November 4, 2011
Practice Group(s):
Mortgage Banking &
Consumer Financial
Products
Breaking and Entering as a Legal
Obligation: Amendments to Chicago
Ordinance Continue Trend of Forcing
Lenders to Maintain Vacant Property Even
Before Assuming Title
By Nanci L. Weissgold, Phoebe S. Winder, and Ryan M. Tosi
1
When is breaking and entering a home you do not own a legal obligation and not a crime? In
Chicago, and in an increasing number of jurisdictions around the country, mortgagees and servicers of
residential loans are required to monitor and maintain vacant properties before they obtain legal title.
The Chicago City Council recently adopted a controversial amendment to the Chicago Municipal
Code that significantly expanded the definition of an “owner” of vacant property. Specifically, the
definition of “owner” includes, among other institutions, “mortgagees,” “assignees,” and “agents” that
have yet to take actual possession of vacant property or legal title to such property. This first
amendment drew so much criticism that the Council subsequently proposed and passed a second,
alternate amendment which agreed to remove mortgagees from the definition of owner and instead
created a separate code section setting forth specific maintenance requirements for mortgagees. The
second amendment is expected go into effect on November 19, 2011.
The Chicago Amendment
This fall, Chicago passed a measure (the “First Chicago Amendment”) continuing the trend of
potential for lender liability with respect to vacant property. The First Chicago Amendment
broadened the definition of an “owner” of vacant property to include “any person who alone, jointly or
severally with others is a mortgagee who holds a mortgage on the property, or is an assignee or agent
of the mortgagee.”2 The amended definition of “owner” required subject entities to maintain vacant
property and the exterior and interior of buildings on such property and to meet certain minimum
standards, including removal of debris, securing buildings by boarding up openings, and not allowing
water to accumulate on the property.3
Failure to comply with the minimum standards would have resulted in substantial penalties.
Violations would have resulted in a fine of $500 to $1,000 per offense, and each day that a violation
continued would have constituted a separate, fineable offense.4 In addition to the liability, an “owner”
has to pay a registration fee (that can range from $250 to $1,000 every six months) and pay the costs
associated with maintaining the property. The First Chicago Amendment took effect on September
17, 2011.5 Those in support of the First Chicago Amendment claimed it would “protect the
community” from the hazards and negative effects of vacant properties.6 Opponents, however, were
troubled by the fact that the First Chicago Amendment made the mortgagee responsible as the
“owner” of a vacant property, despite the mortgagor maintaining legal title and the possessory interest
in the property.7
Breaking and Entering as a Legal Obligation: Amendments to
Chicago Ordinance Continue Trend of Forcing Lenders to Maintain
Vacant Property Even Before Assuming Title
In early November, however, the Chicago City Council unanimously passed a second, compromise
amendment (the “Second Chicago Amendment”), which it struck with the mortgage industry and
which continue to make mortgagees liable for some maintenance requirements on properties that are
vacant and unregistered, but removed mortgagees from the definition of owner and created a separate
code section setting forth specific maintenance requirements for mortgagees.8 The Second Chicago
Amendment still requires mortgagees to register, inspect, and maintain vacant property or face fines,
but the requirements are more limited than under the First Chicago Amendment. Mortgagees do not
need to register a vacant property if the property is already registered by the mortgagor or another
mortgagee of the property.9 When registration by a mortgagee is necessary, it would be required
every six months, but the registration fee of $500 is required only once.10
The Second Chicago Amendment also created “affirmative defenses” mortgagees could raise to those
duties.11 These defenses – which defeat the need to inspect or maintain vacant property – include, the
property is occupied; the mortgagee is barred performing these duties by an automatic bankruptcy
stay; the mortgage was not in default at time of violation; the mortgagee cured all violations within 30
days after receiving notice of them; and the owner has raised claims or defenses or requested
mediation against the mortgagee in bankruptcy proceedings.12 Additionally, the Second Chicago
Amendment protects mortgagees from civil or criminal liability for complying with the ordinance
unless the act or omission “constitutes gross negligence or willful, wanton, or intentional
misconduct.”13 The terms of this second ordinance represent one avenue by which mortgagees can
attempt to protect themselves, if state or local governments insist on making mortgagees liable for
maintaining vacant properties.
