Banks Look to End Already Anemic Virginia Protections for Consumers Facing Mortgage Foreclosures

by Kristi C. Kelly, Kelly Guzzo, PLC[1]; Leonard A. Bennett, Consumer Litigation Associates, P.C.[2]

As Democrats celebrate the opportunity to support progressive change in so many important areas, one seems to remain more elusive – consumer protections that are a cornerstone of Democratic issues and advocacy outside Virginia. As advocates for ordinary and economically vulnerable Virginia consumers have been laser-focused against predatory lending legislation, the banks and their supporters have slipped by an extraordinary proposal designed to end – entirely end –the already anemic protections Virginia has for consumers facing mortgage foreclosures. House Bill 1391 and Senate Bill 253, each with a lone Republican Patron, were described as simple attempts to “clarify” the law and reverse a 2018 Virginia Supreme Court decision restating that the collection lawyers paid by the banks to foreclose on homes had to operate honestly, fairly and impartially.

In the Senate, the debate occurred when SB253 came to the floor with Senators Chap Peterson and John Edwards rallying their fellow Democrats on a largely party-line vote to amend the bill in order to preserve the protections then available “under Virginia law.”

While initially succeeding, Democratic Senators Monty Mason, Dick Saslaw and Lynwood Lewis later joined a motion to reconsider made by their Republican colleagues and killed the Democratic amendment.  In the House, HB1391 came and passed before consumer advocates and Legal Aid voices knew it was an issue, with Delegates Vivian Watts, Patrick Hope, Jennifer Carroll Foy, and others rightly (but unsuccessfully) opposing the Bankers’ Bill.

Here is the issue: Virginia is a “non-judicial” foreclosure state.  That means that a bank can sell your home on the courthouse steps without ever going in to that courthouse. By the time a home mortgage gets to foreclosure, the bank will already have assigned the loan’s collection to one of a handful of foreclosure mills that process hundreds or even thousands of foreclosures at a time. Virginia’s statute allows the bank’s “Trustee” to take ownership of your home and sell it so long as it gives the debtor 14 days mailed notice and advertises the sale twice by running a small advertisement in the back of a (usually unknown) “newspaper.”  That is the extent of the consumer’s material protections within Virginia’s statute.

The only real protection that exists for consumer borrowers is not in the Deed of Trust documents drafted by the lender or in the foreclosure statute itself.  Instead, for over a century, these have been recognized in Virginia’s “common law.”

When the bank appoints a collection “Trustee,” that person or company is currently required to act “impartially” to protect the interests of both sides – the foreclosing bank and the consumer borrower at risk of losing a home.

The facts in the Crosby v. ALG Trustee Virginia Supreme Court decision the banks and their legislative allies seek to overturn were remarkable.  Only $18,313 was owed on a property worth $436,000, and the bank’s Trustee sold it for just $20,000 – enough only for the bank and Trustee’s fee.  The Court obviously found that there were indicia of fraud.  Crosby summarized several existing consumer protections under this duty of impartiality that should seem unremarkable:

• A foreclosure Trustee cannot self-deal, such as purchasing the property himself.
• The Trustee must respond to borrower inquiries requesting a payoff.
• If the Trustee objectively knows that the sale has failed to garner actual and real bidders, with indicia of fraud, such like in Crosby to receive just $20,000 for a $436,000 house (5% of the home’s value), the Trustee should re-notice and better conduct that sale.
• If alerted to material defects in the sale, such as collusion by buyers designed to drive down the bid price, or obvious problems such as the lack of any competitive bids, the Trustee cannot proceed with the sale.
• The Trustee cannot send related vendor work to companies that provide an after-sale kickback.

The Bankers’ Bill, SB253/HB1391 would end all of these prohibitions and others by gutting the common law fiduciary duty of mortgage Trustees. While the bill’s Republican patrons added a sentence recognizing a Trustee’s duty to both debtor and creditor, the bill makes that language irrelevant when it explicitly states that that duty is not violated if the for-profit Trustee complies with the ministerial provisions in the foreclosure statute “Article” (the two postage-stamp sized ads in a remote newspaper), none of which are the source of the actual protections derived from that duty.

Both the Senate Judiciary Committee and the House Courts of Justice Committee have a second chance to do the right thing for Virginia homeowners and consumers – voting down these really horrible bills and preserving the already limited protections their homeowner constituents have.

[1] Co-founder of Foreclosure Assistance Program, Legal Services of Northern Virginia; Co-Recipient Virginia State Bar Pro-Bono Law Firm, 2019; Board of Directors for the Legal Aid Justice Center and National Association of Consumer Advocates; Partner’s Council of the National Consumer Law Center.

[2] National Consumer Lawyer of the Year, 2017; Co-Recipient Virginia State Bar Pro-Bono Law Firm, 2019; Board of Directors, Public Justice; Partners Council National Consumer Law Center.