August 2017 Legal Briefs

• “I received guardianship documents…”
• Thoughts on the 120-day foreclosure waiting period

“I received guardianship documents…”

By Pauli D. Loeffler

First things first

Where are the Oklahoma guardianship statutes? Unless indicated otherwise in this article, citations are to Title 30 of the Oklahoma Statutes, which may be accessed at http://www.oscn.net/applications/oscn/Index.asp?ftdb=STOKST30&level=1. This article will concentrate on guardianship of an adult.

What court issued the guardianship order?  If the guardianship came from a state court other than an Oklahoma district court, unless the bank does business in that state (has a branch there or in the case of a Tribal court order has a branch on Tribal land – See July 2017 OBA Legal Briefs re: garnishments for more information), the court lacks jurisdiction over the bank to enforce the order. These statutes, which also govern Oklahoma Tribal Court orders, apply:

§3-317

If a guardian has been appointed in another state and a petition for the appointment of a guardian is not pending in this state, the guardian appointed in the other state, after giving notice to the appointing court of an intent to register, may register the guardianship order in this state by filing as a foreign judgment in a court, in any appropriate county of this state, certified copies of the order and letters of office.

§ 4-601

When a person liable to be put under guardianship, according to the provisions of this chapter, resides without this state, and has estate therein, any friend of such person, or any one interested in his estate, in expectancy or otherwise, may apply to the judge of the district court of any county in which there is any estate of such absent person, for the appointment of a guardian; and if, after notice given to all interested, in such manner as the judge orders, and a full hearing and examination, it appears proper, a guardian for such absent person may be appointed.

What is the definition of guardian?  Guardians must be appointed by a court. §1-106 provides: “The term “guardian” includes persons appointed as general and limited guardians of the person, general and limited guardians of property, and special guardians, but does not include persons appointed as guardians ad litem. The term “ad litem” is Latin and means “for the lawsuit” and is a person appointed by the court solely to represent the interests of another in a legal action. For instance, a guardian ad litem is often appointed for a child in a divorce when custody is contested.

The person for whom a guardian is appointed is known as the “ward.”

Understanding guardianship orders

Useful definitions (§1-111). This section defines terms that are useful for understanding what is going on in a guardianship:

A. As used in the Oklahoma Guardianship and Conservatorship Act:

4. “Estate” means the property of the person whose affairs are subject to a guardianship proceeding…

7. A “guardian of an incapacitated person” means a person who has been appointed by a court to serve as the guardian of an incapacitated person to assure that the essential requirements for the health and safety of said person are met, to manage the estate or financial resources of said person, or both…

12. “Incapacitated person” means a person eighteen (18) years of age or older:

a. who is impaired by reason of:

(1) mental illness… as defined by Title 43A of the Oklahoma Statutes,

(2) mental retardation or developmental disability as defined by Section 1-818.2 of Title 63,

(3) physical illness or disability,

(4) drug or alcohol dependency as defined by Section 3-403 of Title 43A…, or

(5) such other similar cause, and

b. whose ability to receive and evaluate information effectively or to make and to communicate responsible decisions is impaired to such an extent that said person:

(1) lacks the capacity to meet essential requirements for his physical health or safety, or

(2) is unable to manage his financial resources. Whenever in the Oklahoma Statutes the term “incompetent person” appears and refers to a person who has been found by a district court to be an incompetent person… [I]t shall have the same meaning as “incapacitated person” but shall not include a person who is a partially incapacitated person…

16. A “limited guardian” means a person appointed by the court to serve as the guardian of a partially incapacitated person and who is authorized by the court to exercise only:

a. some of the powers of a guardian of the person or whose power as guardian of the person extends only to certain matters pertaining to the care or control of the ward as specified by the court, or

b. certain powers as guardian of the property over the estate or financial resources of the ward, or whose powers as guardian of the property extend only to some portion of the estate or financial resources of the ward…

17. “Manage financial resources” or “manage the estate” means those actions necessary to obtain, administer, and dispose of real property, business property, benefits and income, and to otherwise manage personal financial or business affairs;

