[Note to drafting committee: The Prefatory Note has not been revised for this draft, and therefore does not mention a few specific modifications that have been made here. It is nonetheless included for your convenience.]

In 1974 the National Conference of Commissioners on Uniform State Laws adopted the Uniform Land Transactions Act (ULTA). ULTA covered numerous aspects of real property law, but a major portion of it was devoted to security interests in land. In 1985, the Conference split these mortgage-related provisions off into a separate act, the Uniform Land Security Interest Act (ULSIA).

No state has adopted either ULTA or ULSIA. The present draft seeks to accomplish two things: first, a further separation of the foreclosure provisions of ULTA and ULSIA (i.e., ULSIA Part 5) into a distinct foreclosure statute, and second, an extensive revision of those foreclosure provisions. In addition, the Act introduces two new forms of foreclosure that were not found in ULTA or ULSIA, and it eliminates ULSIA's provision, tracking UCC Article 9, that permitted nonresidential mortgages to be foreclosed by "reasonable disposition of the collateral" - a provision that was widely opposed.

Revision is appropriate because of a number of changes in the field of mortgage foreclosure law that have occurred since the drafting of ULTA in the early 1970s. These changes include considerable development by the courts of the constitutional concept of due process of law as applied to foreclosures; an expansion of the secondary mortgage market to include large numbers of conventional and commercial mortgages; a vast advance in the securitization of both residential and commercial mortgages; and the publication of the Restatement (Third) of Property: Mortgages in 1997.

A few states have adopted power of sale foreclosure statutes in recent years, but there are still about twenty states that have not done so. This act is offered in the belief that non-judicial foreclosure can be both fair to borrowers and efficient from the viewpoint of lenders, and hence a superior form of foreclosure for all of the affected parties.

The delays and inefficiency associated with foreclosure by judicial action are costly. They increase the risks of vandalism, fire loss, depreciation, damage, and waste. The resulting costs raise the cost of private mortgages and significantly erode the economic value of government subsidy programs involving mortgages. They add to the portfolio of foreclosed properties held by secondary mortgage market investors and government lenders, insurers, and guarantors of mortgages. The availability of a uniform, less expensive, and more expeditious foreclosure procedure will ameliorate these conditions, and will facilitate the sale and resale of secured real estate loans.

The desirability of nonjudicial foreclosure is emphasized by the successful implementation of two federal statutes that permit the U.S. Department of Housing and Urban Development to foreclose by power of sale the mortgage loans it holds. See Multifamily Mortgage Foreclosure Act, 12 U.S.C.A. §§ 3701-3717, adopted in 1981; Single Family Mortgage Foreclosure Act, 12 U.S.C.A. §§ 3751-3758, adopted in 1994; regulations applicable to both acts at 24 C.F.R. §§ 27.1 - 27.123.

Why nonjudicial foreclosure? The fundamental premise of this Act is that, in the great majority of cases, judicial involvement in foreclosure is unnecessary, simply because there is no dispute between the debtor and creditor. The note and security instrument are indeed valid, the payments are indeed in default, and the debtor typically has no defense to foreclosure. Of course, there are exceptional cases in which a defense exists and deserves to be heard, but it makes little sense to force all foreclosures into court because a small fraction of them involve disputes of law or fact. Using the time of judges and the machinery of the courts to conduct foreclosures is therefore often a misallocation of public funds as well as a waste of the secured creditor's resources.

Foreclosure is intended to accomplish two distinct purposes: (1) to evaluate the collateral and (2) to liquidate it. Evaluation is necessary in order to determine whether the lender has a surplus (to be distributed to junior lienors and the debtor) or a deficiency (to be demanded from the debtor and others who are personally liable on the debt). Liquidation is necessary because the lender, in nearly all instances, is not in the business of owning real property and does not want to retain the collateral for the long term.

However, there is no overarching principle that requires the evaluation and liquidation functions to be accomplished in a single process. Indeed, a persuasive case can be made that when both functions are done at once, as in the case of the traditional auction sale, both are likely to be done inefficiently. See Debra Pogrund Stark, Facing the Facts: An Empirical Study of the Fairness and Efficiency of Foreclosures and a Proposal for Reform, 30 U. Mich. J. L. Reform 639, 677-685 (1997).

Types of foreclosure. In recognition of these facts, this draft gives lenders the opportunity (although not the duty) to bifurcate the evaluation and liquidation functions. It provides for three methods of foreclosure, and permits the secured creditor to elect the method to be used. The first is conventional foreclosure by means of an auction sale. Here both evaluation (by means of the high bid at the sale) and liquidation (by means of a foreclosure deed to the high bidder) are combined.

The second method authorized by this draft is foreclosure by negotiated sale. Such a sale will be consummated in much the same way as other real property sales; the property may be listed with a real estate broker and advertised extensively. This is usually a very effective way of liquidating the property, but has not been used in this country in the past as a method of evaluating the property for purposes of foreclosure because of concern about the potential for collusive price-setting between the secured creditor and the purchaser. In the procedure authorized in this Act, however, that concern is eliminated. The creditor notifies the debtor and junior interest-holders of the "cash equivalent amount" that it is willing to allow for the property, and they can simply disapprove the sale if they are dissatisfied with that amount. Their disapproval will force the creditor to abandon the negotiated sale and resort to a different method of foreclosure. In many cases, however, it is believed that the amount will appear adequate to those parties and they will permit the sale to proceed.

The third foreclosure method authorized by this draft is foreclosure by appraisal. This method accomplishes only the first function of foreclosure, namely the evaluation of the collateral. It does not liquidate the property, but rather leaves it in the hands of the secured creditor, who will have the burden of liquidating it after the foreclosure is completed.

Foreclosure by appraisal incorporates several safeguards to ensure the integrity of the appraisal's result. The lender selects the appraiser, but the appraiser must meet reasonable professional standards of qualification and cannot be an employee of the lender. As with foreclosure by negotiated sale, the secured creditor notifies the debtor and junior interest holders of the "cash equivalent amount" that it is willing to offer for the property. Any debtor or junior interest-holder who is dissatisfied with the amount can simply disapprove it and thereby prevent the foreclosure by appraisal from going forward.

It is believed that with all three of these foreclosure methods, sufficient protections have been included to assure the legitimate interests of debtors and junior interest-holders. Irrespective of the method of foreclosure selected by the secured creditor, the foreclosure cannot occur less than 90 days after the giving of the original notice of foreclosure. During this period, any person whose interests will be extinguished by the foreclosure has the right to redeem the collateral from the security interest, but must pay the accelerated balance due in order to do so.

The "residential debtor" concept. This draft preserves, with some changes, the "residential debtor" concept employed (and termed the "protected party") in ULTA and ULSIA. It recognizes two classes of debtors: residential debtors and everyone else. Residential debtors are assumed to need additional legal protections from foreclosing creditors that are not essential to other persons.

"Residential debtor" includes both a person who has a home on which a security interest exists, and anyone who is personally liable on an obligation that is secured by the home of the obligor. "Home" is used here as a shorthand for "residential real property," which must be owner-occupied and contain no more than four dwelling units.

Thus, "residential debtor" encompasses not only the usual consumer borrowers on home mortgage loans, but also relatives who guarantee their loans and purchasers who buy homes subject to, or with an assumption of, existing mortgages.

Four specific protections are provided for residential debtors in this Act. The first relates to the notices of default and foreclosure that must be sent to secured creditors. In general, debtors may agree to receive notice by any reasonable means, including electronic mail or facsimile. However, residential debtors are entitled to written notice, either delivered in person or transmitted by mail or other courier service, and they may not waive their right to such notice. This provision recognizes that other forms of communication are not as reliable as the mails, particularly in residential settings.

Second, the cure period allowed to debtors to reinstate their loans without acceleration is ordinarily thirty days after a notice of default is given. This period may be reduced by agreement of the parties to as little as ten days, but only if no debtor is a residential debtor.

Third, the Act limits the right to cure without acceleration to once per year for a non-monetary default of the same type, but this limitation does not apply to residential debtors.

Fourth, the Act precludes the entry of deficiency judgments against residential debtors who have acted in good faith with respect to the property and the foreclosure. Deficiencies may still be asserted against guarantors of residential debtors.

Systems of notice. Power of sale foreclosure statutes presently in effect may be divided into one-notice and two-notice systems. In a two-notice system, the secured creditor typically is required to send a notice of default, and after the passage of some time period, a second notice of foreclosure. Depending on the jurisdiction, the first notice may or may not coincide with an acceleration of the debt. If it does not, the period between the first and second notices (or some part of that period) may be thought of as a "cure" period, during which only arrearages need be paid to put the loan back "on stream."

The present draft provides for a "two-notice" system. Debtors are given a notice of default and a 30-day period to cure arrearages before a notice of foreclosure may be given to them. For nonresidential debtors this time period may be reduced to ten days by agreement, and the right to cure is eliminated if a prior notice of default has been given and cure made within the previous twelve-month period. No provision is made in this Act for giving the notice of default to junior lienholders, irrespective of whether the debtor is a residential debtor.

In addition to these two notices, all affected parties will receive further warning that the foreclosure is about to occur. In the case of foreclosure by auction, a copy of the advertisement of the sale must be sent to them (although it may be included with the notice of foreclosure). If foreclosure is by negotiated sale, the affected parties must be given a notice informing them of the proposed sale. In the case of foreclosure by appraisal, they will receive a copy of the appraisal report.

Due process: notice and hearing. When a governmental entity forecloses a mortgage, it is reasonably well established that it must comply with the demands of the Due Process Clause, including the giving of notice reasonably calculated to inform those whose rights are affected, and the provision of a hearing at which such persons may present defenses to the foreclosure.

Whether these protections are also required when a private creditor forecloses is not settled. However, irrespective of the requirements of Due Process, fundamental fairness would seem to demand that all persons whose rights may be destroyed by a foreclosure should have advance notice of the proceeding and the opportunity to show why it should not go forward.

This Act therefore provides (in Sections 203 and 204) for notice to all those whose property rights are put at risk by a foreclosure. It also provides, in Section 205, an opportunity for any other person who wishes to receive notice of the foreclosure to file a request for such notice in the public records.

In addition, this Act provides residential debtors and other affected parties (Section 206) the right to an informal meeting with a responsible representative of the secured creditor at a convenient location to present reasons why the foreclosure should not go forward. This meeting, which will be held only if it is affirmatively requested, is intended to guard debtors against the fundamental unfairness of a mistakenly-conducted foreclosure that is legally improper.

It might be argued that the informal meeting process created by this draft is unnecessary because a debtor or junior lienor can always bring an action to enjoin an improper foreclosure. However, this step requires a good deal of affirmative effort by the plaintiff - the retaining of counsel, typically at significant cost, and the pursuit of the litigation. It is not clear that this option is adequate to protect unsophisticated debtors.

Judicial intervention. In a great majority of cases, foreclosures under this Act are expected to proceed without judicial involvement. However, there are a number of situations in which a party may seek and obtain the intervention of a court. For example, a party who believes that there has been no default under the security instrument may seek a judicial review of that issue. A court may also be asked to postpone a foreclosure, to determine the priority of competing security interests, to direct foreclosure in bulk or by parcels, to marshal assets by directing the order in which parcels should be sold, or to direct the order of distribution of the proceeds of a foreclosure. In these situations the court serves as a "safety valve," guarding against improper or overreaching actions by the foreclosing creditor.

Omitted parties. Mortgage law uniformly holds that a person who is not made a party to a judicial foreclosure is not bound by it, and such a person's interest survives the foreclosure. However, in foreclosures by power of sale, there is little legal authority in most jurisdictions as to the effect of failure to provide notice to holders of junior interests. This draft explicitly provides that holders of junior interests are not bound if they are not given notice; hence, their position is like that of an omitted party in a judicial foreclosure.

With respect to tenants under leases junior to a mortgage, a further issue arises: may a tenant who has been omitted purposely (because the lender wishes to preserve rather than destroy the tenant's lease) intervene in the foreclosure for the purpose of getting the lease terminated? Case law on this point is about evenly divided. The position of this draft is that the tenant may not do so. In other words, a foreclosing lender under this draft has the choice of whether to destroy or preserve individual junior leases, a right sometimes referred to as "pick and choose."

Redemption. In general, mortgaged property may be redeemed in either of two ways: by equitable redemption before foreclosure, and by statutory redemption after foreclosure. All states recognize equitable redemption, but only about half of the states have statutes permitting redemption after foreclosure. This draft recognizes the fundamental right to equitable redemption until the date of foreclosure, but does not make any provision for statutory redemption. While statutory post-sale redemption occasionally benefits a debtor or junior lienor, it is believed that in the aggregate such parties are disadvantaged by the depression in foreclosure bid prices that results from the uncertain status of title introduced by statutory redemption.

Title from foreclosures. No matter which method of foreclosure is employed, this Act provides that completion of the foreclosure process raises a presumption of compliance with the notice, advertising, and other procedural requirements of the Act. This presumption is conclusive evidence in favor of good faith purchasers for value of the collateral. However, the presumption does not make foreclosure titles impregnable. The reason is that defects outside the scope of the Act may exist. For example, the debtor may not have had good title to the collateral when the security interest was given; the security instrument itself may be a forgery or otherwise void; or the debtor may not in fact have been in default on the secured obligation. The extent to which such defects will cause a court to set aside a sale, even when the property has passed to a bona fide purchaser, is left to other law.

Deficiency liability. In general, this draft permits recovery of deficiencies by the foreclosing creditor and by "sold-out" junior lienholders (assuming, of course, that the obligation is a recourse debt). As noted above, residential debtors who act in good faith are exempt from deficiency liability. Otherwise, a deficiency judgment is available to the foreclosing creditor, no matter which of the three methods of foreclosure is used. However, if the foreclosure is by auction, deficiency liability is limited by the "fair market value" concept. Any person against whom a deficiency is sought may seek a court determination of the property's value as of the date of foreclosure, and the amount thus determined is substituted for the high bid at the foreclosure sale in calculating the deficiency. This procedure recognizes that auction foreclosure sales often do not bring a price that approximates the market value of the property, and it encourages foreclosing creditors to make efforts to generate interest among potential bidders. No similar fair market value determination is available or needed in the case of foreclosure by negotiated sale or by appraisal.

Note on the terminology of foreclosure. The term "foreclosure" is often used in modern practice in a sense that is inconsistent with its historical origins. In its inception in England, what was "foreclosed" was the debtor's "equity of redemption" - that is, by foreclosure the debtor was precluded from redeeming his or her land from the mortgage. Thus, one did not, properly speaking, "foreclose a mortgage," but rather foreclosed the equity of redemption.

Today, however, terms "foreclose a mortgage" or "foreclose a deed of trust" are in common use and introduce no apparent confusion. This Act follows the modern pattern, and refers to "foreclosing a security interest" in real property and any accompanying personal property.

UNIFORM NONJUDICIAL FORECLOSURE ACT

SECTION 101. SHORT TITLE. This [Act] may be cited as the Uniform Nonjudicial Foreclosure Act.

SECTION 102. DEFINITIONS. In this [Act]:

(1) "Collateral" means property subject to a security interest.

(2) "Common interest community" means real property by virtue of ownership of which a person is obligated to pay for real property taxes, insurance premiums, maintenance, or improvement of other real property described in a declaration or other governing documents, however denominated. "Ownership" includes holding a leasehold interest of at least [20] years, including renewal options.

(3) "Days" means calendar days.

(4) "Debtor" means a person who owes payment or other performance of an obligation secured under a security instrument, or who holds a possessory interest in real property that is subject to a security instrument. Such a person is a "debtor" whether the obligation is absolute or conditional, primary or secondary, and whether or not the security instrument imposes personal liability on the debtor. The term does not include a person whose sole interest in the real property is a security interest.

[Note to drafting committee: should the definition of debtor exclude short-term tenants (e.g., those with leases of one year or less?]

(5) "Default" means the occurrence of an event that, under the provisions of a security instrument, gives a secured creditor a right to initiate foreclosure.

(6) "Evidence of title" means a title insurance policy, a preliminary title report or binder, an attorney's opinion of title based on examination of the public records or an abstract, or any other means of establishing and reporting the state of title to real estate that is customary in the locality. Unless the evidence of title is an attorney's opinion, the evidence of title must state that the issuer is willing to provide evidence of title to the real property collateral to the person who acquires title by virtue of the foreclosure, and the exceptions and exclusions from coverage to which the evidence of title issued to the person will be subject.

(7) "Expenses of foreclosure" means the reasonable costs incurred by a secured creditor, or the maximum amounts permitted by other law of this state, in connection with a foreclosure for transmission of notices, advertising, evidence of title, inspections and examinations of the collateral, management of the collateral, liability insurance, filing and recording fees, attorneys' fees and litigation expenses in pursuant to Section 207 and 601 to the extent provided in the security instrument or authorized by law, appraisal fees, the fee of the person conducting the sale in the case of a foreclosure by auction, fees of court-appointed receivers, and other reasonably necessary expenses.

(8) "Guarantor" includes a guarantor, surety, and accommodation party.

