Lenders and Landlords Beware: The Protecting Tenants at Foreclosure Act (PTFA) Is Back Again

June 22, 2018

President Trump recently signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”).  The Act is intended to scale back parts of the Dodd-Frank Act.  The Act enjoyed bi-partisan support and focused on consumer protection, mortgage lending, and regulatory relief for certain banks.

Hidden in the text of the Act is a little section entitled “Restoration of the Protecting Tenants at Foreclosure Act of 2009.”  Known as PTFA, the Protecting Tenants at Foreclosure Act of 2009 was enacted during the financial meltdown to help tenants caught up in foreclosures.  However, PTFA sunset at the end of 2014 and was not renewed by Congress.  Although some states have enacted their own version of PTFA, as of December 31, 2014, nationwide tenant protection under PTFA lapsed.

Section 304 of the Act repeals the sunset provision of PTFA and restores and revives PTFA and any related regulations to make the law applicable again.  Accordingly, PTFA is the law in every state and preempts any conflicting state or local law.  If a tenant has greater rights under state or local law, those rights are not preempted by PTFA.

PTFA sets forth rules to ensure that residential tenants facing eviction from a foreclosed property are given adequate time to find alternative housing.  Before PTFA (and after its sunset), residential tenants of foreclosed properties could find themselves in a precarious position.  Generally, unless a state or local law provided otherwise, a lease entered into after the execution date of the foreclosed mortgage was junior to the mortgage and was terminated by the foreclosure action.  The new landlord (or lender) who acquired title to the foreclosed property through the foreclosure process ordinarily was not required to honor the lease the tenant had with the foreclosed landlord.  The new landlord could ask tenants to leave and use all of the powers available under the law – for instance, a writ of assistance or eviction action – to remove tenants who did not leave voluntarily.  Of course, new landlords were also free to honor the lease between the tenant and the previous landlord or enter into new leases with tenants.

PTFA is federal law and effectively changes contrary state foreclosure and tenancy law.  A new landlord who immediately succeeds the foreclosed landlord takes the foreclosed property subject to several limitations.  To require any tenant to vacate, the new landlord must give 90-­days’ notice.  This rule applies even if the remaining lease term is less than 90 days.  The 90‑day notice applies even if there is no lease or if the lease would otherwise be terminable at will by the landlord.

If the residential tenant is occupying the foreclosed property pursuant to a lease entered into before the 90‑day notice is given, the new landlord must honor the lease and the tenant is entitled to stay for the entire lease term.  There is an exception to this rule if the foreclosed property is sold to someone who will occupy the unit as their primary residence.  In that case, the tenant is still entitled to 90 days’ notice to vacate.

To be protected, the tenant must have a “bona fide” lease.  The lease must have been the result of an “arms-length” transaction, must be at a rental rate that is not substantially less than fair market rent, and the tenant cannot be the foreclosed mortgagor or the mortgagor’s spouse, child or parents.  PTFA applies to “any foreclosure of a federally-related mortgage loan” or the foreclosure of “any dwelling or residential real property.”  Given these parameters, it is not clear what residential rental property is not covered by PTFA.

PTFA is a short statute and leaves a lot of questions unanswered.  For instance, it is not clear whether a landlord can look to ordinary state eviction law if a tenant is in default of the lease within the 90‑day notice period.  It is not clear whether there are other limits on a “bona fide” lease – such as the length of the lease – other than those stated in PTFA.  It is not clear who qualifies as a “tenant” because occupants of a residential rental property “without a lease” are also entitled to 90 days’ notice.

The upshot is that new owners of foreclosed residential rental properties will need to be aware of the new rights granted tenants under PTFA and must plan and act accordingly.  A bidder at a sheriff’s sale might first want to engage in due diligence to determine the rental status of the foreclosed property.  Property buyers might want to factor in the additional time and cost associated with removing unwanted tenants from a foreclosed property.

If you have any questions about how the information in this article may affect you or your business, please contact Norm Farnam at nfarnam@stroudlaw.com or (608) 257-2281 or your Stroud attorney.

 DISCLAIMER: The information in this article is provided for general informational purposes only, is not necessarily updated to account for changes in the law, and should not be considered tax or legal advice.  This article is not intended to create, nor does the receipt of it constitute, an attorney-client relationship.  You should consult with your own legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.