August 2009 Legal Briefs

After the Loan: Don’t Lose Your Priority to a Federal Tax Lien

 

Credit Card Act of 2009: Certain Provisions Effective August 20, 2009, Plus Overview of Remaining Provision

 

Home Valuation Code of Conduct: Affects Sale of Residential Mortgage Loans to Fannie Mae and Freddie Mac Beginning May 1, 2009

 

New Notice Required Upon Sale/Transfer of Residential Home Mortgages & Protecting Tenants at Foreclosure Act, Both Effective May 20, 2009

            I hope you will indulge me taking up a portion of our allotted space so I can introduce myself as the newest member of the Oklahoma Bankers Association team. You only get the opportunity to write your first Legal Update once, and I want to make sure that you know that I am here to help meet the legal and compliance needs of our members. 

 

Let me first say that it is a great privilege to be serving as General Counsel to the OBA. Having just started on July 16, 2009, I have already had the pleasure of taking many of your calls and getting to know several of you. I fully understand that I am following in the footsteps of some excellent attorneys who have done a great job in this position. Fortunately, I have been able to speak to my two immediate predecessors in this position, Charles Cheatham and Mary Beth Guard, and they have given me some great insights. Also, OBA members should rejoice with me that our long-time Assistant General Counsel, Pauli Loeffler, is here to continue with her great work, helping with your legal questions.

 

The OBA strives to meet and exceed the needs of our members. The OBA offers an incredible amount of services, including from the legal department. However, as the new guy in town, my goal is only to build upon the strong level of services offered and to expand upon it. In that regard, the introduction of a new General Counsel is not only a wonderful opportunity for me, but also creates a very unique (hopefully rare) opportunity for you to influence the future direction of the legal services you receive from the OBA, by helping to shape my tenure here during its infancy. So, I am asking for your input by way of suggestions on how the legal team can better serve your needs. This may be by way of general suggestions or specific topics that have not been addressed or need to be addressed more clearly. Please take a few moments within the next couple of weeks to think about what it is that you need from the OBA’s legal department. Then send an email or pick up the phone and call me.

 

I have already had a couple of excellent suggestions on helping our members. We are working hard on how to implement these suggestions. Stay tuned here and to the Legal and Compliance portion of oba.com for new services coming. We would also love to hear from you if there are particular subjects that a half-day or full day seminar may assist our members. In the meantime, keep those calls and emails coming with your everyday concerns legal issues. Pauli and I are awaiting your call. 

 

 

The Short Version: If you make subsequent advances on existing lines of credit or have loans that are secured by after-acquired collateral, you must do periodic checks for the filing of any federal tax liens, or risk losing priority in your collateral to a federal tax lien, even one that is filed after your loan closes.

 

          Did you know that even if you have a valid security agreement, have adequately described your collateral and have filed your financing statement and are “first in time” to file, you can still lose your priority to a federal tax lien, even one that is filed after you close on your loan? This risk exists because under the Federal Tax Lien Act (“FTLA”), although a federal tax lien will generally be subject to the principal of “first in time, first in right,” there are exceptions that can cause lenders to lose their priority.

 

 

You may say to yourself, “I have a perfected security interest in my collateral and I’m first to file. The Uniform Commercial Code (UCC) says I have priority over competing interests in the same collateral. I win, right?” Although you would often be correct, it may not always be the case. Federal law controls the priority of federal tax liens over competing interests. As described below, in most instances, the FTLA abides by the principal of “first in time, first in right.” However, where the FTLA provides that a federal tax lien will have priority over another interest, the FTLA trumps state law.

 

 

          Internal Revenue Code (“I.R.C.”) § 6323(b) lists ten categories of property or liens for which a federal tax lien will not take priority, even if the tax lien is filed of record. However, in each case it is important to note that the tax lien will still have priority if a purchaser or secured creditor had actual notice or knowledge of the federal lien at the time of purchase or gaining a security interest. These categories include (1) as against purchasers or holders of a security interest in SECURITIES, (2) as against purchasers of MOTOR VEHICLES, (3) as against purchasers of tangible PERSONAL PROPERTY AT RETAIL, (4) as against purchasers of PERSONAL PROPERTY IN CASUAL SALE for less than $1,000 (e.g., garage sale/classified ad purchasers); (5) as against security holder holding PERSONAL PROPERTY SUBJECT TO POSSESSORY LIEN; (6) as against REAL PROPERTY TAX OR SPECIAL ASSESSMENT LIENS assessed by the United States or any State; (7) as against MECHANICS/MATERIALMAN LIENS on residential property of not more than $5,000; (8) as against ATTORNEY’S LIENS; (9) as against insurance companies with respect to LIFE INSURANCE, ENDOWMENT OR ANNUITY CONTRACTS, and (10) as against DEPOSIT-SECURED LOANS.

