If your organization makes real estate loans, you will need to have a Foreclosure Polic

y in place. Use this as the base to create a policy for your organization.

PURPOSE: The Board of Directors recognizes that from time to time the credit union
may have to foreclose on a real estate loan. In light of this, the following policy is esta
blished to ensure:

An appropriate Risk Assessment for foreclosing and holding of a foreclosure is properl

y performed.
Levels of risks are established in relationship to holding a foreclosure.
Proper accounting of the foreclosure is done.
A strategy for either the liquidation or holding of the foreclosure is done.

FORECLOSURES AND RESPONSIBILITY:

As a last resort, the organization will begin the process of foreclosing on the property
…In doing so the organization will follow all foreclosure laws and will do so by obtainin
g appropriate legal counsel.

Foreclosure should be initiated when a real estate secured loan becomes ninety (90) d
ays (depending on the collateral and the individual situation) contractually past due an
d satisfactory up-to-date payment arrangements cannot be obtained, or when a real e
state secured loan is determined to be unrecoverable for any other reason. The actio
n to proceed with foreclosure must be taken seriously, and upon a full review of the a
ccount information.

The CEO is responsible to establish if a workout loan or foreclosure is in the best inter
ests of the credit union and the client. Prudent workout arrangements, in the long ter
m, can be in the best interest of both the credit union and the client. However, when f
oreclosure is unavoidable, the credit union will seek legal counsel to consider all the ri
sks associated with the foreclosure and the liquidation of the foreclosure.

The CEO must approve foreclosures after an analysis of the anticipated equity in the r
eal property and the borrower's financial situation.

WORKING WITH REAL ESTATE LOAN BORROWERS:

If a decision is made to proceed with a foreclosure, copies of the Note and Mortgage
are sent to the attorney selected for legal action along with any required retainer. The
Director of Lending should contact the attorney periodically to update the status of a
ny legal accounts and ensure proper follow-up.

The Director of Lending should place a comment "Refer to Attorney" on the account.

It is important to keep record of all expenses paid in the client's folder, including legal,
updated appraisals, title, etc. All collection costs will be added to the outstanding loa
n payoff balance.

Once the account has been forwarded to the attorney, if the owners of the property c
ontact the attorney regarding reinstatement, it is important to refer them to our forecl
osure attorney. The organization's acceptance of money/payment from the client ma
y remedy the default without total payment of expenses, and/or require the organizati
on to re-initiate the foreclosure process. Our attorney will advise as to whether to acc
ept any loan payments while the account is in the process of foreclosure.

In the event the organization wishes to cancel or postpone the trustee's sale, the Direc
tor of Lending will furnish written instructions to the foreclosure attorney. We must al
so advise our attorney if the organization intends to seek a deficiency judgment or col
lect rent from the subject property.
The attorney will file all required documentation with the appropriate judicial authority
, advertise the property in appropriate media, provide the credit union with copies of
all papers filed and documents created in the process. The trustee's sale date is usuall
y 90 days from the date the paperwork is submitted to the proper authorities, althoug
h this can vary with the number of foreclosures being processed by the County and an
y delays along the way.

If a client desires to reinstate their loan after the organization has initiated foreclosure,
the client must pay all past due payments plus any foreclosure (attorney) costs that h
ave been incurred.

If the property goes to foreclosure auction, the organization will work with the attorne
y to set the opening bid for potential buyers. This will take into consideration any sup
erior liens, the value of the property, the balance owed on our loan and the number o
f potential buyers, among other factors. If no acceptable bids are made, the organizat
ion will purchase the property at the opening bid price.

If the auction price is accepted, the auctioneer and the organization attorney will com
plete the paperwork to document the price, buyer and conditions of the sale.

The time it takes from the date of the initial foreclosure action to final ratification can
be anywhere from one to over two years, depending on the volume of foreclosures, h
ow quickly the sales are processed by the court and if any objections are raised. Until
the final ratification is received, while the buyer has an interest in the property, the buy
er cannot begin to take possession of the property (i.e., evict tenants, gain entry to ho
use, change locks, dispose of household property, etc.).

If organization purchases the property, a determination will be made by the CEO upo
n the best method of marketing the property and what repair costs should be authori
zed. All pertinent foreclosure sale information will be recorded to insure we account f
or the property in our financial reports and obtain satisfactory insurance on the prope
rty.

Foreclosures
Foreclosure proceedings are a legal remedy on a mortgage loan that is in default. For
eclosure is similar to repossession in that it is recovering collateral securing a loan that
is in default. The collateral in a foreclosure will be either land, land and a house or a
mobile home with no land. All foreclosures are processed by an attorney and must be
taken to court.

Foreclosure is a remedy of last resort and should be started only after all other avenue
s of restoration have failed. These should include an evaluation of the feasibility of a l
oan modification. All attempts to resolve the delinquency, including the loan modifica
tion evaluation, should be documented in IBS, with any supporting documents retaine
d in the loan file. Foreclosure must be recommended by the ACM and Risk Managem
ent Specialist (RMS), and approved by the CEO.

