February 4, 2014
by Donna M. Case-Rossato
Hunt Leibert -USFN Member (Connecticut)
and Wendy Walter
RCO Legal, P.S. -USFN Member (Arkansas, Oregon, Washington)
Final amendments to a number of the final mortgage rules and comments issued by the CFPB in January 2013 were published in the Federal Register on October 1 and October 23, 2013. By the time this article is published, our industry will be in full swing complying with, interpreting, and living with the new rules. The USFN Report has been reporting on these rules since they were first rolled out in January 2013. Winter, spring, and summer editions of the USFN Report in 2013 all discussed the rules and the implications they might have on default servicing.
In this article, we hope to round out that coverage, as well as provide a final overview of the last-minute changes happening in late fall 2013. The “final” final rules and comments cover a lot of ground, but there are some standouts that the mortgage servicing industry has been following for a number of months. First, we will cover the finalization of the “first notice or filing” rule, 12 CFR Sec. 1024.41(f), and what has become known as the “one document” implication for loss mitigation under 12 CFR Sec. 1024.41(b), which are addressed in the changes published on October 1, 2013.
Next we will address the major topics in the October 23rd update, which includes an interim final rule excepting loans in bankruptcy from the periodic statement and early intervention requirements and provides guidance for debt collector servicers when the borrower’s FDCPA “cease communication” rights are exercised.
Not covered in this article, but what is important to note, is that for the first time since the mortgage servicing rulemaking kicked off, the CFPB issued a bulletin on October 15, 2013. The bulletin is relatively difficult to locate and has been the source of frustration for servicers who had adapted their compliance tracking systems to review the federal register for changes in the law. Due to space limitations in this print publication, the link to the bulletin is referenced for readers who want to view the update: http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_bulletin.pdf.
Defining “First Notice or Filing”
As an industry, we are used to equating first notice or filing to the Federal Housing Administration’s (FHA’s) definition of “first legal,” as defined for each state. The CFPB declined to utilize this definition in establishing “first notice or filing” under the final rules and comments as originally promulgated. 12 CFR Sec. 1024.41(f) specifically prohibits a servicer from making the first notice or filing required by applicable law to commence a foreclosure, either nonjudicial or judicial, unless a borrower’s mortgage loan is more than 120 days’ delinquent. Thus, it is imperative that there is certainty as to the definition of first notice or filing. It should not be open to interpretation. The original comments stated that first notice or filing should be determined under applicable state law. This is trickier than it may seem.
The original final rule and comment caused much debate as to whether the demand or acceleration letter or other state-mandated letters could be perceived to be the first notice (Is this considered to be a condition precedent under state law for a foreclosure? What about a state-mandated notice of availability of mediation?), thus possibly resulting in a 120-day period after default before those letters could be issued, regardless of contractual or state statutory provisions. Such a delay could cause greater difficulty for a borrower in loss mitigation programs such as state foreclosure mediation. The longer the delay in entering mediation, the less likelihood of a positive resolution for the consumer as the delinquency amount would be much larger.
After a good deal of commentary and input from many industry resources, the CFPB provided a much appreciated “bright line” rule, balancing the need to ensure that the borrower has been afforded as much time as possible to investigate loss mitigation and curative options versus the need for clarity in communicating the timing of options and possibility of foreclosure. Specifically, comment 41(f)-1 has been revised, with four new subparts adopted. This is intended to recognize and address the different types of foreclosure processes throughout the country.
For a judicial process, and referencing applicable state law, new comment 41(f)-1.i clarifies that a document can be considered first notice or filing if it is the earliest document required to be filed with a court or other judicial entity to commence the action or proceeding. By way of example, in Connecticut, the first set of documents filed with the court to commence the foreclosure action is the writ, summons, and complaint, with associated exhibits and attachments. The demand or acceleration letter is not filed with the court to commence the action. For a nonjudicial process, new comment 41(f)-1.ii clarifies that a document may be considered the first notice or filing if it is the earliest document required to be recorded or published to commence the foreclosure action.
Two additional new comments are 41(f)-1.iii and 41(f)-1.iv. The first is designed to address a process that is not covered by the judicial process and may be a subset of a nonjudicial process. In those instances where a court proceeding does not need to be commenced, and recording or publishing a document is not required to commence the action, the first notice or filing may be the first document that sets the foreclosure sale date. Comment 41(f)-1.iv further clarifies that if a document is provided to a borrower and it is not required to be filed, recorded, or published initially, it is not the first notice or filing. This recognizes that certain documents may be submitted later in the foreclosure process, either as an attachment or exhibit, but it is not needed initially. An example might be the demand or acceleration letter that may be submitted late in a judicial process as evidence that it was issued if there is a claim that it was not.
These four new comments do not apply to foreclosures commenced when the due-on-sale clause is violated or if the servicer is joining in the foreclosure action of a junior lienholder. They provide substantive guidance regarding when a foreclosure of the subject mortgage, whether judicial or nonjudicial, may be commenced by a servicer.
Loss Mitigation Amendments
Loss mitigation procedures are covered at length in 12 CFR Sec. 1024.41, and the attendant comments 41(b) through 41(d). This includes comments on receipt and evaluation of a loss mitigation package and determining whether it is complete, facially complete, and later discovered to be incomplete; requirements for review of a loss mitigation package; disclosure timing; determining protections; payment forbearance; and denial of loss mitigation options. Throughout its review, the CFPB recognized that a “complete” package may not always really be complete, through no fault of the borrower or the servicer. It recognized that the loss mitigation review process is complicated and ever-evolving, based upon information the borrower submits initially and subsequently. The process affords a borrower the chance to update information and give a clearer, more complete financial picture and a decision is not always based only upon the initial documents that are submitted.
