SB 201: Illinois Code of Civil Procedure – Mortgage Foreclosure Article
Background on Proposal
Per Section 15-1503 of the Code of Civil Procedure, a notice of foreclosure recorded by the credit union’s attorney in the county in which the mortgaged real estate is located is constructive notice of the pendency of the foreclosure to every person claiming an interest in or lien on the mortgaged real estate, whose interest or lien was not recorded prior to the recording of the credit union’s notice of foreclosure. A Section 15-1503 notice which complies with this section of the foreclosure law is deemed to comply with the separate section of the Code of Civil Procedure addressing the filing of lis pendens notices (Section 2-1901).
Prior to the passage of SB 201, the credit union’s attorney filing a foreclosure case with respect to residential real estate was required to send a copy of the Section 15-1503 notice to the municipality in which the mortgaged real estate was located (or the county in which it was located if it was in unincorporated territory). Beyond that, per the demands of former House Speaker Michael Madigan, Section 15-1503 also required the credit union’s attorney to send the notice to the alderperson for the ward in which the real estate was located, if it was located in a city with a population of more than 2,000,000 (i.e., Chicago). If the credit union failed to send the notice to the alderperson and file an affidavit that the notice was sent to the alderperson, then the credit union’s foreclosure case was stayed on a motion of a party (e.g., the debtor) or the court. The credit union’s attorney was then required to send the notice to the alderperson and provide proof of delivery to the court, to get the stay of the proceeding lifted.
Needless to say, the notification requirements added additional process and burden to the credit union’s attorney, which could translate into additional expense for the credit union to foreclose its mortgage. And the delivery of the notice of foreclosure to cities, counties and alderpersons in Chicago was meaningless, since those entities and persons had no interest in the particular case. The “gotcha” stay of proceedings only added additional time to what is already a very time-consuming and costly process that benefited neither the lender, borrower nor any municipality or county.
SB 201 repeals all the municipality, county and aldermanic notification requirements. This will enable attorneys representing credit unions in foreclosure cases to more expeditiously prosecute the foreclosure case and avoid the tripwire of being challenged by the debtor or the court on the adequacy of service of the notice on parties that have no interest in the proceeding. SB 201 also addresses the sealing of mortgage foreclosure court files pertaining to residential real estate and real estate improved with 6 or fewer dwelling units (if the mortgagor is a natural person landlord, even if he or she does not occupy any of the units). The court may only seal the file upon motion of the mortgagor, if the foreclosure action was filed during the COVID-19 emergency and economic recovery period (defined by the bill as the period from 3/9/2020 through 12/31/2021), and was not subject to the moratoria enacted by Fannie Mae, Freddie Mac, FHA or the Department of Veteran Affairs. If the action was filed during the COVID-19 emergency period because it qualified under an exception to any of the moratoria, it may not be sealed.
HB 2717: Illinois Mortgage Escrow Account Act
Background on Proposal
The Illinois Mortgage Escrow Account Act (765 ILCS 910/1 et seq.) sets forth standards applicable to escrow accounts established in conjunction with mortgage agreements for single-family owner-occupied residential property. The Act provides that when such a mortgage is reduced to 65% of its original amount by timely payments made by the borrower and the borrower is not otherwise in default, the mortgage lender must notify the borrower that he or she may terminate the escrow account.
On the other hand, Regulation Z sets forth different standards concerning escrow accounts for higher-priced mortgage loans (HPML) (12 CFR Section 1026.35). A HPML is a closed-end consumer credit transaction secured by the consumer’s principal dwelling with an annual percentage rate that exceeds the average prime offer rate (as published by the CFPB) for a comparable transaction as of the date the interest rate is set by 1.5% or more for loans secured by a first lien for loans that do not exceed the maximum principal obligation limit eligible for purchase by Freddie Mac; by 2.5% or more for loans secured by a first lien for loans that do exceed the maximum principal obligation limit eligible for purchase by Freddie Mac; or by 3.5% or more for loans secured by a subordinate lien.
Subject to certain exemptions, Reg. Z provides that a creditor may not extend a HPML secured by a first lien on a consumer’s dwelling, unless an escrow account is established for the payment of property taxes and premiums for mortgage-related insurance required by the creditor. Reg. Z goes on to limit the ability of the creditor to cancel an escrow account per the borrower’s request, based upon different thresholds than what are set forth in the Illinois Mortgage Escrow Account Act. Specifically, Reg Z requires the escrow account to be maintained for at least 5 years after consummation of the loan transaction. After that period has elapsed, the borrower may request cancellation of the escrow account if the unpaid balance is less than 80% of the original value of the mortgaged property and he or she is not in default on the loan.
The conflict between the state and federal standards requires lenders to modify their escrow notifications for Illinois borrowers with HPMLs. In turn, those revised notices create confusion for homeowners.
HB 2717 addresses the conflict by inserting a “deemer” clause in the Illinois Mortgage Escrow Account Act. As amended, the Act now provides that notwithstanding the state law requirements, a mortgage lender that complies with the Reg. Z escrow account requirements for HPMLs is deemed to be in compliance with the state Act. It goes on to provide that the borrower shall not have the right to terminate the escrow arrangement on his or her HPML, unless he or she has met all the conditions for cancellation set for in Reg. Z.
