Private Lender Foreclosure vs Institutional Lender Foreclosure
Most purchases of Colorado real estate involve some sort of mortgage financing, in order to complete the purchase. Although a majority of mortgage financing is done by banks or other lenders in the business of making loans (known as “institutional lenders”), some financing is done with a private loan usually by either the current owner of the property, through an “owner-carry” arrangement, or by a relative of the buyer.
Certain financial disclosures are required in some private party transactions (a topic addressed by a different article on this website; see Dodd-Frank, Consumer Financial Protection & Owner Financing, but the end result is the same – a lien against the property by the private lender. The private financing could be in first lien position, as in the case of a full owner-carry first lien, or in a more junior position (with the knowledge and approval of an institutional lender in first position, if done as part of a sale).
In cases when the Promissory Note secured by the new lien goes into default, the private lender may be required to bring a foreclosure to enforce that lien. A common question is whether that process differs from foreclosures done by institutional lenders.
Although there are a few differences at the outset, most of the foreclosure process is the same regardless of who is foreclosing. Two main differences at the outset relate to notice to the borrower before the foreclosure documents are filed with the Public Trustee’s office. A “holder” is required to give at least thirty days written notice to the borrower of the intent to foreclose, with the phone numbers of the Colorado Foreclosure Hotline and the holder’s loss mitigation department. (“Holder” is defined as a “seller” of more than three loans per year, which definition includes all lenders in the business of making mortgages but excludes most private party lenders.) Even though most private parties are not required to send this notice, some choose to do so anyway, to encourage payment before the lender has to spend funds to start the foreclosure process.
Another written notice required of institutional lenders serves to notify the borrower, no later than the forty-fifth day of delinquency, of a single point of contact or “SPOC,” for the borrower to call. The SPOC is tasked with providing the borrower accurate information about loss mitigation options and deadlines to take advantage of them, and to provide copies of the loan payment history and other documents in furtherance of loss mitigation. This is not a representation that loss mitigation is available in all instances, since some borrowers will not qualify for refinancing or other loss mitigation options. But it usually delays the foreclosure process while the borrower goes through potential loss mitigation efforts. Again, private party lenders are not required to send this notice.
In addition to these two notices, the Promissory Note or Deed of Trust may set out other specific requirements for notice to delinquent borrowers. Most Colorado form Deeds of Trust do not require advance notice prior to foreclosure. If, however, any requirement for specific notice is written into a Promissory Note or Deed of Trust, then whether the lender is institutional or private the lender must comply with those notice provisions as well.
Once all notice requirements are complete then the actual foreclosure process proceeds the same for both institutional or private lenders, with one main difference – an institutional lender usually fits the definition of a “qualified holder” in the Colorado statutes, which means that it does not have to provide the original Promissory Note in order to start the foreclosure. Private party lenders must, however, provide either the original Promissory Note or a Lost Instrument Bond.
A Public Trustee foreclosure begins with the lender filing a Notice of Election and Demand with the Public Trustee, who sets the sale date and sends out statutory notices to the borrower and any junior lienholders. The Public Trustee process is simpler and less expensive than a judicial foreclosure – essentially a lawsuit – which is better for the lender but can also serve to benefit the borrower. Since the lender’s attorneys fees and costs are added onto the amount to “cure” the default (which cure would result in withdrawal of the foreclosure), less fees and costs incurred are better for a borrower intending to cure.
In summary, once the required notices are sent, both an institutional lender and a private lender follow the same path through a public trustee foreclosure, to either a cure of the delinquency, payment of the Promissory Note, or eventual ownership of the property. Either type of lender will need legal representation to properly prosecute a Colorado public trustee foreclosure.