 

 

          I.R.C. § 6323(a) provides the general rule that the holder of a security interest will prevail against any federal tax lien until such time as the federal lien has been filed. That is the good news. The bad news is that where § 6323(a) giveth, § 6323(c) taketh away. The end result is that lenders risk losing their priority to a federal tax lien if they are either (i) relying on after acquired property as collateral (e.g., inventory or accounts receivable) or (ii) make subsequent advances upon a line of credit.

 

After acquired collateral – The federal tax lien will attach to collateral that comes into existence after 45 days of the filing of the federal tax lien. By way of example, suppose your collateral includes a retailer’s inventory, which of course, will be resold and replaced with new inventory. To the extent such inventory is acquired by the borrower 45 days after the filing of a tax lien, you will lose priority to the federal tax lien. This provision should give any lender pause before issuing loans where the only or a large portion of the collateral is comprised of after-acquired collateral, including inventory and accounts receivable.

 

Loan advances – The federal tax lien will take priority over your secured lien to the extent you make non-mandatory loan advances under a line of credit. For example, suppose you close on a $1 million line of credit, secured by fixtures and equipment worth $1 million. You make a distribution at closing of $250,000. Ninety days later, your borrower requests an additional advance of $500,000. If you make that advance more than 45 days after the filing of a federal tax lien, you will lose priority to the federal tax lien on the collateral as it relates to the $500,000 advance. There are a couple of exceptions to this result for real property construction or improvement financing (including crop and livestock financing) and for obligatory disbursement agreements, such as irrevocable letters of credit or surety bonds for project completion.

 

What should you do? – In all cases, before making a loan, you should be checking to make sure that there is not a federal tax lien that may affect your collateral (See discussion of where to check, below). If a federal tax lien is already filed, the tax lien WILL take priority over your security interest. In addition, lenders must be extremely vigilant in protecting their rights, even after the loan, when the loan is secured by after-acquired collateral or where lenders make subsequent advances.

 

          Loans Secured by After-Acquired Collateral – For loans that are substantially or completely secured by after-acquired collateral, lenders should set up a program to search for tax liens on a regular basis, such as every thirty days. If a federal tax lien is filed, it puts the secured creditor in a very difficult situation. Upon the earlier of the discovery of the lien or 45 days following the filing of the lien, the lender will lose priority relating to collateral acquired by the debtor. In this scenario, the secured party must be prepared to declare the borrower in default (assuming the loan documents allow), accelerate the note and take immediate steps to protect its interest in the existing collateral. This is not an appealing scenario for anyone, but the alternative is to risk the debtor defaulting and not having any collateral to attach.

 

          Subsequent loan advances – Likewise, when a secured party who is asked to make an advance on an existing loan (other than real property construction or improvement financing and obligatory disbursement agreements described above), the secured party must be prepared to re-check for the filing of a federal tax lien. If no lien is filed and you are not otherwise made aware of a tax lien, you will maintain your priority in your collateral. What if, however, you discover that a federal tax lien was filed 7 days ago? Can you go ahead and make an advance, since you are within 45 days of the filing of the lien? NO! Now you have actual knowledge of the tax lien filing, and you will not be protected from the tax lien’s priority.

 

 

          Pursuant to I.R.C. § 6323(f), a federal tax lien is to be filed as designated by the laws of the state for which the lien applies. Oklahoma has adopted the Uniform Federal Lien Registration Act, at 68 Okla. Stat. §§ 3401 – 3407. Under this act, federal tax liens are to be filed as follows:

 

          Liens on Real Property – 68 Okla. Stat. § 3403(B) provides that federal liens on real property are to be filed with the county clerk in the county where the property is located.

 

          Liens on Personal Property – 68 Okla. Stat. § 3403(C) governs filings against personal property. It provides that liens against corporations or partnerships whose principal executive office is within Oklahoma, as well as trusts and the estates of decedents, filing is with the county clerk of Oklahoma County. In all other cases, including individuals, filing is to be with the county clerk of the county where the person resides at the time of the filing of the lien. NOTE: Whether it relates to the principal office of a business or a personal residence, the place for filing a federal tax lien may differ from where it would have been at the time your loan closed. There is always a risk that your borrower may have changed principal residence, and to a lesser extent in the case of a business, moved its principal office to a different state, and failed to inform you as the lender.

