Denver attorney John Prater sued the state of Colorado in federal court Friday, alleging that it is allowing lenders to seize properties without the due process required under the U.S. Constitution.
“Colorado’s foreclosure process and law are unconstitutional,” said Andrew O’Connor with the Prater Legal Offices.
He said borrowers aren’t getting a fair hearing under the state’s current system of public trustees and limited “Rule 120” court hearings.
Prater is fighting a foreclosure on his Douglas County home and filed a federal lawsuit after failing to get the hearing he wanted in state courts.
Under Colorado’s current system, lenders can foreclose even if a fraudulent origination contributed to the delinquency. They can foreclose even while promising a loan modification that never gets fulfilled. And they can foreclose without ever providing proof before a judge that they have clear legal standing to do so, O’Connor said.
He said Colorado serves a lender’s interest by having judges in Rule 120 hearings address only two issues: Is a borrower in the active military, which allows special consideration, or are they delinquent?
O’Connor comes from Florida, one of 20 states where judges oversee foreclosures. Another 29 states use a private trustee working on behalf of the lender to reclaim property.
Colorado alone uses an elected official or appointee of the governor as trustee.
Defenders of the current system contend that Colorado offers a more balanced approach.
Borrowers have more protections than offered in private- trustee states, without the added strain and costs of putting everything into the courts.
“I am not sure how the judicial system would protect people’s rights that aren’t being protected,” said Mike Rosser, a lending industry veteran and former chairman of the Colorado Foreclosure Prevention Task Force.
Thousands of filings
With more than 40,000 new foreclosure filings expected in the state this year, it would be no small burden to take every case to court, especially since most people don’t ever contest their foreclosures.
A slower-moving foreclosure system would also mean a greater loss in home values, hurting both lenders and the public at large.
“You have public oversight of this process that is much more detailed and more analytical in making sure that everybody’s rights are respected,” Rosser said.
Colorado adopted the public trustee system in the 1890s after borrowers literally found themselves out in the cold following a silver bust, said Carol Snyder, Adams County’s public trustee.
The governor appoints public trustees in the 10 largest counties, except for Denver, where the elected clerk and recorder serves that role. In smaller counties, the elected county treasurer handles public trustee duties.
Having public trustees cuts down on the abuses reported at the hands of private trustees, who charge more fees and reclaim homes much more quickly than in Colorado.
“It gives us a degree of separation,” said Robert Sagel, Morgan County treasurer and public trustee. “We are a disinterested party.”
Private-trustee foreclosures average about three months, with Texas foreclosures racing forward in under a month, according to RealtyTrac, a California provider of foreclosure information.
In Colorado, foreclosures are supposed to take 110 to 125 days from when the initial notice is filed, although they can take longer with various delays.
The process averages about six months in states with “judicial” foreclosures where courts oversee the process, and stretches to 445 days on average in New York, the slowest state.
But the “public” in Colorado’s public trustee system isn’t necessarily what borrowers might expect in the name — say public defender or public advocate.
“When people hear public trustee they think it is an ombudsman,” said Margaret Chapman, Jefferson County’s public trustee.
Chapman said an impartial referee between borrowers and lenders might be a better description. Referee fits because public trustees try to enforce state rules without taking sides.
Consumer advocates charge the battle is uneven from the start, not unlike a featherweight fighting a heavyweight.
“Borrowers don’t even have their hands up to block the punches. They don’t even see the punches coming,” O’Connor said.
Changes benefit lenders
Although public trustees are neutral, they must follow the letter of the law. Whoever has the most influence in writing the rules controls the process, consumer advocates claim.
“It looks to me like the lending industry knew what they needed and were able to get it passed without thinking about the ramifications for debtors,” said Nancy Bentson Essex, a Crested Butte attorney.
One example is a change in 2006 that allowed lenders or their attorneys to sign a certificate claiming they are the “qualified holder” of a note and to provide a copy of the original note to the public trustee.
Lenders initiating a foreclosure don’t have to prove to the public trustee that a note was properly endorsed or assigned to them, Essex said.
Colorado doesn’t require that assignments and transfers on a mortgage be recorded with the country clerk.
Eliminating that paper trail makes it easier to sell mortgages and pool them into securities, now common industry practice. But it also means borrowers can lose their homes without ever knowing if the wrong or right party is foreclosing.
Without that knowledge, they can’t mount a defense.
Denver County Clerk and Recorder Stephanie O’Malley, who is also Denver’s public trustee, would like to see assignments once again recorded in the public record.
She also knows that the lending industry will fight that kind of change.
“The truth is that they have a heavy lobby,” she said. “They are going to protect their interests.”
Aurora resident Kathy Linder is attempting to sue Snyder, the Adams County public trustee, after losing her home last year.
She alleges that Snyder allowed the wrong lender to foreclose on her home and that Snyder oversaw its sale at auction without a judge’s approval.
“The foreclosure attorneys know what they are doing is illegal,” Linder said. “The public trustees know what they are doing is illegal.”
Snyder counters that Linder’s foreclosure followed state law and that a judge provided the necessary approval.
That said, public trustees don’t have the power to audit parties initiating foreclosure to make sure they have legal standing or that the attorneys have seen the documents they claim to see.
Nor do they have the power to sanction lenders and attorneys for filing foreclosures that a Rule 120 hearing later determines to be in error.
Public trustees, fearful of losing their neutrality, say such decisions are better left to judges.
“My legal authority to stop a sale is limited,” Snyder admits. “But if I had unfettered legal authority, does that take away my neutrality? Then I am a quasi- judicial official.”
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