(9) "Notice" has the meaning given in Section 109, and may be either a written notice or an electronic notice unless a provision of this [Act] specifies the form of notice.

(10) "Original notice of foreclosure" means the first notice of foreclosure, sent pursuant to Section 204. The term does not include a notice of foreclosure under Section 315, 408, or 508.

(11) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government; governmental subdivision, agency, or instrumentality; public corporation; or any other legal or commercial entity.

(12) "Real property" means any estate or interest in, over, or under land, including minerals, structures, fixtures, and other things that by custom, usage, or law pass with a conveyance of land though not described or mentioned in the contract of sale or instrument of conveyance. If appropriate to the context, the term includes the land in which the interest is claimed. The term includes the interest of a landlord or tenant and, unless under the law of the state in which the property is located that interest is personal property, an interest in a common interest community.

(13) "Record," used as a verb, means to take the actions necessary to perfect an interest in real property under [the recording act of this State].

(14) "Residential debtor" means:

(A) an individual debtor who holds a possessory interest, other than a leasehold interest with a duration of [one] year or less, in residential real property in which a security interest exists;

(B) an individual debtor who is obligated, primarily or secondarily, on an obligation secured by residential real property; and

(C) a person that is wholly owned and controlled by an individual or individuals described in subparagraph (A) or (B).

[Note to drafting committee: should tenants with leases of one year or less be left out of the "residential debtor protections? Is one year the right duration?]

(15) "Residential real property" means real property that, at the time a notice of default is given pursuant to Section 202 or within one year prior to the giving of such a notice, is used, or is intended by its owner to be used, for the personal, family, or household purposes of its owner and is improved, or intended by its owner at the time a security instrument is entered into to be improved, by one to [four] dwelling units.

[Note to drafting committee: this definition makes the "residential" character of the property depend on the way it is used at the time the notice of default is given, but on the way it is improved (or intended to be improved) at the time the original mortgage loan is made. Is this appropriate? It would be simpler to provide that both the use and the improvements are to be judged at the time the original loan is made.]

[Can we eliminate the "improved" aspect of the definition entirely by providing that "Residential real property" means real property that, at the time a notice of default is given pursuant to Section 202 or within one year prior to the giving of such a notice, is used, or is intended by its owner to be used, for the personal, family, or household purposes of its owner and no more than [three] additional households?]

[Why do we have the one-year retroactive provision here? In effect, it requires the lender to figure out whether the property was owner-occupied at some time during the prior year, even though it is not owner-occupied now. Again, it would be simpler if we focused on the time the mortgage loan was made, although that might leave out a few people who buy property for rental purposes and subsequently move into it themselves.]

Note that vacation homes and other second or third homes are included as "residential real property, since there is no requirement that the home be the debtor's principal residence, or that it be owner-occupied. One comment at the annual meeting questioned whether this is what we intend.]

(16) "Secured creditor" means a creditor who has the right to foreclose a security interest.

[Note to drafting committee: This definition is changed to focus on the security interest rather than the obligation. The previous version of the definition read: "Secured creditor" means a creditor who has the right to enforce an obligation secured by a security interest.]

(17) "Security instrument" means a mortgage, deed of trust, security deed, contract for deed, land sales contract, lease creating a security interest, or other contract or conveyance that creates or provides for an interest in real property to secure payment or performance of an obligation, whether by acquisition or retention of a lien, a lessor's interest under a lease, or title to the real property. The term includes any modification or amendment to such a contract or conveyance. If a security instrument makes a default under any other agreement a default under the security instrument, the security instrument includes the other agreement. The term includes a lien on real property created by a record to secure an obligation owed by an owner of the real property to an association in a common interest community or under covenants running with the real property.

(18) "Security interest" means an interest in property that secures payment or performance of an obligation.

[Note to drafting committee: the definition of "authenticate" or "sign" has been deleted, since it does not seem to be needed. We have not provided that any document involved in foreclosure under the Act has to be signed. Should we?]

Introduction to definitions. American law recognizes that many different interests can be created in real property, and that many different sorts of documents can be employed to encumber those interests as security for debts and other obligations. This Act makes nonjudicial foreclosure available to virtually all consensually secured parties, no matter what interest in land has been made the collateral for the obligation and no matter what the nature of the instrument creating the security interest.

Such conventional terms as "mortgage" and "mortgagor" are not used in this Act, since they could easily be construed as having a limiting effect on the Act's coverage of security interests. Instead, this Act employs a set of terms that have no common law or statutory roots tying them to a particular form. In place of terms such as "mortgage," "contract for deed," "trust deed," etc., this Act substitutes the general term "security instrument" (see paragraph 17). In place of "mortgagor" or "installment contract purchaser" this Act substitutes "debtor" (defined in paragraph 4). In place of "mortgagee," or "vendor," this Act substitutes "secured creditor" (see paragraph 16). Instead of enumerating the various types of real property interests, such as "fee estate," "leasehold," and the like, that can be used as security, this Act substitutes "collateral" as defined in paragraph (1). The interest in the collateral that is conveyed to or retained by the creditor is defined as a "security interest" (paragraph 18) and not as a "lien" or as "title." Hence, for the purpose of foreclosures under this Act it is unimportant whether a state follows the "lien theory" or "title theory" of mortgage law.

1. "Collateral" includes all of the interests in land and all of the items of personal property that are subject to a security interest. The interests in land are subsumed under the term defined in paragraph (11) as "real property." This Act cannot be used to foreclose on a security interest in personal property alone, but can be used to foreclose on personal property in combination with real property.

2. "Common Interest Community." This definition is taken from the Uniform Common Interest Ownership Act. It encompasses condominiums, cooperatives, and planned communities that include common areas supported by the payments of individual owners, but does not include cooperatives if they are treated as personal property under state law.

3. "Days" must be counted to determine the expiration of various time periods prescribed by this Act. All days including Saturdays, Sundays, and holidays are counted. However, under Section 105(j), a required act that would fall on a Saturday, Sunday, or holiday may properly be performed on the next week-day.

4. "Debtor." In most cases the person who is personally obligated to pay the secured debt (if anyone is so obligated) and the owner of the real property securing the debt will be the same person at the inception of the transaction. However, the owner may later transfer the real property "subject to" the security interest while remaining liable on the secured obligation. In that case the definition of "debtor" includes the transferor where the provision refers to the obligation, and the transferee where the provision refers to rights in the real property. A tenant is also a debtor, since she or he holds a possessory interest in the real property. In addition, where the provision refers to the obligation, "debtor" encompasses guarantors, sureties, accommodation makers, assuming grantees, and other persons who are absolutely or conditionally liable on the secured debt. Hence, the term "debtor" often describes more than one person in a transaction. A person who has given a security interest, but has later transferred all of his or her interest in the real property and has been released from personal liability on the secured obligation is no longer a "debtor."

5. A "default" is an event that gives the secured creditor the right to foreclose. The event may be specified in the security instrument, or in any other agreement that the security instrument refers to as defining a default; see paragraph (17). An event can be a default even though the secured creditor must satisfy some preconditions (such as the giving of notices) before initiating foreclosure. See, e.g., Section 202, which provides for notice of default to the debtor.

6. "Evidence of title" may be denominated in a variety of ways, depending on local custom or practice. It might be termed, for example, a "foreclosure report," a "trustee's sale guaranty," or the like.

7. "Expenses of foreclosure" includes the direct costs related to foreclosure, but does not include items not directly related to foreclosure, such as payment of property taxes, insurance premiums, or repairs. Under other applicable law a secured creditor may have the right to expend money on the latter items and add the expenditure to the balance of the obligation secured by the security instrument. See Restatement (Third) of Property: Mortgages § 2.2 (1997). However, these items are not "expenses of foreclosure." All expenses of foreclosure are limited to reasonable amounts, However, the secured party is not required to seek competitive bids for foreclosure services, or to limit foreclosure expenses to the lowest possible amounts. Attorney fees are included as expenses of foreclosure only if they are authorized by the security instrument or by other applicable law.

8. "Guarantor" is employed in this Act as a surrogate for all persons who promise to pay the debt of another.

9. "Notice" is used throughout the Act with the meaning giving in Section 109.

10. "Original notice of foreclosure" is the notice given at the inception of a foreclosure under this Act. If that foreclosure cannot be completed, and the secured creditor then pursues another foreclosure by the same method or a different method under this Act, the notice given in pursuance of that method is not an "original notice of foreclosure."

11. "Person" includes both natural persons (individuals) and all forms of legally-recognized organizations.

12. "Real property." This term refers to the legal relationship or "interest" a person has against the world with respect to an object, the physical land. It includes common law estates, both freehold and nonfreehold, as well as rents, servitudes and other interests that are not estates because they do not carry with them the right of possession of the land. The term is also used, if the context warrants, to refer to the physical object (the land) in which these interests may exist. Leaseholds are regarded as real property for the purposes of this Act, even though for other purposes of state law (e.g., decedents' estates) they may be regarded as personal property. Interests of cooperative apartment owners are not considered real property under this definition if they are regarded as personal property by other law of the state.

Even though rents are regarded under this Act as real property, the procedures of this Act cannot be employed by a creditor to reach or obtain rents prior to the time of foreclosure; see Section 103(b)(3). However, a foreclosure under the Act will pass title to the rents accruing after the time of foreclosure; see Section 212.

13. "To record" incorporates the requirements of the state's existing recording act.

14. "Residential debtor." This definition must be read in connection with definition (15), "residential real property." The first definition of "residential debtor" is, in essence, a person who owns and occupies a home in which a security interest exists. The second definition covers a person who is obligated on a debt secured by "residential real property," even though she or he may have no legal interest in the property. It includes, for example, a former owner who has sold a home but has not been discharged from liability on the debt secured by the home. It also includes a guarantor of a debt secured by a home owned by someone else, as well as a non-possessing co-owner of a home under an "equity-sharing" arrangement. Both classes of "residential debtors" are regarded as needing protections from the acts of creditors that other borrowers do not need. Under the final part of the definition, an entity such as a corporation or trust that is owned and controlled by an individual or individuals meeting the prior parts of the definition is also considered a "residential debtor."

15. "Residential real property" is an essential term in defining "residential debtor" (paragraph 14). There are two elements in the definition, one relating to the use of the property and the other to the improvements on it. "Residential real property" must be used or intended to be used for personal, family, or household purposes of its owner. This definition is similar to that of the Uniform Consumer Credit Code, the Federal Trade Commission's Holder in Due Course Rule, and various other consumer protection statutes. The property may not contain more than four dwelling units, thus excluding larger apartment buildings. (Enacting states may wish to change the number of dwelling units in included property to comply with local custom.) Some commercial or other nonresidential use is permitted within this definition, so long as the residential use is primary.

In addition, to be "residential real property," the real property must either be improved with one to four dwelling units at the time the security instrument is entered into, or the owner must intend at that time to so improve it in the future.

16. "Secured creditor" includes a seller of real property who retains a lien or title to the real property sold for the purpose of securing the price, as well as a person, such as a mortgage lender, whose claim arises initially from a cash loan. It further includes anyone to whom the right to foreclose the secured interest is assigned or transferred.

16. "Secured creditor" is defined in terms of the right to foreclose the security interest. Ordinarily the security interest will automatically follow the obligation, unless the two rights are intentionally separated. See Restatement (Third) of Property: Mortgages § 5.4 (1997). Hence, a transfer of a promissory note will normally transfer the right to foreclose the corresponding security interest as well. However, an intentional separation may occur. Fannie Mae routinely holds the promissory notes representing the loans it acquires, but has the corresponding mortgages held in the names of its servicers for convenience in foreclosing. Since Fannie Mae has the power to direct its servicers to foreclose, it is a "secured creditor" under this definition.

17. "Security instrument." This definition recognizes that the title given to a document by its parties does not necessarily indicate whether it is a security instrument. The test is whether it creates a security interest. See comment to "security interest" below. The caption or title and the precise form of the document are irrelevant. It does not matter whether the document is in the form of a contract or a conveyance of an interest in land, or whether the security interest is created by granting or by retaining it. If the security instrument provides, as is ordinarily the case, that a default on another obligation, such as a promissory note, is a default under the security instrument, then the term "security instrument" includes the terms of the obligation. Hence, whether a particular term of the parties' agreement (such as an acceleration clause or a due-on-sale clause) is stated in the note or in the mortgage is immaterial for purposes of this Act. All modifications and amendments to the note and mortgage are also part of the security instrument. A lien created to assist in the enforcement of owners' obligations in common interest communities or under covenants running with land in a residential subdivision is a security instrument under this Act and can be foreclosed under its provisions.

On the other hand, not all instruments that create or transfer interests in real property do so for the purpose of security. For example, most deeds, space leases, and ground leases are given for the purpose of granting the possession and economic benefits of the conveyed interest to the recipient, not for the purpose of securing performance of an obligation of the grantor. If this is the case, these transactions are not security instruments and this Act does not affect them. See Section 107.

18. "Security interest." As indicated in the preceding comment, security interests can arise from documents labeled in a variety of ways. Mortgages, leases, deeds, and contracts may all create security interests. A security interest arises in any case in which a person receives or retains an interest in property for the purpose of securing an obligation owed to that person.

SECTION 103. SCOPE

(a) Except as otherwise provided in subsection (b), this [Act] applies to, and authorizes the nonjudicial foreclosure of, every form of security interest in real property, whether entered into on, before or after the effective date of this [Act], if the original notice of foreclosure is given after the effective date of this [Act] and if the debtor has agreed in substance in the security instrument that:

(1) the security interest may be foreclosed pursuant to this [Act]; or

(2) the security interest may be foreclosed by nonjudicial process exercised by or on behalf of the secured creditor.

(b) This [Act] may not be used to foreclose or enforce:

(1) a lien created by statute or operation of law, except a lien of an owners' association on property in a common interest community;

(2) a security interest in property in a common interest community if under the law of the State in which the property is located that interest is personal property; or

(3) a security interest in rents or proceeds of property.

(c) This [Act] does not preclude or govern foreclosure or other enforcement of security interests in real property by judicial or other action permitted by other law of this State. A secured creditor may not take action in pursuance of foreclosure under this [Act] while a judicial proceeding is pending in this State to foreclose the security interest or to enforce the secured obligation against a person primarily liable therefor. Foreclosure under this [Act] may proceed even if a judicial proceeding is pending or a judicial order has been obtained for appointment or supervision of a receiver of the collateral, for possession of the collateral, for enforcement of an assignment of rents or other proceeds of the collateral, for collection or sequestration of rents or other proceeds of the collateral, or to enforce the secured obligation against a guarantor.

[Note to drafting committee: in the above subsection, the references to judicial orders for possession of the collateral and for enforcement of an assignment of rents are new.]

(d) If a security instrument covers both real property and personal property, the secured creditor may proceed under this [Act] as to both the real property and personal property to the extent permitted by Article Nine of the Uniform Commercial Code.

This section extends the reach of this Act to all types of consensual security interests in real property. The caption of the document is irrelevant, so long as it creates a security interest in real property and contains a reference to nonjudicial foreclosure as required by subsection (a). In theory even an absolute deed may be foreclosed under this Act if it was given to create a security interest in land, as determined by applicable law. This Act does not specify the circumstances or methods by which a security interest may be created; those matters are left to other law.

The foreclosure provisions of this Act are available only if they are agreed to by the debtor. That agreement will ordinarily be part of the security instrument itself, but an amendment to the security instrument or some other subsequent agreement will also be sufficient. The agreement may either be by reference to the Act itself (e.g., "This mortgage may be foreclosed under the [State] Nonjudicial Foreclosure Act") or by reference to the concept of the Act (e.g., "This mortgage may be foreclosed by a nonjudicial procedure exercised by the mortgagee" or "This mortgage may be foreclosed by exercise of a power of sale by the mortgagee"). The agreement need not contain a precise reference to this Act, but need only refer to its fundamental concept, nonjudicial foreclosure.

Subsection (b) is intended to remove from the Act's coverage security interests that are nonconsensual. For example, the Act does not apply to construction liens, judgment liens, tax liens, landlords' liens, vendors' liens, or vendees' liens, unless the lien in question arises by virtue of an express agreement for a lien between the parties.

In general, liens to assist in enforcement of covenants against owners in common interest communities (see § 102(6)) may be enforced under this Act. If such liens are regarded as being created by operation of law (for example, under a condominium statute), they comprise an exception to the general principle that the Act applies only to consensual security interests. Subsection (b)(2) excludes the foreclosure of association liens on cooperative units if such units are considered personal property, as is the case in some jurisdictions.

Security interests in rents or other proceeds generated by real property are outside the scope of this Act. Secured creditors may employ a variety of methods for enforcement of those interests; this Act does not add to or detract from those methods.

Subsection (c) preserves the existing authority of the courts to foreclose mortgages and other real property security interests. Nonjudicial foreclosure under this Act is simply an option available to secured creditors, to which they may resort if they wish. In some states other processes, such as strict foreclosure of mortgages, are authorized by law and may continue to be used after adoption of this Act.

