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Mirror Mirror on the Wall Which Rules Offer the Greatest Consumer Protection of All?

Posted By USFN, Thursday, August 1, 2013
Updated: Monday, November 30, 2015

August 1, 2013


by Wendy Walter
RCO Legal, P.S.
USFN Member (Arkansas, Oregon, Washington)

by Kathy Shakibi
Northwest Trustee Services, Inc.
USFN Member (California, Oregon)

The Spring 2013 issue of the USFN Report offered an overview of the Consumer Financial Protection Bureau’s Mortgage Servicing Rules (CFPB Rules), specifically Regulation X sections 1024.39 and 1024.40. This follow-up article will compare the loss mitigation portion of the rules in section 1024.41 with their California and Washington counterparts. Where the state laws offer greater consumer protection, the CFPB Rules do not preempt them. With so many layers of regulation governing loss mitigation, one almost wishes for a crystal ball or a magic mirror. Since no authority has determined which of the regulations — state or federal — offers greater consumer protection, the challenge lies in reconciling or aggregating the two.

Uniformity Absent Preemption Equals … Aggregation?

In the midst of myriad regulations, the CFPB aims to standardize loss mitigation procedures with its own rules. The concept of standardization evokes a sense of supremacy or preemption. After all, can uniformity be achieved without preemption? If the CFPB Rules preempted the field of loss mitigation, the world of regulatory compliance would be an easier one. That, however, is not the case. The rules do not preempt the field of loss mitigation if a state (or federal law) offers greater consumer protection.

Who decides which set of regulations offers broader consumer protection? Can the determination be made at a general level or must it be made at a detailed step-by-step level? Are the servicers and their counsel left to venture a guess? The practical result of the lack of absolute preemption appears to be an aggregation of the CFPB Rules and the state counterparts for compliance purposes.

Before Starting a Foreclosure

Perhaps the greatest impact of CFPB’s loss mitigation rules will be felt early in the default stage. CFPB makes it clear that a servicer subject to section 1024.41 is prohibited from making the first notice or filing required for a judicial or nonjudicial foreclosure process unless a borrower is more than 120 days delinquent. In addition to the 120-day prohibition, the CFPB Rules prohibit pre-foreclosure dual tracking. If a borrower submits a complete loss mitigation application (defined as an application in connection with which a servicer has received all of the information that the servicer requires from a borrower), before a servicer has made the first notice or filing, then a servicer is prohibited from making the first notice or filing unless:

  • Servicer has sent written notice that the borrower is not eligible for any loss mitigation option and the appeal process is not applicable; the borrower has not requested an appeal, or the borrower’s appeal is denied;
  • The borrower rejects all loss mitigation options offered by servicer; or
  • The borrower breaches a loss mitigation agreement.

During the Foreclosure Process
After a servicer has started the foreclosure process by making the first notice or filing, the CFPB Rules impose another set of timelines and prohibitions. A servicer’s obligations differ depending on when during the foreclosure process the borrower applies for loss mitigation. For this portion of the rules, a flow chart will prove a handy tool to track the various timelines and obligations.

If a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, the servicer shall review and determine whether the application is complete. Within five days of receipt, the servicer shall send a notice to the borrower acknowledging receipt, a determination of whether the application is complete and, if incomplete, list the additional material the borrower needs to submit. This notice has specific time requirements in that it must state the borrower should submit the documents and information necessary to complete the application by the earliest remaining date of:

  • The date by which the document or information already submitted will be considered stale;
  • The date that is the 120th day of the borrower’s delinquency; or
  • The date that is 38 days before a foreclosure sale.

“Complete Loss Mitigation Application” Review
Under CFPB Rules, if a servicer receives a “complete loss mitigation application” more than 37 days before a foreclosure sale, then within 30 days of receipt, a servicer shall evaluate a borrower for all loss mitigation options available, and provide the borrower with a written notice of determination.

If a borrower’s complete application is denied for a trial or permanent loan modification (only), a servicer shall send a written notice of denial, stating the specific reasons and offering an appeal period. Depending on how many days before the sale a complete application is received, a servicer may require that a borrower accept or reject an offer within a certain number of days (7 or 14 days). A borrower’s failure to timely accept may be deemed a rejection of the offer.

The Foreclosure Sale Itself

After the first notice or filing required to start the foreclosure process is made, if a borrower submits a complete loss mitigation package, the CFPB Rules do not impose a “hold” on the foreclosure, but merely prohibit conducting the sale, or moving for a foreclosure judgment or order of sale. In other words, once the foreclosure has started, application review and foreclosure can proceed concurrently, so long as the sale is not conducted or the foreclosure judgment or order of sale is not obtained.

If a borrower submits a complete loss mitigation application after foreclosure has started, but more than 37 days before a foreclosure sale, a servicer shall not move for foreclosure judgment or order of sale, or conduct a foreclosure sale, unless:

  • The servicer has sent a written notice that the borrower is not eligible for any loss mitigation option and the appeal process is not applicable; borrower has not requested an appeal, or the appeal has been denied;
  • The borrower rejects all loss mitigation options offered; or
  • The borrower breaches a loss mitigation agreement.

The CFPB Rules provide for an appeal process only for a denial of a loan modification and not for denial of a short sale or deed-in-lieu. Significantly, the rules only require a servicer to comply with Section 1024.41 for a single complete loss mitigation application.

