New CFPB Mortgage Servicing Rules (Part 2): Loss Mitigation Procedures. John Rao Lisa Sitkin Josh Zinner

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1 D4 D4 New CFPB Mortgage Servicing Rules (Part 2): Loss Mitigation Procedures John Rao Lisa Sitkin Josh Zinner

2 RESPA Servicing Rules Rules effective Jan. 10, 2014 dealing with foreclosure avoidance: New CFPB Mortgage Servicing Rules (Part 2): Loss Mitigation Procedures Consumer Rights Litigation Conference Early Intervention - Reg. X Continuity of Contact - Reg. X Loss Mitigation - Reg. X Lisa Sitkin, Josh Zinner, John Rao National Consumer Law Center 2013 Early Intervention No later than 36th day of delinquency, servicer must make good faith effort to establish live contact with the borrower includes telephoning or conducting in-person meeting with the borrower, but not leaving a recorded phone message purpose is to provide opportunity to discuss the circumstances of a borrower s delinquency servicer should inform the borrower about availability of loss mitigation options, if appropriate Early Intervention No later than 45th day of delinquency, servicer must provide borrower with written notice containing information about available loss mitigation options servicer is not required to give this notice more than once during any 180-day period rule does not require communication prohibited by applicable law (such as bankruptcy law), but may be adapted to provide debtors with information about loss mitigation options to the extent permitted by bankruptcy law

3 Early Intervention Written notice must include: statement encouraging the borrower to contact the servicer telephone number for continuity of contact personnel and servicer s mailing address brief description of examples of available loss mitigation options application instructions or general statement such as contact us for instructions on how to apply Continuity of Contact Servicer must have policies and procedures reasonably designed to ensure that: a single person or a team of personnel is assigned to borrower no later than 45 th day of delinquency assigned personnel are available by telephone to respond to the borrower s inquiries and assist with available loss mitigation options assigned personnel provide the borrower with accurate information about available loss mitigation options, including actions needed to complete an application, time deadlines, status of borrower s application, and foreclosure referrals Continuity of Contact Servicer must have policies and procedures reasonably designed to ensure that assigned personnel: obtain information needed to properly evaluate the borrower for loss mitigation options timely retrieve a complete record of borrower s payment history and all written information borrower has provided for a loss mitigation application provide this information to other personnel who are required to evaluate the borrower for loss mitigation options provide borrower with information about procedures for submitting a notice of error or an information request Loss Mitigation Procedures CFPB: nothing in imposes duty on a servicer to provide borrower with a specific loss mitigation option Borrowers do not have private right of action under to enforce terms of agreement between servicer and mortgage holder concerning evaluation for loss mitigation options Borrowers do have private right of action to enforce the procedural requirements in

4 Loss Mitigation Procedures Nothing in precludes borrowers from enforcing substantive rights under state or other federal laws for servicers failure to comply with substantive standards of loss mitigation programs No preemption of other loss mitigation laws that give borrowers greater protection Borrowers may be able to use error correction procedures under to address servicer s failure to correctly evaluate borrower for a loss mitigation option Receipt of Application If loss mitigation application received more than 45 days before foreclosure sale, servicer must: promptly conduct review to determine whether application is complete within 5 business days of receiving application, provide written notice to borrower, either: acknowledging that application is complete, or describing the documents and information needed to complete the application servicer must exercise reasonable diligence to obtain information needed to complete the application What is Complete Application? Complete loss mitigation application means all information the servicer requires from a borrower in evaluating applications for the options available to the borrower Servicers have flexibility to establish their own application requirements, but arguably these must be consistent with non-respa standards and guidelines for loss mitigation programs Application is complete if borrower provides all required information even if additional information not in the control of the borrower is required (e.g., credit report) Receipt of Complete Application If servicer receives complete loss mitigation application more than 37 days before foreclosure sale, servicer must within 30 days of receipt: evaluate borrower for all loss mitigation options available to the borrower provide borrower with written notice of options being offered to borrower if denial of loan modification, written notice shall include specific reasons for the servicer s decision for each option available to the borrower