Throughout the rule and comment amendments, the CFPB injects a standard of “reasonableness.” Comment 41(b)(1)-4 is amended to clarify that a servicer must use reasonable diligence to complete a loss mitigation package. A reasonableness standard is open to interpretation and should be approached with the utmost caution. Thus, should a servicer continue loss mitigation efforts and, if so, for how long, if all it receives is one document that complies with the requirements of the loss mitigation package? There was a great deal of comment from all sides regarding how to implement a strict timetable while recognizing that additional documents are often needed after what was originally thought to be a “complete” package is received. All stakeholders recognize that the primary goal is to offer loss mitigation solutions for which a borrower qualifies. The devil is in the details.
As always, a servicer must exercise due diligence and contact a borrower to request additional information [see comment 41(b)(1)-4.i.]. The CFPB is adopting comment 41(b)(2)(i)(B)-1, wherein a servicer must promptly request additional information, if needed. 12 CFR 1024.41(b)(2)(i) requires a servicer to review a loss mitigation package within five days; acknowledge receipt; inform the borrower whether the package is incomplete or complete. If incomplete, the servicer must provide a list of what is missing and the date by which the missing information must be submitted, based upon the stage of foreclosure.
Originally, four specific milestones were provided to address the aforementioned timing of delivery of information to the servicer, based upon stage of the foreclosure and prior delinquency:
1. The date wherein any information or document submitted by the borrower may be considered stale or invalid;
2. The date that is the 120th day of delinquency;
3. The date that is 90 days before a foreclosure sale; and
4. The date that is 38 days before a foreclosure sale.
The goal of the timetable is to encourage submitting a complete application as early as possible, without discouraging continuing efforts to complete that application over time if needed. However, the CFPB was concerned that the above timetable may be overly rigid and not allow for reasonable exceptions.
CFPB has opted to replace the four specified dates to require notices regarding timing of submission of additional information. Instead, the date is to be reasonable. In determining whether the date is reasonable, the corresponding comments suggest that the servicer use the date that saves the maximum amount of rights for the borrower under that section. The four previously specified dates can be considered as reasonable, though no longer mandated. Thus, in practice, it is anticipated that most servicers will utilize the original milestone dates, barring unusual circumstances. Whether this provides a safe harbor may only be determined through litigation.
This change towards a reasonable standard is seen in many of the remaining amended sections. While intended to provide the maximum amount of time to effectuate a loss mitigation resolution, this will most likely result in enough uncertainty that litigation will ensue. Defining reasonable is always a matter of opinion based on the specific facts and is the ultimate fodder for litigation, especially when interpreting new laws and regulations.
No Periodic Statements Required for Loans in Bankruptcy
The change excepting borrowers in bankruptcy from the periodic statement requirement came as a last-minute interim final rule, the rule that would become effective on January 10, 2014 like the rest of the mortgage servicing rules, but was opened for public comment. The rule itself is fairly simple: it amends 12 CFR 1026.41(e)(5) to state that a servicer is exempt from the requirements of the periodic statement requirements for a mortgage loan while the borrower is a debtor in bankruptcy under Title 11 of the U.S. Code.
The comments to the rule provide that a servicer must resume sending statements within a reasonably prompt time after the next payment due date that follows the earliest of any three potential outcomes in the borrower’s bankruptcy case: the case is dismissed, the case is closed, or the consumer receives a discharge. But the servicer does not have to communicate in any manner that would be inconsistent with applicable bankruptcy law or a court order in a bankruptcy case. If a case gets reinstated or revived, the exception to the periodic statement rule would revive as well, according to the commentary. This exemption also applies if one of the borrowers is in a bankruptcy case for a loan where there are “joint obligors.”
No Early Intervention Required for Loans in Bankruptcy
Servicers handling loans where the borrower files bankruptcy will not be required to contact borrowers under the early intervention rules in 12 CFR 1024.39. This exemption applies for the duration of the bankruptcy case; but if the case is dismissed, closed, or the borrower receives a discharge, the servicer will need to resume compliance with respect to any portion of the debt that is not discharged. This exemption also applies if one of the borrowers is in a bankruptcy case for a loan where there are “joint obligors.”
FDCPA Compliance in Conjunction with New Servicing Rules
Recognizing the potential conflict that exists within the Fair Debt Collection Practices Act and some of the new servicing rules, the Bureau covered this subject in the interim rule published on October 23rd. Essentially, servicers are not required to comply with a borrower’s request to “cease communication” under FDCPA Section 805(c) if the servicer is attempting to comply with the servicing rules regarding periodic statements and ARM adjustment notices. However, if the borrower sends a “cease communication” request covering the time when the servicer is required to engage in early intervention, the servicer is exempt from compliance with 12 CFR 1024.39, the early intervention rules.
Overall these bankruptcy and FDCPA exemptions are good news for the industry. It demonstrates that the Bureau has listened to the comments of the industry, Chapter 13 trustees, and parties involved in the bankruptcy process. The comments provided in the 30 days after the rule was issued indicate that the major trade organizations representing mortgage banking are satisfied with the exemptions. Predictably, consumer organizations weren’t as happy with the last-minute exemptions and it is likely that a dialogue regarding intersections between the FDCPA and bankruptcy law will continue into early 2014.
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