What is the difference between statutory foreclosure and strict foreclosure?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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When a loan is issued by a lender, the borrower is usually required to provide a collateral of equal or greater value than the amount that is given as loan. This protects the lender in case the borrower defaults on the repayment. The lender can sell the collateral and recover the remaining amount.

Foreclosure is the term used in the context of a loan that is initiated with a property as collateral. When the borrower defaults, the lender can take possession of the property and sell it to recover the amount.

Statutory foreclosure is another term used for non-judicial foreclosure. If the borrower agrees to a power of sale clause when the loan is granted, the lender has the legal right to sell the property in case of default by the borrower. Before a property is foreclosed, the lender is required to inform the borrower of the consequences of defaulting on the loan and offer reasonable opportunities to repair the default. When the borrower is unable to do so, the lender can sell the property independently, without having to involve the courts. This reduces costs and makes the process easier. The amount received from the sale of the property is used to reimburse the lender and any amount remaining is given to the borrower. Statutory foreclosure gives the borrower an opportunity to correct the default and adequate time to do so. This makes it fair for the lender as well as the borrower.

If the loan contract includes a clause that allows the lender to sell the property immediately in case of a default by the borrower, the foreclosure proceedings are referred to as strict foreclosure. In this case the lender is not required to inform the borrower that the property is going to be sold and neither offer a chance to repair the default. The lender can go ahead with the sale and the borrower does not have a say in this. Strict foreclosures are rare as the loan contract does not give borrowers a chance to repair the default and borrowers are not inclined to agree to the same.

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