On January 10, 2014, new mortgage servicing rules promulgated by the Consumer Financial Protection Bureau went into effect. Among other things, the new rules include detailed requirements for loss mitigation. If a servicer violates the loss mitigation provisions, a borrower may sue for damages, costs, and attorney fees.
Whatever their shortcomings, the rules are the first meaningful attempt to rein in abusive servicing practices in mortgage loss mitigation, and, unlike the National Mortgage Settlement, wronged borrowers finally have some recourse when violations occur.
In this post, we will review the essential provisions in 12 C.F.R. § 1024.41 and the CFPB’s official interpretation of the loss mitigation rules.
Receipt of a Loss Mitigation Application
The key trigger for the loss mitigation rules is the servicer’s receipt of a loss mitigation application at least 45 days before a foreclosure sale. A “loss mitigation application” is any
oral or written request for a loss mitigation option that is accompanied by any information required by a servicer for evaluation for a loss mitigation option.
There are three critical points to note. First, an application may be submitted orally. In other words, if a borrower calls the servicer to request a loan modification and provides any information required for the evaluation, the servicer’s duties under the rule are triggered. Second, timing is critical. The borrower must apply 45 days or more before a foreclosure sale to take advantage of the loss mitigation rules. Third, the initial application need not be complete to trigger the servicer’s obligations.
Reviewing the Loss Mitigation Application for Completeness
Within 5 business days after receiving a loss mitigation application, the servicer must send the borrower a written notice acknowledging receipt and identifying any “additional documents and information the borrower must submit to make the loss mitigation application complete.” If the servicer later discovers that additional information is required, the servicer must exercise “reasonable diligence” to obtain that information from the borrower.
The written notice also must include the deadline for submitting the additional information. In most cases, the deadline will be the earlier of the date by which the information already submitted will become “stale” or the 120th day after the borrower became delinquent. For borrowers in foreclosure, the date may be either 90 or 38 days before the foreclosure sale.
Because receipt is the triggering event, borrowers or their representatives should keep detailed records of the date an application is submitted, what information is submitted, and the manner of submission.
Reviewing a Complete Loss Mitigation Application
A loss mitigation application is “complete” when the servicer receives “all the information that the servicer requires” to evaluate the borrower for available loss mitigation options. As discussed above, to comply with the rules, the servicer must be “reasonably diligent” in identifying what information is required.
If a complete application is received at least 37 days before a foreclosure sale, then the servicer must review the borrower “for all loss mitigations available to the borrower.” A loss mitigation option is “available” if the servicer administers a program with that option for the investor, even if the borrower is determined to be ineligible. The servicer may not evade the requirement to review for all loss mitigation options by making an offer based on an incomplete application. However, if the servicer is reasonably diligent in attempting to obtain information from the borrower and the borrower fails to complete the application, after a reasonable time the servicer may make an offer based upon an incomplete application.
The servicer must complete its review and make a determination within 30 days after receiving a complete application. Within those 30 days, the servicer must send a written notice to the borrower stating which, if any, loss mitigation options the servicer will offer the borrower.
If a borrower is denied for any loan modification option, the servicer must include in the notice “the specific reasons for the servicer’s determination” for each modification option that was “available” but denied. For example, if a servicer reviews the borrower for HAMP Tier 1, HAMP Tier 2, and a proprietary modification and denies each for different reasons, the notice must state the reasons for each denial.
Notably, according to the CFPB’s official interpretation of the rule, if the reason for the denial is an investor restriction, the servicer must
identify the owner or assignee of the mortgage loan and the requirement that is the basis of the denial. A statement that the denial of a loan modification option is based on an investor requirement, without additional information specifically identifying the relevant investor or guarantor and the specific applicable requirement, is insufficient.
Similarly, if the reason for the denial is negative net present value, the servicer must disclose the inputs used in the NPV calculation.
Although the servicer is required to review a borrower for all available loss mitigation options and to state which, if any, options the servicer will offer, the rules do not require the servicer to state reasons for denial of options other than a loan modification.
Responding to a Loss Mitigation Offer
How long a borrower has to accept or reject an offer is determined by how far in advance of a foreclosure sale the servicer receives a complete application.
