Nevada didn't explicitly forbid Bank of America Corp. from initiating new foreclosures within its borders last month. But it might as well have done so.
BofA completely ceased filing new notices of default in Nevada, in the month following the Oct. 1 implementation of a state law raising the documentary and procedural standards for foreclosures.
Other banks cut back heavily as well: overall filings of so-called NOD's in Nevada fell 81% month-over-month, according to data from Foreclosure Radar, which tracks county recorder filings covering the overwhelming majority of the state's population.
The change in foreclosure practices required by the law is likely temporary, but it is still dramatic. While many states have sparred with the banking industry over foreclosure documentation, they have generally allowed foreclosure proceedings to continue after the banks promised to sort out the kinks. Now, between its new law and its criminal indictment of two alleged robo-signers, Nevada has shown itself to be far less patient with the industry.
One of the provisions of Nevada's Assembly Bill 284, approved in May and implemented in October, hit Bank of America harder than most. The law requires lenders to use an independent foreclosure trustee, which is responsible for administering the foreclosure process and providing notice to the borrower. Unfortunately for Bank of America, a high proportion of its foreclosure actions have historically been taken through a subsidiary called ReconTrust Co.
Now BofA must scramble to find a new trustee to handle its foreclosures. In terms of handling B of A's filings, "the trustee they use to foreclose on all of their loans is basically out of business in Nevada," says Sean O'Toole, founder of Foreclosure Radar.
That is not as insurmountable an obstacle as it might seem: BofA can still process foreclosures through other trustees, and ReconTrust can do work for other lenders. But while the restriction should eventually be manageable, it has created a sizable disruption to the operations of banks that passed foreclosure work to affiliated trustees.
"When you've got one or two [foreclosure filings] a month, that's one thing," says Bill Uffelman, head of the Nevada Bankers Association. "When you've got whole blocks, it's not easy to find someone who can take the workload."
BofA spokesman Dan Frahm said in an emailed statement that the bank expects to see its foreclosure operations "move forward" in coming months. "Before proceeding with foreclosure activities, Bank of America is ensuring that our processes are designed to be carried out in accordance with the new legislation in Nevada," he wrote.
The third-party trustee requirement is only one of several problems the Nevada law has created for banks' mortgage operations. Other provisions of the law require a signed affidavit to be filed along with a notice of default, mandate an attestation of the precise amount of a borrower's unpaid debts, and expand borrowers' rights to sue over foreclosure errors.
The law also heightens the penalties for banks that are found filing improper documents. Nevada is becoming particularly tough on this practice, a year after many of the largest mortgage servicers were found to be "robo-signing" and cutting corners on massive numbers of foreclosure-related documents. Last week's news that the state's attorney general had filed 606 criminal charges, many of them felonies, against two alleged "robo-signers" working for Lender Processing Services has raised the stakes even further.
"Everybody has pulled back," Uffelman says. "I've talked to Wells Fargo, and Wells pulled back to reexamine all of their filings to make sure all the i's are dotted and t's crossed because of the affidavit process."
For banks in general, "You don't want someone to wind up with felony charges for someone who looked at all the pieces of paper but they can't vouch for the contents."
A Wells Fargo spokeswoman would not discuss the matter.
Nevada has been working with banks and their state association to clear up questions about proper procedure, Uffelman says. The state recently held a conference call in which the law's lead sponsor and the office of the attorney general told bankers that they intended complying with the law to be manageable.
"I understand that complying with any new law requires businesses to make changes in their prior business practices, which may not be accomplished overnight," Nevada Attorney General Catherine Cortez Masto told ASR sister publication American Banker in an e-mailed statement. "I am confident that legitimate businesses pursuing proper foreclosures will devote the effort necessary to comply with Assembly Bill 284, and that they will be able to incorporate the requirements of AB 284 into their business practices in the near future."
Uffelman is relatively optimistic that the industry can come up with a workable solution in relatively short order.
"I suspect that, probably into December, especially after the holidays, we'll work our way back to normal," he says. "If the norm is 3,000 [notices of default per month], we might do 4,500 just to get caught up … we'll get back there."