 

 

          So, your borrower has defaulted. The borrower was subject to a federal tax lien, but you still have priority under the rules described above. You’re safe, right? NOPE! Keep in mind, that federal law controls the priority of a federal tax lien. I.R.C. § 7425 requires that if a federal tax lien is filed 30 days prior to a foreclosure sale, notice of a judicial or non-judicial sale (including forfeiture of the borrower in a land sales contract) must be given to the Internal Revenue Service at least 25 days prior to the sale. Failure to give such notice will result in the federal tax lien remaining attached to the property. In addition, at least one case stands for the proposition that failure to give such notice will cause the federal tax lien to be elevated to first position, and the IRS would then have the ability to come after the proceeds of such a sale! See, e.g., Southern Bank of Lauderdale Cty v. I.R.S., 770 F.2d 1001 (11th Cir. 1985). 

 

 

          The priority given to federal tax liens under the I.R.C. makes it nearly impossible to lend to someone who is subject to such a lien. In addition, especially where lenders are in the business of making loans that are collateralized by after-acquired property or loans for which future advances can be made, lenders must be prepared to do periodic checking for federal tax liens affecting their collateral and be prepared to act if such a lien is filed.

 

 

            The Short Version: Portions of the Credit Card Act of 2009 go into effect on August 20, 2009, including a requirement that card holders be given 45 days notice prior to any changes to the card holder agreement, including APR changes, fee changes or other significant changes. The Act also effectively gives cardholders the right to reject such changes by canceling their account, while prohibiting the card issuer from requiring that the card holder repay the outstanding balance upon the card holder’s exercise of the right to cancel. Also, issuers of open end consumer credit (not just credit card issuers) are required to get statements to their borrowers at least 21 days prior to the due date, or no late fee can be charged. There are numerous other changes in this act which are summarized below. Most are effective February 22, 2010.

President Obama signed the Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “Act” or “Credit Card Act”) on May 22, 2009. The Act enacts several consumer protection provisions into law by amending the Truth In Lending Act. Although many of the changes mirror or are similar to recent regulatory requirements (including some of the recent Reg. Z changes), the effect of the Credit Card Act is important, because (i) it has the force of law (as upposed to regulations which may be easier to modify or reverse) and (ii) it applies uniformly, regardless of a credit card issuer’s organization type or regulator.

 

          The default effective date for the provisions of the Credit Card Act is nine months following enactment of the Act, or February 22, 2010. However, there are two sections of the Act that have an effective date of 90 days following the Credit Card Act’s enactment, or August 20, 2009.

 

Discussion of Provisions Effective August 20, 2009:

 

 

Section 101(a) adds a new subsection (i) to 15 U.S.C. § 1637 of the Truth in Lending Act. The effect of this addition is that beginning August 20, 2009, credit card issuers must send an advanced notice of any increase in an APR or any other significant changes to the cardholder agreement, explicitly including an increase in any fee or finance charge, not later than 45 days before the effective date of the change. The Federal Reserve Board may add to the list of “other significant changes” by later rulemaking.

 

 

As part of any notice of rate increase or other significant changes, described above, the notice must contain a brief statement that the card holder has the “right to cancel” the account before the effective date of the rate increase or other change. In effect, this gives card holders the right to reject the changes. The Federal Reserve Board is to make rules regarding the procedures in this circumstance. As part of the right to cancel, Section 101 specifically provides that if a card holder exercises the right to cancel, a card issuer is prohibited from requiring the card holder to repay the outstanding balance in full. Rather, an issuer must provide a repayment plan that allows repayment over time. The issuer is restricted to either (i) amortizing the balance over a period of at least 5 years or (ii) requiring a payment that is not more than 2 times the previous minimum payment percentage required previously, as provided at 15 U.S.C. § 1666i-1(c)(2).

 

The result of these changes could make it much more difficult for credit card issuers to change terms in their favor. So long as a card holder is willing to forego the further extension of credit from the issuer, he or she will be effectively empowered to reject increases in APR, increased fees or other significant changes.

 

 

NOTE: This provision applies to ALL open end consumer credit plan, not just credit cards. Thus, other issuances of credit, such as personal lines of credit, may be subject to this new provision. Section 106 of the Act enacts changes regarding requirements for sending periodic statements in relation to the charging of late fees. It provides that a creditor may not treat a payment as having been received late for any purpose, unless the creditor has adopted reasonable procedures designed to ensure that each periodic statement is mailed or delivered to the consumer not later than 21 days before the payment due date.  In all cases, no late fee can be charged unless the statement is mailed or delivered at least 21 days prior to the due date, including any grace period, if applicable.