When a complete application is received more than 90 days prior to a foreclosure sale, the servicer must give the borrower at least 14 days to accept or reject any loss mitigation offer. When a complete application is received between 37 and 90 days prior to a foreclosure, the servicer is required to give the borrower only 7 days to accept or reject an offer.
If the borrower does not accept an offer by the applicable deadline, the servicer may deem the offer rejected. However, if the servicer offers a trial period plan and the borrower submits the first trial payment by the deadline, the servicer must give the borrower a “reasonable time” to fulfill any other requirements for acceptance.
Appealing the Servicer’s Determination
The rules provide borrowers with limited rights to appeal a servicer’s rejection of a loan modification option.
The servicer must give the borrower at least 14 days to appeal rejection of a trial or permanent loan modification. If the borrower timely appeals, the servicer must notify the borrower of the servicer’s determination within 30 days from receipt of the borrower’s appeal.
If the result of the appeal is that the servicer offers the borrower a loss mitigation option, the borrower will have another 14 days to accept or reject that offer. Similarly, if the servicer rejected an application for a loan modification but offered a different loss mitigation option, the borrower will have 14 days after the appeal to accept or reject the alternative loss mitigation option.
Not all denials result in a right of appeal. Borrowers do not have a right under the rules to appeal the terms of a modification offer or the rejection of a loss mitigation option other than a loan modification.
Furthermore, the right of appeal applies only if the borrower submits a complete application at least 90 days before the foreclosure sale. If the servicer offered a loan modification based on an incomplete application, the rules do not offer a right of appeal.
Submitting Applications When a Foreclosure Sale Is Looming
The process of reviewing borrowers for loss mitigation while also proceeding with a judicial or non-judicial foreclosure is commonly known as “dual-tracking.” The rules provide borrowers with limited protection from dual-tracking.
Borrowers who submit complete applications before a servicer commences the foreclosure process receive the greatest protection. If a borrower submits a complete application within 120 days of becoming delinquent or prior to the servicer making “the first notice or filing” required for a judicial or non-judicial foreclosure, then the servicer is prohibited from commencing a foreclosure until the loss mitigation process described above is complete.
Once the foreclosure process commences, a borrower who submits a complete application receives limited protection under the rules. If the borrower submits a complete application more than 37 days before the foreclosure sale, the servicer must review the application and make a determination, but is only prohibited from moving for a foreclosure judgment or conducting a sale while the loss mitigation process is completed.
For example, in a judicial foreclosure, if a borrower submits a complete application, the servicer must follow the loss mitigation rules described above and may not move for summary judgment or a default judgment, but the servicer is not required to dismiss the foreclosure action and is not prohibited from conducting discovery or making routine, non-dispositive motions.
Three Important Limitations of the Loss Mitigation Rules
Although the rules provide the first meaningful protections for borrowers in the loss mitigation process, the rules have three very significant limitations.
First, nothing in the rules requires a servicer to offer any loss mitigation option, even if the investor’s guidelines require the servicer to do so. If the servicer violates the loss mitigation rules, the borrower can sue for damages. If the servicer violates investor guidelines, the borrower will have no recourse under the rules. In fact, the CFPB’s official interpretation makes clear that the servicer’s evaluation is not required “to meet any standard other than the discretion of the servicer.”
Second, borrowers generally only get one bite at the apple. A servicer must comply with the loss mitigation rules only for “a single complete loss mitigation application for a borrower’s mortgage loan account.” If a borrower completes an application on or after January 10, 2014, the loss mitigation rules apply to that application and only that application. If servicing is transferred, however, the borrower will get another bite at the apple with the new servicer. The limitation does not apply to an unsolicited offer by the servicer or an offer based on the borrower’s incomplete application.
Third, not all servicers are required to follow the rules. “Small servicers” that service no more than 5,000 loans that the servicer originated or owns are exempt from most of the loss mitigation rules. Even a small servicer, however, must wait 120 days after delinquency to commence a foreclosure and is prohibited from conducting a foreclosure sale if the borrower is complying with the terms of a loan modification or other loss mitigation agreement.
For more information about the mortgage servicing rules, visit CFPB’s website.