5 Loan Modification Denial If loan modification denial based on a requirement set by loan owner or assignee, notice must identify owner or assignee and specific requirement that was basis for denial If loan mod. denial based on net present value test, notice must state this reason and include the inputs used for the calculation Denial notice must also describe borrower s right to appeal, the deadline to appeal, and any requirements for making an appeal Borrower s Response If complete application received 90 days or more before a foreclosure sale, servicer may require that a borrower accept or reject an offer no earlier than 14 days after offer made If a complete application received less than 90 days but more than 37 days before a foreclosure sale, servicer may require that borrower accept or reject offer no earlier than 7 days after offer made if a borrower requests an appeal, deadline for accepting option is extended until 14 days after servicer provides the appeal determination notice Appeal Rights Appeal rights apply only to decisions: involving eligibility for loan modifications made on complete applications submitted at least 90 days before a scheduled foreclosure sale or during the 120-day pre-foreclosure review period Borrower must request an appeal within 14 days after servicer provides notice of denial Review must be by different personnel than those responsible for evaluating application Servicer must decide appeal and provide notice of determination to borrower within 30 days of appeal request Dual-Tracking Provisions Servicers must not make first notice or filing required for foreclosure process until mortgage loan is more than 120 days delinquent If borrower submits complete loss mitigation application during 120-day period or before servicer has made first notice or filing, a servicer shall not make first notice or filing to initiate the foreclosure process This provision ( (f)(1)) preempts state foreclosure timelines to the extent they allow an earlier commencement of foreclosure

6 Dual-Tracking Provisions If borrower submits complete loss mitigation application after first notice or filing but more than 37 days before a foreclosure sale, servicer may proceed with foreclosure process, but shall not move for foreclosure judgment or order of sale, or conduct sale, until decision given or borrower rejects offer or fails to perform Prohibition includes making a dispositive motion, such as motion for default judgment, judgment on pleadings, or summary judgment, which may directly result in a foreclosure judgment or order of sale If such a motion has been made before receiving a complete application, servicer must take reasonable steps to avoid a ruling or issuance of an order Duplicative Applications Section (i): a servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower s mortgage loan account Does this really mean borrowers have only one bite at the apple, regardless of when earlier application was submitted or whether there haven been changed circumstances? Are there any limitations? rule does not apply when application is made to a different servicer - a transferee servicer is required to comply with regardless of whether a borrower received an evaluation of a complete loss mitigation application from a transferor servicer Transfer Requirements New servicer must obtain loss mitigation documents and information submitted by borrower to former servicer and comply with If borrower s complete application is being evaluated when mortgage is transferred, new servicer should continue the evaluation to the extent practicable Documents in a complete application are received for purposes of timelines as of date they were received by former servicer, not new servicer Covered error for notice of error includes: Failing to transfer accurately and timely information relating to servicing of a borrower s mortgage loan account to a transferee servicer Exemptions CFPB declined requests to create blanket bankruptcy exemptions, noting that a borrower could have filed for bankruptcy but still be eligible for loss mitigation As to early intervention, Comment 39(c) 1 clarifies that a servicer is not required to communicate with a borrower in a manner inconsistent with applicable bankruptcy law or a court order in a bankruptcy case, and that the requirements may be adapted As to continuity of contact, Comment 40(a) 2 explains that servicer may assign personnel with specialized knowledge in bankruptcy law to assist the borrower

7 Exemptions Loss mitigation procedures apply only to a mortgage that is secured by the borrower s principal residence. Small servicers are required to comply with the 120-day pre-foreclosure waiting period, and shall not make first notice or filing to initiate the foreclosure process if borrower performing under a loss mitigation agreement Small servicers are exempt from all other loss mitigation procedures Servicers of reverse mortgages are exempt from all loss mitigation procedures Using RESPA Error Resolution New regime for QWRs: separate qualifications and procedures for: notice of error under Reg. X request for information under Reg. X Written inquiry can be a NOE or RFI even if not a QWR Notice of Error Error must fall within one of ten listed categories, plus catchall category for any other error related to the servicing of borrower s mortgage loan One covered error includes failing to transfer accurate and timely information about borrower s mortgage account to a transferee servicer, including loss mitigation information Two covered errors deal with dual tracking Notice of Error Can a borrower assert under catch-all a servicer s failure to correctly evaluate borrower for a loss mitigation option? Reg. X changes clearly make loss mitigation related to servicing of loan CFPB said it did not add this as specific covered error because appeal process in (h) should provide effective review but CFPB also noted that catch-all was added to encompass the myriad and diverse types of errors that borrowers may encounter. loss mitigation evaluation was not excluded as a noncovered error