 

In considering this provision, it is worth noting that another provision of the Credit Card Act that will not be effective until February 22, 2010, may affect how credit issuers handle the statements change. Section 106 will require that payment due dates for a credit card account must be on the same day each month (e.g., the 15th of the month). If the due date for a particular month falls on a day that the credit institution does not accept payments, it will have to treat a payment received on the next business day as timely received. 

 

 

Most of the other provisions of the Credit Card Act will go into effect on February 22, 2010. The full effect of the Act will be ongoing, as it authorizes further rulemaking and calls for the creation of certain reports regarding credit practices. Although, it will likely be necessary to get into further depth at a later time, following is a limited summary of the Acts other provisions (unless noted otherwise, effective date will be February 22, 2010):

 

Limitations on Fees and Interest Rates

 

1.      Prohibits over-the-limit fees unless the customer explicitly authorizes the particular transactions causing balance to become over-the-limit. Over-the-limit fees will be restricted.

2.      Where cardholders maintain balances subject to differing interest rates, any payments over the minimum amount must be first applied to the balance with the highest APR.

3.      Increases in interest rates will only apply to new balances, with limited exceptions. Exceptions include: if the rate is disclosed at account opening, promotional rates, or when cardholder becomes more than 60 days late on a payment.

4.      Interest rate increases cannot occur during the first 12 months of opening a credit card account (subject to exception for indexed variable rate accounts) and promotional rates must last for at least 6 months.

5.      Double cycle billing prohibited (occurs when finance charges are calculated considering interest owed on previously paid balances).

6.      Prohibits the term “fixed rate” unless interest rate will not vary for any reason for the specified period.

7.      Prohibits early morning deadlines for credit card payments.

8.      Requires payments received at local branches to be credited same day.

9.      Prohibits charging fee to pay credit card by mail, telephone or electronic transfer, unless relates to live person assisting to make expedited payment.

10.    Requires penalty fees to be reasonable. (Effective August 22, 2010).

11.    If grace periods are offered, they must extend to partial payments.

12.    Payment due dates must be the same day each month.

13.    Billing statements must state the number of months to repay the outstanding balance, the total credit costs if only monthly minimum payments are made and the amount that is necessary to repay the balance in 36 months.

 

 

1.      In order to issue credit card to borrowers under 21, requires a co-signer over 21 or proof that borrower has the means to repay the credit.

2.      Consumers under 21 will have to opt in for pre-screened credit offers.

 

 

1.      Prepaid cards (e.g., gift cards) must be usable for at least five years. (Effective August 22, 2010)

2.      Practice of declining values/hidden fees for gift cards not used within certain period of time prohibited. (Effective August 22, 2010)

 

 

1.      Will require credit card issuers to consider consumer’s ability to pay when issuing credit cards or increasing credit limits.

2.      Will require credit card issuers who increase a cardholder’s interest rate to periodically review the account and decrease the rate when appropriate. (Effective August 22, 2010)

3.      Increases existing penalties under Truth in Lending Act.

4.      Will require credit card issuers to post credit card agreements on the Internet and provide agreements to the Federal Reserve Board to post on its website.

 

 

 

The Short Version: The Home Valuation Code of Conduct is intended to address the integrity of the process of obtaining appraisals for residential mortgages. It does not have the power of law or regulation. However, effective May 1, 2009, Fannie Mae and Freddie Mac will not purchase home mortgages that do not satisfy these requirements. The result may be that the standards of this Code will develop into common industry standards. Lenders that want to ensure that they are able to sell their residential mortgages on the secondary market may want to consider proactively implementing these changes.

 

          It is unique to have a portion of these pages dedicated to something that is neither enacted into law or the product of regulation, but such is the case here. The Home Valuation Code of Conduct (“HVCC”) does not have the force of law or regulation. However, if you originate single-family mortgages and you want to sell such a mortgage to either Fannie Mae or Freddie Mac, HVCC will certainly affect you. Moreover, because of the number of loans that HVCC will affect, it is possible that the industry may naturally evolve to adopt the standards provided by HVCC. Thus, it may be appropriate to consider compliance with HVCC now in order to ensure that your home mortgages can be sold in the future, even to parties other than Fannie and Freddie.

