Creditor Responsibility

New Jersey has given local governments a valuable tool to ensure that properties in foreclosure will be maintained, and do not become a blight to their neighborhoods and a drain on municipal resources. The purpose of this piece is to brief local officials, CDC staff and others on the provisions of the new Creditor Responsibility Law  enacted by the legislature, and on potential ways to use them to help preserve neighborhoods and keep people in their homes.

Why do we need the Creditor Responsibility Law?

In New Jersey, the process from initial foreclosure filing to sheriff’s sale is a long one, often taking 18 months or longer. During that period it is not unusual for residential owners to abandon their properties. In the case of single family homeowners, the house is left empty. In the case of multifamily properties, if the owner walks away, the tenants remain in place without the ability or authority to maintain their buildings. Until now, with the owner unavailable and unwilling to take responsibility, local governments had no one to hold responsible for these problem buildings. The building could sit empty, or tenants could find themselves without heat or other essential services, for months or even years.  Many properties were vandalized and became deteriorated beyond repair by the time the foreclosure was final.

The Creditor Responsibility Law changes this situation. Now, if a property becomes vacant during foreclosure proceedings, or if the owner of rental property abandons a building with tenants in place during the foreclosure process, the local government can require the entity initiating the foreclosure (the creditor) to take responsibility for the property. For purposes of maintaining property abandoned by its owner, the creditor is deemed to have the same responsibility as the entity that holds title to the property.  

How does the Creditor Responsibility Law work?

All creditors now must notify the municipal clerk each time they initiate a foreclosure proceeding on a residential property.  That way, each municipality can create a data base of all residential properties in foreclosure in the community. The notice must include contact information for an in-state entity that will accept service on behalf of the creditor, and for an entity responsible for receiving complaints about the property.

If at any point after the foreclosure proceeding has begun the local government finds that the property has been abandoned by its owner, responsibility devolves to the creditor. At that point, if there is a nuisance condition or a code violation on the property, the appropriate municipal official may notify the creditor, who must “abate the nuisance or correct the violation in the same manner and to the same extent as the title owner of the property, to such standard or specification as may be required by State law or municipal ordinance.”  

If the municipality issues an order to a creditor to fix a violation or abate a nuisance, and the creditor fails to do so and the municipality has to spend funds to correct the problem, the municipality can not only put a lien on the property but can go after any other asset of the creditor to obtain repayment, just as if the creditor were the title holder under existing law.  

Making the Creditor Responsibility Law work

Municipalities using the Creditor Responsibility Law need to have a way to keep track of properties, and find out when properties in foreclosure have been abandoned by their owners, and thus become subject to the provisions of the law. While municipalities may not have the resources to keep track of the status of properties on which they receive notices, they can enlist partners – community development corporations, neighborhood organizations, block clubs, crime watch groups, tenant organizations, and citizens – to help out.

Municipalities can set up a data base for this information, and as notices are received, add them to the data base. The data base can be put on the municipality’s web site, so citizens and others can see if a vacant property in their neighborhood is on the data base. The city can also send out periodic mailings to community-based organizations with lists of properties. Then, as organizations and individuals see that particular properties are empty or neglected, they can report those properties to the city, which can then follow up and issue citations to the creditor listed on the notice.

Municipalities can also use the information directly. Using the notices, they can identify which creditors are foreclosing on a large number of properties in the municipality, and reach out to those creditors to get them to undertake a proactive property maintenance program. By mapping the properties in the notices, they can find out where they have clusters of properties in foreclosure, and work with local CDCs or civic associations to mount efforts to maintain or gain control of those properties.

Making the Creditor Responsibility Law part of a larger strategy

While the Creditor Responsibility Law can stand alone as a way to help municipalities track and deal with properties in foreclosure, it can also be used as part of a larger local strategy to deal with problem properties. New Jersey’s towns and cities have access to other tools to deal with problem properties, both in the nuisance abatement laws (N.J.S.A. 40:48-2.3 through 2.12) and in the Abandoned Property Rehabilitation Act (P.L.2003, c.210 as amended). When a property meets the criteria of that Act, it triggers important municipal powers, including the ability to accelerate tax foreclosure, pursue vacant property receivership, or use ‘spot blight’ eminent domain to take properties.  

The Creditor Responsibility Law can be seen as an early warning system for property abandonment. Once a municipality has set up its data base for notices under the law, it can track those properties and plug in any of the tools from the abandoned property toolkit, including using accelerated tax foreclosure to gain control of the property, or vacant property receivership to make sure that it does not further deteriorate. In many of these areas, local CDCs can be invaluable partners, bringing skills and capacity in rehabilitation or property management that the municipality alone may not have.