HB 3314: Illinois Consumer Reciprocal Attorney’s Fees Act (New)
Background on Proposal
HB 3314 was a consumer advocacy initiative filed to establish a new act called the “Consumer Reciprocal Attorney’s Fees Act” (Act). The measure was designed to effectively amend existing consumer loan agreements to address the issue of recovery of attorneys’ fees in collection cases. In so doing, it violated constitutional standards relating to the impairment of contract. It also breached the commitment struck in 2020 between consumer advocacy groups and associations representing lenders, including the Illinois Credit Union League, to make certain changes in the Code of Civil Procedure relating to consumer debt judgment collections in exchange for a 5-year “stand still period” on further attempts to revise statutory collection standards.
Opposition to HB 3314 as Filed
Credit unions and banks support a well-balanced approach to the collection of loans in default. They have a long track record of collaborating with consumer advocacy groups to ensure debtors have adequate resources to meet their needs, while they fulfill their personal responsibility of repaying their contractual obligations. However, the League and its financial institution association colleagues strongly opposed HB 3314 as filed for the following reasons:
(1) Consumer loan agreements (defined as “consumer contracts” in the Act) typically provide that in the event of default the borrower will pay all fees and costs of collection. The lender has performed its end of the deal by advancing the loan proceeds. The borrower then has the contractual responsibility to repay the loan per its terms. If he or she fails to do so, the default provisions are activated to help the lender avoid a loss loan write down. The measure interjects a term not negotiated when the loan was originated that may increase charge-offs. Charge-offs impact the capital strength of the financial institution and raise regulatory red flags.
(2) The measure authorizes the debtor to recover attorney’s fees if he or she “prevails” in an action to enforce the agreement. Not only does this generate an ex post facto impact by applying to loan agreements existing before its enactment, but it is contrary to Article I, Section 10 of the U.S. Constitution that prohibits that passage of laws impairing contracts. Section 20 of the bill appears to pay homage to the constitutional standard, but the reference is NOT to the subject consumer contract. Rather, it ambiguously references the preservation of the right to recover attorney’s fees under OTHER contracts. This confirms the intent is, in fact, to impair the rights of lenders to recover attorney’s fees established under the terms of their consumer contracts.
(3) It breaches the good faith agreement negotiated with Representative Guzzardi, consumer advocacy groups and creditors in 2019 with the passage into law of HB 88 (P.A. 101-0168, effective 01/01/2020). In exchange for the statutory establishment of a new category of judgments defined as “consumer debt judgments” and the reduction in the post-judgment interest rate and the revival period applicable to those judgments, the agreement provided that no other restraints on collection remedies would be pursued for a 5-year standstill period. The applicability of the Act to actions on consumer contracts as defined in HB 3314 (amounts allowable for a small claim action – i.e., $10,000) fits within the definitional standard for recovery of interest on a consumer debt judgment ($25,000 or less).
(4) The ambiguous reference to “prevails” gives attorneys for borrowers a statutory bargaining chip to argue the lender should compromise its claim to recover the full balance due under the loan agreement.
(5) It generates the unintended consequence of tightening up credit for the very borrowers the measure is seeking to help.
Through negotiations with the sponsor and proponents of the measure, the League ended up re-writing HB 3314 in its entirety to effectively eliminate its impact on credit unions. As amended, the measure was passed into law and provides as follows:
(1) It only applies to consumer contracts (contracts in which the money, property or service that is the subject of the transaction is primarily for personal, family or household purposes).
(2) It only applies to consumer contracts that allow for the recovery of attorney’s fees in an action brought by the credit union to enforce the consumer contract.
(3) It only applies to actions filed by the credit union on or after the effective date of the Act (January 1, 2024), with respect to a consumer contract entered into on or after the effective date of the Act, where the principal amount claimed does not exceed the maximum allowable amount for a small claim judgment (currently $10,000).
(4) It only applies if the defendant “prevails” in the action. To “prevail”, (i) judgment must be entered by the court in favor of the defendant; (ii) or a Section 2-619 motion to dismiss the case is filed by the defendant and granted by the court; or (ii) the plaintiff voluntarily dismisses the pending case under Section 2-1009 after a trail date has been set and after the pending case has been previously filed on the same consumer contract and dismissed under Section 2-1009.
(5) It does not apply in any event if the credit union does not request attorney’s fees in its complaint, or if each party to the consumer contract was represented by counsel in the negotiation of the consumer contract.
(6) It does not apply to or limit the rights of credit unions to the recovery of attorney’s fees as authorized under Illinois Credit Union Act Section 46.
So, if the Act applies to a particular credit union collection matter, the court may award attorney’s fees to the defendant if and only if the defendant prevails in the action. As passed into law, the new Act should have little, if any, applicability to efforts by credit unions to collect loans in default.
For further information about items in this L & T Bulletin, please contact ICUL’s Compliance & Advocacy Office: