May 3, 2013
by Kathy Shakibi
Northwest Trustee Services, Inc.
USFN Member (California, Oregon)
by Wendy Walter
Routh Crabtree Olsen, P.S.
USFN Member (Alaska, Oregon, Washington)
The Consumer Financial Protection Bureau’s Regulation X establishes uniform national servicing standards, effective January 10, 2014, but does not routinely preempt state laws. Compliance with national regulations that overlap and intertwine with, as well as veer off from, state obligations presents a challenge for servicers and their vendors.
Comparison with WA and CA
The focus of recently enacted relevant state regulations and laws in Washington and California is on default servicing and foreclosures. Local counsel can help servicers reconcile and prepare for the differences between the national and state level regulations. This article will offer a comparison of Regulation X sections 1024.39 (Early Intervention) and 1024.40 (Continuity of Contact) with Washington and California’s default servicing and foreclosure requirements.
Borrower Contact Requirements
In recent years, servicers have been required to establish contact with delinquent borrowers in Washington and California. The state requirements have been a prerequisite to nonjudicial foreclosure referrals, but have not extended to judicial sales. Regulation X requires borrower contact as a prerequisite to foreclosure referral for both nonjudicial and judicial sales.
Regulation X, Section 1024.39 — The purpose of borrower contact listed in section 1024.39 is to encourage delinquent borrowers to work with their servicer to identify foreclosure prevention alternatives early in the delinquency. Live contact or good faith attempts need to occur no later than the 36th day of delinquency, followed by written contact no later than the 45th day of delinquency. Both the live and written contacts have content requirements although discretion is provided for live contact, while the written contact is scripted.
Washington Law — In this state’s nonjudicial foreclosure statute, a servicer is required to make written contact with the borrower of a loan secured by a principal residence by providing a notice of pre-foreclosure options. For the live contact, a servicer must attempt to call the borrower three times on three different dates to provide the borrower with options for loss mitigation. The nonjudicial foreclosure statute does not specify how far into default the loan must be before these contacts can begin. Servicers of loans secured by property in Washington have approached these requirements differently.
Some have sent out the notice of pre-foreclosure options when the loan was in the 15th day of delinquency, and others have waited until running through investor required loss mitigation programs and begin the Washington process before commencing the foreclosure. Furthermore, after this outreach process, the borrower has the opportunity to request a face-to-face meeting with its lender/servicer in Washington. For those servicers that wait until they have completed their investor required loss mitigation programs, this might result in a borrower having two opportunities for live contact. Borrower may be confused at the stream of mailings, phone calls, and outreach attempts, especially in those cases where they are not interested in retaining the property.
In addition to the prerequisites for the nonjudicial foreclosure process in Washington (which apply to all servicers of loans secured by a borrower’s principal residence), the Department of Financial Institutions, the agency that regulates state-licensed mortgage servicers, promulgated a rule, effective April 1, 2013, that applies to both judicial and nonjudicial foreclosures and requires its regulated servicers to have an electronic system that allows borrowers the ability to “check the status of their loan modification, at no cost.” The system must also be accessible to housing counselors and allow communication from them. Finally “the system must be updated every 10 days.” There is an exception to this requirement if the servicer is “using a HAMP or GSE loan modification program.”
Although this requirement, found in Washington Administrative Code (WAC) section 208-620-900(6), does prescribe a specific method in which Washington licensed servicers will need to be communicating with borrowers in loss mitigation, it was not a requirement adopted by the CFPB while promulgating the final Regulation X rules on borrower contact. The bureau states in the preamble to the rules that it needs more time to study the benefits of electronic portals and that despite the fact that the national servicing standards in the Attorney General/Department of Justice settlement agreement impose such a requirement, there are “other reasonable means to track and maintain borrower-submitted loss mitigation documents.”
California Law — Similar to section 1024.39, California requires the servicer to make borrower contact prior to a nonjudicial foreclosure referral (Civil Code § 2923.55 or § 2923.5). While Regulation X relates the time of contact to the date of delinquency, California counts backwards from the date of first legal action for a nonjudicial foreclosure, which is the notice of default. Live contact needs to be made at least 30 days prior to recording a notice of default. If successful, a servicer need not make written contact, although as a matter of business practice written contact is routine. A certain exchange of information needs to take place if the servicer is successful at making live contact. If unable to make live contact, the servicer needs to perform due diligence, consisting of written contact, followed by three attempted telephone calls, followed by a second written contact, with prescribed timing, content, and method of delivery. Due diligence needs to be completed at least 30 days before recording a notice of default. Once the contact requirement is performed, a compliance declaration is attached to the notice of default.