In some states special statutory provisions govern the termination of installment land contracts (contracts for deed). A state adopting this Act may wish to consider whether foreclosure of such contracts should be excluded from its coverage, or alternatively whether the statute providing for termination of installment contracts should be repealed.

The final sentence of subsection (c) is intended to prevent secured creditors from harassing debtors with a foreclosure by nonjudicial process when a judicial foreclosure or an action on the debt is pending. However, judicial proceedings for appointment or supervision of a receiver, for enforcement of an assignment of rents, or for collection of rents and proceeds are not inconsistent with foreclosure under this Act, and may be pursued simultaneously with foreclosure against the real property under this Act. The same is true of actions against guarantors. Even a foreclosure against other property provided by a guarantor as security for the guaranty may proceed despite the pendency of a foreclosure under this Act against the principal security for the debt.

The Act does not impose a "one-action" or "security first" rule, prohibiting commencement of an action on the debt prior to foreclosure if the debt is secured by real property, as is found in a few states. But it does prohibit simultaneous pursuit of a foreclosure under the Act and an independent action on the debt, except as noted above. In addition, if a foreclosure under this Act is completed against a residential debtor, Section 602 may exempt that person from any further liability for a deficiency.

Mortgages and other security instruments that chiefly affect real property often contain terms encumbering some items of personal property as well. It is permissible for lenders to employ this Act to foreclose on the real property, and to use other procedures consistent with Article 9 of the Uniform Commercial Code to realize on the security of the personal property. However, a lender may, at its option, sweep the personal property into a real property nonjudicial foreclosure under this Act. Under subsection (d) this is permissible so long as the requirements of Article 9 for disposition of collateral are satisfied.

SECTION 104. VARIATION BY AGREEMENT.

(a) Except as otherwise provided in subsections (b), (c) , and (d), the parties to a security instrument may not vary by agreement the effect of a provision of this [Act].

(b) The time within which a person must respond to a notice sent by a secured creditor may be lengthened by agreement.

(c) The parties may vary the effect of a provision that by its terms permits the parties to agree to the contrary.

(d) The parties may by agreement determine the standards by which performance of obligations under this [Act] is to be measured if those standards are not manifestly unreasonable.

(e) If no debtor under the security instrument is a residential debtor, an agreement by a guarantor waiving the right to receive notices under this [Act] with respect to the foreclosure of the property of a debtor who is not a guarantor is enforceable to the extent otherwise allowed by applicable law.

In general, the parties to a real property security instrument have freedom of contract with respect to their rights and remedies. However, for many centuries judicial policy has provided certain protections not only for the defaulting debtor but also for subordinate creditors. Hence, the rights and duties associated with foreclosure under this Act may not be modified by agreement of the parties unless the Act specifically so provides. In addition, the parties are permitted to lengthen by agreement the time allowed to respond to a notice sent by a secured creditor, to establish reasonable amounts of foreclosure expenses, and to establish reasonable standards of performance for obligations under this Act.

Lenders frequently demand that guarantors waive the right to receive notices related to foreclosures. Such a waiver is recognized by this Act in nonresidential transactions, but only with respect to the foreclosure of the property of the principal debtor. However, to the extent that other law, such as Article 9 of the Uniform Commercial Code, restricts the enforceability of such waivers, those restrictions govern in a foreclosure under this Act notwithstanding the waiver. See UCC 9-611(c)(2) and UCC 9-602(7) (2000 revision). A waiver is not recognized in a foreclosure of a security interest in the guarantor's own property given to secure the guaranty.

SECTION 105. SUPPLEMENTAL PRINCIPLES OF LAW AND EQUITY APPLICABLE. Unless displaced by a particular provision of this [Act], the principles of law and equity affecting security interests in real property supplement this [Act].

[Note to drafting committee: should the phrase "affecting security interests in real property" be deleted?]

An act governing foreclosure cannot anticipate all possible forms of conduct that would cause courts to intervene in the normal foreclosure process. Historically foreclosure has been subject to equitable principles, and this Act does not change that fact. Hence, this section provides that the fundamental principles of the common law, worked out over centuries, continue to apply to foreclosures. These principles include the law relating to acceleration, bankruptcy, capacity to contract, coercion, duress, estoppel, fraud, marshaling of assets, misrepresentation, mistake, principal and agent, redemption, subrogation, unjust enrichment, and other validating or invalidating cause.

For example, a court might "deaccelerate" an installment debt that had been accelerated under inequitable conditions (see, e.g., Federal Home Loan Mortg. Corp. v. Taylor, 318 So.2d 203 (Fla.App. 1975); might enjoin or stay a foreclosure because the granting of the security interest was tainted with fraud, duress, or lack of capacity (see, e.g., National Management Corp. v. Adolfi, 277 A.D.2d 553, 715 N.Y.S.2d 526 (2000); or might order that multiple parcels be foreclosed in a particular order to avoid unnecessary harm to holders of subordinate interests under the doctrine of marshaling (see, e.g., Indiana Lawrence Bank v. PSB Credit Services, Inc.,

706 N.E.2d 570 (Ind.App.1999).

The listing of legal and equitable principles in this comment is not exhaustive, but is merely illustrative of the principles that supplement this Act.

SECTION 106. NOTICE.

[Note to drafting committee: This section has been completely revised to conform to the federal E-Sign statute and the Uniform Electronic Transactions Act. Please review it with special care.]

(a) In this Section:

(1) With respect to notices given by a secured creditor, "address for notice" means:

(A) for a recipient who has given a security instrument, guaranty, assumption agreement, personal property security instrument, or other document in connection with a security instrument to the secured creditor, the address, if any, specified in the document;

(B) for a recipient not described in subparagraph (A) who is identifiable from examination of the public records in [the office of the county recorder], or identifiable from the financing statement filings in the office of the [Secretary of State] if personal property is being foreclosed, the address, if any, specified in the recorded or filed document;

(C) for a recipient not described in subparagraph (A) or (B) who the secured creditor has notice is a tenant, subtenant, or leasehold assignee of all or part of the real property collateral, the address made known to the secured creditor by that person or, if none, the address of the real property collateral, including any office, apartment or other unit that the secured creditor has notice is possessed by the recipient, with the notice directed to the recipient's name if known or "To Tenant occupying property at [Address]";

(D) if the sources described in subparagraph (A), (B), (C), or (D) do not disclose an address, the address of the real property collateral if known to the secured creditor.

(2) With respect to notices given by persons other than a secured creditor, "address for notice" means the address given in a document provided to the person giving notice by the recipient.

(3) "Address" includes both physical and electronic addresses, as the context requires.

(4) "Electronic" means relating to technology having electrical, digital, magnetic, wireless, optical, electromagnetic, or similar capabilities.

(5) "Electronic record" means a contract or other record created, generated, sten, communicated, received, or stored by electronic means.

(6) "Electronic signature" means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with intent to sign the record.

(7) "Recipient" means a person to whom a notice is sent.

(8) "Record," used as a noun, means information that is inscribed on a tangible medium or that is stored in a electronic or other medium and is retrievable in perceivable form.

(9) "Written notice" means a written record signed by the person sending the notice.

(10) "Electronic notice" means an electronic record signed by means of an electronic signature.

(b) A person has notice of a fact if:

(1) the person has actual knowledge of the fact;

(2) the person has received a notice or notification of the fact; or

(3) from all the facts and circumstances known to the person at the time in question the person has reason to know the fact exists.

(c) To send or give a notice, or to notify a recipient means:

(1) if the recipient is an individual, to hand deliver a written notice to the recipient or to an individual found at the recipient's address for notice who is authorized to receive service of civil process under the [Rules of Civil Procedure];

(2) if the recipient is not an individual, to hand deliver a written notice to an individual found at the recipient's address for notice who is authorized to receive service of civil process under the [Rules of Civil Procedure];

[Note to drafting committee: One comment from the floor at the annual meeting suggested that personal service should always be required.]

(3) if the recipient is an individual and the security interest covers the recipient's primary residence:

(A) if the notice is a notice of foreclosure pursuant to Section 203, to send written notice properly addressed to the recipient's address for notice, with costs provided, with the United States Postal Service, registered or certified mail, return receipt requested, or with another commercially reasonable carrier, and in addition to send written notice with the United States Postal Service by regular mail;

(B) if the notice is a notice of default pursuant to Section 202, to send written notice properly addressed to the recipient's address for notice, with costs provided, with the United States Postal Service or with another commercially reasonable carrier; or

(4) in all other cases, to send written notice properly addressed to the recipient's address for notice, with costs provided, with the United States Postal Service or with another commercially reasonable carrier or, except as provided in subsection (e), to send electronic notice by initiating operations that in the ordinary course will cause the notice to come into existence in the recipient's information processing system or address within that system in a form capable of being processed by the recipient.

(d) If a person sending a notice pursuant to this [Act] and the recipient have agreed to limit the type of notice or method of transmission of the notice, that limitation is enforceable to the extent permitted by law.

(e) An electronic notice may not be sent unless the recipient uses, designates by agreement or otherwise has designated or holds out an information processing system or address within that system as a place for the receipt of communications of that kind. An electronic notice is not sent if the sender or its information processing system inhibits the ability of the recipient to print or store the record.

(f) If, at the time of sending a required notice, a person has actual knowledge that the address for notice of a recipient as defined by subsection (a)(1) is incorrect or that notices cannot be delivered to the recipient at that address, the person sending notice shall make a reasonable effort to determine a correct address for the recipient and send the notice to the address so determined.

(g) If, after sending a notice, a person gains actual knowledge that the address of the recipient to which the notice was directed is incorrect or that notices cannot be delivered to the recipient at that address, the person who sent the notice shall promptly make a reasonable effort to determine a correct address for the recipient and send another copy of the notice to the address so determined, if any. The first notice, if timely sent and properly directed to the recipient's address for notice as defined in subsection (a)(1), complies with the time requirements of this [Act].

(h) A notice is sufficient even if it includes information not required by law or contains minor errors that are not seriously misleading.

(i) Receipt of a notice within the time in which it would have been received if properly sent has the effect of a proper sending.

(j) If the recipient is an individual, a notice is received when it comes to the recipient's attention or is delivered to and available at the recipient's address for notice. If the recipient is not an individual, a notice is received from the time when it is brought to the attention of the individual conducting the transaction, and in any event from the time when it would have been brought to that individual's attention if the recipient had exercised due diligence. An organization exercises due diligence if it maintains reasonable routines for communicating significant information with the person conducting the transaction and there is reasonable compliance with the routines. Reasonable diligence does not require an individual acting for the organization to communicate information unless such communication is part of the individual's regular duties or unless the individual has reason to know of the transaction and that the transaction would be materially affected by the information.

(k) After a notice is sent, the person sending it may revoke it by a subsequent notice unless the revocation would be unjust in view of a material change of position in reliance on the notice. A notice of foreclosure may be revoked by the secured creditor at any time prior to the date of foreclosure. Revocation must be accomplished by the recording of a sworn affidavit in the [Office of the County Recorder] of each [county] in which the notice of foreclosure was recorded, stating that the secured creditor has revoked the notice of foreclosure. If a notice of foreclosure is revoked, all proceedings taken under that notice are a nullity.

(l) This Act modifies, limits, and supercedes the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. section 7001, except that nothing in this [Act] modifies, limits or supercedes section 7001(c) of that Act nor authorizes electronic delivery of any of the notices described in section 7003(b) of that Act.

[(m) If a provision of this [Act] or a notice sent pursuant to this [Act] requires a performance on or by a certain day, and that day falls on a Saturday, Sunday, or legal holiday, the performance is sufficient if done on the day next following that is not a Saturday, Sunday, or legal holiday.]

This section adopts the concepts of the Uniform Electronic Transaction Act and conforms to the requirements of "E-Sign," the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. section 7001 et seq.

The terms "gives," "notifies," or "sends" are the words used when the essential fact is the proper dispatch of the notice, not its receipt. When the essential fact is the other party's receipt of the notice, that is stated. Subsection (c) provides that proper dispatch and not its receipt satisfies the obligation "to notify" or "to give notice." Subsection (j) states when a notice is received.

In most cases, the notice requirements of this Act may be satisfied by electronic transmission. However, when notices of default or foreclosure required by Article 2 are given by a secured creditor to an individual in connection with the foreclosure of that individual's person residence, electronic transmission is not permitted. These notices are regarded as so important, and the consequences of failure to receive them so great, that only a paper notice that is hand-delivered, mailed, or sent by a commercially reasonable carrier to the recipient is satisfactory. Indeed, in the case of a notice of default, dual copies of the notice must be sent, one by commercial carrier or by registered or certified mail, and one by regular mail. Notices of default and foreclosure of primary residences to recipients other than individuals residing there, and to individuals with respect to property other than primary residences, may be sent electronically. Likewise, types of notices other than notices of default and foreclosure may be sent electronically.

However, in all cases, electronic notice may be used only if the recipient uses, has agreed to, or holds out a suitable system to receive the notice. If a recipient is a consumer, an electronic notice may not be sent unless the recipient has consented to receipt of electronic records, and such consent remains in effect, as provided in the federal Electronic Signatures in Global and National Commerce Act, 15 U.S.C. section 7001(c).

If a person sending a notice knows or later discovers that an address is incorrect, the sender has a duty to make a reasonable effort to determine a correct address. An address might be incorrect because no such address exists, because as a result of error the recipient's address has been mis-transcribed, or for other reasons. The reasonable effort to determine a correct address would ordinarily include use of any forwarding address provided by the U.S. Postal Service, the use of at least one generally-used telephone directory for the area in which the recipient is believed to be located, and at least one nationwide internet search database. As technology develops, other methods of address search may also become reasonable and hence obligatory on persons sending notices.

If a correction notice is sent because the sender discovers that the address used for the original notice was incorrect, any applicable time periods run from the date of the original sending.

The provisions of subsection (j) concerning receipt of notice are derived from Uniform Commercial Code section 1-201(27).

The provisions of subsection (k) concerning revocation of notices are derived from Uniform Commercial Code section 2-209(5).

Subsection (m) is bracketed because its enactment is not necessary if the enacting state already has a general statute dealing with performances on Saturdays, Sundays, and holidays.

SECTION 107. TRANSACTIONS CREATING SECURITY INTERESTS. A transaction that is intended to create a security interest does so irrespective of the captions the parties give to the documents. A seller's retention of legal title to real property after the buyer enters into possession under a contract of sale creates a security interest only if the retained title is intended as security and the contract permits the seller to retain title for more than one year after the buyer enters into possession.

The creation of a security interest depends on the parties' intent. The intent in question, however, is that relating to real estate law. For example, a "synthetic lease" transaction that is intended to be regarded as a security interest for legal purposes but a lease for accounting purposes is within the scope of this Act.

The common situation in which a buyer takes possession of real property a short time before the closing under a contract of purchase is excluded from the coverage of this Act. However, if a seller may retain the title for longer than one year after the buyer enters into possession, the other circumstances of the case must be examined in order to determine whether a security interest was created. In many such cases, it will be clear that a "contract for deed" or "installment sale" transaction was intended and that title was retained for purposes of security. If so, foreclosure under this Act is available to the seller if the requirements of subsection 103(a) are satisfied.

With respect to whether a lease creates a security interest, guidance may be obtained from UCC § 1-203 (ALI Council Draft 2001).

[ARTICLE] 2

PROCEDURES BEFORE FORECLOSURE

SECTION 201. RIGHT TO FORECLOSE.

(a) A secured creditor has a right to foreclose under this [Act] if:

(1) a default has occurred;

(2) all conditions that, by the terms of the security instrument and applicable law, are prerequisites to foreclosure have been satisfied;

(3) all notices to the debtor required by the security instrument and by this [Act] as prerequisites to foreclosure have been given; and

(4) all periods for cure available to the debtor by the terms of the security instrument and applicable law as prerequisites to foreclosure have elapsed without cure being made.

(b) The secured creditor may pursue foreclosure by auction, by negotiated sale, or by appraisal, or may simultaneously pursue, together with foreclosure by auction, either foreclosure by negotiated sale or by appraisal, but not both. If the creditor pursues two methods of foreclosure simultaneously, the notice of foreclosure must so state.

[Note the drafting committee: Subsection (b) was moved from sec. 204. Is there any reason not to allow a creditor to pursue all three methods of foreclosure simultaneously?]

The fundamental role of this Act is to permit secured creditors, after giving appropriate notice, to foreclose without the necessity of judicial process. This section defines when foreclosure is available. If a secured creditor has a right to foreclose, the secured creditor may give notice of foreclosure (Sections 203 and 204), and foreclose against the collateral by auction (Article 3), negotiated sale (Article 4), or appraisal (Article 4). Notice of the secured creditor's elected method or methods of foreclosure must be given by the secured creditor as provided in Section 204(b)(6).

SECTION 202. NOTICE OF DEFAULT AND RIGHT TO CURE.

(a) If a default has occurred that cannot be cured, a notice of default need not be given before notice of foreclosure.

