July 1, 2009

On April 5, 2009, Governor Pat Quinn signed the Homeowner Protection Act into law, instantly affecting borrowers and lenders in the residential real estate market. The Act attempts to mitigate both the impact of the current economic strain on homeowners and the influx of mortgage foreclosure filings by providing a grace period for defaulting borrowers to develop a payment plan with their lender and the help of a housing counselor

To Whom Does The Act Apply?

The Act applies to residential real estate that is occupied by the borrower as his/her principal residence. Lenders only need to comply with the provisions of the Act when the mortgage they seek to foreclose is secured by the borrower’s principal residence.

What Does The Act Require?

After a borrower becomes 30 days delinquent in their mortgage payment, the Act requires the lender to send a “Grace Period Notice” to the borrower. The statutory notice states that payment on the loan is 30 days overdue, that the borrower has a 30 day grace period to obtain housing counseling, that the 30 day grace period may be extended by an additional 30 days if the borrower obtains housing counseling from an approved housing counseling agency, and that the lender will not take any legal action during the grace period. The notice must also list the Department of Financial
and Professional Regulation’s consumer hotline and website, as well as the lender’s telephone number, fax number and mailing address. The Act’s requirements only apply once per mortgage and cannot be waived by the borrower.

What Should Happen During The Grace Period?

During the grace period, the borrower and housing counselor should prepare a proposed sustainable loan workout plan. The lender has the authority to determine whether to accept the proposed plan. The parties may negotiate all relevant terms, but the lender is under no duty to accept any workout plan. Any agreed upon plan and any modifications thereto must be in writing and signed by both the lender and the borrower. The borrower may change counseling agencies during the grace period, but such a change does not extend the borrower’s grace period.

What Is The Act’s Practical Effect?

All lenders must comply with the requirements of the Act before filing a complaint to foreclose a mortgage secured by the borrower’s primary residence. First, these lenders must wait until the borrower’s loan payment becomes 30 days past due. Then, the lender must send the statutory notice to the borrower, creating a 30 day grace period for the borrower to seek housing counseling. If during that 30 day grace period an approved counseling agency provides written notice to the lender that the borrower is seeking its services, then the grace period extends for an additional 30 days from the date of the notice. During the additional grace period, the borrower and the counseling agency may offer proposed loan workout plans to the lender. However, the Act does not require the lender to accept any workout plan. Rather, it simply provides the borrower with additional time and resources to negotiate a plan with the lender.

If the lender accepts the workout plan, then it may not file a foreclosure action while the borrower complies with the terms of the plan. However, the lender may immediately foreclose the mortgage if the borrower fails to comply with the workout plan. If the lender does not accept the workout plan, then it may file a foreclosure suit as soon as the grace period expires.

All-in-all, the Act provides up to a 90 day grace period for borrowers whose loans are secured by their primary residences to create a loan payment plan that they can afford and the lender can live with. Borrowers should be aware of the additional time and resources this statute provides and use its benefits to avoid foreclosure proceedings on their homes. Lenders should be aware of this statute because it sets up additional hurdles that must be cleared before they can foreclose on mortgages secured by borrowers’ primary residences