22. “Partially incapacitated person” means an incapacitated person whose impairment is only to the extent that without the assistance of a limited guardian said person is unable to:

a. meet the essential requirements for his physical health or safety, or

b. manage all of his financial resources or to engage in all of the activities necessary for the effective management of his financial resources. A finding that an individual is a partially incapacitated person shall not constitute a finding of legal incompetence. A partially incapacitated person shall be legally competent in all areas other than the area or areas specified by the court in its dispositional or subsequent orders. Such person shall retain all legal rights and abilities other than those expressly limited or curtailed in said orders…

25. “Property” means real property, personal property, income, any interest in such real or personal property and includes anything that may be the subject of ownership;

26. “Restrictions on the legal capacity of a person to act in his own behalf” means powers of an incapacitated or partially incapacitated person which are assigned to a guardian…

Powers of the guardian. §1-119 provides: “A guardian has only those powers over the person or the property of the ward, or both such person and property, as ordered by the court…” As far as the bank is concerned, you will need to ascertain: 1) The type of guardian (general, limited or special); 2) whether the guardian is over the person, the property or both; and 3) if the ward is “partially incapacitated,” the extent to which the ward may act on his or her own.

What type of guardian do you have? §1-108 states:

Guardians are either:

1. General;

2. Limited; or

3. Special.

Under §1-109, a general guardian is one who is the guardian of the person, or ALL the property of the ward within the state of Oklahoma, or of both the person and property of the ward (the court order will say which).

A limited guardian is one who is authorized by the court to exercise limited powers over the person of the ward or over the property of the ward within the state of Oklahoma or both the person and property. Sometimes, multiple guardians are appointed, each with limited powers. I remember a guardianship with four siblings as coguardians. One had authority to make health care decisions, another had authority to make home and living decisions, the third sibling had authority to manage the business of the ward, and the fourth had authority to manage financial resources. Fortunately, this is not the norm. It is not uncommon for coguardians to be appointed but usually it is without specific duties assigned. I will cover how to handle the situation where more than one guardian is appointed by the court.

What is a special guardian? Bankers tend to, for want of a better word, “freak-out” when they see the term “special guardian.” Pursuant to §1-110, a special guardian may be appointed by the court pursuant to §3-115. A special guardian is one that is appointed for a person whose health or safety or financial resources will be seriously damaged unless immediate action is taken, and no person appears to have authority to act or a guardian previously appointed is unable to or refuses to act. The special guardian is appointed for a period not exceeding 30 days, and a subsequent hearing will be scheduled for a date within the time period. A petition to appoint a special guardian may also contain a request for appointment of a general or limited guardian, or this may be done by a separate petition. §3-111 requires the court to determine whether or not it is necessary to appoint a guardian of the person, property or both, as well as the nature and extent of any incapacity of the ward (see below).

When the ward is determined to be a “partially incapacitated person.”  If the court determines the ward is “partially incapacitated,” the guardianship type will always be a limited guardianship with regard to powers. §3-113 requires the court to state the specific limitations imposed upon the ward, including, but not limited to, appointment of an agent (signer on an account or appointment of an attorney-in-fact under a POA/DPOA, enter into contracts, execute deeds, mortgages, and releases, make gifts of property, drive a vehicle, maintain a professional license, vote, be a juror, etc. You will need to see a certified copy of the court’s order in order to know what acts the ward is considered competent to perform.

When the ward is an “incapacitated person.” If the ward is determined to be an “incapacitated person,” the court has determined the person to be legally incompetent. This means the ward cannot: a) write or indorse checks, make withdrawals using a debit card, authorize a telephone check, opt-in for ODP, add, remove or change PODs or authorized signers, b) obtain, extend, renew or modify a loan, or c) enter into a lease or renew a safe deposit box lease or even enter the box without the guardian’s consent. If the bank receives a guardianship order for an incapacitated person, the bank MUST flag all accounts, etc. While it is up to the guardian whether s/he wishes to close current accounts or have them restyled under the guardianship, I would want to advise the guardian that if there is any chance the ward might get access to checks on the current account or use the information to make purchases using the account information, it is advisable to close the current account and open a new one.

