ALBUQUERQUE, N.M. — New Mexico has begun warning financial institutions to stop marketing deeds of trust as mortgages because the two are separate legal instruments with significantly different potential consequences for borrowers.
The Attorney General’s Consumer Protection Division last week notified 11 lenders — including some of the nation’s largest banks — that the practice may violate the state’s Unfair Practices Act and the Home Loan Protection Act.
The violations would affect most harshly those borrowers who default on their home loans but could also significantly impact people transferring home loans in divorce proceedings, following deaths, or in quit-claiming residences.
A mortgage lien, the traditional instrument used in most home purchases in New Mexico in the past, gives a lender the legal protection to foreclose on a loan in the event a borrower should default, said Assistant Attorney General Karen Meyers. But the law also provides due process for the borrower, requiring judicial approval of all foreclosure sales.
Additionally, although most homeowners need mortgages to buy a home and pay off their loans, usually over 15 or 30 years, a mortgage allows the borrower to assume title to a property. A deed of trust may not.
In 2006, lenders convinced the Legislature to include mortgages in the Deed of Trust Act — which is ambiguous on whether judicial approval is required for a foreclosure sale — a mandate that is written into the Home Loan Protection Act.
With the change, instead of a traditional mortgage foreclosure sale overseen by a judge, the revised law authorizes a trustee sale for loans secured under a deed of trust. The law isn’t clear on whether a judge’s involvement is required. The change provided lenders with much more discretion and borrowers with far less due process, Meyers said.
In 2009, advocates for homeowners convinced state lawmakers to strengthen the Home Loan Protection Act to assure judicial involvement in all mortgage foreclosures. Prior to that, only high cost loans were included.
The 11 lenders notified by the AG’s Office have continued to market products as mortgages even when, in fact, they have been issuing deeds of trust, according to Meyers and fellow Assistant Attorney General David Kramer.
“It is apparent … that the wholesale use of deeds of trusts in lieu of mortgage instruments to secure home loans is intended to modify and abrogate the protections afforded a homeowner by the judicial foreclosure process and the Home Loan Protection Act,” the letter to the 11 lenders states.
The lenders under investigation are the First Mortgage Co., New Mexico Bank and Trust, Sandia Laboratory Federal Credit Union, New Mexico Educators Federal Credit Union, Peoples Bank, JP Morgan Chase Bank, Wells Fargo, Quicken Loans, BOKF Bank of Albuquerque, Bank of America and USAA Federal Savings Bank.
They were advised that the Attorney General’s Office “intends to continue its investigation and seek all appropriate remedies.” However, the letter to the lenders also expressed a willingness to “discuss a pre-litigation agreement to achieve appropriate remedial steps, a comprehensive change of practice and policy, and other appropriate relief.”
The letter offers to meet with the lenders, separately, during the first two weeks of January. So far, Bank of America, Wells Fargo and JP Morgan Chase have expressed a willingness to sit down with the state’s attorneys, Kramer said.