(Editor's note: This select print feature originally appeared in the January 2017 issue of DS News)
On August 4, the CFPB announced expanded consumer foreclosure protections. Cast as “rule clarifications,” the updated final rules do contain a large number of new, additional requirements that are already being discussed and digested by the servicing industry.
Much of this discussion has, justifiably, focused on expanded protections, such as: new life-of-loan loss mitigation (loss- mitigation protections now extended to each consumer delinquency over the life of a loan); communication and loan-handling requirements during servicing transfers; and broadened definitions on successors in interest and how to handle relations with those individuals.
The Fine Print
The updated rules, however, bury the lead with a new slant on an already-existing protection-enhanced servicer liability for potential dual-track violations. In these updated rules, the CFPB makes explicitly clear that a mortgage servicer is legally responsible for the conduct (or inaction) of its hired counsel for any dual tracking violations during a foreclosure action.
The Mortgage Servicing Executive Summary, released on August 4, states, “The servicer must not move for a foreclosure judgment, move for an order of sale, or conduct a foreclosure sale, even where a third party conducts the sale proceedings, unless one of the specified circumstances is met (the borrower’s loss mitigation application is properly denied, withdrawn, or the borrower fails to perform on a loss mitigation agreement). Absent one of the specified circumstances, conduct of the sale violates Regulation X. