Insights

A Colorado law allowing a qualified holder of an evidence of debt to foreclose on real property under a deed of trust simply by providing a statement from the holder’s attorney that the holder’s interest in the property is valid may be up for vote later this year. Under the current law, banks and other qualified financial institutions can establish their interest in the property with a simple statement from their attorney, even if the holder’s interest is based on an assignment from the original lender and the assignment or other intermediate documents are not produced. In January, the Colorado legislature introduced House Bill 1156, aimed at reversing this law. Although that bill was defeated, there is currently an effort underway to amend the Colorado Constitution to change the evidentiary requirements for the non-judicial foreclosure of real property. If approved, the amendment would require banks and financial institutions to verify ownership of any property through a county note or a certified copy presented to the court during the judicial stage of the foreclosure process.

House Bill 1156 would have amended Colorado law governing Foreclosure Sales by removing the provisions allowing qualified holders to establish the correctness of document copies to show their interest in the property by a simple signed statement by the holder’s attorney. The bill generally sought to tighten the rules for documentation of the holder’s interest that must be filed with the public trustee before a foreclosure sale is authorized. Among other things, the bill would have required the holder to submit an affidavit establishing its interest in the property and to present copies of all documents showing an unbroken chain between the original evidence of debt and the holder initiating the foreclosure.

Borrowers argued that this legislation was necessary to restrict banks’ ability to foreclose upon a lawyer’s stroke of a pen. Industry groups argued that the measure would increase the cost of credit and make it more difficult for borrowers to get loans in Colorado. In a near-partisan vote, House Bill 1156 was postponed indefinitely on March 13, 2012, amid opposition from Colorado’s largest banking associations.

Upon the postponement of House Bill 1156, the Colorado Progressive Coalition (“CPC”) created Initiative 84 to amend the Colorado Constitution by “changing the existing evidentiary requirements for foreclosure of real property and in connection there with requiring the evidence to be filed to sufficiently establish a party’s right to enforce a valid recorded security interest prior to the foreclosure of any real property.” The initiative recently passed muster at the state title board, and CPC is currently gathering volunteers and paid representatives to launch its signature drive. If the CPC is able to collect 87,000 signatures, which is estimated to cost $200,000 or more, Initiative 84 will appear on the November 2012 ballot.

By requiring additional evidence of the holder’s right to foreclose, Initiative 84 may result in increased foreclosure costs and may discourage mortgage lending in Colorado. On the other hand, Initiative 84 would eliminate any doubt regarding a lender’s right to foreclose that may exist when there is no proof of original loan documents before starting a foreclosure. If CPC successfully collects the required signatures, this issue will be up for vote in Colorado this November.

Catharine Andricos is an associate in the Washington, D.C., office of Hudson Cook, LLP. Catharine can be reached at 202-327-9706 or by email at candricos@hudco.com.