Legality of the Chicago Amendments Making Lenders Liable to
Maintain Properties without Legal Title
Even though the terms of the Second Chicago Amendment are less onerous than those of the First
Chicago Amendment, serious legal questions still exist as to whether Chicago’s City Council has the
power to treat mortgagees as akin to owners for purposes of protecting vacant buildings. As an initial
matter, the Second Chicago Amendment as passed appears to conflict with existing law. Illinois state
statutes setting forth Mortgage Foreclosure Law expressly dictate that “[n]o mortgagee shall be
required to take possession of the mortgages real estate, whether upon application made by any other
party or otherwise.”14 This provision directly contravenes the attempt of the Second Chicago
Amendment to treat a mortgagee as akin to an owner or force the mortgagee take possession before
foreclosure.15
Moreover, under Illinois precedent, home rule units – like the City of Chicago – only have authority to
enact an ordinance if (1) the subject pertains to local government affairs and is not of statewide or
national concern; and (2) the General Assembly of Illinois can restrict the concurrent exercise of a
home rule unit’s power by enacting a law specifically limiting such power.16 Given the fact that the
Second Chicago Amendment appears to “contravene[] a state statute, or otherwise intrude[] upon the
bailiwick of a governmental branch,” the Illinois courts should “not hesitate[] to find it an invalid
exercise of home rule authority.”17
The Second Chicago Amendment potentially implicates other laws such as trespass and wrongful
entry provisions, which act to prohibit lenders from entering or controlling property prior to such time
as legal title passes to the lender. Indeed, to the extent a vacant property was owned by a borrower
that had filed bankruptcy, federal bankruptcy protections, including the Bankruptcy Code’s automatic
stay provision would also act to limit the acts a lender could take prior to such time as the automatic
stay was lifted. Even if the Second Chicago Amendment is found not to contradict state or federal
2
Breaking and Entering as a Legal Obligation: Amendments to
Chicago Ordinance Continue Trend of Forcing Lenders to Maintain
Vacant Property Even Before Assuming Title
law, however, it could arguably be struck down as addressing a statewide or national concern, because
mortgage foreclosure law should be consistent statewide – both for mortgagees and mortgagors.
The Second Chicago Amendment also runs contrary to analogous environmental law standards, which
provide that a lender is exempt from liability for environmental clean up under the federal
Comprehensive Environmental Response, Compensation and Liability Act on property the lender
holds or acquires title to, where the lender “without participating in the management of a vessel or
facility, holds indicia of ownership primarily to protect his security interest in the vessel or facility.”18
Even within the realm of property law, lender liability laws like the Second Chicago Amendment,
create tension. Traditionally, lenders have not been responsible for maintaining property, including
vacant property, before obtaining legal title to it, whether through foreclosure or otherwise.19 Many
jurisdictions have codified this principle by making the legal title holder solely responsible for the
maintenance of a vacant property.20
Implications of the Second Chicago Amendment
Not only does the Second Chicago Amendment – as well as other lender liability laws – clash with
existing state and federal law, it also runs counter to nationwide efforts by state and federal
governments, and by mortgage servicers, to keep borrowers in their homes and to provide them with
the opportunity to avoid foreclosure.21 By forcing mortgagees to take control of vacant properties
prior to foreclosure, the Second Chicago Amendment encourages mortgagees to complete the
foreclosure process quickly in order to obtain legal title to the properties they are obligated to
maintain.22
It also runs counter to the current stance of the Department of Justice’s United States Trustee Program,
which contends that mortgagees should inspect properties less frequently.23 But the Second Chicago
Amendment has the contrary effect, forcing mortgagees to inspect properties more often. Mortgagees
are required to inspect properties frequently to determine if they are vacant and, if so, whether they are
in compliance with the minimum standards for vacant properties.24 Moreover, mortgagees must
