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CFPB: Mortgage Servicing Final Rules under RESPA (Regulation X)

by Wendy Walter
Routh Crabtree Olsen – USFN Member (AK, OR, WA)

This article focuses on some of the possible changes to foreclosure practice under the Mortgage Servicing Final Rules released by the Consumer Financial Protection Bureau (CFPB) in January 2013. The rules will take effect on January 10, 2014.

Loss Mitigation: Additional Defenses to Outcome Challenges?
When crafting the long awaited mortgage servicing rules — portions of which will live within Regulation X, which implements the Real Estate Settlement Procedures Act of 1974 — the CFPB elected to mandate a process for loss mitigation, rather than prescribe the outcome.

In 12 CFR § 1024.41, Loss Mitigation Procedures, the CFPB imposed an application, review, and appeal period, which the CFPB itself has estimated to take approximately 90 days. While homeowner advocates pushed for detailed loss mitigation criteria, specified waterfalls, debt-to-income targets or net present value models or assumptions, they were unsuccessful. What Regulation X does is prescribe deadlines and time frames, enabling borrowers to sue servicers who fail to comply with these time frames when reviewing, evaluating, and deciding loss mitigation applications. Also, § 1024.41(a) prohibits a borrower from enforcing the terms of any agreement between a servicer and the owner or assignee of a mortgage loan. These might be effective arguments for those who have been defending lawsuits and claims that the borrower deserved a loan modification because of a certain net present value calculation presented during foreclosure mediation — assuming a judge is persuaded by the CFPB’s approach to loss mitigation regulation.

Clarity re Foreclosure Cases in Progress
The CFPB also realized that some strategic borrowers might wait until the last minute to submit their loss mitigation applications; and, for these reasons, Regulation X will not allow the late submission of a loss mitigation application to completely kill a foreclosure process. After reviewing the commentary to the proposed rules, the CFPB was persuaded that some borrowers might not be willing to “come to terms with their situations” and would not explore loss mitigation unless a foreclosure was close at hand. The CFPB even admitted that some borrowers might tactically stall foreclosure, factoring this into its rulemaking process.

Therefore, under § 1024.41(g), the submission of a complete loss mitigation application after the first notice or filing required by applicable law will bar the servicer from moving for dispositive judgment or taking any action to cause the foreclosure sale, but will not prohibit the servicer (and presumably its legal counsel) from continuing with mediation, publication, or any other non-dispositive motion that might be necessary to avoid a restart. This, of course, may be easier to accomplish in a nonjudicial state where counsel doesn’t have to deal with a court interested in keeping the docket moving along.

Pre-foreclosure Processes
The CFPB is implementing a 50-state pre-foreclosure review period under § 1024.41(f) by restricting the first notice or filing requirement until after a loan is 120 days delinquent. The CFPB intends to preempt any state law that allows for an earlier first notice or legal filing period. This could raise some interesting legal challenges. Practically speaking, it might also cause a shift in the GSE timelines, since those are calculated based on last payment installment. Foreclosure counsel will undoubtedly be asked to weigh in on what constitutes the first notice or filing requirement; and, for those states that have instituted pre-foreclosure processes, counsel may be asked to advise on the servicer’s ability to move on those processes during this 120-day period.

It is also interesting to note that the CFPB advises servicers to comply with the most restrictive of all loss mitigation processes to which they are subject, acknowledging that the national mortgage settlement and GSE requirements require a fast track review process for loss mitigation applications received 37 days or less before a foreclosure sale, whereas § 1024.41 does not. (For convenient reference, a link to the national mortgage settlement webpage is provided here.)

What’s Upcoming?
This review of some of the new CFPB loss mitigation rules and their potential impact on foreclosure practices will be expanded upon in my articles planned for the spring and summer editions of the USFN Report. Look for those in May and August.

© Copyright 2013 USFN. All rights reserved.
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