The national and state level regulations require live and/or written contact with a borrower; both require certain timing and content, and both provide for a private right of action in case of violation. Servicers need to compare the timing, content, sequence and method of delivery to determine whether some contact requirements can be combined or need to be performed in a certain sequence. Keep in mind the restriction in the CFPB rules on foreclosure referral, which provides that a servicer shall not make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless a borrower’s mortgage loan obligation is more than 120 days delinquent.
The “first notice or filing” has been defined in the official commentary to be “any document required to be … provided to a borrower as a requirement for proceeding with a judicial or nonjudicial foreclosure process … including any notice that is required by applicable law in order to pursue acceleration of a mortgage loan obligation or sale of a property securing a mortgage loan obligation.” The timing and sequence of these requirements may turn, in part, on whether the state-required notices would fall within this definition. It is important to note that this is an area where the CFPB has expressly stated that federal regulation will preempt state law.
Continuity of Contact Requirements
Washington and California have also recently enacted point of contact requirements. The state law requirements in California are limited to nonjudicial foreclosures, while Regulation X and Washington requirements extend to judicial sales as well. Rather than calling it a single point of contact or SPOC, the bureau adopted the phrase “continuity of contact.” The difference in terminology appears to be a non-issue, however, as the divergence lies in the substance of the requirements.
Regulation X, Section 1024.40 — To further assist borrowers with exploring foreclosure prevention alternatives, section 1024.40 requires a servicer to assign personnel to a delinquent borrower with the written notice described in section 1024.39, sent no later than the 45th day of delinquency. The personnel must be available via telephone to assist a borrower with loss mitigation options until the borrower has made two consecutive mortgage payments under a permanent loss mitigation agreement. This section does not require providing a borrower with identifying information about the contact personnel. A telephone number and address for the servicer personnel appears sufficient. The assigned personnel may be single- or multi-purpose, meaning their primary responsibility might not be responding to a delinquent borrower. Nonetheless, the personnel do have enumerated functions. Section 1024.40 does not provide a private right of action.
Washington Law — WAC 208-620-900(5), effective January 1, 2013, requires that a state-licensed servicer must respond to a borrower’s request for information and, at a minimum, provide the telephone number and mailing address of an individual servicer representative with the information and authority to answer questions and resolve disputes and to act as a “single point of contact for the homeowner.” The Washington SPOC must have the authority and ability to: explain loss mitigation options and requirements, track documents provided by the borrower, inform the borrower of the status of his loss mitigation process, and ensure the borrower has been considered for all loss mitigation options, as well as have access to individuals who can delay or stop the foreclosure proceedings. The trigger for these requirements is a borrower’s “request for information.” The servicing rules in Washington do not appear to have a private right of action, but the Department of Financial Institutions can enforce them and will likely audit accordingly when conducting examinations of Washington-licensed servicers.
California Law — California’s SPOC requirement is triggered if and when a borrower requests a “foreclosure prevention alternative” (Civil Code § 2923.7). The SPOC may be an individual or a team of personnel, each of whom needs to have the ability and authority to perform specified functions. There is no requirement that the SPOC be available via telephone, but one or more direct means of communication needs to be provided.
A SPOC shall remain assigned to a borrower until the servicer determines that all loss mitigation options are exhausted, or the borrower’s account becomes current. The difference between assigned personnel versus SPOC seems to be that section 1024.40 does not require providing identifying information about the contact personnel. For practical purposes that difference might be negligible, as a SPOC can be a team of personnel. California law does provide a private right of action.
While, in essence, there is similarity in SPOC or “continuity of contact” functions under the three regulations compared here, the functions are not identical. Servicers need to be aware of the differences in trigger point, means of communication, categorized functions, and borrower’s private right of action.
The borrower contact requirements and single point or continuity of contact rules are significant. However, a greater challenge is presented when one analyzes loss mitigation procedures under state laws and Regulation X. Evaluating borrowers for loss mitigation options is not new for servicers, but the complexities of navigating the multifarious covenants and restrictions — each with different scripts, timelines, and penalties — are unprecedented. Planned for the summer USFN Report is an article comparing the loss mitigation measures of Washington and California with Regulation X, section 1024.41. Look for that in August.
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