Some states, such as California, Oregon, and Georgia, use a deed of trust or a similar document instead of a mortgage. If you have a deed of trust rather than a mortgage, your home probably will go through a non-judicial foreclosure rather than a judicial foreclosure. When this happens, the lender or mortgage servicer will choose a third party to handle the process. This party is known as a foreclosure trustee and is technically neutral. An attorney often will serve as a foreclosure trustee, or the trustee may be a bank or another entity. State laws may restrict who can serve as a trustee. For example, a state may limit trustees to attorneys or require the trustee to have an office or otherwise be physically present in the state.
A trustee does not advocate for either side in the foreclosure process but simply administers the proceedings. They have duties of diligence and fairness toward both the borrower and the lender. However, a trustee may have an ongoing affiliation with the lender or mortgage servicer or their attorney. This undercuts their impartiality because they likely want to continue being retained by that party. Despite the problems posed by this situation, most states have not addressed the potential conflict of interest. North Carolina is an important exception of which to be aware if you are a homeowner there.
Rules Governing Foreclosure Trustees in North Carolina
Under North Carolina law, an attorney cannot serve as a trustee in a foreclosure proceeding if they are also assisting the lender with the foreclosure. This law ended the common practice among lenders of retaining the same attorney to represent their interests in any foreclosure-related disputes and to serve as the ostensibly neutral trustee. A trustee in a North Carolina non-judicial foreclosure thus is more likely to be neutral than a trustee in other states, since they have no pre-existing affiliation with the lender. This law took effect in 2017, so it may serve as a prototype for laws in other states.
As a result, a homeowner in North Carolina may be able to challenge a foreclosure if the lender is using their own attorney to serve as the foreclosure trustee. There may be loopholes in the law in some cases, however, such as when a large lender owns subsidiary entities. The lender could use a subsidiary company as the trustee while using its own counsel to represent its interests. The state law only covers attorneys rather than business entities. Courts reviewing foreclosure cases often examine whether the lender is complying with the spirit of the law rather than just the letter of the law, though. A foreclosure attorney may be able to craft an argument that this type of arrangement should be disallowed because it results in the same conflict of interest that the law was designed to prevent.
If you are going through a bankruptcy as well as a foreclosure, you should be aware that these are two separate processes. You may be interacting with both a bankruptcy trustee and a foreclosure trustee, but these are different parties with different roles that should not be confused.