Last fall, we published a blog article that reviewed the intricacies of the “Liability after Foreclosure” disclosure. Here we provide a quick update and add some valuable new information.
As a refresher, the following disclosure appears in the Loan Estimate but only when the transaction is defined as a refinance:
| Liability after Foreclosure | Taking this loan could end any state law protection you may currently have against liability for unpaid debt if your lender forecloses on your home. If you lose this protection, you may have to pay any debt remaining even after foreclosure. You may want to consult a lawyer for more information. |
A similar but more detailed “Liability after Foreclosure” disclosure is required on all Closing Disclosures. Research is needed to determine if state law provides any protection to a borrower in the event of foreclosure. The appropriate box in the disclosure is checked based on the result of the research.
| Liability after Foreclosure | If your lender forecloses on this property and the foreclosure does not cover the amount of unpaid balance on this loan, __ state law may protect you from liability for the unpaid balance. If you refinance or take on any additional debt on this property, you may lose this protection and have to pay any debt remaining even after foreclosure. You may want to consult a lawyer for more information. __ state law does not protect you from liability for the unpaid balance. |
Have you done your research to determine if your state offers any protection for the borrower?
We recently came across a couple of websites that simplify the research. The sites provide information on foreclosure deficiency laws for each state:
- https://www.alllaw.com/articles/nolo/foreclosure/anti-deficiency-laws.html
- https://www.nolo.com/legal-encyclopedia/after-the-foreclosure-deficiency-judgments-taxes
Both sites detail, by state, the type of foreclosure allowed in the state:
- Judicial – requires foreclosures to go through the court system; or
- Non-judicial – foreclosure not required to go through the court system.
In addition, the sites explain whether deficiency judgments are allowed and whether any protections are afforded to the borrower. Each site provides the ability to click a link for each state that provides a basic summary of deficiency judgment requirements. Keep in mind, if any type of protection is allowed within a state, the creditor should select the top box of the Liability after Foreclosure disclosure on the Closing Disclosure. If state law does not afford any protection for the borrower the bottom box is selected in the disclosure.
While both websites provide a good summary, we strongly encourage you to seek advice from bank counsel or state association counsel to ensure proper completion of the disclosure.