8 Request for Information Servicer is required to respond to any written request for information with respect to the borrower s mortgage loan Unlike QWR, a RFI is not limited to information related to the servicing of the loan RFI may seek: information about a loan modification application servicing file RESPA Remedies Actual Damages, Costs and Attorney s Fees Must plead actual damages to avoid 12(b)(6) dismissal Includes emotional distress damages Statutory Damages Up to $2,000 per violation if pattern or practice of noncompliance Capped in class actions at $1 mil. or 1% of servicer net worth, whichever is less The nonprofit National Consumer Law Center (NCLC ) helps build family wealth for low-income and other disadvantaged people in the U.S. by offering advocacy expertise through publications, policy analysis, research, litigation services, and training.

9 HOMEOWNER BILL OF RIGHTS NATIONAL MORTGAGE SETTLEMENT CFPB FINAL RULES PREEMPTION N/A N/A Rules establish a floor of minimum consumer protections and state law can be more restrictive. REQUIRED PRE FORECLOSURE PAUSE FOR BORROWERS TO EXPLORE FORECLOSURE ALTERNATIVES (a)(1) A Mortgage servicer... may not record a notice of default... until...: (1) 30 days after initial contact is made: (2) [to a] borrower in person or by telephone in order to assess the borrower s financial situation and explore options for the borrower to avoid foreclosure (a)(1) (2). No. Servicers are only required to notify potentially eligible borrowers of currently available loss mitigation options prior to foreclosure referral. Exh. IV A 1, Pg. A 16. Comment to final rules P. 38: (f) specifically referenced with 120 days of delinquency as floor for foreclosure); Comment P. 39: Bureau accounted for loss mitigation timelines and dual tracking provisions in NMS and HBOR when designing their timelines. No. Servicers are only required to 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 obligations is more than 120 days delinquent (f). DEFINITION OF COMPLETE APPLICATION... [A] borrower s first lien loan modification application shall be deemed to be complete when a borrower has supplied the mortgage servicer with all documents required by the mortgage servicer within the reasonable timeframes specified by the mortgage servicer (h); (b); (f); (d). None. Definition: An application is complete when a servicer has received all the information that the servicer requires from a borrower in evaluating applications for the loss mitigation options available to the borrower. A servicer shall exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application (b)(1). Notice of Complete Application:... [W]ithin 5 days after receiving the loss

10 REQUIRED PROCEDURES FOR SERVICER TO NOTIFY BORROWER OF MISSING DOCUMENTS IS SERVICER REQUIRED TO PUBLISH LIST OF REQUIRED DOCUMENTS? When a borrower submits a complete modification application, the servicer must provide written acknowledgment of the receipt of the documentation within five business days. In its acknowledgment, it must include: (3) Any deadlines, including deadlines to submit missing documentation, that would affect the processing of a first lien loan modification application (4) Any expiration dates for submitted documents. (5) Any deficiency in the borrower s first lien loan modification application (a). No. Servicer shall notify borrower of any known deficiency no later than 5 business days after receipt including any missing information or documentation required for the loan modification to be considered complete. Exh. IV F 2, Pg. A 26. Yes. Servicer shall make publicly available information on its qualification processes, all required documentation and information necessary for a complete first lien loan modification application, and key eligibility factors for all proprietary loan modifications. Exh. IV I 1, Pg. A 29. mitigation application, the servicer must acknowledge receipt of the loss mitigation application and that the servicer has determined that the loss mitigation application is either complete or incomplete (b)(2)(i)(B). If a servicer receives a loss mitigation application 45 days or more before a foreclosure sale, it must notify the borrower in writing within 5 days whether the application is complete or incomplete. If the application is incomplete, the notice shall state the additional documents and information the borrower must submit to make the loss mitigation application complete and the applicable date by which the documents need to be received by the servicer (b)(2)(i)(B). Application Remaining Incomplete: If a servicer has exercised reasonable diligence in obtaining documents and information to complete a loss mitigation application, but a loss mitigation application remains incomplete for a significant period... without further process by a borrower to make the loss mitigation application complete, a servicer may, in its discretion, evaluate an incomplete loss mitigation application and offer a borrower a loss mitigation option (c)(2)(ii). No. Servicer is only required to list what documents are required when sending a notice that a loss mitigation application is incomplete (b)(2)(i)(B). Comments: Bureau strayed away from mandating any certain types of documents and wanted to