regularly inspect not only known vacant properties, but all properties in that jurisdiction where the
borrowers are in default,25 raising costs for mortgagees and mortgagors.26 Thus, the Second Chicago
Amendment – and other lender liability laws – may cause mortgagees to either raise the costs of credit
or even avoid extending credit in jurisdictions that impose such property maintenance obligations.27
The Chicago Amendment Continues a Trend of New Lender
Liability for Vacant Properties in Other Jurisdictions
The City of Chicago, however, is not alone. Several jurisdictions have recently imposed varying
levels of liability on lenders to perform inspections or other tasks related to the maintenance of
properties before obtaining title. New York law, for example, makes a mortgagee responsible for
maintenance of vacant properties “until such time as ownership has been transferred through the
closing of title in foreclosure, or other disposition, and the deed for such property has been duly
recorded.”28 New Jersey law requires mortgagees to maintain vacant properties after filing foreclosure
action but only if the properties are deemed a public “nuisance.”29 In March 2008, the City of Boston
passed an ordinance requiring owners to maintain vacant properties and defining “owner” as, among
other things, “a mortgagee in possession of such a property.”30 More recently, the City of Springfield,
Massachusetts, passed an ordinance similar to Boston’s, defining mortgagees as owners for the
purposes of maintaining vacant properties.31 In 2010, the City of Los Angeles adopted an ordinance
providing that vacant “[p]roperties shall be maintained by the beneficiary/trustee” holding the note or
3
Breaking and Entering as a Legal Obligation: Amendments to
Chicago Ordinance Continue Trend of Forcing Lenders to Maintain
Vacant Property Even Before Assuming Title
deed of trust.32 And the City of Chula Vista, California, promulgated an ordinance mandating that
“[a]ny beneficiary/trustee who holds a deed of trust … shall perform an inspection of the property” to
determine if it is vacant and may be responsible for maintenance.33
Conclusion
Both Chicago Amendments are controversial to say the least. It is anticipated that challenges will be
brought to test the validity of the Second Chicago Amendment, even though its terms are less onerous
than the terms in the First Chicago Amendment, as well as lender liability laws in other jurisdictions.
Time will tell whether the obligations imposed on mortgagees by lender liability laws will have the
intended effect of protecting borrowers or will instead result in more property inspection fees and
increased borrowing costs for future mortgagors.
Authors:
Nanci L. Weissgold
nanci.weissgold@klgates.com
+1. 202.778.9314
Phoebe S. Winder
phoebe.winder@klgates.com
+1. 617.261.3196
Ryan M. Tosi
ryan.tosi@klgates.com
+1. 617.261.3257
1
The authors would like to express their thanks to Matthew N. Lowe for his contributions to this client alert.
See CHICAGO, ILLINOIS, AMENDMENT OF CHAPTER 13-12 OF CHICAGO MUNICIPAL CODE CONCERNING OWNER AND
MINIMUM REQUIREMENTS FOR VACANT BUILDINGS, ORD. NO. SO2011-5547 at § 13-12-124(e) (Passed July 28, 2011),
available at http://chicago.legistar.com/LegislationDetail.aspx?ID=923767&GUID=5B7316FC-1189-4D15-8CC4D55AA5A852D6&Options=Advanced&Search (hereinafter “FIRST AMENDMENT OF CHAPTER 13-12”).
3
See CHI. MUN. CODE § 13-12-135 (setting forth minimum requirements for vacant buildings).
4
See id. at § 13-12-135(f).
5
See FIRST AMENDMENT OF CHAPTER 13-12, supra note 2, § 3 (noting amendment takes affect “10 days after its
passage and publication”).
6
See City Embracing Legislation Tackling Abandoned Homes, CHICAGO TRIBUNE, July 28, 2011 available at
http://articles.chicagotribune.com/2011-07-28/news/ct-met-vacant-building-ordinance-20110728_1_freddie-macordinance-housing-crisis (quoting Alderman Pat Dowell’s comments in support of the amendment and noting
endorsement by Mayor Rahm Emanuel).
7
See Letter from Tom Deutsch, Exc. Director, American Securitization Forum, to The Honorable Rahm Emanuel,
Mayor of Chicago et al. (July 26, 2011) at 2, available at
http://www.americansecuritization.com/uploadedFiles/ASF_Letter_re_Chicago_Ordinance_7_26_11.pdf (hereinafter “ASF
Letter”); Letter from Alfred M. Pollard, General Counsel, Federal Housing Finance Authority, to The Honorable Rahm
Emanuel, Mayor of Chicago et al. (July 27, 2011) at 1-2, available at
http://asf.informz.net/z/cjUucD9taT0xMjM4NjA5JnA9MSZ1PTc2NTI4MjU5MCZsaT01NDE5MjQy/index.html (hereinafter
“FHFA Letter”).