(b) Subject to the provisions of subsection (g), if a default has occurred that can be cured, a notice of foreclosure may not be given unless:

(1) each debtor has been given notice by the secured creditor of:

(A) the facts establishing that a default has occurred;

(B) the amount to be paid to the secured creditor or other performance required to cure the default;

(C) the name, address, telephone number, and if available, electronic mail address of a representative of the secured creditor who can be contacted for further information concerning the default; and

(D) a statement that foreclosure may be initiated if the default is not cured in a timely manner; and

(2) no person has, within 30 days after notice of default was given:

(A) cured the default if the default is curable by the payment of money, or

(B) commenced to cure the default if the default cannot be cured by the payment of money, diligently proceeded to cure the default, and cured the default within [90] days after the notice of default was given.

(c) If, at any time after 30 days from the date the notice of default was sent, no person is continuing to proceed diligently to the cure a nonmonetary default, the secured creditor may immediately terminate the period allowed for cure by accelerating payment of the principal amount owing on the secured obligation or sending an original notice of foreclosure.

(d) Unless a debtor is a residential debtor:

(1) if the default cannot be cured by the payment of money and a notice of default was given by the secured creditor within one year before the date of the default in question, no notice of default under this section is required to be given and no right to cure exists except as agreed by the parties; and

(2) the periods specified in subsection (b) to cure a default may be reduced as the parties agree, but may not be less than 10 days.

(e) This [Act] and the right to cure a default provided in this section do not impair or limit any other right to notice of default or to cure a default provided to any person by the security instrument. The period to cure provided in this section and any period to cure provided in the security instrument run concurrently unless the security instrument provides otherwise.

(f) Unless precluded from doing so by other law, the secured creditor shall cooperate with any person holding an interest in the collateral who attempts to cure a default by promptly providing upon request reasonable information concerning the amount or other performance due and expenses necessary for cure.

(g) If a default is cured within a period allowed by subsection (b), ( c), or (d), or after the expiration of that period but before acceleration of the principal amount owing on the secured obligation or the giving of an original notice of foreclosure, an acceleration by the secured creditor of the principal amount owing on the secured obligation on account of that default is ineffective.

(h) During a period allowed for cure of a default under subsection (b), (c), or (d), a secured creditor may enforce any remedy other than foreclosure provided for by the security instrument and enforceable under other law of this State if enforcement of the remedy does not unreasonably interfere with the ability of a debtor to cure a default under this Section.

In most cases this Act requires two notices prior to foreclosure, the notice of default specified by this section and the notice of foreclosure itself, specified by Sections 203 and 204. However, no notice under this section is necessary if the default is incurable.

Illustrations of curable defaults include a borrower's failure to pay money by a specified date, failure to repair the collateral, failure to comply with local building codes, and failure to carry casualty insurance if no insurable event has occurred during the period of failure. Illustrations of non-curable defaults include a borrower's failure to maintain a specific net worth on a specified date, failure to carry casualty insurance if an insurable event has occurred during the period of failure, and failure to reside on the premises if the failure is caused by the borrower's death.

Illustrations of nonmonetary defaults include the commission of waste by the debtor, a transfer of the property in violation of a covenant in the security instrument, a failure to keep the real property insured as required by the security instrument, or the like. A lender may convert a nonmonetary default into a monetary default by paying the money necessary to cure and then demanding reimbursement from the borrower.

The notice under this section simply advises the debtor or debtors that a default has occurred, what must be done to cure it, and that foreclosure may ensue if it is not cured within the allowed time period. Non-debtor parties, such as subordinate lienholders, are not entitled to receive this notice, although they may cure the default if they wish.

The notice must advise the debtor of the facts establishing that a default has occurred, and must state what must be done to cure it. The performance required may be stated on a per diem basis with respect to items whose amount changes with the passage of time. Legally enforceable fees, if provided for in the security instrument, may be included. Examples might include attorneys' fees, late fees, and fees for property inspection. See the example notice at the foot of this comment. Upon request, the secured creditor must cooperate by explaining the basis upon which any such fees are calculated. This Act does not deal with the enforceability of such fees, but leaves that issue to other law. Since redemption requires payment of the secured obligation in full, the cure provided by this Section is not a redemption.

To be effective under subsection (b), a cure must include reimbursement to the secured creditor of all reasonable and legally recoverable expenses incurred by the secured creditor on account of the default.

The cure period runs from the date the secured party gives the debtor notice of the default. If the default is monetary, it must actually be cured within 30 days. In the case of a nonmonetary default, however, acceleration and foreclosure can be avoided if continuing and diligent efforts to cure are commenced within 30 days, even if a complete cure cannot be accomplished within that time. However, if those diligent efforts to cure cease before cure is completed, and in all events after 90 days if the cure is not completed, the secured creditor may then immediately proceed to accelerate the debt or to give notice of foreclosure without taking any other preliminary action.

In practical effect, the cure period may last longer than the 30 or 90 days indicated in this section. For example, suppose a nonmonetary default occurs and the debtor is given notice of the default under this section. The debtor then commences and continues diligent efforts to cure the default. At the end of 90 days, if the cure is incomplete the secured creditor is entitled to accelerate the debt or send an initial notice of foreclosure. However, suppose the creditor does not do so, and with an additional time period - say, 120 days from the date of the notice - the debtor completes the cure. This cure is effective and the secured creditor cannot thereafter accelerate or send a notice of foreclosure on account of that default. Thus the cure period is at least 30 or 90 days as provided in this Section, but may be effectively extended if the secured creditor takes no action until a longer period passes. If cure is made within the time permitted by this section, subsection (h) "deaccelerates" any acceleration of the obligation that the secured creditor has initiated.

This section generally applies whether any of the debtors are residential debtors or not. However, if no debtor is a residential debtor two additional limitations are imposed on the right to cure. First, the 30-day cure period for may be reduced by the parties' agreement to as little as 10 days. Second, if the default is non-monetary, the right to cure may be exercised only if no default of the same type has occurred within the previous year.

The security instrument may provide debtors with additional protections, such as rights to notice and grace periods, beyond those provided by this Act. Such protections must be observed before notice of foreclosure can be given. However, any time period for cure under the security instrument and the time for cure granted by subsection (a) will run concurrently unless the parties have agreed that they will not do so.

The cure periods provided by this section inhibit acceleration and the instigation of foreclosure under this Act, but do not necessarily stand in the way of other remedies the secured creditor may have. For example, if the security instrument gives the creditor a security interest in the rents generated by the real estate collateral, and if that interest is otherwise enforceable under applicable law on account of the default in question, the creditor may assert its rights against the rents despite the fact that the cure period has not expired. Exercise of such other remedies is barred only if they would unreasonably interfere with the debtor's ability to cure the default.

To: Mary and John Jones

455 South Main Street

Ashland, Example 12345

Dear Ms. and Mr. Jones:

1. This notice affects real property located at Lot 13, Block B, Ridgefield Addition No. 2, in the City of Ashland, County of Pembroke, State of Example. The street address of this property is 455 South Main Street, Ashland, Example 12345.

2. This property is subject to a first mortgage executed by Mary and John Jones to First Financial Corp. on 23 June, 1999, and recorded in Book 455, Page 244, Official Records of Pembroke County, State of Example.

3. The mortgage and its accompanying promissory note require payments to First Financial Corp. of $1,455.00 principal and interest on the first day of each calendar month.

4. Your obligations under this note and mortgage are now in default as follows: (a) The payments for August 1, September 1, and October 1, 200X have not been made. (b) The premium on the homeowners insurance policy, due on October 1, 200X, was not paid by you, and was paid by First Financial Corp. on October 14, 200X in order to keep this insurance in force.

5. If you do not cure these defaults within 30 days of the date of this notice, by December 31, 200X, First Financial Corp. may initiate foreclosure proceedings against the real estate, which could result in your loss of ownership of this property.

6. You can cure these defaults within the time stated by tendering at the office of First Financial Corp., 677 First Avenue, Ashland, Example 12344 the following sums of money:

August 1, 200X payment: $1,455.00

Late fee for above payment: 72.75

September 1, 2000X payment: $1,455.00

Late fee for above payment: 72.75

October 1, 200X payment: $1,455.00

Late fee for above payment: 72.75

Reimbursement of insurance premium paid by

First Financial 10/15/0X $ 588.00

Interest on insurance premium

at 7.5% per annum to date of this notice: 5.66

Attorneys' fees in connection with this notice: $ 200.00

Total due as of 12/01/0X: $5,376.91

Additional per diem interest after 12/01/0X $ .12/per day

Payment must be made by cash, cashier's check, certified check, or postal money order.

7. If you have any questions about the defaults mentioned above or the calculation of the amounts owed, you may contact Sandra A. Mortgagee, residential loan officer for First Financial Corp. She can be contacted at 677 First Avenue, Ashland, Example 12344, telephone number 123-654-3210, e-mail address mortgageesa@firstfinancial.com.

[Signed] First Financial Corporation

Sandra A. Mortgagee, Loan Officer

SECTION 203. NOTICE OF FORECLOSURE: MANNER OF GIVING

(a) After the giving of a notice of default if required by Section 202 and the expiration of any cure period allowed by Section 202 without cure having been made, the secured creditor may give notice of foreclosure. The notice shall comply with Section 204. The giving of notice of foreclosure as provided in this section is a prerequisite to foreclosure.

(b) The secured creditor shall record in the [Office of the County Recorder of each county in which the real estate collateral is located] a copy of the notice of foreclosure. A recorded notice of foreclosure is notice of its existence and contents to any person acquiring an interest in the real property collateral after the notice of foreclosure is recorded. In the absence of recording of the notice of foreclosure, any purported foreclosure under this [Act] is voidable.

(c) Except as provided in subsection (d), the secured creditor shall send a notice of foreclosure to the following persons no later than 5 days after recording the notice of foreclosure pursuant to subsection (b) if they can be identified as of the time of recording of the notice of foreclosure.

(1) a person known to the secured creditor to be a debtor;

(2) a person specified by the debtor in the security instrument to receive notice on the debtor's behalf;

(3) a person who is shown by the public records [in the office of the County Recorder of the county] in which any part of the real property collateral is located to hold an interest in the collateral which is subordinate in priority to the security instrument;

(4) if the secured creditor holds and intends to foreclose on a security interest in personal property, a person who is entitled to notice with respect to the disposition of the collateral under [Article 9 of the Uniform Commercial Code];

(5) a person who the secured creditor has notice holds an interest in the real property collateral that is subordinate in priority to the secured creditor's security interest; and

(6) a person who has recorded in the public records [in the office of the County Recorder of the county] in which any part of the real property collateral is located a request for notice of foreclosure satisfying the requirements of Section 205.

(d) A secured creditor may omit the giving of notice of foreclosure to any person described in subsection (c)(1) through (c)(5) in order to avoid the termination of that person's interest in the collateral.

(e) The secured creditor, within 10 days before or after recording the notice of foreclosure, shall affix a copy of the notice of foreclosure at a conspicuous place on the real property collateral.

(f) An original notice of foreclosure under this [Act] is ineffective if given after the limitations period for foreclosure of a security interest in real property by judicial proceeding has expired.

This section is designed to provide a fair opportunity to receive notice of foreclosure for all persons who may be adversely affected by it. In the case of governmental lenders and others whose actions fall under the Due Process Clause of the federal constitution, compliance with this section should ensure that the notice requirements of due process will be met.

This section does not require secured creditors to resort to factual investigation of the property in order to determine where notice of foreclosure must be sent. Lenders need consult only their own records, the usual public land title records, and for personal property collateral, the office where UCC financing statements are filed. Since notice must be given to persons with recorded interests under subsection (b)(3), the practical result is that the foreclosing secured creditor must perform a title examination down to the date and time that the notice of foreclosure is recorded. However, there may be parties, such as grantees of the original borrower and subordinate interest holders, who have not recorded their conveyances, and the foreclosing creditor may not have actual knowledge of their rights. In such situations, they are not entitled to notice of foreclosure, and their rights will be cut off despite the fact that no notice of foreclosure is given to them.

This follows even if such unrecorded parties were in possession of the real property. However, posting of the notice of foreclosure at a conspicuous place on the real estate is required by subsection (c). Posting is reasonably likely to come to the attention of persons, such as tenants, subtenants, and leasehold assignees, who have unrecorded interests, and to give them actual knowledge.

Recording of the notice of foreclosure is required by subsection (a). Once a notice of foreclosure is recorded, the foreclosing creditor need no longer be concerned about giving notice to persons who acquire interests in the collateral after the time of recording but before the foreclosure sale. The recorded notice is analogous to the doctrine of lis pendens, and provides automatic notice to such parties. Recording of the notice is an absolute requirement for foreclosure under this Act, since numerous time periods involved in a foreclosure are measured from the time of recording. For this reason, a purported foreclosure in the absence of recording of the notice of foreclosure is voidable unless the collateral has passed into the hands of a good faith purchaser for value; see Section 208(c).

No notice of foreclosure is necessary to persons holding interests in the property with priority superior to the security instrument being foreclosed; such persons are unaffected by the foreclosure and have no need of notice.

Notice need not be given to guarantors of the secured obligation who have waived their right to notice if there are no residential debtors in the transaction and if the waiver is otherwise enforceable under applicable law. See Section 104(d).

Under subsection (d) the secured creditor may elect to omit giving notice to a person entitled to notice under subsection (c) because the creditor believes that it is desirable to preserve that person's interest. A common example is a subordinate lease which the creditor believes adds to the property's value, and hence which it is undesirable to terminate.

The only effect of a secured creditor's failure to give notice to a person entitled to notice under subsection (c) is to preserve that person's interest. The failure does not impair the foreclosure's effect on the interests of other persons, and does not impair the secured creditor's interest or its priority as to the interest of the person who was omitted from notice. The failure to give notice under this Act is analogous to the effect of omitting a necessary party to a judicial foreclosure proceeding.

SECTION 204. NOTICE OF FORECLOSURE: CONTENT.

(a) A notice of foreclosure must be conspicuously headed as follows: "NOTICE OF FORECLOSURE. YOU ARE HEREBY NOTIFIED THAT YOU MAY LOSE YOUR RIGHTS TO CERTAIN PROPERTY. READ THIS NOTICE IMMEDIATELY AND CAREFULLY."

[Note to drafting committee: A comment at the annual meeting asked whether we should have a definition of "conspicuous."]

(b) A notice of foreclosure must contain:

(1) the date of the notice, the name of the owner of the collateral as identified in the security instrument, a legally sufficient description and, at the secured creditor's option, the street address, if any, stated in the security instrument of the real property collateral or portion thereof being foreclosed, and a description of any personal property collateral to be included in the foreclosure;

(2) information concerning the recording of the security instrument, including recording date and [book and page number] [document number];

(3) the facts establishing that a default exists under the security instrument and a statement that the secured creditor is commencing foreclosure;

(4) a statement that the secured creditor has accelerated or, by virtue of the notice, is accelerating the principal amount owing on the secured obligation, or a statement that the secured creditor elects not to accelerate the principal amount;

(5) a statement that the collateral may be redeemed from the security interest by payment in full or performance of the secured obligation in full before foreclosure and the amount to be paid or other action necessary to redeem, including a per diem amount that will allow calculation of the total balance owed as of future dates and any further amount the secured creditor anticipates expending to protect the collateral;

(6) a statement of the method or methods of foreclosure the secured creditor elects to use, as provided in subsection (c), and the earliest date on which foreclosure will occur if no redemption is made;

(7) a statement that the foreclosure will terminate the rights in the collateral of the person receiving the notice of foreclosure;

(8) if applicable, an explanation of a residential debtor's right to avoid a deficiency claim by compliance with Section 602(c);

(9) if the foreclosure is by negotiated sale or by appraisal, an explanation of the right of the debtor and holders of subordinate interests to object to the foreclosure under Section 407 or 507;

(10) if applicable, a statement that the debtor may, within 15 days after the date the notice of foreclosure is given, request a meeting with a representative of the secured creditor to object to the foreclosure, as provided by Section 206; and

(11) the name, address, telephone number, and if available, electronic mail address of a representative of the secured creditor who can be contacted for further information concerning the foreclosure.

[Note to drafting committee: Item (9) above, the explanation of the right to object in a foreclosure by negotiated sale or by appraisal, was added in response to a comment from the floor at the annual meeting. It is necessary or helpful to have such an explanation at this early point in the foreclosure process? The actual notice of the "cash equivalent" amount to the debtor and junior interest holders will contain such an explanation.]

The amount that must be paid to redeem ordinarily will be stated as the balance owing as of a fixed date, plus a per diem amount representing the accruing interest on that balance. If a debtor seeks further information about the amount needed to redeem (for example, the basis of attorneys' fees or other expenses), the creditor must cooperate reasonably in providing that information.

Under subsection (1), the secured creditor may foreclose against all of the collateral or only part of it. The security interest will continue to exist on the part omitted from the foreclosure until the secured obligation is fully discharged and the expenses of foreclosure are paid. If a portion of the collateral is not covered by the initial foreclosure, the secured creditor may institute a subsequent foreclosure under this Act or otherwise foreclose on the remaining collateral if necessary at a later time. See Section 207 regarding foreclosure on multiple parcels.

