On January 10, several regulations that will fundamentally change the mortgage servicing and origination industries will go into effect. Essentially extensions of Dodd-Frank created by the Consumer Financial Protection Bureau (CFPB), the changes will present serious compliance issues and litigation exposure.
This three-column series focuses primarily on the potential for litigation under the Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA), specifically those provisions that govern responses to borrower inquiries and requests for loss mitigation. Additionally, special attention will be paid to how these regulations and others interface with the foreclosure process.
Potential exposure governing responses to borrower inquires
As amended, the CFPB’s Regulations X and Z contain three provisions impacting servicer responses to borrower inquires. While Dodd-Frank made certain changes directly to RESPA’s existing framework for a Qualified Written Request, these new regulations increase the number and type of written inquiries that trigger a servicer’s legal obligation to respond in a specified time and manner. Failure to do so will potentially increase litigation exposure under the private rights of action of both the TILA and RESPA.
All of the new servicing regulations that impact servicer responses to borrower inquiries are privately enforceable. Specifically, Sections 1024.35 (Notice of Error) and 1024.36 (Request For Information) of Regulation X were both promulgated pursuant to §6 of RESPA and thus subject to RESPA’s private right of action, which entitles a successful plaintiff to damages and attorney’s fees, and in the case of a pattern or practice of noncompliance, statutory damages not to exceed $2,000.
However, §1024.38 (General Servicing Policies, Procedures, and Requirements) and §1024.40 (Continuity of Contact) are restructured such that they are not subject to RESPA’s private action. (Provisions not subject to private right of action are not discussed in this article, although they still present complicated compliance issues for loan servicers.)
Another area of borrower inquiries, Section 1464 (Crediting of Payments/Payoff Statements) of Regulation Z, was promulgated pursuant to §105(a) of TILA, which subjects it to private enforcement against creditors and assignees. As a result, a successful plaintiff under the applicable provisions of TILA is entitled to actual damages, attorney’s fees, and statutory damages between $400 and $4,000. Additionally, both private rights of action contain provisions for class actions, though class damages are capped.
It should be noted that statutes providing for these types of recoveries, particularly attorney's fees, invariably lead to significant litigation.
Specifically, many plaintiffs’ attorneys typically file a high volume of these actions, regardless of merit, with the objective of settling quickly and recovering fees and expenses. Additionally exposure arises when such attorneys detect a failure to comply with a particular provision, and then send numerous letters on behalf of his clients, building a portfolio of hundreds or even thousands of technical violations before commencing the first action. Correspondingly, the servicer is put on notice only after considerable litigation exposure has accrued.
The existing Qualified Written Request provisions of RESPA and the borrower response requirements of TILA and Regulation Z already generate substantial litigation. Consequently, experience suggests that borrowers’ counsel will seize upon the new regulations to add to their existing arsenal of written requests to create causes of action. Similarly, foreclosure and debt defense attorneys often use the new regulations to file collateral lawsuits or counterclaims based upon a servicer's alleged failure to properly respond to written inquiries.
Challenges specific to notices of error and requests for information
Amended Regulation X provides for error-resolution procedures when a borrower submits a written Notice of Error or Information Request. Under the new procedures, upon receiving a one of these requests, a servicer must provide written notice to a borrower within five days, acknowledging receipt, and then has 30 days to investigate, correct or respond. These short deadlines potentially create serious litigation challenges.
Both the Notice of Error and Request for Information regulations apply to “federally related mortgage loans” as the term is defined in §1024.2(b), subject to seven exemptions. In addition, the provisions do not apply to home-equity lines of credit, reverse mortgages, mortgages not attached to real property, and loans made by a creditor making five or fewer mortgages in a year.
The Dodd-Frank Notice of Error and Request for Information regulations build upon the pre-existing framework in RESPA for Qualified Written Requests. In fact, the regulations expressly provide that a request asserting an error or seeking information constitutes a Notice of Error or Request for Information. In addition, the request need not satisfy the RESPA definition in order to conceivably trigger the servicer’s obligations for responding to Notices of Error and/or Requests for Information.
Furthermore, a borrower need not expressly identify the correspondence as a Notice of Error or Request for Information to trigger the servicer’s obligation(s) under the regulations. In fact, a borrower may mislabel or even fail to label the correspondence, and as long as the borrower meets the substantive requirements for a Notice of Error, Request for Information, or both, the correspondence triggers the servicer’s obligations under the regulation. Such mislabeled or unlabeled requests could make it difficult for servicers to comply with the short five-day acknowledgement and 30-day response deadlines.
Consequently, servicers should avail themselves of perhaps the regulations’ only protection from mislabeled or deceptively labeled inquiries — the ability to designate a specific address for Notices of Error and Requests for Information. Servicers must provide written notice to borrowers of the exclusive address for Notices of Error and Requests for Information, and must post it on the servicer’s website.
The disclosure must also meet the clear and conspicuous requirement in §1024.32(a)(1); in the absence of such a designation, “a servicer must respond to a notice of error received by any office of the servicer,” and thus all incoming written correspondence must be screened for covered Notices of Error/Requests for Information.
Even so, the CFPB’s Official Interpretations of §1024.38 (governing required policies and procedures) require that a servicer’s policies and procedures be reasonably designed to ensure that if a borrower submits a notice of error to an incorrect address that was given to the borrower in connection with submission of a loss mitigation application, or in connection with the continuity of contact under §1024.40, the servicer will inform the borrower of the procedures for submitting written Notices of Error, including the correct address, or redirect such notices to the proper exclusive address.
When the CFPB first promulgated these rules, the industry raised concerns about conflicts between the Mortgage Rules and the Federal Debt Collection Practices Act (FDCPA), which prohibits direct contact with borrowers who have sent cease and desist letters to the servicer. The CFPB responded with a Bulletin on Oct. 15, 2013, stating in pertinent part that a servicer who is considered a debt collector under the FDCPA with respect to a borrower is not liable under the FDCPA for communicating with the borrower in connection with Notices of Error and Requests for Information, “notwithstanding a ‘cease communication’ instruction sent by the borrower...”
Therefore, a servicer must continue to respond to borrower Notices of Error and Requests for Information irrespective of a cease and desist notice under the FDCPA.
Our column next month will focus on the specific and independent challenges related to Notices of Error and Requests for Information.