8
CHICAGO, ILLINOIS, AMENDMENT OF CHAPTER 13-12 OF CHICAGO MUNICIPAL CODE CONCERNING OWNER AND
MINIMUM REQUIREMENTS FOR VACANT BUILDINGS, ORD. NO. SO2011-8066, available at
2
4
Breaking and Entering as a Legal Obligation: Amendments to
Chicago Ordinance Continue Trend of Forcing Lenders to Maintain
Vacant Property Even Before Assuming Title
http://chicago.legistar.com/LegislationDetail.aspx?ID=986507&GUID=4F651E52-334B-41EB-88CE177766FE044B&Options=&Search= (hereinafter “SECOND AMENDMENT OF CHAPTER 13-12”); see also Chicago City
Council Legislative Information Center, Ord. No. SO2011-8066, available at
http://chicago.legistar.com/LegislationDetail.aspx?ID=986507&GUID=4F651E52-334B-41EB-88CE177766FE044B&Options=&Search (noting that the full City Council passed the updated amendment on November 2,
2011 by a vote of 49 in favor and none against).
9
Id. at § 13-12-126(a)(1); see also id. at § 13-12-126(c)(2) (creating an “affirmative defense” to the ordinance if
“the owner or another mortgagee has registered the building . . .”).
10
Id. at § 13-12-126(a)(1).
11
Id. at § 13-12-126.
12
Id.
13
Id. at § 13-12-127.
14
735 ILL. COMP. STAT. 5/15-1702(a).
15
Compare Id. with SECOND AMENDMENT OF CHAPTER 13-12, supra note 8.
16
See Village of Glenview v. Zwick, 826 N.E.2d 1171, 1175 (Ill. App. Ct. 2005).
17
See City of Oakbrook v. Suburban Bank and Trust Co., 845 N.E.2d 1000, 1010 (Ill. App. Ct. 2006).
18
42 U.S.C. § 9601(20)(A)(iii).
19
See RESTATEMENT (THIRD) OF REAL PROP.: MORTGAGES § 4.1(a) (1997) (“[a] mortgage creates only a security
interest in real estate and confers no right to possession of that real estate on the mortgagee”).
20
See, e.g., CONN. GEN. STAT. §§ 7-148hh & 7-148ii (2011) (not including mortgagee in definition of owner as
applied to statute requiring registration and maintenance of vacant properties); D.C. CODE §§ 42-3131.05 & 42-3131.06
(2011) (same); TEX. LOC. GOV’T CODE § 214.231 (2010) (same).
21
See, e.g., Golden State Law Group San Diego, http://www.goldenstatelawca.com/110955/2011/04/26/slowdown-the-foreclosure-process.html (last visited Aug. 23, 2011) (offering borrowers tips on how to slow foreclosure); Illinois
Legal Aid, http://www.illinoislegalaid.org/index.cfm?fuseaction=home.dsp_content&contentID=6790 (last visited Aug. 23,
2011) (same).
22
See SECOND AMENDMENT OF CHAPTER 13-12, supra note 8 (requiring mortgagees to maintain vacant properties
before foreclosure and without legal title); N.Y. REAL PROP. ACTS. LAW § 1307(1) (2011); New Jersey Foreclosure Fairness
Act, Pub. L. No. 2009, c. 296 (enacted Jan. 17, 2010); BOSTON, MASS., MAINTENANCE OF VACANT, FORECLOSING
RESIDENTIAL PROPERTIES, ORD. NO. 16-52 (2008); LOS ANGELES, CAL., FORECLOSURE REGISTRY PROGRAM, ORD. NO.
181,185 (2010); CHULA VISTA MUN. CODE § 15.60 et seq. (2007).
23
See, e.g., In re Gray, 447 B.R. 524, 526-28 (E.D. Mich. 2011) (discussing allegations by U.S. Trustee as to
“whether so many inspections were necessary and whether the associated fees were reasonable”); Gretchen Morgenson,
A Low Bid for Fixing a Big Mess, N.Y. Times, May 14, 2011, available at
http://www.nytimes.com/2011/05/15/business/15gret.html?pagewanted=all (discussing investigation against mortgagees
by Director of the Executive Office of the U.S. Trustee Program, Clifford J. White III).