If the ward is an incapacitated person and is the trustee of a trust, the court order effectively removes her/him from acting as trustee. The determination does NOT, however, trump the provisions of the trust with regard to who is the successor trustee, i.e., the provisions of the trust are still effective. The guardian will not become the successor trustee of an existing trust unless s/he is named as such in the trust or the court provides a specific order to that effect. Rather, the successor trustee will step up, and the guardian will have to work with the named successor.

Similarly, if a rep payee for Social Security or federal fiduciary for VA benefits is someone other than the guardian, the guardian will either have to work with the rep payee or federal fiduciary or be approved as the rep payee or federal fiduciary. Since neither the SSA nor VA allows commingling of funds with other funds of the beneficiary, the guardian would need to receive the approval of these organizations before these funds could be directly deposited into a guardianship account. Otherwise, the guardian will need to set up separate rep payee and/or federal fiduciary account to receive the deposits. The guardian must account to the court for all funds received by the ward and for funds paid on behalf of the ward. S/he will also have to report to SSA or VA relative to funds received from these organizations even if commingling in a guardianship account is approved.

If prior to the determination of incapacity by the court, the ward has named one or more POD beneficiaries, it is perfectly fine for the POD designations to remain on the current account subject to the guardian’s control or be carried over to a new guardianship account if one is needed. As far as changing prior POD designations or adding PODs to an account having none, this is NOT a power granted to the guardian and would require a specific order of the court. I have seen this allowed by courts on occasion. I also have seen court orders allowing the guardian to set up a trust to avoid probate proceedings.

The appointment of a guardian for an incapacitated ward does NOT automatically trump a durable power of attorney pursuant to Tit. 58 O.S. §1074. Under this statute, the guardian, who is considered to stand in the shoes of the ward, may revoke the DPOA or allow the attorney-in-fact to continue to act. On the other hand, the guardian CANNOT appoint an authorized signer on a guardianship account without order of the court. A guardian is a fiduciary and a fiduciary cannot delegate his/her duty without either a court order or statutory authority. Additionally, the guardian is entitled to have ALL information the ward would be entitled to obtain, so a guardian over property would be entitled to information regarding deposit accounts, loans, safe deposit boxes, retirement accounts as well as business accounts, including information on activity prior to the date of appointment.

A guardian of the property of the ward cannot sell or encumber real estate of the ward without authorization of the court.

Coguardians.  Quite often more than one guardian is appointed by the court over the person or property or both. The order will not state that each may act independently because §4-502 takes care of the problem:

A. If there are two guardians who are residents of this state, the act of one alone shall be effectual:

1. If a coguardian is laboring under any legal disability from serving, said coguardian in such case shall be relieved from official liability; provided however, proper finding and valid order of the district court having jurisdiction therein is first obtained; or

2. If a coguardian has given the other coguardian authority in writing to act for both.

B. If there are more than two guardians, the act of a majority of them is valid.

It is recommended that each coguardian execute a document giving the other coguardians the authority to act with “or” between their names. A template granting authority can be downloaded here.

Thoughts on the 120-day foreclosure waiting period

By John S Burnett

One of the most often discussed requirements in the CFPB’s 2013 Servicing Rule is the prohibition in section 1024.41(f) on foreclosure referral. Under that provision, a servicer is not permitted to make the first notice or filing required by state law for a judicial or non-judicial foreclosure process except under three circumstances:

1. The borrower’s mortgage loan obligation is more than 120 days delinquent;

2. The foreclosure is based on a borrower’s violation of a due-on-sale clause; or

3. The servicer is joining the foreclosure action of a subordinate lienholder (as of October 19, 2017, “subordinate” is changed to “superior or subordinate”).

What mortgage loans are subject to the limitation? Section 1024.30(c), which defines the scope of sections in subpart C (Mortgage Servicing) of Regulation X, tells us that section 1024.41 applies to mortgage loans secured by a property that is a borrower’s principal residence.

Accordingly, if the loan in question is not secured by the borrower’s principal residence, it’s not protected by the 120-day waiting period before foreclosure can be initiated.

Are HELOCs covered by the rule? The term “mortgage loan” is defined, for the purposes of subpart C, in section 1024.31: “Mortgage loan means any federally related mortgage loan, as that term is defined in § 1024.2 subject to the exemptions in § 1024.5(b), but does not include open-end lines of credit (home equity plans).”