Under the Servicemember Civil Relief Act, military personnel have certain additional pr
otections. If a mortgage originated prior to the member’s active duty, a foreclosure a
ction cannot be initiated or a foreclosure sale made during or within 90 days after of t
heir period of military service without a court order. There are conditional exceptions
to this rule, but as a general rule the credit union will refrain from initiating foreclosure
action against a servicemember during or within 90 days after of their period of milita
ry service. As already stated, foreclosure is a remedy of last resort, and will not be pur
sued until all other options have been eliminated.
Foreclosure by ICU
Washington Senate Bill 1362, Foreclosure Fairness Act, was passed in April 2011. It revi
sed and expanded strict rules on foreclosures of owner-occupied residential mortgage
s in Washington State. , These new rules don’t apply if the borrower has already surre
ndered the property as evidenced by a letter to the credit union or delivery of the key
s; or if the credit union has verified that the borrower has filed bankruptcy and the sta
y remains in effect or the Court has granted relief to pursue enforcement of the deed
of trust.

At least 30 days prior to the sending of the formal Notice of Default (done by our atto
rney), a number of steps must be taken by the credit union. First, in order to assess th
e borrower’s financial ability to pay the debt and explore options for the borrower to a
void foreclosure:
1. A letter (initial contact) sent first class to the borrower’s address and the property ad
dress (in no less than 12 point font bolded) that includes the regulatory specific statem
ent, a toll free DFI # to locate a housing counseling agency (877-894-4663) and to co
ntact DFI (877-746-4334); a notice that “You may contact” the Department of Financia
l Institutions, the Washington State Bar Association, or the statewide Civil Legal Aid ho
tline (888-201-1014) for possible assistance or referrals; a paragraph stating that a hou
sing counselor may be available at little or no cost to the borrower; options for avoidi
ng foreclosure & instructions on steps to take to explore options; notice of the borrow
er’s right to request a meeting; what documents to collect in order to provide to lende
r when discussing options to avoid foreclosure; a toll free # for borrowers to call to di
scuss options; and a paragraph explaining how the borrower may respond to the lette
r giving them notice that after thirty days if no response or ninety days if they respond
a notice of default may be issued which starts the foreclosure process. [O\Control\
Pre-foreclosure letter revised 5-2011.docx]
2. After the initial contact letter has been sent, a phone call to the home and secondar
y numbers of record. Must call at least three times at three different times of day, unl
ess the numbers are found to be disconnected (this should be documented). If phone
contact is made, the same information included in the letter should be conveyed. An
assessment of ability to pay and a discussion of options to foreclosure can be done d
uring this conversation. The borrower should also be advised of their right to request
a meeting, and to designate a representative.
3. If a meeting is requested, it must be scheduled to occur within 14 days after the req
uest. The meeting can be in-person (borrower or representative) or by phone depend
ing on the type of information being reviewed in the meeting. Any meeting scheduled
to assess the borrower’s financial ability to modify or restructure the loan obligation a
nd discuss options to avoid foreclosure must be in person unless the requirement to
meet is waived in writing by the borrower or borrower’s representative. If the borrowe
r designates a representative (counseling agency, attorney, adviser) to discuss the loan
with the credit union, they must provide contact information. The credit union must c
ontact the representative for the discussion within 14 days after the representative is d
esignated by the borrower.
4. If, after 14 days, there is no response to the letter and no contact made by phone, t
he second letter required by the Act should be sent certified mail to the borrower’s ad
dress and the property address. If there is no response to the letter within 30 days of i
nitial contact, then a notice of default may be issued. Initial contact is considered to be
three days after the first letter has been sent.
5. Complete a Loss Mitigation form to send to the foreclosure attorney.

The mediation provisions (section 7) of the Foreclosure Fairness Act do not apply to a
ny federally insured depository institution, as defined in 12 U.S.C. Sec. 3 461(b)(1)(A), th
at certifies to the department under penalty of perjury that it was not a beneficiary of
deeds of trust in more than two hundred fifty trustee sales of owner-occupied residen
tial real property that occurred in this state during the preceding calendar year. A fede
rally insured depository institution certifying that section 7 of this act does not apply m
ust do so annually, no later than January 31st of each year. This certification must be s
igned by the CEO or CEO designate and sent to the Foreclosure Mediation Program
Manager at the Washington State Department of Commerce.
• If mediation is required, refer to the Foreclosure Mediation Procedures (P\Accounts
Control Procedures\Mediation Procedures 5-2011.docx)

The credit union shall post a link on the home page of the website with the following i
nformation:
1. Options that may be available to the borrowers who are unable to afford their mort
gage payments and who wish to avoid foreclosure, and the instructions to borrowers
advising them to explore those options;
2. A list of financial documents borrowers should collect and be prepared to present t
o the beneficiary or authorized agent when discussing options for avoiding foreclosur
e;
3. A toll-free telephone number or charge-free equivalent for borrowers who wish to
discuss options for avoiding foreclosure with their beneficiary or authorized agent; an
d
4. The toll-free telephone number or charge-free equivalent made available by the de
partment to find a department certified approved housing counseling agency.