24
See FIRST AMENDMENT OF CHAPTER 13-12, supra note 8 (requiring mortgagees to maintain vacant properties);
CHI. MUN. CODE § 13-12-135 (setting forth minimum maintenance requirements for vacant buildings); N.Y. REAL PROP.
ACTS. LAW § 1307(1) (2011) (stating that lenders can enter property “for the limited purpose of inspections . . .”); CHULA
VISTA MUN. CODE § 15.60.040 (2007) (requiring lenders to conduct inspections “upon default by the trustor, prior to
recording a notice of default”).
25
See FIRST AMENDMENT OF CHAPTER 13-12, supra note 8 (applying mortgagee’s duty to maintain a property to
vacant properties); CHULA VISTA MUN. CODE § 15.60.040 (2007) (making lender responsible for determining vacancy and
maintaining property when vacant).
26
See Uniform Security Instrument for Illinois, Freddie Mac, ¶ 9, available at
http://www.freddiemac.com/uniform/unifsecurity.html#highlights (recognizing that when a mortgagee pays property
maintenance costs it “shall become additional debt of Borrower secured by this Security Instrument.”); Anonymous,
Rahm’s Home Improvement: Chicago bleeds mortgage lenders for money from vacant property, WALL ST. J., Aug. 24,
2011 (arguing the Amendment “will raise the price of loans for future homeowners as banks . . . pass down the increased
cost”) (hereinafter “Rahm’s Home Improvement”).
27
See ASF Letter, supra note 7, at 2 (recognizing disincentive imposed by the Amendment on extending credit);
Rahm’s Home Improvement, supra note 26 (quoting a Moody’s Senior Analyst as stating that the lenders would “limit or
exclude geographic locations with such lender liability laws”).
28
N.Y. REAL PROP. ACTS. LAW § 1307(1) (2011).
29
New Jersey Foreclosure Fairness Act, Pub. L. No. 2009, c. 296 (enacted Jan. 17, 2010).
30
BOSTON, MASS., MAINTENANCE OF VACANT, FORECLOSING RESIDENTIAL PROPERTIES, ORD. NO. 16-52 (2008).
31
SPRINGFIELD, MASS., REGULATING THE MAINTENANCE OF VACANT AND/OR FORECLOSING RESIDENTIAL PROPERTIES,
ORD. NO. 7.50 et seq. (2011).
32
LOS ANGELES, CAL., FORECLOSURE REGISTRY PROGRAM, ORD. NO. 181,185 (2010).
33
CHULA VISTA MUN. CODE § 15.60.040 (2007).
5
Mortgage Banking & Consumer Financial Products
Practice Contact List
K&L Gates’ Mortgage Banking & Consumer Financial Products practice provides a comprehensive
range of transactional, regulatory compliance, enforcement and litigation services to the lending and
settlement service industry. Our focus includes first- and subordinate-lien, open- and closed-end
residential mortgage loans, as well as multi-family and commercial mortgage loans. We also advise
clients on direct and indirect automobile, and manufactured housing finance relationships. In addition,
we handle unsecured consumer and commercial lending. In all areas, our practice includes traditional
and e-commerce applications of current law governing the fields of mortgage banking and consumer
finance.
For more information, please contact one of the professionals listed below.
LAWYERS
Boston
R. Bruce Allensworth
Irene C. Freidel
Stanley V. Ragalevsky
Brian M. Forbes
Andrew Glass
Phoebe Winder
Charlotte
John H. Culver III
Amy Pritchard Williams
Chicago
Michael J. Hayes Sr.
Dallas
David Monteiro
Miami
Paul F. Hancock
New York
Philip M. Cedar
Elwood F. Collins
Steve H. Epstein
Drew A. Malakoff
San Francisco
Jonathan Jaffe
Elena Grigera Babinecz
Seattle
Holly K. Towle
Washington, D.C.