11 PERMISSIBLE DEADLINES FOR BORROWER TO SUBMIT MISSING DOCUMENTS AFTER RECEIVING NOTICE THAT APPLICATION IS INCOMPLETE PERMISSIBLE DEADLINES FOR BORROWER TO SUBMIT COMPLETE LOAN MOD APP Nothing specific in HBOR. Deadlines seem to be at discretion of servicer. When notifying borrower of missing information in its initial acknowledge of receipt of loan modification application, servicer shall include deadlines to submit missing documentation (a)(2): None. Borrower has 30 days from the date of the Servicer s notification of any missing information or documentation to supplement borrower s submission of information prior to making a determination on whether or not to grant an initial loan modification. Exh. IV F 3, Pg. A 26. No restrictions on when a complete application must be received, but dualtracking protections are determined based the date of submission in relation to foreclosure date at the following intervals: Before 120 days of delinquency. Exh. IV B 1, Pg. A 17. Within 30 days after the Post Referral to Foreclosure Solicitation Letter. Exh. IV B 4, Pg. A 18. More than 30 days after the Post Referral to Foreclosure Solicitation Letter, but more than 37 days before a foreclosure sale is scheduled. Ex. IV B 6, Pg. A 19. More than 30 days after the Post Referral to Foreclosure Solicitation Letter, but within 37 to 15 days before a foreclosure sale is scheduled. Exh. IV B 8, Pg. A 19. More than 30 days after the Post Referral to Foreclosure Solicitation Letter, but within less than 15 days before a scheduled foreclosure sale. Exh. IV B 9, Pg. A 20. maintain servicer autonomy with regard to this matter. By the earliest remaining date of: (A) The date required documents will become stale or invalid; (B) 120 th day of borrower s delinquency; (C) 90 days before foreclosure sale; or (D) 38 days before a foreclosure sale (b)(2)(ii). If a complete application is received more than 37 days before a foreclosure sale, then, within 30 days of receiving a borrower s complete loss mitigation application, a servicer shall: (i) evaluate the borrower for all loss mitigation options available to the borrower; and provide the borrower with a notice in writing stating the servicer s determination of borrower s application (c)(1)(i) (ii).

12 DEADLINE FOR SERVICERS TO RENDER DECISION ON COMPLETE LOAN MOD APP PERMISSIBLE ACTIVITIES WHERE MOD APP SUBMITTED POST REFERRAL TO FORECLOSURE No specific timing required. A mortgage servicer s initial acknowledgement letter must include an estimate of when a decision on the loan modification will be made after a complete application has been submitted by the borrower (a)(1). If a borrower submits a complete application for a... loan modification offered by... the borrower s mortgage servicer, a mortgage servicer... shall not record a notice of default or notice of sale... while the complete first lien loan modification application is pending (c). 30 days. IV F 4, Pg. A days (b)&(c). When complete application received: Within 30 days after the Post Referral to Foreclosure Solicitation Letter. o Servicer shall not move for foreclosure judgment or order of sale (or, if a motion has already been filed, shall take reasonable steps to avoid a ruling on such motion), or seek a foreclosure sale. Exh. IV B 4, Pg. A 18. More than 30 days after the Post Referral to Foreclosure Solicitation Letter, but more than 37 days before a foreclosure sale is scheduled. o Servicer shall not proceed with the foreclosure sale. Ex. IV B 6, Pg. A 19. More than 30 days after the Post Referral to Foreclosure Solicitation Letter, but within 37 to 15 days before a foreclosure sale is scheduled. o Servicer shall conduct an If a borrower submits a complete application after a servicer has made the first notice or filing required by applicable law for any judicial or nonjudicial foreclosure process 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: (1) Borrower has been sent notice that she is not eligible for loss mitigation; (2) Borrower rejects all loss mitigation options; or (3) Borrower fails to perform loss mitigation agreement (g)(1) (3)

