons to do so

For further information on these statutes or other foreclosure issues, contact Erika Barnes at ebarnes@stites.com or 615-782-2252.