Turning to California’s Homeowner Bill of Rights (HBOR)

Since the CFPB Rules do not absolutely preempt, compliance needs to occur somewhat within a framework of conjecture. No governing authority has determined as between the CA HBOR and the CFPB Rules: which one offers greater consumer protection? The challenge, therefore, lies in reconciling or combining the two layers of regulation. In a general sense, the CFPB Rules provide for wider coverage and greater clarity than HBOR for the following reasons:

  • The CFPB Rules govern both judicial and nonjudicial sales, while HBOR only applies to nonjudicial sales;
  • The CFPB Rules apply to “Loss Mitigation Application,” whether complete or incomplete. HBOR focuses on a “complete loan modification application;”
  • The CFPB Rules provide for definite timelines and a servicer’s obligations differ depending on when in the foreclosure process a loss mitigation application is received. HBOR does not provide for timelines except in case of an appeal, and does not contemplate proximity to a sale date and the different scenarios based on that proximity.

While the CFPB Rules have a more expansive coverage and provide for greater certainty and clarity, HBOR has a narrower scope, is on occasion more stringent and, more often that not, uncertain. HBOR is greatly focused on loan modification, as opposed to a short sale or deed-in-lieu (DIL). California Civil Code § 2923.6 and § 2924.10 specify in detail the protocol for processing a loan modification application, while short sales and deeds-in-lieu (DIL) are scarcely covered in Civil Code § 2924.11, and the coverage is ambiguous. For example, where a complete application for a loan modification triggers a hold on the foreclosure process, an incomplete application or an application for a short sale or DIL does not trigger a hold. The trigger for a hold in case of short sale is so vague as to require guesswork.

Under HBOR if a borrower submits a complete loan modification application, the foreclosure process has to go on-hold — meaning the next major step, such as recording a notice of default or notice of sale, cannot be taken pending review and any appeal. This prohibition on dual tracking is more stringent than the CFPB Rules, where once a foreclosure has started permit reviewing an application and concurrently proceeding with foreclosure, while merely prohibiting the conduct of the sale itself or obtaining a judgment or order of sale.

Additionally, HBOR is more stringent because, unlike the CFPB Rules, it permits duplicative requests and does not limit a servicer’s obligation to review a borrower for loss mitigation to only once. A borrower may submit multiple loan modification applications, and a servicer is obligated to evaluate them if there has been a material change in the borrower’s financial circumstance since the last evaluation.

Likewise, where the CFPB Rules streamline the evaluation process by requiring a servicer to evaluate a borrower for all available loss mitigation options at once, based on a single application received, HBOR has no such concept. In sum, since the CFPB Rules do not preempt, the two layers of regulation need to be aggregated.

A Look at Washington State’s Consumer Loan Act
Washington’s Department of Financial Institutions (DFI), the agency that regulates state-licensed mortgage servicers, promulgated rules based on the National Mortgage Settlement back in 2012. Due to imprecise drafting of the rules related to loss mitigation, for the purposes of this article, it will be assumed that DFI intends for its loss mitigation rules to apply, if a servicer isn’t otherwise required to follow HAMP or GSE program guidelines1. There are a few notable differences in Washington state regulation that are likely to cause dual compliance burdens on state-regulated servicers covered by the CFPB Rules.

The Washington rules prohibit a servicer from referring a loan to foreclosure if it has a complete loan modification application from the borrower. Under the CFPB Rules, there is no prohibition on when a loan may be referred to foreclosure, but rather those rules restrict the first notice or filing activity itself, not the referral or the engagement of foreclosure counsel.

In Washington, it isn’t clear whether the borrower can submit a complete loan modification application fewer than 15 days before the foreclosure sale and have that submission stop the foreclosure sale. Section 208-620-900(6)(a)(vi) seems to indicate an automatic restraint on sale no matter how close the loan is to the foreclosure. However, the section states “see (a)(viii) and (ix),” and subsections (viii) and (ix) provide the borrower a review if the loan modification application is received up to 15 days prior to sale. Subsection viii covers the cases referred prior to 37 days before the sale and subsection (ix) covers those receiving expedited review for loan modification application receipt between 37 and 15 days prior to sale. Do these two subsections restrict the right of the borrower to claim a sale restraint? To add to the confusion, the CFPB Rules only provide the borrower with the right to a sale restraint if the complete loan modification application is submitted within 37 days prior to the foreclosure sale.

Regardless of how servicers choose to adopt these competing interpretations, foreclosure counsel and trustees should prepare to ask servicers to confirm whether a completed loan modification application is pending before going to sale. Best practice might be to check at day 37 prior to sale, day 15 prior to sale, and again the day before sale.

CFPB’s Implementation Plan
While a much-needed magic mirror is currently unavailable for compliance purposes, The CFPB does offer an implementation plan designed to provide support in the months preceding the January 10, 2014 effective date. Servicers, trustees, and legal counsel can access CFPB’s resources for support at

©Copyright 2013 USFN. All rights reserved.
Summer USFN Report.

1 The Washington Consumer Loan Act rules distinguish between servicers who are obligated to follow HAMP and GSE mandates, and those who are not obligated to do so. If a regulated servicer is not using those programs, it isn’t clear what exactly they must do to comply with the Consumer Loan Act Rules. The provisions in WAC section 208-620-900(6)(a)(i)-(ix) outline requirements relating to the time frame for reviewing a complete loan modification application, the content of any denial notice, the time frame for allowing borrowers to correct application errors, and prohibitions on referring or proceeding to foreclosure while an application is pending. Sections 208-620-900(b)-(g) cover appeal procedures, documentation of any agreement, general provisions to require adequate staffing, and accessibility of short sale requirements. In the current format of the rules, subsections (6)(a)(i)-(ix) seem to only apply if there is no HAMP or GSE programs, and sections (6)(b)-(g) appear to apply to all state-regulated servicers, including those who have agreed to HAMP or service for the GSEs. It doesn’t appear to make sense to require servicers who have agreed to HAMP or to administer GSE programs to comply with half of the Consumer Loan Act rules regulating loss mitigation, especially when some of that portion are covered by those programs (appeal rights and documentation requirements for example).

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