13 IS SERVICER REQUIRED TO OFFER A General Policy: It is essential to the economic health of this state to mitigate the negative effects on expedited review of the borrower but does not need to postpone any foreclosure sale unless the borrower is extended an offer. Exh. IV B 8, Pg. A 19. More than 30 days after the Post Referral to Foreclosure Solicitation Letter, but within less than 15 days before a scheduled foreclosure sale. o Servicer must notify the borrower before the foreclosure sale date as to Servicer s determination (if its review was completed) or inability to complete its review of the loan modification application. Exh. IV B 9, Pg. A 20. These restrictions are extended in all scenarios based on whether or not an application is approved or denied, and whether or not borrower is eligible for an appeal. See generally, Exh. IV B. Servicer shall cease all collection efforts while borrower has submitted a complete loan modification application, and a modification decision is pending. Exh. IV D 4. Yes servicer shall offer and facilitate loan modifications for borrowers rather than initiate foreclosure when such loan Nothing in imposes duty on servicer to provide any borrower with any specific loss mitigation option (A).

14 BORROWER A LOAN MODIFICATION FOR WHICH HE/SHE QUALIFIES? the state and local economies and the housing market that are the result of continued foreclosures by modifying the foreclosure process to ensure that borrowers who may qualify for a foreclosure alternative are considered for, and have a meaningful opportunity to obtain, available loss mitigation options. Section 1(b). modifications for which they are eligible are net present value (NPV) positive and meet other investor, guarantor, insurer and program requirements. Exh. IV A 2. No affirmative requirement to give borrower a loan modification for which she qualifies, but affirmative requirement to give borrower meaningful opportunity to obtain a modification: Pre NOD: Prior to recording NOD, servicer must contact borrower to discuss alternatives to foreclosure. Incorporates the 30 day pause (a)(1) (2)). Post NOD: Unless a borrower has previously exhausted the first lien loan modification process offered by... his or her mortgage servicer,... within five business days after recording a notice of default... a mortgage servicer that offers one or more foreclosure prevention alternative shall send a written communication to the borrower, stating that (1) the borrower may be evaluated for foreclosure prevention alternatives; (2) whether an application is required for foreclosure prevention alternatives; and (3) the means by which a borrower may obtain such an

15 REQUIRED DISCLOSURES IN DENIAL LETTERS APPEALS application (a) (f): After being denied for a loan modification, the mortgage servicer must send a written notice to the borrower identifying the reasons for denial, including: (1) Timeline for appeal and instructions on how to appeal; (2) specific reasons for investor disallowance, if applicable; (3) NPV figures, if applicable; (4) a finding that the borrower was previously offered a loan modification and failed to make term payments, if applicable; and (5) description of other foreclosure prevention alternatives and steps borrower can take to be considered for these options (b): Following the denial of a first lien loan modification application, the mortgage servicer shall send a written notice to the borrower identifying with specificity the reasons for the denial and shall include a statement that the borrower may obtain additional documentation supporting the denial decision upon written request to the mortgage servicer (d): If a borrower s loan modification application is denied, he shall have at least 30 days from the date of written denial to provide evidence that the determination was in error. Appeal information must be included in denial letter (f)(1). Foreclosure Process Post Denial and (1) Reasons for denial (2) factual information considered (3) That borrower has 30 days from the date of the denial letter declination to provide evidence that the eligibility determination was in error. Exh. IV G 2 a, Pg. A 27. (4) If denied because disallowed by investor, then notice of the name of the investor (5) Summarization of the reasons for investor denial. Exh. IV G 2 b, Pg. A 27. If denied because of an NPV calculation, then the monthly gross income and property value used in the calculation. Exh. IV G 2 c, Pg. A 27. Borrowers who qualify for appeal, shall have 30 days to request an appeal and obtain an independent review of the modification denial. 30 days is calculated from the date of the written nonapproval notice to provide information as to why the denial was in error, unless reason for non approval is (1) ineligible mortgage, (2) ineligible property, (3) offer not accepted by borrower or request If a borrower loss mitigation application is denied for any trial or permanent loan modification, the servicer shall state in a notice sent to the borrower: (1) The specific reasons for the servicer s determination for each such trial or permanent loan modification option; and (2) If applicable,* that the borrower may appeal the servicer s determination, the deadline for appeal, and any requirements to make an appeal (d). * (h): For a borrower to appeal, a servicer must receive a complete loss mitigation application 90 days or more before a foreclosure sale or during the pre foreclosure review period (120 days delinquent (f)(1)). If a servicer receives a complete loss mitigation application 90 days or more before a foreclosure sale or during the pre foreclosure review period, it shall permit a borrower to appeal the servicer s determination to deny a borrower s loss mitigation application (h)(1). A servicer shall permit a borrower to make an appeal within 14 days after the servicer provides the offer of a loss mitigation option to the