The notice must state the facts establishing a default in reasonable detail. For example, it is not sufficient to state "borrower has not made payments when due" or "borrower has failed to comply with the covenants of the mortgage." In the case of a default in payment, the notice should specify the dates and amounts of delinquent payments. In the case of a breach of mortgage covenants, the relevant covenants should be identified, as in "borrower has failed to keep casualty insurance in force as required by paragraph 12 of the mortgage."

The notice of foreclosure automatically accomplishes an acceleration of the obligation by virtue of compliance with subsection (b)(4). Even in the exceedingly rare cases in which the security instrument contains no acceleration clause, an acceleration will still take place by operation of this Act. This should impose no inconvenience on lenders, since ordinarily no lender wishes to foreclose without acceleration. However, if the lender wishes, it can expressly disclaim an acceleration in the notice of foreclosure. Nothing in this Act prevents a lender from voluntarily "deaccelerating" as part of a workout agreement with a borrower, even after the notice of foreclosure has been given. Such a deacceleration is possible, if the lender is willing, up to the time of foreclosure.

The following is an illustrative notice of foreclosure complying with the requirements of this section.

1. This notice is given December 1, 200_, and affects real property located at Lot 13, Block B, Ridgefield Addition No. 2, in the City of Ashland, County of Pembroke, State of Example. The street address of this property is 455 South Main Street, Ashland, Example 12345.

2. This property is subject to a mortgage executed by Mary and John Jones to First Financial Corp. on 23 June, 200_, and recorded in Book 456, Page 244, Official Records of Pembroke County, State of Example.

3. The mortgage and its accompanying promissory note require payments to First Financial Corp. of $1,455.00 principal and interest on the first day of each calendar month. The payments for August 1, September 1, and October 1, 200_ have not been made. First Financial Corp. is now commencing foreclosure of this mortgage.

4. First Financial Corp. is hereby accelerating the unpaid balance on the promissory note. This means that the entire balance of $137,455.34 is now due and payable. Interest will continue to accrue on this balance at the rate of 7.5% per annum, and will be added to the principal due until paid in full.

5. The debtor and the holders of property interests subordinate to the mortgage of First Financial Corp. may prevent a foreclosure of the real property by paying the full balance of $137,455.34 on December 1, 200_, plus interest at the rate of $30.13 for each day thereafter to the date of payment. Payment must be made before the time of foreclosure in order to prevent foreclosure from occurring.

6. If payment is not made in this amount, First Financial Corp. elects to foreclose by auction. The earliest date on which foreclosure can occur is March 3, 200_.

7. If the foreclosure sale is held, it will terminate the rights of the owner of the property, and may terminate the interests of other persons to whom this notice is directed.

8. If the sum paid at the foreclosure sale is less than the unpaid balance on the mortgage indebtedness and expenses of foreclosure, the borrowers, Mary and John Jones, may be held personally liable for any remaining unpaid sum. However, they can avoid this liability by compliance with [Section 602(c) of the Uniform Nonjudicial Foreclosure Act] by acting in good faith, which means that they must

(1) peaceably vacate the real estate collateral and relinquish any personal property collateral within 10 days after notice is given to them that foreclosure has been completed;

(2) not have committed significant affirmative waste upon the collateral and left such waste uncured at the time of foreclosure;

(3) not have significantly contaminated the collateral with hazardous materials and left such contamination uncured at the time of foreclosure;

(4) not have committed fraud against the secured creditor;

(5) not have engaged in criminal activity on the secured real estate collateral that significantly reduced its value at the time of foreclosure;

(6) not have permitted significant uncured damage to be done to the collateral by other persons or natural causes as a result of their failure to take reasonable precautions against such damage; and

(7) provide reasonable access to the collateral for inspection by the secured creditor and prospective purchasers after the initial notice of foreclosure is sent.

9. If the borrowers, Mary and John Jones, believe that the proposed foreclosure is improper, they may request a meeting with Jane A. Doe, attorney at law, who represents First Financial Corp. in this matter, to discuss their objections with her. She can be contacted at 123 Main Street, City of Ashland, State of Example, at telephone number 123-654-3210, or by e-mail at doej@doelawfirm.com. Ms. Doe must receive a request for a meeting within 15 days after the date of this notice given above. Upon receiving such a request she will schedule a meeting, in person or by other means, at a mutually convenient time.

[Signed] First Financial Corp.

Sandra Mortgagee, Loan Officer

SECTION 205. REQUEST FOR NOTICE OF FORECLOSURE.

(a) Any person may record in the [Office of the County Recorder] a request for notice of foreclosure of a security instrument that has been recorded. The request must state:

(1) the [date, book, and page] [recording information] of the security instrument's recording;

(2) the names of the parties to the security instrument;

(3) a legally sufficient description of the real property collateral affected by the security instrument;

(4) the name and address of the person requesting notice of foreclosure; and

(5) the legal interest, if any, held by the person recording the request for notice.

(b) A person that records a request under subsection (a) is entitled to be given notice of foreclosure under Section 203(a). Recording a request does not affect the title to the real property collateral and does not constitute constructive notice to any person of an interest in the real property collateral held or claimed by the person requesting notice. A person that records a request for notice under this section may subsequently record an amendment correcting the person's name, address, or other information in the request, or withdrawing the request.

(c) A secured creditor is liable for a penalty of $500 to a person who has recorded a request for notice of foreclosure meeting the standards of this section and who is not given timely notice of foreclosure, but whose request for notice did not state that the person held an interest in the real property collateral. No other remedy or sanction may be imposed against the secured creditor on behalf of such person. If a recorded request for notice states that the person recording the request has an interest in the real property collateral and the person is not given timely notice of foreclosure, the person's actual interest in the collateral, if any, is preserved.

This section permits anyone who wishes to become eligible for receipt of a foreclosure notice. For example, a tenant under an unrecorded lease could record a request for notice under this section, and thus could ensure learning that foreclosure had been commenced. Even a person with no legal interest in the collateral may record a request under this section.

SECTION 206. MEETING TO OBJECT TO FORECLOSURE.

(a) A residential debtor may request a meeting to object to a foreclosure. The request must be made by record received by the secured creditor within 30 days after the notice of foreclosure is given. If the secured creditor receives a request for a meeting, the secured creditor or a responsible representative of the secured creditor shall schedule and attend a meeting with the person requesting it at a mutually agreeable time. The representative may be an employee, agent, servicer, or attorney of the secured creditor, and must have authority to terminate the foreclosure if the representative determines that there is no legal basis for foreclosure. The meeting may be held in person or by telephone, video conferencing, or other reasonable means, at the election of the secured creditor. If the meeting is held in person, it must be held at a location reasonably convenient to a parcel of the real property collateral unless the person requesting the meeting and the representative mutually agree on a different location. If requests from more than one person are received, the secured creditor may attempt to arrange a consolidated meeting, and the persons requesting meetings must cooperate reasonably with the secured creditor's effort to do so.

(b) A meeting under subsection (a) is informal, and the rules of evidence do not apply. The parties may be represented by legal counsel. If the meeting is attended by a representative of the secured creditor, the representative must have access to the secured creditor's records that provide evidence of the grounds for foreclosure. The secured creditor or representative shall consider the objections to foreclosure stated by the person requesting the meeting. Within 10 days after the meeting the secured creditor or representative attending the meeting shall send to each person who requested the meeting a written statement indicating whether the foreclosure will be discontinued or will proceed and the reasons for the determination. Neither the objections to foreclosure stated by the person requesting the meeting nor the reasons stated by the secured creditor or representative preclude any person from raising those or other grounds for objecting to or supporting foreclosure in any subsequent judicial proceeding. Each party must bear its own expenses in connection with the meeting. A statement or representation made by a person at the meeting may not be introduced as evidence in any subsequent judicial proceeding.

(c) Neither the secured creditor nor the representative incurs liability for making a determination that is adverse to the person who requested the meeting.

The objective of the informal meeting process provided by this section is to ensure both fairness and the appearance of fairness to residential debtors who are at risk of losing their homes in a foreclosure. The meeting is not automatic, but is scheduled only if a residential debtor requests it. Secured creditors have no obligation under this Act to conduct similar meetings at the request of nonresidential debtors, but of course may do so if they wish.

The responsible representative of the secured creditor is required to determine whether the person requesting the meeting has a legal basis for stopping the foreclosure. This section does not list all of the possible bases for taking such action, and they are left to other law. Illustrative bases would include the fact that the security instrument is a forgery not executed by the debtor, that the secured obligation has already been paid in full, and that the debtor is not in default.

The law is not entirely clear, but it is believed that the meeting required by this section will satisfy the hearing demands of the Due Process Clause, at least with respect to an attack by a residential debtor, if the secured creditor is a governmental entity and hence subject to that Clause. Existing cases establish that the "hearing" need not be formal and need not be before a judicial officer. An employee of the same agency that is conducting the foreclosure is acceptable, at least if that officer is impartial and not in the chain of decision-making that decided to foreclose in the first instance. See Johnson v. U.S. Department of Agriculture, 734 F.2d 774 (11th Cir. 1984); Lisbon Square v. U.S., 856 F.Supp. 482 (E.D.Wis. 1994). (The latter case sustained the Federal Multifamily Mortgage Foreclosure Act, 12 U.S.C. § 3701 et seq., despite its failure to provide a neutral decision-maker.) Since governmental agencies can provide for such a neutral "responsible representative" by regulation or administrative action, the informal meeting required by this section should satisfy their Due Process obligations to residential debtors. However, since there is no requirement of a meeting with non-debtor holders of subordinate interests in the collateral or with nonresidential debtors, such persons may still be able to raise Due Process claims unless the secured creditor grants them a meeting or hearing voluntarily.

The secured creditor and representative cannot be not held liable for making a determination adverse to the debtor, even if their determination is shown to be wrong. However, the secured creditor may still be held liable for actually proceeding with the foreclosure if a legal basis for foreclosure did not exist or the foreclosure was conducted wrongfully. See Section 601. In order to encourage free exchange of information at the meeting, statements by the representative of the creditor or admissions by the debtor at the meeting cannot be used in a later judicial proceeding.

SECTION 207. JUDICIAL SUPERVISION OF FORECLOSURE.

(a) Before the time of foreclosure an aggrieved party may commence a proceeding in [district] court for any violation of this [Act] or of other law or principle of equity in the conduct of the foreclosure. The court may make any order within the scope of authority of the court in a foreclosure of a mortgage by judicial action, including injunction and postponement of the foreclosure.

The objective of this Act is to provide a fair procedure under which foreclosures can take place without judicial supervision. However, cases will inevitably arise in which a party believes that judicial involvement or supervision of the foreclosure is necessary. This section provides for such involvement if requested by the secured creditor, by a person who was entitled to notice of foreclosure under Section 203, or by any other aggrieved party, such as a prospective or actual purchaser of the collateral.

The court's powers are analogous to those applicable in judicial foreclosure proceedings. For example, the court may enjoin the foreclosure; set a new foreclosure date; determine the priority of interests in the collateral; direct that the foreclosure be in bulk or by parcels; direct the sequence of foreclosure of parcels in order to marshal assets; and direct the order of distribution of the proceeds of the foreclosure.

The procedural aspects of injunctions against foreclosure - temporary restraining orders, preliminary injunctions, and permanent injunctions, and associated bond requirements - are not spelled out in this Act, but are left to other state law.

SECTION 208. EFFECT OF FORECLOSURE; LIMITATION PERIOD; REDEMPTION

[Note to drafting committee: This section is new, and collects several items that did not fit well in their previous positions. However, all of the material in this section appeared in prior drafts.]

(a) A foreclosure under this [Act] transfers the debtor's title to the collateral to the successful bidder under Section 301, the contract purchaser under Section 401, or the secured creditor under Section 501, subject only to interests in the collateral having priority over the security interest foreclosed and the interests of persons entitled to notice under subsection 202(c) who were not given notice of the foreclosure. The interests of all of other persons in the collateral are terminated.

(b) The time of foreclosure may not be less than 90 days nor more than one year after an original notice of foreclosure is recorded under Sections 203 and not less than 30 days after any subsequent notice of foreclosure is given. The one-year limitation of this subsection may be extended by agreement of the secured creditor and the holders of all interests in the collateral to whom notice of foreclosure was given. The one-year and 30-day limitation periods of this subsection are tolled during the effective period of any court order temporarily enjoining or staying the foreclosure, and during any automatic stay taking effect under the Bankruptcy Code.

(c) Persons having the right to redeem collateral from a security interest under applicable principles of law and equity may not redeem after the time of foreclosure. Unless precluded from doing so by other law, a secured creditor must cooperate with any person who attempts to redeem the property from the security interest before the time of foreclosure by promptly providing upon request reasonable information concerning the amount due or performance required to redeem.

[Note to drafting committee: On comment from the floor at the annual meeting suggested that the procedure for redemption should be spelled out in the Act. Redemption is, of course, a common law right, and there is considerable case law in most jurisdictions defining and explaining it. Should the Act be more specific in explaining redemption?]

Subsection (a) states the fundamental purpose of foreclosure: to transfer title to the collateral to the secured creditor or other person who prevails in the foreclosure process, and to eliminate all of the interests subordinate to the security interest being foreclosed that held by persons who were made parties to the foreclosure. Interests superior in priority to the security interest will survive the foreclosure, as will subordinate interests if their holders are not properly given notice of the foreclosure. A subordinate interest holder might be omitted from notice because the secured creditor makes a conscious decision to preserve the interest; see Section 203(d). Likewise, the foreclosing creditor might inadvertently omit giving notice to person entitled to notice. In either case the effect is the same: the person's interest is preserved and remains as an encumbrance on the title to the collateral.

Ordinarily a foreclosure will terminate all subordinate interests except those that have been intentionally or inadvertently omitted from notice, as stated in subsection (a). However, one equitable exception to this principle exists. If an owner of the equity of redemption in the real estate purchases at the foreclosure sale, the interests subordinate to the foreclosed mortgage are preserved. If this result were not followed, a debtor could collude with the holder of a first mortgage and unjustly cleanse the title to the land of the junior liens. See Restatement (Third) of Property (Mortgages) § 4.9 (1997).

Subsection (b) constrains the time that may elapse between the giving of an original notice of foreclosure and the foreclosure itself. The minimum time is 90 days, which gives the debtor an opportunity to redeem the collateral. The maximum time is one year, a period designed to prevent a secured creditor's lengthy inaction from leading the debtor to believe that the foreclosure will not occur. The one-year limitation is applicable to all parcels of real estate described in the original notice of foreclosure.

Subsection (c) summarizes the fundamental concept of foreclosure - that its effect is to cut off the right of foreclosed parties to redeem the property from the security interest.

[ARTICLE] 3

FORECLOSURE BY AUCTION

SECTION 301. FORECLOSURE BY AUCTION

If a secured creditor elects to foreclose by auction, the creditor shall comply with the requirements of this [Article].

This section describes the procedures for foreclosure by auction, the traditional method of foreclosing land security interests in the United States. It contains several features that are designed to make the auction sale more attractive to purchasers. These features include the obtaining and exposure to prospective purchasers of evidence of title, the potential for making other information and reports available, and the authority of the secured creditor to advertise the sale in other ways in addition to the traditional newspaper advertisement.

SECTION 302. EVIDENCE OF TITLE

The secured creditor shall obtain evidence of title to the real estate collateral. The evidence of title must have an effective date no earlier than, and must be issued no later than [10] days after the time of recording of the original notice of foreclosure. The secured creditor shall make a copy of the evidence of title available to any prospective foreclosure purchaser upon request. Neither the secured creditor nor the issuer of the evidence of title is liable to any person for inaccuracy of the evidence of title. The secured creditor, at its option, may also make available to prospective foreclosure purchasers other reports and information that it possesses affecting the collateral, but is not liable to any person for any inaccuracy in any report not prepared by the secured creditor.

[Note to drafting committee: It was previously decided that the last sentence above would be placed in comment. However, doing so will make it impossible to include a disclaimer of the secured creditor's liability, and in the absence of such a disclaimer, creditors may be very reluctant to release reports and information. Should the disclaimer be retained?

The time for issuance of evidence of title was shortened from 30 to 10 days. However, what if the local title or abstract companies, for business reasons, are unable to issue title reports that quickly. Is the result that lenders cannot foreclose by auction?]

SECTION 303. ADVERTISEMENT OF SALE

(a) After giving notice as required by Sections 203 and 204, the secured creditor, shall advertise the foreclosure sale by placing an advertisement in

[a publication complying with the publication requirements of the law of this State for judicial foreclosure of security interests in real property. The advertisement must be published as required for publication of notices of such foreclosures in this State.]

[a newspaper having general circulation in each county where any part of the real property collateral is located. The advertisement must be published at least once per week for three consecutive weeks, with the last publication not less than 7 days nor more than 30 days before the advertised date of sale.]

