Litigation exposure under the 2013 Dodd-Frank mortgage servicing regulations (Part 3)

The Mortgage Rules rewrite much of Regulations X and Z, and will fundamentally change the mortgage origination and servicing industry

In this series, we are outlining the impact for litigation exposure that the new mortgage servicing regulations have on servicers (Part 1 and Part 2).

Today, we evaluate one more area of specific challenges: those related to requests for payoff statements, and then we will wrap-up by taking a look at the interface of new loss mitigation and mortgage servicing regulations with the foreclosure process.

Challenges related to requests for payoff statements

With regard to payoff requests, the Consumer Financial Protection Bureau’s (CFPB) commentary on this rule states that a “payoff balance request is any request from a consumer or appropriate party acting on behalf of the consumer, which inquires into the total amount outstanding on the loan, or the amount needed to pay off the loan.” Payoff information provided must be accurate “when issued.” This means that payoff information which is thereafter found to be inaccurate due to a payment reversal or other unforeseen circumstance will still fulfill the servicer’s obligation.

The regulation narrows Regulation Z’s requirements governing payoff requests by requiring that they be made in writing. However, the new regulation also expands the existing provisions in important ways. First, while the existing provisions apply to loans secured by a principal dwelling, the new provision applies to loans secured by any dwelling. Second, the new regulation applies to HELOC payoff requests whereas the old provision did not.

The new regulation expands the reasonable time for response from five days to seven, but under certain circumstances (i.e. when the loan is in bankruptcy or foreclosure, the loan is a reverse or shared appreciation mortgage, or because of natural disasters or the like), that may be extended further. The CFPB specifies that an authorized representative, such as an attorney, can make the request on the borrower’s behalf, but the servicer may first take reasonable measures that the representative is truly authorized by the borrower.

Unfortunately, there is no provision authorizing servicers to create a specific address for submission of payoff requests, so servicers must remain vigilant for payoff requests buried in otherwise irrelevant requests or mistitled/untitled correspondence. Likewise, the CFPB has not provided guidance about properly responding to a payoff request where the borrower has issued a cease and desist letter under the Fair Debt Collection Practices Act (FDCPA).

In addition, the new rule does not clarify in the confusing world of local, state and federal law requiring that a payoff be provided in less than seven days. While the CFPB expressly noted that known state and federal law may require shorter deadlines than the seven days under the new regulation, the CFPB expressly declined to interpret the new regulation as being in direct conflict.

Consequently, Dodd-Frank does not appear to preempt statutes requiring a shorter turn-around time.

Interface of the new loss mitigation and mortgage servicing regulations with the foreclosure process

TILA and RESPA have never before had so direct an impact on the foreclosure process. Unlike Regulations X and Z prior to Dodd-Frank, the requirements of §1024.39 (Early Intervention Requirements for Certain Borrowers) and §1041.41 (Loss Mitigation Procedures) now impose requirements that directly affect when a servicer can take certain actions with respect to foreclosure of residential mortgages. Foreclosure defense attorneys will utilize these provisions to gain leverage in foreclosure proceedings, delay final judgment and/or sale of the property, and ensure that borrowers are able to exhaust loss mitigation options prior to completion of the foreclosure process.

The Early Intervention and Loss Mitigation regulations apply to “federally related mortgage loans,” and 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.

Which new loss mitigation regulations are privately enforceable

Both the Early Intervention Requirements and the Loss Mitigation Procedures arise under Regulation X and were promulgated pursuant to §6 of RESPA. Therefore, they provide borrowers with a private right of action. If a servicer fails to comply with this section, borrowers may seek an amount equal to the sum of any actual damages as a result of the failure, as well as any additional damages in the case of a pattern or practice of noncompliance with the requirements of this section in an amount not to exceed $2,000.

Damages awarded in borrower class actions may not exceed the lesser of $1,000,000 or one percent of the net worth of the servicer. In addition, a borrower (or class of borrowers) may recover reasonable attorneys’ fees.

As discussed earlier in the series, the opportunity to recover attorneys’ fees will undoubtedly lead to voluminous claims. Combined with the tight deadlines for compliance, servicers must be vigilant in monitoring this process.