16 APPLICATION OF DUAL TRACKING PROVISIONS WHERE BORROWER HAS SUBMITTED SEQUENTIAL LOAN MOD APPS PRIVATE RIGHT OF ACTION? Pending Appeal (e): After a denial, the mortgage servicer shall not record a NOD or NOS until the later of: (1) 31 days after borrower is notified in writing of denial. (2) If the borrower appeals the denial, the later of 15 days after the denial of the appeal or 14 days after a first lien loan modification is offered after appeal but declined by the borrower, or, if a first lien loan modification is offered and accepted after appeal, the date on which the borrower fails to timely submit the first payment. In order to minimize the risk of borrowers submitting multiple applications for first lien loan modifications for the purpose of delay, the mortgage servicer shall not be obligated to evaluate applications from borrowers who have already been evaluated or afforded a fair opportunity to be evaluated for a first lien loan modification prior to January 1, 2013, or who have been evaluated or afforded a fair opportunity to be evaluated consistent with the requirements of this section, unless there has been a material change in the borrower s financial circumstances since the date of the borrower s previous application and that change is documented by the borrower and submitted to the mortgage servicer (g). withdrawn, or (4) the loan was previously modified. Exh. IV G 3 a, Pg. A 27. Servicer has 30 days to communicate its decision to borrower. Exh. IV G 3 c, Pg. A 28. If the appeal is denied, the denial letter shall include a description of other available loss mitigation, including short sales and deeds in lieu of foreclosure. Ex. IV G 3 d, Pg. A 28. Service shall not be obligated to evaluate requests for loss mitigation options from (a) borrowers who have already been evaluated or afforded a fair opportunity to be evaluated consistent with the requirements of HAMP or proprietary modification programs, or (b) borrowers who were evaluated after the date of implementation of the Settlement, unless there has been a material change in the borrower s financial circumstances that is documented by the borrower and submitted to the Servicer. Exh. IV H 12, Pg. A 29. borrower (h)(2). Within 30 days of a borrower making an appeal, the servicer shall provide a notice to the borrower stating the servicer s determination of whether the servicer will offer the borrower a loss mitigation option based upon the appeal. A servicer may require that a borrower accept or reject an offer of a loss mitigation option after an appeal no earlier than 14 days after the servicer provides the notice to a borrower (h)(4). A servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower s mortgage loan account (i). Yes. No. Borrower may enforce provisions of this section pursuant to 6(f) of RESPA (a).

17 If a trustee s deed upon sale has not been recorded, a borrower may bring an action for injunctive relief to enjoin a material violation of Section , , , , , , or (a)(1). RESPA 6(f): Damages and costs Whoever fails to comply with any provision of this section shall be liable to the borrower for each such failure in the following amounts: (1) Individuals: In the case of any action by an individual, an amount equal to the sum of (A) any actual damages to the borrower as a result of the failure; and (B) any additional damages, as the court may allow, in the case of a pattern or practice of noncompliance with the requirements of this section, in an amount not to exceed $1,000. Comments p. 446: borrowers have a private right of action to enforce the procedural requirements in , as set forth in (a) *Disclaimer: This summary reflects the views of the California Monitor Program. It does not necessarily reflect the views of the Attorney General or the California Department of Justice. This summary is reprinted with the permission of the California Monitor Program.