Costas A. Avrakotos
David L. Beam
Melanie Hibbs Brody
Krista Cooley
Daniel F. C. Crowley
Eric J. Edwardson
Steven M. Kaplan
Phillip John Kardis II
Rebecca H. Laird
Laurence E. Platt
Phillip L. Schulman
bruce.allensworth@klgates.com
irene.freidel@klgates.com
stan.ragalevsky@klgates.com
brian.forbes@klgates.com
andrew.glass@klgates.com
phoebe.winder@klgates.com
+1.617.261.3119
+1.617.951.9154
+1.617.951.9203
+1.617.261.3152
+1.617.261.3107
+1.617.261.3196
john.culver@klgates.com
amy.williams@klgates.com
+1.704.331.7453
+1.704.331.7429
michael.hayes@klgates.com
+1.312.807.4201
david.monteiro@klgates.com
+1.214.939.5462
paul.hancock@klgates.com
+1.305.539.3378
phil.cedar@klgates.com
elwood.collins@klgates.com
steve.epstein@klgates.com
drew.malakoff@klgates.com
+1.212.536.4820
+1.212.536.4005
+1.212.536.4830
+1.216.536.4034
jonathan.jaffe@klgates.com
elena.babinecz@klgates.com
+1.415.249.1023
+1.415.882.8079
holly.towle@klgates.com
+1.206.370.8334
costas.avrakotos@klgates.com
david.beam@klgates.com
melanie.brody@klgates.com
krista.cooley@klgates.com
dan.crowley@klgates.com
eric.edwardson@klgates.com
steven.kaplan@klgates.com
phillip.kardis@klgates.com
rebecca.laird@klgates.com
larry.platt@klgates.com
phil.schulman@klgates.com
+1.202.778.9075
+1.202.778.9026
+1.202.778.9203
+1.202.778.9257
+1.202.778.9447
+1.202.778.9387
+1.202.778.9204
+1.202.778.9401
+1.202.778.9038
+1.202.778.9034
+1.202.778.9027
Mortgage Banking & Consumer Financial Products
Practice Contact List
Nanci L. Weissgold
Kris D. Kully
Morey E. Barnes
Kathryn M. Baugher
Emily J. Booth
Holly Spencer Bunting
Andrew L. Caplan
Rebecca Lobenherz
Melissa S. Malpass
David G. McDonough, Jr.
Eric Mitzenmacher
Stephanie C. Robinson
Tori K. Shinohara
Kerri M. Smith
David Tallman
nanci.weissgold@klgates.com
kris.kully@klgates.com
morey.barnes@klgates.com
kathryn.baugher@klgates.com
emily.booth@klgates.com
holly.bunting@klgates.com
andrew.caplan@klgates.com
becky.lobenherz@klgates.com
melissa.malpass@klgates.com
david.mcdonough@klgates.com
eric.mitzenmacher@klgates.com
stephanie.robinson@klgates.com
tori.shinohara@klgates.com
kerri.smith@klgates.com
david.tallman@klgates.com
+1.202.778.9314
+1.202.778.9301
+1.202.778.9215
+1.202.778.9435
+1.202.778.9112
+1.202.778.9853
+1.202.778.9094
+1.202.778.9177
+1.202.778.9081
+1.202.778.9207
+1.202.778.9127
+1.202.778.9856
+1.202.778.9423
+1.202.778.9445
+1.202.778.9046
PROFESSIONALS
Government Affairs Advisor / Director of Licensing
Washington, D.C.
Stacey L. Riggin
stacey.riggin@klgates.com
+1.202.778.9202
Regulatory Compliance Analysts
Washington, D.C.
Dameian L. Buncum
Teresa Diaz
Robin L. Gieseke
Brenda R. Kittrell
Dana L. Lopez
Patricia E. Mesa
Daniel B. Pearson
Jeffrey Prost
+1.202.778.9093
+1.202.778.9852
+1.202.778.9481
+1.202.778.9049
+1.202.778.9383
+1.202.778.9199
+1.202.778.9881
+1.202.778.9364
dameian.buncum@klgates.com
teresa.diaz@klgates.com
robin.gieseke@klgates.com
brenda.kittrell@klgates.com
dana.lopez@klgates.com
patty.mesa@klgates.com
daniel.pearson@klgates.com
jeffrey.prost@klgates.com