A loan that’s not subject to Regulation X, such as a loan secured by personal property and not by real estate, or a loan primarily for a business, commercial or agricultural purpose, etc., or an open-end real-estate-secured line of credit would not meet the “mortgage loan” definition for subpart C and would not be covered by the 120-day waiting period requirement.

When does a borrower’s mortgage loan obligation become more than 120 days delinquent? This is the big question for which there has, until now, been no definitive answer. Why? Because, believe it or not, there is currently no single definition of “delinquency.” There is comment 39(a)-1, which explains when delinquency begins for the purposes of the early intervention requirements of section 1024.39, but there’s no cross-reference to that comment in section 1024.41(f).

When the servicing rules were published in 2013, the absence of a Regulation X definition of “delinquent” or “delinquency” was noted, and servicers questioned how they should determine that a mortgage loan is 120 days delinquent. There were two schools of thought.

The more aggressive theory was that “delinquency” is a status that a loan enters the day after a periodic loan payment has become due and fails to be paid, and continues until the loan is brought current. Under this theory, the length of delinquency is calculated from the date when delinquency began, and the date delinquency began doesn’t change while the account remains delinquent.

The more conservative theory was different in that the date delinquency began gets advanced if one or more past-due periodic payments are satisfied.

The more conservative approach is more protective of the borrower, since the borrower’s mortgage loan obligation could remain continuously delinquent but never more than 120 days past due (because the borrower manages to make the monthly payment but never catches up completely); the servicer could never initiate foreclosure proceedings.

Servicing Rule amendments

The Bureau’s amendments to the Servicing Rule, published on October 19, 2016, become effective in two stages. In the first set of changes, effective October 19, 2017, a definition of delinquency and explanatory comments are added to section 1024.31.

Delinquency will be defined as “a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. A borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid.”

A literal reading of that definition could lead you to believe that the “more aggressive theory” described earlier is correct. However, you should not rely on any definition (or any other provision) in a consumer regulation unless you have also read the Official Interpretation(s) of the regulatory text. In this case, the “length of delinquency” is critical to the first exception to the prohibition on initiation of foreclosure proceedings on a consumer’s principal residence, the exception that’s available if the borrower’s mortgage loan obligation is more than 120 days delinquent.

Comment 1 to the definition of delinquency in § 1024.31, also added as of October 19, 2017, says this:

1. Length of delinquency. A borrower’s delinquency begins on the date an amount sufficient to cover a periodic payment of principal, interest, and, if applicable, escrow becomes due and unpaid, and lasts until such time as no periodic payment is due and unpaid, even if the borrower is afforded a period after the due date to pay before the servicer assesses a late fee.

That doesn’t add much information other than the fact that any “grace period” before a late charge is imposed does not affect the date on which delinquency starts. For example, if a borrower’s monthly periodic payment is due on the first day of each month, and the borrower fails to make the August 1, 2017, payment on or before August1, the borrower’s mortgage loan obligation is delinquent one day beginning on August 2, even if a late charge won’t be added unless the payment remains past due on August 17 (the day after a 15-day grace period).

Comment 2 to the definition of delinquency, however, can affect the date that delinquency starts. Here’s what it says:

2. Application of funds. If a servicer applies payments to the oldest outstanding periodic payment, a payment by a delinquent borrower advances the date the borrower’s delinquency began. For example, assume a borrower’s mortgage loan obligation provides that a periodic payment sufficient to cover principal, interest, and escrow is due on the first of each month. The borrower fails to make a payment on January 1 or on any day in January, and on January 31 the borrower is 30 days delinquent. On February 3, the borrower makes a periodic payment. The servicer applies the payment it received on February 3 to the outstanding January payment. On February 4, the borrower is three days delinquent.

That comment is important if the servicer applies payments first to the oldest outstanding payment, then to the next outstanding payment, etc. If each periodic payment that the borrower satisfies bumps the date the borrower’s delinquency began, the “more conservative” approach described earlier will apply, and a borrower can, by making one periodic payment each month, remain on the servicer’s 30, 60 or 90-days past due list, never becoming 120 days or more past due, and the borrower doesn’t risk foreclosure unless one of the other exceptions (remember, there are three exceptions to the prohibition, any one of which lifts the prohibition).

