February 5, 2015
by Wendy Walter
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)
On November 20, 2014, the Consumer Financial Protection Bureau (CFPB or the Bureau) issued a 492-page proposal to further amend the servicing rules that went into effect on January 10, 2014. This action was designed by the CFPB to revisit known issues that arose prior to the effective date of the servicing rules, but for which more study was necessary (bankruptcy revisions). Further, the action addresses concerns that have arisen as the CFPB engaged in post-implementation outreach with the industry and with consumer advocacy groups (foreclosure revisions). The proposal has a comment period of 90 days, as of the date of the proposal’s publication in the Federal Register. [As of date of this article in early December 2014, the proposal was not yet published.] It is anticipated that comments will be due sometime in mid-March 2015, which means the changes would not be effective until sometime later in 2015.
In late 2013, debates were waged regarding the then-proposed servicing rules that would have required servicers to send the new periodic payment statement to borrowers in bankruptcy. It was clear that Chapter 13 trustees, bankruptcy creditor lawyers, and consumer advocates all needed to educate the CFPB on the real costs and confusion that would be introduced by requiring periodic payment statements while a loan was in a Chapter 7 or Chapter 13 proceeding.
After several meetings and input, the CFPB has proposed to peel back the bankruptcy exemption given in the periodic payment statement rule, which was provided in the Interim Final Rule on October 15, 2013 under 78 FR 62993. The exemption would be allowed to apply to those bankruptcy consumers who are surrendering the property (in the Chapter 13 plan with lack of payment provision to the servicer or in the Statement of Intention), who are avoiding the lien securing the mortgage, or who have requested that the servicer stop sending periodic statements. The proposal would require the servicer to resume sending statements upon request from the consumer in writing, or when the bankruptcy case is dismissed, closed, or the borrower reaffirms the mortgage — to the extent that the remaining debt is not otherwise discharged in the bankruptcy. The proposal also intends to repeal the payment statement exemption for a non-debtor joint obligor in a Chapter 7.
Loss Mitigation Concerns
An important foreclosure provision covered in the CFPB’s proposal is related to the loss mitigation section, 12 CFR 1024.41, which contains the prohibition on obtaining a judgment or order of sale, or actually conducting the sale, when the borrower has a complete loss mitigation application pending. In the proposed revision to the official commentary in section 12 CFR 1024.41(g), when a servicer or its counsel fails to take reasonable steps to avoid the ruling on a dispositive motion or issuance of an order of sale, the CFPB would like to force the servicer to dismiss the foreclosure proceeding (if necessary) to avoid the sale.
In the proposed amendment titled “interaction with foreclosure counsel,” the CFPB intends to clarify that a servicer is liable for violation of the rules, if the “foreclosure counsel’s actions or inaction caused a violation.” It goes on to require that the servicer “must properly instruct counsel not to make a dispositive motion for foreclosure judgment or order of sale; [and] to take reasonable steps where such a motion is pending to avoid a ruling on the motion or issuance of the order of sale.” Examples given of reasonable instructions include: asking counsel to move for a continuance for the deadline to file a dispositive motion; to move or request that the sale be stayed, otherwise delayed, or removed from the docket; or that the foreclosure proceeding be placed in any administrative status that stays the sale.
In the proposed amendment titled “conducting a sale,” the CFPB identifies reasonable steps for the servicer (or its counsel) to take, including: requesting that a court (or the official conducting the sale) reschedule or delay the sale, remove the sale from the docket, or place the foreclosure proceeding in any administrative status that stays the sale. Again, if the servicer or counsel fails to take reasonable steps to delay the sale, or if the servicer fails to instruct counsel to take reasonable steps, the servicer must dismiss the foreclosure proceeding.
The CFPB is doing this because it has learned in its evaluations of mortgage servicer practices that some servicers did not properly structure and manage third-party vendor relationships, which resulted in harm to borrowers, and imposed “unwarranted fees on borrowers” related to dual tracking. It cites that one of the clearest harms of servicers pursuing loss mitigation and foreclosure procedures concurrently is the loss of the borrower’s house when a complete application review is pending.
The Bureau has received reports that foreclosure counsel does not always have accurate information about the completion of the borrower’s loss mitigation application and, “in extreme cases,” foreclosure counsel may not accurately represent the status of the loss mitigation application to the court. It goes on to suggest that foreclosure counsel fails to impress upon the courts the significance of 1024.41(g)’s prohibition when counsel is taking steps to avoid a judgment or sale. The CFPB thinks that a lack of express commentary requiring the servicers to take affirmative steps has caused servicers to fail to instruct foreclosure counsel appropriately, and has resulted in courts discounting servicer obligations under the rule, which has harmed borrowers and deprived them of important protections in 12 CFR 1024.41.
There are several concerns with the underlying premise outlined in the background leading up to the proposals. The CFPB seems to imply that the servicer is the party causing the dual-tracking issues. By demanding and providing a borrower with a right to a post-foreclosure referral loss mitigation review in 12 CFR 1024.41, the Bureau has intensified the issue by placing obligations on parties outside of the CFPB’s scope of authority to regulate.
The real-life scenario seems to be this: servicer’s counsel is confronted with an underfunded court system and has been dealing with a borrower and a case for many months (possibly years). In the final stretches before the case is finally going to judgment and the sale might be moving forward, a borrower surfaces with a loss mitigation application; the servicer is scrambling to carry on with that process, and to keep its foreclosure counsel in the loop. It is no wonder that a last-minute plea to stop the process in its tracks is denied by the court. In the early days of the loss mitigation rules, there were reports of judges (after extensive briefing on the issue of the importance of the rules) declaring that they are not bound by the CFPB rules and, accordingly, determining that the matter will proceed.
Attorney-Client Privilege & Other Potential Issues
Concerns about the interaction with the foreclosure section raise significant issues, including whether requiring this type of communication would compromise the attorney-client relationship between foreclosure attorneys and their servicing clients. To prove that there was a violation for which the servicer would be liable under 1024.41 (and for which there is a private right of action for a borrower to enforce against a servicer), the borrower would need access to communications that would be protected by the attorney-client privilege. The rule does not consider the impact of this likely possibility on the relationship between servicers and their counsel.
Additionally, the proposal discusses the Bureau’s concern with courts that are trying to clear overloaded dockets and, in the process, might not be acting judiciously with regards to borrowers’ rights. Through this proposal and commentary, the CFPB is hoping to “educate” the judiciary on the consumer impact of the courts’ actions. In the process, however, it appears that the servicer and its counsel are being sandwiched between state court justice systems that are dealing with their own practical realities and the Bureau. The CFPB appears to take the position that a servicer in a foreclosure case — in civil procedure terminology: a plaintiff in a lawsuit — has ultimate control over the court, the case (and whether it can be dismissed), and the sale (and whether it can be called off).
Finally, there could be an issue if the proposal is enacted, and the revision to the comments regarding “interactions with counsel” goes into effect. It is a concern that foreclosure counsel is more likely to be sued when the borrower believes he or she has not been afforded proper treatment under the rules. The CFPB is demanding a certain outcome in the court systems, where servicers and their counsel have little say as to how the courts control their own dockets.
For all of the concerns raised here, though, there is a ray of hope in that the proposal contains a requirement that the servicer must send a letter to a consumer informing when a loss mitigation application is determined to be complete. Assuming this proposal is adopted in its current form, the letter confirming when a loss mitigation application is complete could be a touchstone for counsel to look to when deciding how to proceed before filing a dispositive motion, obtaining an order of sale, or conducting the sale.
Copyright © 2015 USFN. All rights reserved.
Winter USFN Report