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  Volume 2 | Issue 19 | May 22, 2013

MortgageOrb E-Feature

Foreclosing According To The Honor System In Colorado

The state has some unique statutory features that are coming under fire right now.


Most foreclosure cases are largely ignored by everyone except the parties involved. But one Colorado borrower has gained attention recently in her fight against not only U.S. Bank, but also the constitutionality of a Colorado law.

The Denver Post reported that earlier this month, U.S. District Judge William Martinez issued a preliminary injunction against the foreclosure sale of Lisa Kay Brumfiel's four-bedroom home in Aurora, a Denver suburb. Brumfiel had stopped making mortgage payments in 2011, and U.S. Bank began foreclosure proceedings later that year. Brumfiel maintained that U.S. Bank did not own the mortgage because she had applied for the loan through First Franklin Mortgage.

Although selling mortgages and having the mortgage serviced by another party is routine, the process is different in Colorado than in other states. Lenders are not required to record the transfer of the mortgage with the county. Instead, they track it with the Mortgage Electronic Registry System. When a borrower defaults, the lender does not need to provide original documentation proving that it owns the note. Rather, a lawyer signs a statement of qualified holder - a document that guarantees that the lawyer's client (the bank) has the right to foreclose.

Brumfiel filed a lawsuit maintaining that the use of this document is unconstitutional because it denies her right to due process. Attorneys watching the case say the document is, at the very least, unusual.

"It allows the attorney in Colorado to say, 'I promise my client owns this note,'" says Keith Gantenbein, a Denver attorney who is not involved in the case (Brumfiel, citing monetary woes, represented herself) but represents homeowners in foreclosure cases. "It is really an honors system in Colorado, and I find that very concerning."

It is concerning not only for homeowners, but for other banks. An attorney can sign the document, the bank forecloses and then another bank realizes the customer's property is being foreclosed.

"It does happen," Gantenbein says. "Most often, foreclosure occurs in the wrong name because the servicer gets it wrong."

He adds that Colorado is unique in its use of the statement of qualified holder, which became a regular practice upon legislation enacted in 2006. This past year, the legislature considered - but did not pass - a bill that would require judges to certify that foreclosing lenders had the legal right to take the property.

Colorado's other uniqueness is that the state uses the public trustee system, while many other states use the judicial foreclosure system. When a bank files a foreclosure case, it can do so with a county trustee, not with the state court.

"Most of it is administrative," Gantenbein explains. "We have a Rule 120 hearing, which is what I call a constitutional due process pit stop without much due process."
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In the Rule 120 hearing, a judge decides whether the borrower defaulted on the loan and whether the person is in the active military.

Matt Weidner, an attorney who represents consumers in foreclosure cases in Florida, says attorneys in other states are paying attention to the Colorado case.

"You have a judge that is really stepping in and looking at this and trying to bring some balance back for consumers," he says.

The Florida legislature recently passed H.B.87, a mortgage foreclosure law that, among other stipulations, "specifies required contents of complaint seeking to foreclose on certain types of residential properties with respect to authority of plaintiff to foreclose on note and location of note."

Weidner says the bill is absurd. "It's already the law," he says of the bank having to prove it owns the note. "By and large, it merely restates what is the existing law." (As of Friday, May 17, Gov. Rick Scott's press secretary said, by email, that the governor had not yet received the bill.)

A few days after the Denver Post first reported the Brumfiel case, U.S. Bank announced it would drop its public trustee foreclosure case against her. Then, on May 17, the paper reported that the bank, in its request to dismiss Brumfiel's lawsuit, said it would pursue judicial foreclosure in Arapahoe County District Court. The judicial foreclosure action, governed by Rule 105, will require the bank to prove it has the legal right to foreclose.

Nora Caley is a Denver-based freelance writer.