(b) No later than 21 days before the advertised date of sale, the secured creditor shall send a copy of the advertisement required by subsection (a) to the persons to whom notice of foreclosure was sent under Section 203. The advertisement may be sent with the notice of foreclosure, or may be sent separately in the manner prescribed for notices by Section 106. The secured creditor is privileged to enter the real property collateral and post on it a copy of the advertisement or a sign containing information about the sale.

[Note to drafting committee: Are we sure we don't want to require the posting of notice on the property?]

(c) An advertisement required by subsection (b) must state or contain:

(1) the date, time, and location,[ by street address and, if applicable, by floor and office number,] of the foreclosure sale;

(2) that the sale will be made to the highest qualified bidder;

(3) the amount or percentage of bid of the deposit that will be required of the successful bidder at the completion of the sale and the form in which the deposit may be made if payment other than by cash or certified check will be accepted;

(4) a legally sufficient description, the [property tax map number] [parcel identifier number] of the real property to be sold, and the street address if any, or the location if there is no street address, of the real property;

(5) a brief description of any improvements on the real property and any personal property collateral to be sold;

(6) a name, address, telephone number, and electronic mail address if available for a secured creditor who is an individual, or for an employee, agent, or attorney who can provide information concerning the collateral and the foreclosure if the secured creditor is not an individual;

[Note to drafting committee: We do not have a definition of "agent." Is there a risk that people will confuse this with a registered agent for service of process?]

(7) that additional information, a copy of the evidence of title, and any available reports concerning the collateral, which may be listed specifically, are available from the person identified in paragraph (6);

(8) whether access to the collateral for the purpose of inspection before foreclosure is available to prospective bidders and, if so, how to obtain access; and

(9) any other information concerning the collateral or the foreclosure that the secured creditor elects to include.

The advertising requirement stated in this section represent the minimum requirements. The secured creditor may advertise the property in any other reasonable manner, and the cost of such advertisements is a proper foreclosure expense. For example, the secured creditor may post information about the sale on an internet site that provides information about foreclosures, whether the site is operated by a private party or by an entity of state or local government.

The following is an example of a sufficient advertisement.

A foreclosure sale will be held on March 27, 200_ at 10:00 am at the offices of Street and Black, Attorneys at Law, 1250 Main Street, Suite 400, Ashland, Example 12344. Sale will be made to the highest qualified bidder. The successful bidder must make a deposit of five percent of the bid immediately upon completion of the sale. The deposit must be in the form of a cashier's check or certified check.

The real property to be sold is Lot 13, Block B, Ridgefield Addition No. 2 (Parcel Number 134552), as shown in Plat Book 33, Page 141, Official Records of Pembroke County, State of Example, with a street address of 455 South Main Street, Ashland, Example 12345. The real property consists of a two-story single-family house with a detached garage. No personal property is being sold with the real property.

For additional information concerning the property, contact Ann Adams, Loan Foreclosure Specialist, First Financial Corp., 677 First Avenue, Ashland, Example 12344, telephone number 123-654-1889. Prospective bidders may obtain copies of a preliminary title insurance report and an appraisal of the property by contacting Ms. Adams. The property is vacant, and prospective bidders may obtain access for purposes of inspecting it by contacting Ms. Adams. The property is located in Special Street Improvement District No. 34, as established by the City of Ashland, State of Example, and special assessments of $605 per year are assessed against it until the year 200_.

SECTION 304. ACCESS TO COLLATERAL

If the secured creditor has authority to grant access to the collateral, the secured creditor shall reasonably accommodate a person who contacts the person designated in Section 303(c)(6), expresses an interest in bidding at the foreclosure sale, and requests an opportunity to inspect the collateral.

A debtor typically has no legal obligation to allow access to the real property prior to the foreclosure for the purposes of allowing prospective buyers to inspect. However, the debtor or the debtor's tenant may voluntarily grant such access. In the case of a residential debtor, the granting of reasonable access is an element that is considered in assessing the debtor's good faith, and hence the debtor's freedom from deficiency liability under Section 602.

SECTION 305. LOCATION AND TIME OF SALE

(a) An auction sale must be conducted at a date and time permitted for a sale under judicial foreclosure of a security interest in real property in this State, in a county where some of the real property collateral is located

[at a location where a sale under judicial foreclosure of a security interest in real property may be held in this State.]

[at:

(1) a main door of the [county] courthouse, or other location in the courthouse if prominent signs indicate that location; [or]

(2) the site of the real property collateral; or

[(3) a location that is readily accessible to the public and bears a standard street address.]]

SECTION 306. FORECLOSURE OF TWO OR MORE PARCELS.

(a) Collateral consisting of multiple parcels of real property may be foreclosed by auction separately or in combination as provided in the security instrument, or if the security instrument does not specify the manner of sale of multiple parcels:

(2) by conducing a separate sale on each of the parcels; or

(3) if two or more parcels, at the time of notice of foreclosure is given, are contiguous, are being used in a unitary manner, are part of a unitary plan of development, or are operated under a single management:

(A) by combining the parcels in a single sale; or

(B) by conditionally offering the parcels both in combination and separately, and accepting the higher of the two aggregate bids.

(b) If the entire real property collateral is not made the subject of a single auction sale, the secured creditor shall discontinue sales of parcels or combinations of parcels when the total amount of bids received is sufficient to pay the secured obligation and the expenses of foreclosure.

This section deals with the question whether multiple parcels should be offered for sale separately or together. There is no corresponding provision in the Act for foreclosure by negotiated sale or by appraisal. The Act does not constrain the choice of the secured creditor in those situations, since debtors and holders of junior interests can send a notice of objection and prevent the foreclosure from proceeding if they do not agree with the secured creditor's choice.

The security instrument controls the manner of sale of multiple parcels. If it does not speak to the issue, the foreclosing creditor may in all cases sell the parcels separately. In its discretion, it may instead sell them in combination, or conditionally offer them separately and in combination, if they are contiguous, are being used in a unitary manner, are part of a unitary plan of development, or are operated under a single management. This test is applied as of the date the notice of foreclosure is given, and is intended to assure that the parcels have a sufficient relationship to one another that some prospective purchasers will probably be interested in buying more than one parcel. Note that the term "single management" does not necessarily require that the same business entity is managing the parcels; the test is whether as a practical matter the same management controls the parcels, even if it does so through multiple business entities.

A court order marshaling assets will supersede the provisions of this section.

SECTION 307. POSTPONEMENT OF SALE

A person conducting an auction sale may, for any cause the person considers appropriate, postpone the sale for no more than 30 days. Announcement of postponement must be given orally at the place previously scheduled for the sale and within a reasonable time after the scheduled time for commencement of the sale. No other advertisement or notice of the postponed time and place of sale is required. Subsequent postponements of the sale may be made in the same manner.

The person conducting the sale may elect to postpone it for up to 30 days. This may be deemed expedient, for example, because of inclement weather, the absence of sufficient bidders, or damage occurring to the property.

SECTION 308. CONDUCT OF SALE

(a) An auction sale must be conducted by a person designated by the secured creditor.

[Note to drafting committee: In several sections, including this one, previous drafts contained references back to Section 208(b), which imposes a 90-day minimum and a 1-year maximum time limit from the date of recording of the notice of foreclosure to the time of foreclosure. In this draft all such references have been deleted. Should they be reinserted?]

(b) Before commencing the sale, the person conducting the sale shall make available to prospective purchasers copies of the evidence of title, and may make available any other reports or information concerning the collateral.

(c) Before opening the sale to bids, the person conducting the sale may verify that persons intending to bid have funds in an amount and form necessary to pay the deposit required by the advertisement, but shall not disclose the amount of any bidder's deposit to any other bidder.

(d) The sale shall be conducted

[in the manner prescribed by law in this State for the judicial foreclosure of a security interest in real property.]

[under the following rules:

(1) Any person, including a debtor and the secured creditor, may bid at the sale. The individual conducting the sale may bid on behalf of the secured creditor or any other person by whom he or she is authorized but may not bid for his or her own account. The secured creditor may bid by credit any amount up to the balance owing on the secured obligation, including the expenses of foreclosure.

(2) A fixed bid of a person not attending the sale may be submitted by a record received at least 24 hours before the scheduled time of the sale by the person designated in the advertisement of sale to provide information about the property. The bid must be accompanied by a deposit satisfying the requirements of subsection (i). The bid must be read aloud by the person conducting the sale before the sale is opened to oral bids.

(3) Sale shall be made to the person bidding the highest amount who complies with this section.]

SECTION 309. TIME OF FORECLOSURE. The auction sale is completed by the announcement of the person conducting the sale that the property is "sold" Except as provided in Section 310, the time of the announcement is the time of foreclosure.

SECTION 310. DEPOSIT BY SUCCESSFUL BIDDER.

The successful bidder must pay a deposit to the person conducting the sale immediately after the sale is completed. The deposit must be 10 percent of the amount of the bid unless the advertisement stated that a lower deposit or no deposit would be required. The deposit must be paid by means of cash, certified check, or such other form of funds as was stated to be acceptable in the advertisement or is acceptable to the person conducting the sale.

[SECTION 311. UPSET BIDS

(a) An upset bid is a bid by which a person offers to purchase the collateral that has theretofore been sold at a foreclosure by auction under this [Act]. The amount of an upset bid must exceed the highest bid at the auction sale or the last previously received upset bid by a minimum of 5 percent or $1,000, whichever is greater.

(b) An upset bid may be made by any person by notice to the secured creditor. The notice shall give the name, address, and telephone number of the upset bidder and the amount of the upset bid, must identify the property on which the bid applies, and must be directed to attention of the person named in the notice of foreclosure pursuant to Section 302 (c)(6).

(c) An upset bid must be received by the secured creditor no later than 10 days after the time of foreclosure or 10 days after receipt of the most recent previous upset bid.

(d) An upset bid must be accompanied by a deposit, in the form of cash, cashier's check, or certified check, payable to the secured creditor, in an amount at least equal to 10 percent of the upset bid amount and no less than $1,000.

(e) There may be successive upset bids, receipt of each of which shall be followed by a period of 10 days within which a further upset bid may be received.

(f) When a secured creditor receives an upset bid in compliance with this section, the last previous bidder, whether an upset bidder or a bidder at an auction sale, is released from any further obligation on account of that bid, and any deposit made by the bidder shall immediately be returned, together with a notice from the secured creditor informing the bidder that the bid is of no effect on account of the receipt of an upset bid. If an upset bid is received and no timely further upset bid is received, the upset bidder becomes obligated to purchase the collateral for the amount of the upset bid.

(g) The person named in the notice of foreclosure pursuant to Section 303(c)(6) shall maintain a record of all upset bids received, and shall, upon inquiry from any person, advise that person of the status of the most recent bid received and the period of time remaining for receipt of a further upset bid.

(h) When a bid at a foreclosure by auction or an upset bid is made, and no further upset bid is received by the secured creditor within the time permitted by subsection (b), the secured creditor shall immediately notify the last previous bidder that the bid of that bidder is now final and binding.]

[Note to drafting committee: The foregoing section is an attempt to integrate the North Carolina upset bid concept into the Act. It appears feasible to the Reporter to do so. Changes in other sections that will be necessary to accommodate the upset bid process are shown in brackets.]

SECTION 312. PAYMENT OF REMAINDER OF BID.

(a) The successful bidder shall pay the remainder of the bid to the person conducting the sale within [ten] days after notice is given under Section 311(g).

(b) If payment of the remainder of the bid is not timely made:

(1) the secured creditor may cancel the sale;

(2) the secured creditor may terminate the foreclosure under Section 314; and

(3) the deposit of the successful bidder is forfeited and shall be distributed in the same manner as the proceeds of a sale.

(4) all previous rights to the collateral that were terminated by the foreclosure reattach and right to redeem the collateral from the security interest is revived; and

(5) the time of the announcement "sold," as provided in Section 309, is not the time of foreclosure.

SECTION 313. FORECLOSURE AMOUNT; DISTRIBUTION OF PROCEEDS.

(a) The highest amount bid at a sale [or the last upset bid, if any], less the expenses of foreclosure, is the foreclosure amount. The proceeds of the sale shall be distributed by the secured creditor within 45 days after the time of foreclosure [or 45 days after receipt of the last upset bid if any] in the following order:

(1) to the expenses of foreclosure;

(2) to pay the secured obligation;

(3) to pay, in the order of their priority, the value of all interests terminated by the foreclosure;

(4) to the debtor.

(b) If the secured creditor, in distributing the proceeds of the sale, acts in good faith and without actual knowledge of the invalidity or lack of priority of the claim of a person to whom distribution is made, the secured creditor is not liable for an erroneous distribution. The secured creditor may maintain an action in the nature of interpleader, in the [district] court sitting in a county in which some part of the real estate collateral is located, for an order directing the order of distribution of the proceeds of the sale.

The balance owing on the secured obligation is not limited to principal and accrued interest on the secured debt. It may include late fees, default interest, prepayment fees, and other fees to the extent permitted by other law of the state; the enforceability of such fees is not governed by this Act. It may also include expenditures made by the secured creditor to protect the collateral, such as property tax payments, insurance premiums, and expenditures to correct waste. See Restatement (Third) of Property: Mortgages § 2.2 (1997).

Any surplus from the sale, after payment of the foreclosure costs and discharging the secured obligation, is distributed to the holders of subordinate interest who were given notice of the sale, and to the debtor, in the order of their priority. Distribution is not limited to persons who hold liens, but rather is made to the holders of all interests that have a positive value, such as tenants under leases that have "bonus value." If agreement cannot be reached about the value of such interests, a judicial determination of their value may be necessary. Persons having interests superior in priority to the security instrument being foreclosed are not entitled to receive any of the proceeds of the sale, since it does not affect their interests.

If the secured creditor is uncertain about the priority of junior interests, it may apply for a court determination of priority. Pending such determination the secured creditor may invest the proceeds of sale in a reasonable manner. Any investment earnings must be added to the proceeds.

SECTION 314. DEED TO SUCCESSFUL BIDDER; AFFIDAVIT.

(a) Upon payment by the successful bidder of the full balance of the bid, the secured creditor shall:

(1) issue and deliver a deed, such other documents as may be necessary to record the deed and, if applicable, a bill of sale, all without warranty of title, conveying the collateral to or as directed by the successful bidder; and

(2) execute and record in [office of the county recorder] a sworn affidavit containing the following:

(A) identification of the security interest and the debtor, and a sufficient description of the collateral;

(B) identification of the [book and page number] [document number] at which the notice of foreclosure was recorded;

(C) identification of the interests in the collateral the holders of which were given notice of foreclosure and which were terminated by the foreclosure;

(D) a statement that the secured creditor has complied with all provisions of this [Act] for a foreclosure by auction; and

(E) a statement that title to the collateral has passed to the purchaser and identification of the purchaser.

SECTION 315. DISCONTINUANCE OF FORECLOSURE BY AUCTION

(a) At any time before the time of foreclosure the secured creditor may elect to discontinue foreclosure by auction. To do so, the secured creditor shall send notice to the persons to whom notice of foreclosure was sent under Section 203(b), advising them that foreclosure by auction has been discontinued and whether the secured creditor will:

(1) pursue another foreclosure by auction under this section;

(2) continue to foreclose by negotiated sale or by appraisal pursuant to a notice of foreclosure previously given;

(3) commence foreclosure by negotiated sale;

(4) commence foreclosure by appraisal;

(5) foreclose by judicial proceeding; or

(6) discontinue the foreclosure.

(b) If a notice sent by a secured creditor under this section includes all elements required for a notice of foreclosure under Sections 203 and 204, further notice under those sections is not necessary to pursue a further foreclosure.

The secured creditor's election to foreclose by auction is not necessarily a final decision. The creditor can change course and foreclose by negotiated sale or by appraisal instead. However, all of the persons who were entitled to notice of the foreclosure must be given new notices if the foreclosure method is changed.

SECTION 401. FORECLOSURE BY NEGOTIATED SALE. If a secured creditor elects to foreclose by negotiated sale the secured creditor the secured creditor shall comply with the requirements of this [Article].

This section provides for foreclosure by negotiated sale, a method that may in some cases be quicker and more efficient than the traditional auction sale. However, it may be employed only if no objection is made to it by those whose interests will be terminated by it. Those persons are entitled to notice of the negotiated sale, and if they make a timely objection to it, the sale cannot proceed unless the secured creditor excludes their interests from the effect of the foreclosure. If foreclosure by negotiated sale cannot be completed because of such objections, the secured creditor may either pursue a new foreclosure by negotiated sale or resort to one or more of the other methods of foreclosure.

SECTION 402. ADVERTISEMENT AND CONTRACT OF SALE

(a) The secured creditor may advertise the collateral for sale to prospective purchasers by whatever methods the secured creditor considers appropriate, and may list the collateral for sale with brokers.

(b) The secured creditor may enter into a conditional contract of sale with a prospective purchaser or, if the collateral is sold in parcels, with more than one purchaser. A condition of the secured creditor's obligation to sell under the contract is that no objection to the cash equivalent amount is made under Section 404 and that no redemption of the collateral from the security interest be made before the time of foreclosure.

