New Florida Law Treats All Foreclosure Rescue Deals Containing A Buyback Right As An Equitable Mortgage Unless Otherwise Rebutted

The Florida legislature recently passed a statute regulating foreclosure rescue transactions. One key provision is contained in Florida Statute Sec. 501.1377(6) which creates a rebuttable presumption that any foreclosure rescue transaction involving a lease option or other repurchase agreement is an equitable mortgage. Below is the provision in its entirety (begins at line 345 of the bill):

• (6) REBUTTABLE PRESUMPTION.--Any foreclosure-rescue transaction involving a lease option or other repurchase agreement creates a rebuttable presumption, solely between the equity purchaser and the homeowner, that the transaction is a loan transaction and the conveyance from the homeowner to the equity purchaser is a mortgage under s. 697.01. Unless the lease option or other repurchase agreement, or a memorandum of the lease option or other repurchase agreement, is recorded in accordance with s. 695.01, the presumption created under this subsection shall not apply against creditors or subsequent purchasers for a valuable consideration and without notice.

[Editor's Note: The reference to "creditors or subsequent purchasers for a valuable consideration and without notice" is a reference to bona fide purchasers / encumbrancers.]

This rebuttable presumption could affect the following legal issues commonly involved in foreclosure rescue conveyances: usury, bonafide purchaser, and tenant evictions.

Usury:

Because of the rebuttable presumption that the conveyance is an equitable mortgage, it appears that usury claims by the financially distressed homeowner against a foreclosure rescue operator could be much easier to bring in a lawsuit since the statute clearly places the burden of demonstrating that the so-called "rescue" arrangement was a "true sale" (as opposed to a "financing/refinancing arrangement") on the foreclosure rescue operator. Put simply, the law treats the deal as a secured loan unless established otherwise.

Florida arguably has among the toughest usury statutes in the country. Florida's civil usury statute (where interest exceeds 18% per year) generally requires a forfeiture of the right to collect interest on the loan and requires the creditior to pay a penalty of double the amount of interest actualy reserved or collected (see Florida Statute Section 687.04).

Its criminal usury statutes (where interest exceeds 25% per annum) generally makes the entire amount of money advanced by the operator an unenforceable loan, and triggers those penalties commonly associated with misdemeanor (over 25% but not more than 45%) and felony (over 45%) crimes (see Florida Statute Section 687.071).

Based on the Florida case law on equitable mortgage, it appears that a foreclosure rescue operator in Florida could be hard-pressed to sucessfully rebut the statute's presumption.

Bona Fide Purchaser and Tenant Evictions:

For observations on how this rebuttable presumption in the new law may affect issues regarding the doctrine of bona fide purchaser, as well as tenant evictions in the context of a typical foreclosure rescue, see the longer version of this post at Florida Foreclosure Rescue Conveyances With Buyback Right To Be Treated As Equitable Mortgages Unless Established Otherwise.