There are two other comments to the “delinquency” definition. Comment 3 deals with application of short payments:

3. Payment tolerance. For any given billing cycle for which a borrower’s payment is less than the periodic payment due, if a servicer chooses not to treat a borrower as delinquent for purposes of any section of subpart C, that borrower is not delinquent as defined in § 1024.31.

If a servicer has a policy that treats a borrower as current if the most recent periodic payment is within some tolerance amount or percentage for any purpose under the servicing requirements in subpart C of Regulation X – e.g., the borrower is treated as current if the borrower is “short” by no more than $10 – the borrower can’t be considered delinquent under the definition in § 1026.31. That, of course, affects when the servicer can start counting the number of days the obligation is delinquent.

And finally, the fourth comment to the “delinquency” definition—

4. Creditor’s contract rights. This subpart does not prevent a creditor from exercising a right provided by a mortgage loan contract to accelerate payment for a breach of that contract. Failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency.

That comment makes it clear that the new definition and the other comments aren’t interpreted to prevent a creditor from exercising a right to accelerate payment for a breach of the mortgage loan contract. If the contract gives the creditor the right to accelerate – e.g., if the mortgage contract gives the creditor the right to accelerate the payment of the balance of the mortgage if the borrower fails to make timely payments, or fails to pay property taxes or maintain adequate property insurance – the “delinquency” definition doesn’t affect those rights to accelerate. The creditor can exercise the right to accelerate and, if the borrower doesn’t meet any “cure” requirement in the notice of acceleration (the “cure” requirement is less than the amount of the fully accelerated loan balance and interest) by the date required in the notice, the obligation becomes delinquent and, since the lender can refuse to accept anything less than the required “cure” payment, the borrower can’t “bump” the date of delinquency by making contractual periodic payments.

One more thought on the 120-day rule

As we noted at the beginning of this article, this rule applies to extensions of consumer credit secured by real estate that is the borrower’s principal residence. Does the rule continue to apply when the real estate is no longer the borrower’s principal residence? Until the amendments were finalized, the regulation was silent on that question, and servicers and creditors were left to weigh the risks of ignoring the 120-day rule when they believed the borrower had “quit the premises.”

To help sort out the issues on this question (although not completely, as we will see), the Bureau included in its October 19, 2017, amendments another Official Interpretation in new comment 30(c)(2)-1 to the scope statement in § 1024.30(c)(2) that “The procedures set forth in §§ 1024.39 through 41 of this subpart apply to a mortgage loan that is secured by a property that is a borrower’s principal residence.” The comment says—

1. Principal residence. If a property ceases to be a borrower’s principal residence, the procedures set forth in §§ 1024.39 through 1024.41 do not apply to a mortgage loan secured by that property. Determination of principal residence status will depend on the specific facts and circumstances regarding the property and applicable State law. For example, a vacant property may still be a borrower’s principal residence.

As is often the case, when one question is resolved, another takes its place. The comment makes it very clear that if the property is no longer a borrower’s principal residence, the 120-day delinquency rule no longer applies. But the last two sentences of the comment leave us scratching our heads. Clearly, we still have to be concerned with state law if it has anything to say on when real estate ceases to be a borrower’s principal residence.

Servicers also must be aware of any other specific facts and circumstances before going ahead with a foreclosure. We are also reminded in plain language that vacancy isn’t an absolute test of principal residency. One example of such a situation is the servicemember who is ordered overseas for an extended period. Even if the servicemember rents out her principal residence during her absence, she is entitled to treat it as her principal residence until she establishes another principal residence, maintaining her voter registration, driver’s license, etc., during her absence. The “specific facts and circumstances” of that situation would create a major problem for the servicer that started foreclosure before the end of the 120-day waiting period believing that the property was no longer the borrower’s principal residence.

Accordingly, although we will have the benefit of the comment concerning applicability of the rule once the property is no longer a borrower’s principal residence, servicers should carefully gather facts concerning the borrower’s and the real estate’s status and consult with legal counsel before treating the property as other than a principal residence protected by § 1026.41.