(c) The contract of sale may provide for a cash sale or for the financing of the sale by the secured creditor.

The secured creditor has wide discretion in advertising of the property. Newspapers, broadcast media, magazines, the internet, and other reasonable methods may be used.

The contract of sale negotiated by the secured creditor may provide for a cash sale or may provide for installment payments or other forms of financing by the secured creditor. However, in all cases the secured creditor must give notice of the cash equivalent amount that it will credit against the secured debt and distribute to subordinate interest-holders and the debtor. This will become the foreclosure amount if the sale is completed.

SECTION 403. NOTICE OF PROPOSED SALE

(a) If the secured creditor enters into a conditional contract of sale as provided in Section 402, the secured creditor shall send notice of the proposed sale at least 30 days before the date of the proposed sale to the persons specified in Section 203. The notice of proposed sale shall state or contain:

(1) the date on or after which the secured creditor proposes to sell the collateral;

(2) the cash equivalent amount, net of all expenses of foreclosure, that the secured creditor offers to credit to the debtor and other persons entitled thereto, which amount may be greater or less than the selling price stated in the contract;

(3) that if the sale is completed, title to the collateral will be transferred to the purchaser under the contract as of the time of foreclosure, and that the stated cash equivalent amount will be applied to the secured obligation and any balance distributed as provided in Section 313(a).

(4) that the person receiving the notice may inspect a copy of the contract of sale by contacting an individual whose name, address, telephone number, and electronic mail address if available are given in the notice;

(5) that if any person who holds an interest in the collateral that is subordinate in priority to the secured creditor's security interest objects to the sale, the person may notify the secured creditor by sending a notice so stating, and if the notice is received by the secured creditor no later than 7 days before the date of the proposed sale, the secured creditor will discontinue the foreclosure by negotiated sale unless the secured creditor elects to preserve that person's interest from termination by the foreclosure.

The cash equivalent amount must be stated net of foreclosure expenses; in other words, the secured creditor is left with the responsibility for paying the foreclosure expenses and any other costs associated with performance of the contract of sale. The cash equivalent amount may be more or less than the actual price the purchaser agrees to pay, and is determined entirely in the secured creditor's discretion. The secured creditor might arrive at the cash equivalent amount by taking the actual selling price and reducing it by the various expenses of foreclosure and sale that the secured creditor expects to pay. In effect, the secured creditor is offering to apply this cash equivalent amount against the secured indebtedness, and the persons who are entitled to object must decide whether this amount is acceptable to them. The purchase price stated in the negotiated sale contract provides at least a limited basis for the subordinate interest holders to judge whether the cash equivalent price stated by the secured creditor is acceptable. If one or more of them believes that a different form of foreclosure will produce a higher amount, there is a logical basis for the making of an objection to the proposed negotiated sale. However, there is no requirement that a person objecting give a reason for the objection, nor that the objection be reasonable or made in good faith. As a matter of self-interest, those with the right to object will not do so if they consider the proposed cash equivalent amount reasonable.

SECTION 404. COMPLETION OF SALE

(a) If the secured creditor does not receive a notice 7 or more days before the proposed date of sale objecting to the sale from any person who has been given notice of the proposed sale and who holds an interest in the real property collateral that is subordinate in priority to the secured creditor's security interest, the sale may be completed by the secured creditor in accordance with the contract of sale as provided in subsection (b).

(b) Upon compliance by the purchaser with the contract for sale, and on or after the proposed date of sale, the secured creditor shall deliver to the purchaser such form of deed, bill of sale, if applicable, and other documents as the parties agree or as are necessary to consummate the sale. The secured creditor shall also execute a sworn affidavit containing the following:

(1) identification of the security interest and the debtor and a legally sufficient description of the collateral;

(2) A reference to the [book and page number] [document number] at which the notice of foreclosure was recorded;

(3) identification of the interests in the collateral that were terminated by the foreclosure;

(4) a statement that the secured creditor has complied with all provisions of this [Act] for a foreclosure by negotiated sale; and

(5) a statement that title to the collateral has passed to the purchaser and identification of the purchaser.

SECTION 405. RECORDING OF AFFIDAVIT AND DEED; TIME OF FORECLOSURE. On or after the date of delivery of the deed, the affidavit and deed required by Section 404 shall be recorded in the [county recorder's office], with the affidavit recorded first and the deed recorded as soon after the recording of the affidavit as is feasible. When recorded, the deed transfers title to the collateral as provided in Section 203(f). The time of recording of the deed is the time of foreclosure.

The affidavit that the secured creditor must record along with the deed to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the secured creditor exercises the "opt out" right provided by Section 407(b), the particular subordinate interest that was "opted out" will not be listed in the affidavit as having been terminated by the foreclosure.

SECTION 406. FORECLOSURE AMOUNT; DISTRIBUTION. The cash equivalent amount is the foreclosure amount and shall be distributed as provided in Section 313(a). In making distribution the secured creditor has the rights stated in Section 313(b). No fee may be paid from the cash equivalent amount to a person conducting the sale. After expiration of the time for objection specified in Section 404(a), no person to whom notice of foreclosure under Section 203 and notice of proposed sale under Section 403 were sent may subsequently assert that the foreclosure amount was inadequate.

A subordinate interest-holder who has been given the appropriate notices of foreclosure and of the proposed negotiated sale, and who does not prevent consummation of the sale by making a timely objection to it, is prohibited from attacking the sufficiency of the cash equivalent amount thereafter. In effect, such parties are estopped to question the cash equivalent amount. However, the amount might nonetheless be attacked in a subsequent bankruptcy proceeding as a preference or a fraudulent conveyance.

SECTION 407. NOTICE OF OBJECTION TO SALE.

(a) If, 7 or more days before the proposed date of sale, the secured creditor receives notice of objection to the sale from any person who has been given notice of the proposed foreclosure by negotiated sale and who holds an interest in the real property collateral subordinate in priority to the secured creditor's security interest, the secured creditor shall proceed as provided in subsection (b) or (c).

(b) The secured creditor that receives a timely notice of objection under subsection (a) may notify the person who made the objection that the person's interest in the collateral will be preserved from termination by the foreclosure as if that person had not been given notice of foreclosure. The secured creditor's notice to the person objecting must be sent before the time of foreclosure. If the secured

creditor gives the notification, the objection of the person to whom it is given may be disregarded by the secured creditor, the foreclosure may be completed, and the affidavit recorded under Section 405 must not identify that person's interest in the collateral as having been terminated by the foreclosure.

(c) If a secured creditor that receives a timely notice of objection under subsection (a) does not issue a notice to the person objecting as provided in subsection (b), the secured creditor shall discontinue the foreclosure by negotiated sale.

Under subsection (b), the secured creditor may neutralize an objection to the sale simply by notifying the objector that the sale will be subject to, and will not terminate, the objector's interest in the collateral. In this way the secured creditor can "opt out" of foreclosing a particular interest, just as if that person had not originally been given notice of foreclosure under Section 203. The holder of such an interest cannot reasonably object to the sale's consummation, since the foreclosure will not affect that interest. The affidavit that the secured creditor must record in order to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the secured creditor exercises the "opt out" right mentioned above, the particular subordinate interest that was "opted out" will, of course, not be listed in the affidavit.

SECTION 408. DISCONTINUANCE OF FORECLOSURE BY NEGOTIATED SALE.

(a) If the secured creditor is unable to complete a foreclosure by negotiated sale, whether because of receipt of a timely notice of objection as provided in Section 407 or for any other reason, the secured creditor shall send notice to the persons specified in Section 203(b) advising them that the foreclosure by negotiated sale has been discontinued and whether the secured creditor will:

(1) pursue another foreclosure by negotiated sale under this section;

(2) continue to foreclose by auction or by appraisal pursuant to a notice of foreclosure previously given;

(3) commence foreclosure by auction;

(4) commence foreclosure by appraisal;

(5) foreclose by judicial proceeding; or

(6) discontinue the foreclosure.

(b) If the notice sent by the secured creditor under subsection (a) contains all of the elements required for notice of foreclosure under Sections 203 and 204, no further notice under those sections is necessary to pursue a further foreclosure.

If for any reason the particular proposed foreclosure by negotiated sale is not consummated, any "opt out" under Section 407 is automatically revoked. The secured creditor then has several choices. If the original or previously-given notice of foreclosure stated that the creditor would pursue both foreclosure by auction and foreclosure by negotiated sale simultaneously, the creditor may continue to pursue the foreclosure by auction. Alternatively, the creditor may by an appropriate new notice proceed with a different foreclosure by negotiated sale or a different method of foreclosure, as provided in this section. In all such cases, the "opt out" is no longer in effect, and the holder of the previously "opted out" subordinate interest will be bound by the subsequent foreclosure unless a similar "opting out" occurs again.

[ARTICLE] 5

FORECLOSURE BY APPRAISAL

SECTION 501. FORECLOSURE BY APPRAISAL. If a secured creditor elects to foreclose by appraisal the creditor shall comply with the requirements of this [Article].

This section provides for foreclosure by appraisal as an alternative to foreclosure by auction or negotiated sale. Unlike the latter two methods, foreclosure by appraisal transfers title to the collateral directly to the secured creditor or its nominee. In that respect it is similar to strict foreclosure at common law. An important difference, however, is that the creditor must notify all subordinate interest-holders of the amount, net of all expenses of foreclosure, that it is willing to pay for the property, and the foreclosure can proceed only if no objection is made to it by those whose interests will be terminated by it. If they make a timely objection, the sale cannot proceed unless the secured creditor excludes those making an objection from the effect of the foreclosure. If foreclosure by appraisal cannot be completed because of such objections, the secured creditor may either pursue a new foreclosure by appraisal or resort to one or more of the other methods of foreclosure. In this way foreclosure by appraisal under this Section is similar to foreclosure by negotiated sale under Article 4.

SECTION 502. APPRAISAL

(a) The secured creditor shall obtain a written appraisal of the collateral not more than 60 days before the date of foreclosure stated in the notice of foreclosure. The debtor and other persons in possession of the real property collateral shall provide reasonable access to the real property to the appraiser, and may be subjected to a judicial order to do so if they fail to do so voluntarily. The appraisal report shall state the appraiser's conclusion as to the fair market value of the collateral.

(b) The appraisal must be made by an appraiser who is not an employee of the secured creditor and who is designated as a certified or licensed appraiser by the [Appraisal Certification Board] of this State with respect to the type of property to be appraised.

[Note to drafting committee: The phrase "with respect to the type of property to be appraised" has been added to reflect the fact that in some states different certifications are given for residential and commercial property.]

In a foreclosure under this Article the secured creditor must obtain an appraisal of the collateral by a certified appraiser and forward it to the debtor and other holders of subordinate interests in the collateral. The purpose of the appraisal is to assist the junior interest-holders in deciding whether or not to object to the amount of the creditor's offered cash equivalent amount. However, that amount may be either lower or higher than the appraised value, and is determined entirely in the secured creditor's discretion. If one or more of the subordinate interest-holders believes that a different form of foreclosure will produce a higher amount, they have a logical basis for making an objection to the proposed foreclosure by appraisal.

The reference to "the type of property to be appraised" is included in subsection (b) because appraiser certification systems in some jurisdictions make distinctions between, for example, residential and commercial appraisers. In such jurisdictions the appraiser employed under this Article must have the proper credentials for the type of property to be appraised.

SECTION 503. NOTICE OF APPRAISAL. The secured creditor shall send notice of the appraisal at least 30 days before the proposed date of the foreclosure to the persons specified in Section 203. The notice shall be accompanied by a copy of the appraisal report and state or contain:

(1) the date on or after which the secured creditor proposes to foreclose by appraisal;

(2) the cash equivalent amount, net of all expenses of foreclosure, that the secured creditor offers to credit against the secured obligation and to pay to the debtor and other persons entitled thereto, which amount may be greater or less than the appraised value of the collateral;

(3) that if the foreclosure by appraisal is completed, title to the collateral will vest in the secured creditor or its nominee as of the time of foreclosure, and that the stated cash equivalent amount will be applied to the secured obligation and any balance distributed as provided in Section 313(a);

(4) that if any person who holds an interest in the collateral that is subordinate in priority to the secured creditor's security interest objects to the foreclosure, the person may notify the secured creditor by sending a notice so stating, and if the notice is received by the secured creditor no later than 7 days before the proposed date of foreclosure, the secured creditor will discontinue the foreclosure by appraisal unless the secured creditor elects to preserve that person's interest from termination by the foreclosure.

The cash equivalent amount must be stated net of foreclosure expenses; in other words, the secured creditor is left with the responsibility for paying the foreclosure expenses and any other costs associated with performance of the contract of sale. The cash equivalent amount may be more or less than the actual price the purchaser agrees to pay, and is determined entirely in the secured creditor's discretion. The secured creditor might arrive at the cash equivalent amount by taking the actual selling price and reducing it by the various expenses of foreclosure and sale that the secured creditor expects to pay. In effect, the secured creditor is offering to apply this cash equivalent amount against the secured indebtedness, and the persons who are entitled to object must decide whether this amount is acceptable to them. The appraisal report provides at least a limited basis for the subordinate interest holders to judge whether the cash equivalent price stated by the secured creditor is acceptable. If one or more of them believes that a different form of foreclosure will produce a higher amount, there is a logical basis for the making of an objection to the proposed foreclosure by appraisal. However, there is no requirement that a person objecting give a reason for the objection, nor that the objection be reasonable or made in good faith. As a matter of self-interest, those with the right to object will not do so if they consider the proposed cash equivalent amount reasonable.

SECTION 504. COMPLETION OF FORECLOSURE BY APPRAISAL.

(a) If the secured creditor does not receive a notice 7 or more days before the proposed date of foreclosure objecting to the foreclosure from any person who has been given notice of the proposed foreclosure and who holds an interest in the real property collateral that is subordinate in priority to the secured creditor's security interest, the foreclosure may be completed by the secured creditor as provided in subsection (b).

(e) On or after the proposed date of sale, the secured creditor shall execute a sworn affidavit containing the following:

(1) identification of the security interest and the debtor and a legally sufficient description of the collateral;

(2) A reference to the [book and page number] [document number] at which the notice of foreclosure was recorded;

(3) identification of the interests in the collateral that were terminated by the foreclosure;

(4) a statement that the secured creditor has complied with all provisions of this [Act] for a foreclosure by appraisal; and

(5) a statement identifying the secured creditor and stating that title to the collateral has passed to the secured creditor or its nominee.

In most cases the secured creditor may be willing to accept title to the collateral in its own name. However, if the creditor wishes title to pass directly to some other entity as a result of the foreclosure, it may designate such an entity as its nominee in the affidavit that it records to signify the completion of the foreclosure.

SECTION 505. RECORDING OF AFFIDAVIT; TIME OF FORECLOSURE. On or after the proposed date of foreclosure, the affidavit required by Section 504 shall be recorded in the [county recorder's office]. When recorded, the affidavit transfers title to the collateral to the secured creditor or its nominee. The time of recording of the affidavit is the time of foreclosure.

SECTION 506. FORECLOSURE AMOUNT; DISTRIBUTION. The cash equivalent amount is the foreclosure amount and shall be distributed as provided in Section 313(a). In making distribution the secured creditor has the rights stated in Section 313(b). No fee may be paid from the cash equivalent amount to a person conducting the foreclosure. After expiration of the time for objection specified in Section 503(a), no person to whom notice of foreclosure under Section 203 and notice of appraisal under Section 503 were sent may subsequently assert that the foreclosure amount was inadequate.

A subordinate interest-holder who has been given the appropriate notices of foreclosure and notice of appraisal, and who does not prevent consummation of the foreclosure by appraisal by making a timely objection to it, is prohibited from attacking the sufficiency of the cash equivalent amount thereafter. In effect, such parties are estopped to question the cash equivalent amount. However, the amount might nonetheless be attacked in a subsequent bankruptcy proceeding as a preference or a fraudulent conveyance.

SECTION 507. NOTICE OF OBJECTION TO FORECLOSURE BY APPRAISAL.

(a) If, 7 or more days before the proposed date of foreclosure by appraisal, the secured creditor receives notice of objection to the foreclosure from any person who has been given notice of the proposed foreclosure by appraisal and who holds an interest in the real property collateral subordinate in priority to the secured creditor's security interest, the secured creditor shall proceed as provided in subsections (b) or (c).

(b) The secured creditor that receives a timely notice of objection under subsection (a) may notify the person who made the objection that the person's interest in the collateral will be preserved from termination by the foreclosure as if that person had not been given notice of foreclosure. The secured creditor's notice to the person objecting must be sent before the time of foreclosure. If the secured creditor gives the notification, the objection of the person to whom it is given may be disregarded by the secured creditor, the foreclosure may be completed, and the affidavit recorded under Section 504(b) must not identify that person's interest in the collateral as having been terminated by the foreclosure.

(c) If a secured creditor that receives a timely notice of objection under subsection (a) does not issue a notice to the person objecting as provided in subsection (b), the secured creditor shall discontinue the foreclosure by appraisal.

