Page 9 - John Hundley 2009

Sharp Thinking

No. 20 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. May 2009
While Federal Proposals Stall . . .
Illinois Enacts Mortgage Reform Law

Mortgage forbearance and reform legislation has stalled in Congress (see p. 2), but Illinois has moved
ahead with its own enactment in that area.
P.A. 95-1046 amends the Illinois Mortgage Foreclosure Law (735 ILCS 5/15-1101 et seq.) to require
opportunities for credit counseling and negotiation of a “sustainable loan workout
plan” for home mortgages where the mortgagor is not in bankruptcy.

Effective April 6, and running until April 2011, P.A. 95-1046 prevents
foreclosures on delinquent home mortgages unless the homeowner has
filed for bankruptcy or several preliminary steps have been taken first –
which steps create a substantial delay. First, the mortgagee must mail the mort-
gagor a notice, in substantially the form set forth in the act, advising that the mort-
gagor may consult a housing counselor. The notice is to be mailed to a mort-
gagor “delinquent by more than 30 days”, which seems to (a) prevent foreclosure
for non-financial defaults (“delinquent” is defined as having a payment past due) and (b) mean that one
must wait 30 days after the account becomes delinquent before one can mail the notice.
The notice then creates a 30-day period for the mortgagor to consult with a counselor. If, within
those 30 days, a recognized housing counselor gives notice that the mortgagor is seeking its services,
foreclosure filing is stayed another 30 days. During those 30 days, a “sustainable loan workout
plan” may be proposed to the mortgagee, and the mortgagee is prevented from initiating foreclosure
until it has decided whether to accept that plan. If the plan is accepted, foreclosure cannot be initiated for
so long as the mortgagor is in compliance with the plan.
P.A. 95-1046 defines a sustainable loan workout plan as one that the mortgagor
and counselor “believe” will enable the mortgagor to “stay current” on his or her pay-
ments for the foreseeable future, taking “into account the [mortgagor’s] income and
existing and foreseeable debts.” “Stay current” is not defined, but does not refer to
existing mortgage terms because such a plan expressly may include a suspension of
payments, a lengthened term, a lower or frozen interest rate, a principal write-down,
deferred payments, or a complete refinancing, among other suggestions. The bene-
fits of the amendments cannot be waived, but the process can be used only once.
The effect is that a debtor can gain a forbearance of up to 90 days regardless of whether any
realistic workout plan is forthcoming or possible. P.A. 95-1046 does not appear to limit mortgagees’
discretion in rejecting such plans, but to recover damages against counselors for engaging in meritless or
unacceptable workout proposals one must show willful or wanton misconduct. The lesson for lenders
would seem to be that one should start the process under the act sooner rather than later. If the
initial notice letter is sent, nothing prevents the debtor from bringing the account current while the clock is
running on the other steps. However, if one delays, the time lost cannot be recaptured.

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Sharp Thinking is an occasional newsletter of The Sharp Law Firm, P.C. addressing developments in the law which may be of interest. Nothing contained in Sharp
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