Matthew J. Richardson is Manley Deas’ Director of Litigation and Compliance. Throughout his career, he has practiced in the areas of commercial and financial services litigation and currently focuses his practice on defending mortgage servicers in trials and appeals. Before he began practicing, Richardson clerked for the Honorable Howell Cobb in the Eastern District of Texas.
What obligations do the new RESPA loss mitigation regulations impose on servicers?
Broadly, the new RESPA loss mitigation regulations require that servicers develop effective policies and procedures for reviewing loss mitigation applications and for communicating with borrowers once their loans are in default (12 C.F.R. 1024.38 -.41). More specifically, the regulations require that servicers review timely submitted loss mitigation applications for completeness and for any applicable loss mitigation resolutions. The regulations also require servicers to conduct their reviews of loss mitigation applications within a reasonable time frame and to communicate to borrowers if their applications are complete and whether borrowers are entitled to any loss mitigation resolutions. Finally, if borrowers are denied for the prospect of a loan modification, the regulations require that servicers provide borrowers with the specific reasons that they were denied and further to provide the notice that the borrowers may appeal the denial to different personnel employed by the servicers.
What rights do borrowers have under the RESPA loss mitigation regulations?
Borrowers generally have the right to induce their servicers review one single, complete, and timely submitted loss mitigation application submitted on or after January 10, 2014, the date the regulations took effect. The RESPA loss mitigation regulations also give borrowers the right to delay a number of milestones in the foreclosure process if they do submit timely and complete loss mitigation applications. Section 1024.41 of the regulations entitles borrowers to delay the following milestones, if the borrower has submitted a compliant application: (i) the initial filing of a foreclosure action, (ii) any motion for judgment that the servicer might file, and (iii), most importantly, a judicial sale of the mortgaged property. If servicers violate these regulations, borrowers have the right to recover actual damages caused by the violation, costs of an action filed against the servicer, and attorney fees. Statutory damages can be recovered if the borrower demonstrates that the servicer engaged in a pattern or practice of violating the regulations.
It is also important to note what rights borrowers do not have under these regulations, but which they may attempt to assert nevertheless. Even if they establish liability against a servicer for violating these regulations, borrowers are not entitled to rescind a foreclosure sale. The regulations do not provide borrowers with the right to equitable or injunctive relief, but only to recover damages, costs, and fees. Also, as the regulations expressly state in 12 C.F.R. 1024.41, borrowers are not entitled to any specific loss mitigation resolution, regardless of whether they submit a timely and complete loss mitigation application. Nor are the borrowers given the right to enforce an agreement between the servicer and the investor to achieve a desired loss mitigation resolution. Instead, borrowers’ rights under these regulations are limited to induce the servicer to review the application, to delay the start or the progress of a foreclosure action while the review is conducted, and to trigger the duty of the servicer to communicate the results of the review.
But note that the borrowers will have greater rights once a revised version of Section 1024.41 goes into effect on October 17, 2017. Borrowers will have additional rights to receive disclosures when they are under a forbearance or repayment plan. Also, borrowers will be able to hold transferee servicers to the same duties as servicers that transferred the servicing rights to a new servicer, when a loss mitigation application was pending with the transferor servicer.
What rights do servicers have under the loss mitigation regulations?
Servicers are not required to review untimely submitted loss mitigation applications, specifically those that are submitted less than 37 days before a foreclosure sale. The Consumer Financial Protection Bureau, which drafted the regulations, did not want to create an incentive for borrowers to avoid foreclosure sales merely by submitting loss mitigation applications that cannot realistically be reviewed before the sale.
Additionally, the regulations benefit servicers by defining a complete loss mitigation application liberally as “an application in connection with which a servicer has received all of the information that the servicer requires from a borrower in evaluating applications for the loss mitigation options available to the borrower.” In this respect, servicers are held to a “reasonable diligence” standard to collect additional documentation when loss mitigation applications are incomplete.
Finally, servicers are only required to review one complete loss mitigation application after the effective date of the regulations, January 10, 2014, and multiple loss mitigation applications need not stop the progress of a foreclosure action once a complete application has been reviewed and did not result in a resolution.
What rights to litigate the loss mitigation regulations do borrowers have?
With the exception of Section 1024.41, borrowers do not have a private right of action under RESPA Section 2605(f) to litigate claims that servicers have violated these regulations. Federal district courts have denied that borrowers hold the right to enforce provisions of these regulations: (i) requiring servicers to enact loss mitigation policies and procedures (Section 1024.38), (ii) to make early live contact with borrowers regarding loss mitigation options (1024.39), and (iii) to ensure continuity of contact with borrowers (Section 1024.40). Instead, the full extent of borrowers’ rights to enforce the loss mitigation regulations is contained in Section 1024.41. Furthermore, as with all RESPA claims, borrowers must have suffered actual damages caused by the servicers’ violation of the loss mitigation regulations to establish liability.
What are some of the trends in loss mitigation litigation?
In many cases, borrowers have asserted claims against servicers without understanding the limited nature of their rights under the regulations. Often borrowers fail to acknowledge that they cannot rescind judicial sales by asserting actions against servicers under these regulations and that they are only entitled to review of one complete and timely submitted loss mitigation application.
For these reasons, borrower complaints in district court are frequently dismissed for failure to state a claim under Rule 12(b)(6). Under Rule 12(b)(6), complaints are subject to dismissal if they do not contain sufficient factual allegations to enable the trier of fact to conclude that the defendant is liable. This can easily occur when borrowers attempt to assert claims under these regulations for which they have no private right of action or when they cannot allege that they submitted a timely and complete loss mitigation application to the servicer. Nor do the regulations bind assignees or investors, only servicers, and nonborrower spouses lack the standing to recover under the regulations.
What are some of the better strategies to defend against borrower claims?
At this time, probably the way to defend against borrowers’ claims against servicers under these regulations is to challenge whether the borrower’s pleading contains sufficient facts to state a claim against the servicer for a violation under Section 1024.41.
However, several district courts are taking notice that many borrower claims are so fact-intensive as pleaded that the district court will deny a servicer’s motion to dismiss. For instance, if the timing of the borrower’s submission of a loss mitigation application leaves doubt as to when the application was complete and submitted, the district court may deny the motion to dismiss. District courts may also deny the motion because all reasonable inferences of fact are resolved in favor of the borrower under the 12(b)(6) standard, and the remedial nature of the loss mitigation regulations requires that the regulations be liberally construed in favor of the borrower.
Besides a borrower’s failure to allege the correct facts against a servicer to support a violation, the borrower’s complaint could nevertheless be subject to dismissal under the applicable state’s res judicata doctrine or the federal Rooker-Feldman doctrine. If the borrower had the opportunity to raise the alleged violation in state court or did raise it, the federal court may dismiss for lack of jurisdiction.
If borrower claims are not resolved through the servicer’s filing a motion to dismiss, they may be resolved at summary judgment as the correct dates and documents submitted are put before the court. But trials are a possibility when real factual disputes arise regarding whether servicers complied with their duties within the applicable time frames.