 

          In brief, the HVCC requires that lenders engage in selecting appraisal professionals using independent and impartial processes, and further that such processes be transparent and subject to examination. The goal of the HVCC is to set up a system to enhance the independence, and hopefully the reliability, of appraisals used for mortgages that are acquired by Fannie Mae and Freddie Mac. The HVCC does not address appraisal standards, but the independence of the appraiser from those who are involved in the loan origination process. 

 

The HVCC is the direct result of the meltdown and bailouts of Fannie Mae and Freddie Mac. The Attorney General of New York, Andrew Cuomo, began conducting an investigation of the appraisal practices used by Fannie Mae and Freddie Mac. In order to short circuit this investigation, Fannie and Freddie agreed to the development and adoption of the HVCC. A preliminary version of the HVCC was disseminated on March 3, 2008. It was heavily revised as a result of comments and intense pressure from banking industry groups, including the American Bankers Association. The revised (current version) HVCC was distributed on December 23, 2008. Effective May 1, 2009, Fannie Mae and Freddie Mac will no longer accept mortgage purchases from sellers who do not comply with the HVCC. For more information, including a copy of the HVCC, visit www.freddiemac.com/singlefamily/home_valuation.html.  

 

 

          The heart of the HVCC is separating appraisers from those who stand to profit depending on the result of the appraisal. Apart from requiring that appraisals be performed by state-licensed appraisers, the provisions of the HVCC are designed to ensure the independence of the appraiser.

 

 

          In brief, the HVCC requires that lenders either identify employees independent of the loan production staff or hire an independent third party to make decisions regarding appraiser engagement. The rules governing appraiser engagement are described in Section III of the HVCC. An appraiser must be selected, retained and provided all compensation from the lender or a third party contracting with the lender. An appraiser may not have been selected, retained or paid by any other third party, including mortgage brokers or real estate agents. In addition, all members of the lender’s loan production staff or anyone reporting to such staff are prohibited from selecting, influencing the selection, retaining an appraiser, or even having any substantive communication with an appraiser or appraisal management company related to any appraisal assignment. Finally, any employee of the lender, or employee of an independent third party hired for the purpose, must be trained and qualified in the area of real estate appraisals, and if an employee of the lender, must be wholly independent of the loan production staff and process.

 

 

          Section IV of the HVCC is entitled “Prevention of Improper Influences on Appraisers.” There is one very important provision of this section that comes at its end: Those who meet the definition of “small bank” as set forth at 12 U.S.C. § 2908 (having assets of not more than $250 million) are not subject to provisions of Section IV, provided that they are otherwise in compliance with the HVCC, and have in place appropriate policies and procedures, and adequate controls to prevent undue appraiser influence.

 

          Under Section IV, a lender may use an appraisal report prepared in-house or by an affiliate in underwriting a loan, provided that the appraiser or the company for which the appraiser works reports to a function of the lender independent of sales or loan production, and so long as sales and loan production staff have no involvement in the operation of appraisal functions or selection of the appraiser. Further, sales and loan production staff may not have substantive communications with in-house appraisers related to or having an impact on the valuation (this also prohibits providing a target value or loan amount). Finally, an appraiser’s compensation cannot depend on the value of the appraisal or the closing of the loan. If a lender chooses to use in-house appraisers, it must also adopt written procedures implementing the HVCC and must subject itself to an annual audit for reporting to Fannie Mae or Freddie Mac. 

 

          In theory, the easiest way to get around the complexities of Section IV of the HVCC is to hire a wholly independent third-party company for the purpose of obtaining appraisals for home loans, so long as the third party also agrees in writing to abide by the HVCC. However, this would likely result in higher appraisal costs.

 

 

          NOTE: The exception to Section IV requirements for small banks does not apply outside of Section IV.  Other provisions of the HVCC include:

 

1.      Lenders must ensure that the borrower is provided a copy of any appraisal report concerning the subject property at no additional cost to the borrower within three days prior to the closing of the loan. The borrower may wave this requirement and this requirement does not prohibit the lender from requiring the borrower to reimburse the lender for the cost of the appraisal. (Section II)

2.      Fannie Mae/Freddie Mac are creating a new entity, the Independent Valuation Protection Institute. Once this entity is up and running, lenders will be required to provide information to appraisers and borrowers regarding the Institute, including a telephone hot-line and email address for complaints relating to HVCC non-compliance. Lenders are prohibited from retaliating based on complaints made to the Institute. (Section V)

3.      Lenders are required to perform quality control testing of the appraisals or valuations used by the lender and report any negative results of such testing to Fannie Mae or Freddie Mac. (Section VI)