Under subsection (b), the secured creditor may neutralize an objection to the foreclosure simply by notifying the objector that the sale will be subject to, and will not terminate, the objector's interest in the collateral. In this way the secured creditor can "opt out" of foreclosing a particular interest, just as if that person had not originally been given notice of foreclosure under Section 203. The holder of such an interest cannot reasonably object to the completion of the foreclosure, since the foreclosure will not affect that interest. The affidavit that the secured creditor must record in order to consummate the foreclosure must identify the subordinate interests in the property that are being terminated by the foreclosure. If the secured creditor exercises the "opt out" right mentioned above, the particular subordinate interest that was "opted out" will, of course, not be listed in the affidavit.

SECTION 508. DISCONTINUANCE OF FORECLOSURE BY APPRAISAL.

(a) If the secured creditor is unable to complete a foreclosure by appraisal, whether because of receipt of a timely notice of objection as provided in Section 507 or for any other reason, the secured creditor shall send notice to the persons specified in Section 203(b) advising them that the foreclosure by appraisal has been discontinued and whether the secured creditor will:

(1) pursue another foreclosure by appraisal under this section;

(2) continue to foreclose by auction or by negotiated sale pursuant to a notice of foreclosure previously given;

(3) commence foreclosure by auction;

(4) commence foreclosure by negotiated sale;

(5) foreclose by judicial proceeding; or

(6) discontinue the foreclosure.

(b) If the notice sent by the secured creditor under subsection (a) contains all of the elements required for notice of foreclosure under Sections 203 and 204, no further notice under those sections is necessary to pursue a further foreclosure.

If for any reason the particular proposed foreclosure by appraisal is not consummated, any "opt out" under Section 507 is automatically revoked. The secured creditor then has several choices. If the original or previously-given notice of foreclosure stated that the creditor would pursue both foreclosure by auction and foreclosure by appraisal simultaneously, the creditor may continue to pursue the foreclosure by auction. Alternatively, the creditor may by an appropriate new notice proceed with a different foreclosure by auction or a different method of foreclosure, as provided in this section. In all such cases, the "opt out" is no longer in effect, and the holder of the previously "opted out" subordinate interest will be bound by the subsequent foreclosure unless a similar "opting out" occurs again.

[ARTICLE] 6

RIGHTS AFTER FORECLOSURE

SECTION 601. ACTION FOR DAMAGES OR TO SET ASIDE FORECLOSURE.

(a) Subject to subsection (c), after the time of foreclosure an aggrieved party may commence a proceeding in [district] court seeking the following relief:

(1) damages against the secured creditor as compensation for any violation of this in the conduct of the foreclosure; or

(2) that the foreclosure be set aside to correct a violation of this [Act] or to satisfy an applicable law or principle of equity.

[Note to drafting committee: One comment at the annual meeting suggested that the Act should include a fixed dollar amount of minimum damages to which lenders would be subject for foreclosing without compliance with the Act, in cases in which no actual damages could be shown. Of course, unless the fixed amount was fairly high, it would be meaningless in the absence of a provision for recovery of attorneys' fees by the plaintiff. It would also be necessary to decide who could be a proper plaintiff in such an action - only debtors, or junior interest-holders as well.]

(b) Recording of the deed and affidavit pursuant to Section 314, the deed and affidavit pursuant to Section 405, or the affidavit pursuant to 505 conclusively establishes compliance with all applicable procedural requirements of this [Act] in favor of good faith purchasers for value of the collateral. If the title derived from foreclosure is not held by a good faith purchaser for value, any person attacking the foreclosure on grounds of noncompliance with this [Act] has the burden of production and persuasion.

[Note to drafting committee: Is the phrase "procedural requirements" sufficiently clear? Are there some violations of the Act that should be assertable even against a BFP?]

(c) An action may not be commenced for damages for violation of this [Act] more than [3] years after the time of foreclosure, or for an order to set aside a foreclosure conducted under this [Act] more than [1] year after the time of foreclosure.

After the foreclosure has occurred, the powers of a court to change the result are limited. Damages may be assessed against the secured creditor if it has failed to comply with this Act or other legal duties in carrying out the foreclosure. For example, if there was proof that notices were not properly given as required by Section 203, the court might award damages against the secured creditor to the debtor or to third parties whose interests were terminated by the foreclosure without notice. However, the court must recognize that compliance with certain provisions of the Act is conclusive, as provided in subsection (b). For example, if the collateral had passed into the hands of a bona fide purchaser (BFP), the court would not be authorized to issue an order taking the collateral out of the BFP's hands in order to order a reforeclosure on account of failure to give proper notices, but could nonetheless grant an award of damages.

Courts should employ their powers to grant damage awards or to set aside foreclosures only in cases in which the violation of this Act or the principles of law and equity are sufficiently serious that it is likely that they had a substantial detrimental impact on the foreclosure amount. No remedies should be awarded for minor violations that had no significant effect on the outcome of the foreclosure.

SECTION 602. POSSESSION AND RENTS AFTER FORECLOSURE.

(a) A person who acquires an interest in collateral by foreclosure under this [Act] which entitles the person to possession of the collateral may give notice to any person in possession of the collateral. The notice shall state that foreclosure has occurred and that the person giving notice is entitled to possession of the collateral [10] days after notice is given. The person acquiring the interest is entitled to possession of the collateral [10] days after the giving of such notice.

(b) A person who acquires an interest in real property collateral by foreclosure under this [Act] which entitles the person to possession of the real property may commence an action under [the forcible entry and detainer statute of this State] to gain possession of the real property. Notice as provided in subsection (a) must be given to any person in possession before the commencement of the action. An order of possession may not issue until [10] days after the notice is given.

(c) A person acquiring a interest in collateral by foreclosure under this [Act] which entitles the person to possession of the collateral is entitled to all rents or proceeds of the collateral accruing and becoming due after the time of foreclosure.

This Act does not address the question whether a secured creditor may demand possession of the collateral prior to the time of foreclosure; that question is left to other law. However, one who acquires property in a foreclosure proceeding under this Act is entitled to possession 10 days after giving the person or persons in possession notice that the foreclosure has occurred. This principle applies only if the interest acquired is a possessory one. For example, a foreclosure of a reversion in land that is subject to a lease having priority over the mortgage would not entitle the person obtaining the reversion through foreclosure to possession until the reversion became possessory. If the holder of the reversion is also entitled to rents from the real property, all rents accruing after the time of foreclosure belong to the person acquiring title to the reversion through the foreclosure.

If a tenant's lease is subordinate to the foreclosed security interest and is terminated by foreclosure, the person acquiring title by foreclosure is entitled to possession upon 10 days' notice, as this section provides. Since that person's right to rents accrues immediately upon foreclosure, he or she is entitled to the rents from the time of foreclosure until possession is actually relinquished by the tenant.

This section permits one who obtains title to real estate in a foreclosure conducted under this Act to obtain possession by use of the same process as is available to landlords to take possession from tenants. The section is significant because in its absence, there is doubt in a number of states whether the landlord-tenant procedure is available to foreclosure purchasers.

SECTION 603. JUDGMENT FOR DEFICIENCY.

After the time of foreclosure and the time for the receipt of upset bids under Section 311 has expired, the secured creditor and any other person whose security interest in the collateral was terminated by the foreclosure may obtain a money judgment against any person liable for a deficiency.

A judgment for a deficiency is intended to assist the secured creditor in collecting any portion of the obligation that is not discharged by the foreclosure. Since only persons who are "liable therefor" can be subjected to a deficiency judgment, it is necessary for a creditor seeking a deficiency to establish the personal liability of the person against whom the deficiency is claimed. A deficiency may be recovered against a debtor or against anyone else, such as a guarantor, who is liable on the secured obligation. Both the foreclosing creditor and subordinate secured creditors whose security interests have been terminated by a foreclosure can bring actions for deficiencies.

SECTION 604. NONLIABILITY FOR DEFICIENCY.

(a) A debtor is not liable to the secured creditor for a deficiency if:

(1) the secured creditor waived the right to a deficiency; or

(2) the debtor is a residential debtor, unless:

(A) the debtor is found by the court not to have acted in good faith; or

(B) the debtor is a guarantor of the secured obligation.

(b) For purposes of this section, a residential debtor acted in good faith if the debtor:

(1) peaceably vacated the real estate collateral and relinquished any personal property collateral within 10 days after the giving to the debtor of notice pursuant to Section 602;

(2) did not commit significant affirmative waste upon the collateral and leave such waste uncured at the time of foreclosure;

(3) did not significantly contaminate the collateral with hazardous materials and leave such contamination uncured at the time of foreclosure;

(4) did not commit fraud against the secured creditor;

(5) did not engage in criminal activity on the secured real estate collateral that significantly reduced its value at the time of foreclosure;

(6) did not permit significant uncured damage to be done to the collateral by other persons or natural causes as a result of the debtor's failure to take reasonable precautions against such damage; and

(7) provided reasonable access to the collateral for inspection by the secured creditor and prospective purchasers after the initial notice of foreclosure was sent.

(c) The burden of proof as to the absence of good faith on the part of a debtor is on the person seeking a deficiency judgment against the debtor. The absence of good faith by one debtor does not make any other debtor liable for a deficiency.

(d) A guarantor against which a deficiency judgment is entered has no personal right of recourse against a residential debtor if the secured creditor to whom the guaranty is owed is barred from recovery of a deficiency against the debtor by subparagraph (a)(2)(A).

(e) This section does not prohibit recovery of a deficiency by a person other than the secured creditor whose interest in the collateral was terminated by the foreclosure.

(f) If the collateral consists of both residential and nonresidential real property and the secured creditor forecloses on the nonresidential collateral first, the secured creditor may not proceed with foreclosure against the residential collateral unless the secured creditor first waives the right to a deficiency.

[Note to drafting committee: At the annual meeting, Prof. Benfield strenuously argued that the antideficiency provision should apply only to purchase-money mortgages. He gave as a reason the fact that 'home equity loans" are commonly made for more than 100% or value or of unencumbered equity. The effect of the present antideficiency provision above would be to limit such a lender's recovery to the value of the real estate, despite the fact that they had quite consciously lent more than the value of the real estate. He suggested that the provision above would have the effect of discouraging home equity lending.]

In light of the fact that guarantors are liable for deficiencies even if the principal debtors are not, one comment from the floor at the annual meeting suggested that lenders might attempt to preserve personal liability by the use of a "stunt" in which one of the primary borrowers would be designated a guarantor. This might be a "bad faith" action or a "sham," but we have done nothing to discourage it. Should it be mentioned, at least in a comment, or in the black letter?]

This section prohibits deficiency judgments against residential debtors (other than guarantors) if they have acted in good faith, as defined in subsection (b). Lenders often assert that the threat of a deficiency judgment, even if it will rarely be enforceable, provides a useful inducement to borrowers to engage in meaningful "workout" efforts. This Act adopts that principle; under the "good faith" concept here, the threat of a deficiency may dissuade the debtor from committing waste or fraud, or engaging in other acts detrimental to the secured creditor's interests. "Good faith" is an individualized determination, and in a particular case some debtors may have acted in good faith although others did not.

Even if a deficiency judgment cannot be obtained by the foreclosing creditor, the holders of "sold-out" junior liens may still obtain and collect deficiency judgments under subsection (d). Likewise, deficiencies can still be collected from guarantors under subparagraph (a)(2)(b). However, guarantors may not obtain reimbursement or exoneration against a residential debtor who has acted in good faith, since permitting recourse would effectively defeat the protection against deficiencies that the Act grants to such persons.

A secured creditor may waive the right to a deficiency, and if so, will note be permitted to recover the deficiency. The waiver might be found in the security instrument, in the notice of foreclosure, or in some other agreement or communication between the parties.

[Note to drafting committee: Subsection (f) was suggested for inclusion at our last meeting, but the reporter is unable to recall or reconstruct the rationale for it. Can anyone help?]

SECTION 605. DETERMINING AMOUNT OF DEFICIENCY.

(a) Subject to subsection (c), the deficiency of the secured creditor is the positive number, if any, determined by subtracting the foreclosure amount, as determined under Section 313, from the balance owing on the secured obligation, including all principal, interest, and legally recoverable fees and charges but not including expenses of foreclosure.

(b) The deficiency of any person whose security interest in the collateral was terminated by the foreclosure, other than the secured creditor, is the positive number, if any, determined by subtracting the portion of the foreclosure amount as determined under Section 313, if any, distributed or distributable to such person from the balance owing on that person's secured obligation, including all principal, interest, and legally recoverable fees and charges.

(c) In an action for a deficiency following a foreclosure by auction, a person against whom the action is filed may petition the [district] court for a determination of the fair market value of the collateral at the time of foreclosure. The court shall hold a hearing at which all interested parties may present evidence of fair market value, and shall determine the fair market value of the collateral as of the time of foreclosure. [The determination shall be made by the court without a jury.] If the court determines that the fair market value of the collateral was greater than the bid accepted at the foreclosure sale or the last subsequent upset bid, the fair market value must be substituted for the foreclosure amount in making the calculations required by subsection (a) with respect to all parties against whom a judgment for a deficiency is entered.

[Note to drafting committee: One comment at the annual meeting suggested that the "fair value" limitation on deficiencies be confined to residential real property. Under the present draft, all types of real estate get the benefit of the "fair value" determination.]

A deficiency action by the foreclosing creditor is governed by subsection (a). The formula stated there does not deduct for expenses of foreclosure, since these expenses are already deducted in arriving at the foreclosure amount. Deficiency actions by "sold-out" junior lienors are governed by subsection (b). Under that subsection, the amount distributed to the junior lienor, rather than the full foreclosure amount, is considered as offsetting the obligation owed to the lienor.

If the foreclosure was by auction, subsection (c) provides that the defendant in the deficiency action is entitled to have the fair market value of the property determined by the court. If this procedure is used and the fair market value is found to be greater than the highest bid (including any upset bid), the fair market value must be used in computing the deficiency. This subsection recognizes that foreclosures by auction often do not bring fair market prices, and in effect limits the amount of the deficiency as if a fair market price had been bid. This limitation applies both to deficiencies sought by both the foreclosing creditor and sold-out junior lienors. No fair market value determination is available or necessary if the foreclosure was by negotiated sale or by appraisal, since under those procedures, any subordinate interest holder may force a discontinuation of the foreclosure simply by objecting to it

[ARTICLE] 7

SECTION 701. UNIFORMITY OF APPLICATION AND CONSTRUCTION. In applying and construing this Uniform Act, consideration shall be given to the need to promote uniformity of the law with respect to its subject matter among States that enact it.

[SECTION 702. APPLICATION OF THE LAW OF ANOTHER STATE. If no debtor is a residential debtor, and if the security instrument so provides and covers real property collateral located both in this State and in another State or territory of the United States, the foreclosure law of the other State or territory may be applied to foreclose on the real property collateral located in this State, and the law of this State may be applied to foreclose on the real property collateral located in the other State or territory if permitted by the law of that State or territory.]

This section is provided for optional enactment. Ordinarily, a foreclosure on real property must be conducted under the law of the state in which the property is located. However, subsection (d), for optional enactment, permits extraterritorial use of another United States jurisdiction to foreclose in this State if there are no residential debtors involved and the security instrument so provides. It also authorizes extraterritorial use of this Act in another jurisdiction under the same conditions, provided that the other jurisdiction's law permits. This provision may make foreclosures of multistate collateral simpler in some cases.

SECTION 703. EFFECTIVE DATE. This [Act] takes effect on ___________________.

[Legislative Note: It is recommended that the effective date be fixed at least two years after the date of enactment, in order to allow time for members of the bar and the affected industries to become familiar with the Act and to modify existing forms and procedures.]

SECTION 704. REPEALS. The following acts and all other acts and parts of acts inconsistent with this [Act] are repealed: [Here should follow the statutes to be specifically repealed. Statutes governing judicial foreclosure should not be repealed.]

SECTION 705. SAVINGS CLAUSE. Security interests created before the effective date of this [Act] may [for a period of 30 years after the effective date of this [Act]] be foreclosed under any statute or other law repealed or amended by this [Act] as if the repeal or amendment had not occurred.

[Note to drafting committee: The former version of this section provided "Valid security instruments entered into before the effective date of this [Act], and the resulting rights, duties, and interests remain valid thereafter." Professor Billings pointed out that there is nothing in the Act purporting to affect the validity of securing instruments, and suggested that the quoted sentence was therefore unnecessary. Do you agree?]

[Legislative note: Adopting jurisdictions may find it necessary to amend their recording acts in order to permit the recording of (1) notices of foreclosure under Section 203;  (2) requests for notice under Section 205; and (3) affidavits of foreclosure under Sections 314, 405, and 505.]

[Note to drafting committee: One comment at the annual meeting suggested that the Act should contain some reference to the "predatory lending" statutes that are now being enacted. Of course, to the extent that those statutes might stand in the way of a foreclosure, they would equally bar a foreclosure under the Act whether any specific reference was made to them or not.]