Once the decision has been made to start foreclosure, mail to the attorney a copy of:
1. the loss mitigation form
2. the credit application
3. Promissory Note
4. Deed of Trust
5. delinquent payment amount
6. total amount to reinstate loan and
7. history of the loan
The legal work will be done by the attorney. If the debtor does not cure the default b
efore the trustee’s sale, the property will be auctioned on the steps of the courthouse.
If there is no bidder higher than ICU’s set price the Credit Union will own the propert
y.

Rental Properties
The federal Helping Families Save Their Homes Act of 2009, P.L. 111-22, was signed int
o law on May 20, 2009. Title VII of this law, the Protecting Tenants at Foreclosure Act,
ensures that tenants facing eviction as a result of foreclosure on the properties they ar
e renting have adequate time to find alternative housing. This law establishes a minim
um time period a tenant can remain in a foreclosed property before eviction. This stat
ute does have a sunset date. The protections of this statute will terminate on Decemb
er 31, 2012.
When a credit union takes title to a rental property after foreclosure, it must:
• Provide bona fide tenants with 90 days notice prior to eviction; and
• Allow bona fide tenants with leases to occupy property until the end of the lease ter
m, with the exception that the lease can be terminated on 90 days notice if the unit is
sold to a purchaser.
• The property will then be liquidated by the credit union either through a direct sale
by the ACM or by listing with a real estate agent. The CEO or CEO designate must ap
prove any sale of property.
Foreclosure by Other Institutions
If another institution starts foreclosure on property on which the credit union has a lie
n, a decision must be made whether to buy out the mortgages ahead of the credit uni
on. The CEO must approve this decision. This decision will be based on a new market
appraisal, a visual inspection of the property, and the original appraisal.

If it is decided to stay in 2nd or 3rd lien position, the Credit Union will receive whateve
r funds are available after the sale of the property and the satisfaction of any senior lie
ns.
If it is decided to buy out the senior positions, an assigned agent of the credit union w
ill go to the trustee sale and bid on the property. If the credit union obtains the prope
rty, the procedure of liquidation will be the same as a foreclosure by the credit union.

All costs incurred prior to the Trustee sale will be added to the loan balance, with supp
orting documents retained in the loan file. Once the property becomes an Other Real
Estate Owned (OREO), costs incurred on the property will be charged to the GL desig
nated by the accounting department. Each foreclosure will have a specific GL number
to move the loan funds into once ICU owns the property. At this point the property b
ecomes an (OREO). All debits and credits will be put into that GL and once the proper
ty has been liquidated, that GL number may be used again in the future. Foreclosures
will also be tracked on the foreclosure log at:

R\Control\Foreclosures\foreclosure log.xls

Once the property is a liquid asset, the credit union will put its own insurance in place
until it is sold. The credit union may do repairs and whatever it deems necessary to se
ll the property. Unlike repossession, there is no collectible deficiency balance with fore
closure, unless it was a judicial foreclosure (rare).

The credit union may have its members sign a Quit Claim Deed in lieu of a foreclosure
, but only after a title search is done and the credit union’s attorney is consulted as to
whether it is in the best interests of ICU to do so.
Reclassifying Foreclosed Collateral as Assets Acquired in Liquidation
Once ICU has possession of real property, the Accounts Control Department will be re
sponsible for changing the loan’s collateral code to 995 – Assets in Liquidation. This re
-classification will automatically transfer the loan from the Secured Loans GL (701) to t
he Assets in Liquidation GL (798).

The Accounts Control Department will apply fair value accounting principles by deter
mining a market value (mark-to-market) for the asset. This value should be what the c
redit union expects the selling price of the asset to be. If the market value of the asset
is less than the loan amount, the difference will be removed from the Assets in Liquida
tion GL and posted to the Charge Off Loan GL (710). The amount charged-off will be
approved by the CEO and reported in the monthly Board Report. The Accounting De
partment will be responsible for making this journal entry. The remaining balance in th
e Assets in Liquidation GL will represent the estimated market value of the asset.

Once the asset has been sold, the proceeds will be applied against the member’s loan
-first to principal, then any remainder to interest and late fees. The remaining balance
will be the deficiency or “true loss” of the loan. The Accounts Control Department will
be responsible for changing the collateral code to 999-charged off loans. At this time,
the loan loss will be reported to the credit bureaus.

The Accounting Department will be responsible for clearing out the Assets in Liquidati
on Account. The Extraordinary Gain or Loss on Disposal of Asset GL (430) will be used
to post any differences between the estimated market value and actual sale amount.

The Accounting Department will be responsible for reconciling the Assets in Liquidatio
n GL at least monthly. The reconciliation will be approved by the Finance Director/CFO
.