Disclosure Statements and Sale of REO Property

QUESTION: My lender client foreclosed on a residential property it had a deed of trust on, then bought the property at the foreclosure sale and now has it listed with my firm. I sent the Residential Property and Owners Association Disclosure Statement, the Mineral and Oil and Gas Rights Mandatory Disclosure Statement, and the Lead-Based Paint Hazard Addendum to the bank representative to sign. She refuses to complete any of them and says that the bank doesn’t have to provide any of the forms to prospective  buyers because the bank bought the property at foreclosure. Is that right?

ANSWER: The bank representative is correct that the bank does not have to provide a Residential Property and Owners Association Disclosure Statement or a Mineral and  Oil and Gas Rights Mandatory Disclosure Statement. Both Disclosure Statements are required by the Residential Property Disclosure Act; however, the Act contains 11  exemptions for certain types of transfers. The second exemption includes “transfers by a beneficiary under a deed of trust, who has acquired the real property at a sale  conducted pursuant to a foreclosure sale under a deed of trust.” The lender is the “beneficiary” under the deed of trust; thus, a transfer of the property by the lender after it  acquired the property at the foreclosure sale is exempt.

However, the bank is not exempt from the disclosure requirements imposed by the HUD/EPA lead-based paint disclosure rules. The rules do exempt certain transactions,  including “sales of target housing at foreclosure.” However, that exemption appears to apply only to the transfer of the property from the trustee who handles the foreclosure  to the high bidder at the sale, and not to subsequent transfers by the high bidder following the conclusion of the foreclosure proceeding. The subsequent transfer is not “at  foreclosure” as we understand that term. We have been unable to locate any guidance indicating that HUD/EPA intended the exemption to apply more broadly. Thus, in our  opinion, the bank does need to complete the Lead-Based Paint Hazard Disclosure form.