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Fewer notices reduces competition at auctions

Friday, May 6, 2011

Tennessee has one of the least restrictive foreclosure processes in the country. But Tennessee Bankers hope to make foreclosure simpler in Tennessee.

Tennessee is one of only five "non-judicial review" states. We rank near the top for ease and speed of foreclosures; no courts, no judges, no long drawn-out process.

All a bank needs do is:

* Serve a single letter of notification to the homeowner.

* Publish three public notices of foreclosure in the area newspaper.

* Sell the property at auction.

The only way to slow down the process is to file bankruptcy. Coincidentally, Tennessee has one of the highest bankruptcy rates in the country.

But a bill written by the Tennessee Bankers Association would simplify the process further to a single notice in the newspaper with no property description or even an address in the ad; just the deed book and page number from the county register of deeds office. The deed book and page number? Who could possibly understand where the property is while sitting at their kitchen table? One printing? Have I missed something? Isn't the point to encourage interest in the auction?

Foreclosure is a forced sale, and the debtor must make up any shortage between the difference in the amount received from the foreclosure sale and the amount that they owe to the bank. Advertisement of the sale serves to ensure that our free market system of competition will increase the likelihood that bidders attend and drive up the price so that the debtor will incur as small of a deficiency as possible. The three advertisements and description help by notifying the public of the sale.

In other states, banks have to go before a judge - it can take a year or more to foreclose. Tennessee bankers are fortunate to operate in a non-judicial review state.

There is a time worn reason why the law requires that notices be published three times in the newspaper. The legal term is constructive notice; it relieves banks of liability should a debtor claim that he or she did not receive notice by mail. The thrice publication is considered ample notice that the debtor could not have missed. Situations abound where elderly, separated or divorcing persons had no idea their home was being foreclosed upon. Some were too embarrassed to seek help. But notice in the paper helped rescue their home. In other instances, buyers, upon seeing an ad, have made an offer to the debtor and foreclosure was prevented. Each of these circumstances would be much less likely with fewer notices and such a vague description.

Banks also complain that notices are currently too long and thus advertising is costly. But the length of the ad is actually the bankers' own fault. The current law only requires a "brief description" and does not require the lengthy legal language that the banks customarily print; but even as it is done now the average cost of an ad is about $230.

This is not a conservative or liberal issue but one of fairness. A property owner deserves to get the best price for their home in a forced sale. The public deserves to know that a government-proscribed procedure, foreclosure, is creating an opportunity. In return, the bank is deemed to have acted in good faith when foreclosing on a home.

HB1920 was to be heard Tuesday in the House Judiciary Committee.

Susan Lynn is a former member of the Tennessee Legislature.