By: Kael K. Bowling
On June 23, 2018, the Protecting Tenants at Foreclosure Act (PTFA) will go back into effect to offer protection for tenants when their rented property goes into foreclosure.
Congress first passed the PTFA in 2009 in response to the real estate crisis of 2008. The PTFA’s general purpose was to protect certain tenants from being evicted after their landlords lost the tenant-occupied home in foreclosure. As initially drafted, the PTFA was set to terminate at the end of 2012. Pursuant to a subsequent extension, though, the PTFA was repealed without action on December 31, 2014. However, the PTFA was restored by the most recent Dodd-Frank amendments signed into law by President Trump earlier this year. It is vital that lenders understand the PTFA and its impact on foreclosure actions.
The PTFA only applies to “federally-related mortgage loans,” which phrase carries the same definition as given in the Real Estate Settlement Procedures Act of 1974 — more commonly known as “RESPA.” Essentially, “federally-related mortgage loans” are loans secured by a lien on residential real property – including individual condominium or cooperative units — which are made by lenders regulated by or associated with the federal government. Purchasers of property secured by a “federally-related mortgage loan” at foreclosure are subject to the PTFA.
Similarly, the PTFA only protects “bona fide” tenants and tenancies. Under the PTFA, a tenant or tenancy is not “bona fide” if (1) the tenant is the borrower or the borrower’s spouse, child, or parent; (2) the tenancy was not the result of an arms-length transaction; or (3) the tenant is paying substantially less than fair market rent (unless the rent is reduced or subsidized pursuant to applicable law). So, while the PTFA protects tenants from eviction, it also protects lenders and other foreclosure purchasers from certain situations where the borrower may attempt to unfairly remain in possession of the subject property.
The PTFA requires a foreclosure purchaser to provide any bona fide tenant written notice giving them at least 90 days to vacate the premises from the date title is transferred to the foreclosure purchaser. However, bona fide tenants under the PTFA have certain rights afforded to them, and the foreclosure purchaser takes the property subject to such rights. For example, a bona fide tenant who entered into their lease before the foreclosure purchaser took title to the property has the option to remain in the premises until the end of the lease’s term. An important caveat to this rule, though, is that if the foreclosure purchaser has given the 90-day notice and then sells the property to someone who will use the property as their primary residence, the tenant’s right to remain for the lease term extinguishes as of the date of the subsequent sale.
The PTFA is a federal statute that was reenacted without much fanfare. However, this lack of attention does not diminish the PTFA’s importance to mortgage lenders. Our firm would be happy to assist you or your business in navigating the foreclosure process in light of the PTFA’s resurrection.
The information provided above is created the Attorney Kael K. Bowling of Friday, Eldredge & Clark, LLP. Kael is an associate in the firm’s Commercial Litigation and Regulation Practice Group. His practice includes serving as litigation counsel to financial institutions, insurance companies, and other business entities in connection with a broad range of subject matters.
This is not a substitute for legal advice and should be considered for general guidance only. For more information or if you have further questions, please contact one of our attorneys.