4.      Lenders are required to refer instances of misconduct by an appraiser or appraisal management company to the state agency that licenses or certifies appraisers. (Section VII)

5.      Lenders must certify and warrant that each appraisal report was obtained in compliance with the HVCC. (Section VIII)

 

 

The Short Version: Effective May 20, 2009, buyers/assignees of residential home mortgages must give the borrowers the notice described below within 30 days of obtaining the mortgage. Failure to do so subjects the transferee to possible civil liability. Also effective May 20, 2009, the Purchasing Tenants at Foreclosure Act affects the ability of parties who purchase residential real property as a result of a foreclosure (including a mortgagee) to deal with tenants living in the property at the time of the foreclosure. The Act requires that a notice to quit be given to tenants at least 90 days before they must move and will generally require that the purchaser takes subject to the terms of an existing lease on the property.

 

          The U.S. Congress and President Obama have certainly been busy making bankers lives harder! Just two days before signing the Credit Card Act of 2009, President Obama signed P.L. 111-22. Signed on May 20, 2009, two provisions that may affect your bank became effective immediately! 

 

 

          Section 404 of P.L. 111-22 requires that a notification of the sale or transfer of mortgage loans be given within 30 days after a mortgage loan is sold, transferred or otherwise assigned to a third party. The notice requirement applies only to the new owner or assignee of the debt. So, if your bank never purchases or accepts a transfer of a residential mortgage loan, this provision will not apply to you. Otherwise, read on.

 

          Section 404 amends the Truth in Lending Act (“TILA”) at 15 U.S.C. § 1641. It applies to the sale, transfer or assignment of “any consumer credit transaction that is secured by the principal dwelling of a consumer.” Thus, it clearly applies to both first and second mortgages, including home equity lines of credit. It provides that the creditor that is the new owner or assignee of the debt must notify the borrower in writing within 30 days after the sale or transfer. The notice must include the following information: (i) the identity, address, and telephone number of the new creditor; (ii) the date of the transfer; (iii) how to reach someone having authority to take action on behalf of the new creditor; (iv) the location of the place where the transfer of ownership of the debt is recorded; and (v) “any other relevant information regarding the new creditor.” 

 

          Perhaps more important than the requirement of the notice itself, Section 404 also provides that failure to give the required notice will result in civil liability of the creditor. The civil liability provisions of TILA, contained at 15 U.S.C. § 1640, authorize recovery by a borrower (including a class of borrowers) for actual damages or damages of not less than $400 per transaction! 

 

 

          Where it applies, the Protecting Tenants at Foreclosure Act (“PTFA”) places roadblocks on the ability of a purchaser at a foreclosure sale to deal with the purchased property. The PTFA applies to any foreclosure on (i) a federally-related mortgage loan (as defined by the RESPA at 12 U.S.C. § 2602); or (ii) ANY dwelling or residential real property after May 20, 2009. A “federally-related mortgage loan” is the familiar definition from RESPA, which includes first or subordinate liens on 1-4 family dwellings. The provision relating to any dwelling or residential real property should include all of the previous category and could be interpreted much more widely to include dwellings containing more than 4 family dwellings. This could conceivably include such things as extended stay hotels and the like.

 

          Even if the PTFA applies, it only affects the rights of purchasers of real property as it relates to “bona fide tenants.” The term “bona fide tenants” includes all tenancies where (i) the tenant is not the foreclosed mortgagor, or such mortgagor’s child, spouse or parent, (ii) the tenancy was the result of an arms-length transaction, and (iii) the tenancy requires the receipt of rent in an amount that is not substantially less the fair market value OR if the unit’s rent is reduced or subsidized due to a federal, state or local subsidy.

 

          If a purchaser at foreclosure sale (including, if applicable the mortgagee) purchases residential real property having a bona fide tenant(s), the following restrictions apply: 

 

(1) the purchaser must give a bona fide tenant a notice to vacate at least 90 days before the effective date of the notice (this is the minimum amount of notice if the lease is terminable at will or month-to-month);

 

(2) the purchaser takes the property subject to the remaining term of a bona fide lease; provided, however that the initial purchaser may terminate the lease by selling the property to a buyer who will occupy the property as a primary residence, subject to a minimum notice to vacate of 90 days;

 

(3) if an applicable federal, state or local lease subsidy program applies and provides a longer notice period or any additional protections to tenants, the greater notice period or additional protections will apply;

 

The PTFA provides the same restrictions related to “Section 8” housing.