Early intervention requirements

This section imposes two early intervention requirements for delinquent borrowers. First, a servicer has 35 days to make good faith efforts to establish live contact — a telephone or in-person meeting, but not a voicemail — with the delinquent borrower and inform him/her about the availability of loss mitigation options.

Second, a servicer must provide the borrower with a written notice, no later than the 45th day of delinquency, to encourage the borrower to contact the servicer. The notice must also convey required contact information, and if applicable, a brief description of examples of loss mitigation options which may be available, instructions or information on how to obtain additional information on loss mitigation from the servicer, and contact information for HUD homeownership counseling.

The Early Intervention Requirements generated substantial industry concern about conflicts with the FDCPA and/or Bankruptcy Code under certain circumstances. While the CFPB initially attempted to provide guidance on the issue through the Official Interpretations, the industry felt the commentary in the Official Interpretations did not provide the necessary certainty.

In response, the CFPB issued an amendment to the regulations stating that early intervention notifications need not be given if the borrower has filed for bankruptcy or has invoked the cease and desist provisions of the FDCPA. The servicer must resume compliance with §1024.39 after the first delinquency that follows dismissal, closure, or discharge in bankruptcy.

Loss mitigation requirements

Concerns about servicer conduct in evaluating loss mitigation applications, particularly in circumstances where a foreclosure action had already been initiated, became a prominent issue in the National Mortgage Settlement, and Section 1024.41 has essentially codified the provisions concerning loss mitigation. These provisions create broad pre-foreclosure limitations and requirements for the evaluation of loss mitigation applications, and also significant limitations regarding “dual tracking.” They also require that servicers provide the right to appeal most loss mitigation denials, but subsequent loss mitigation applications do not trigger the regulation’s protections.

There are a number of considerations related to loss mitigation requirements — including the definition of “application,” pre-foreclosure limitations, notice and review requirements, limitations on dual tracking, and appeals — that should be considered by servicers.

Are conditions precedent to foreclosure?

While Notice of Error and Requests for Information provisions are privately actionable, the plain text of the regulations themselves make it is clear that with one exception, neither §1024.35 nor §1024.36 is a condition precedent to foreclosure or sale. That exception is where the Notice of Error asserted a servicer's failure to suspend a foreclosure sale in the circumstances described in §1024.41(g) (regarding suspension of a foreclosure sale upon timely receipt of a completed loss mitigation application).

Consequently, while §1024.35 and §1024.36 may support a defense in recoupment, neither is intended to delay a foreclosure action except in the limited circumstances of a Notice of Error that contends an error has occurred with respect to compliance with the rules governing dual tracking.

Conclusion

The Mortgage Rules became effective Jan. 10, 2014. With less than three months to go, the CFPB continued to amend the Mortgage Rules and issue declarations clarifying their meaning. The Mortgage Rules rewrite much of Regulations X and Z, and will fundamentally change the mortgage origination and servicing industry. The provisions governing responses to borrower inquiries add considerably to the number of methods borrowers can use to generate potential liability for servicers with written inquiries and requests. The requirement for early intervention in cases of default will lengthen the amount of time it takes to go from default to foreclosure, even in circumstances where the borrowers have no interest in loss mitigation. Furthermore, servicers must now review loss mitigation applications for completeness, and review completed applications for a final loss mitigation decision, at a higher rate of speed than is presently customary. Issues with compliance with any one of these provisions will create potential litigation exposure.

However, each new regulation is lengthy, and within each provision one can typically find provisions that protect the servicing industry from unreasonable application or abuse of the new regulations. Servicers and their counsel will also need to stay abreast of the inevitable changes the CFPB will implement in the future to ensure that compliance issues and litigation exposure are minimized to the greatest extent possible.

Contributing Author

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David A. Elliott

David A. Elliott is an attorney in Burr & Forman LLP’s Financial Services Litigation Practice Group, which serves as national and regional litigation counsel for...

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Contributing Author

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Nicholas S. Agnello

Nicholas S. Agnello is an attorney in Burr & Forman LLP’s Financial Services Litigation Practice Group, which serves as national and regional litigation counsel for...

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Seth I. Muse

Seth I. Muse is an attorney in Burr & Forman LLP’s Financial Services Litigation Practice Group, which serves as national and regional litigation counsel for...

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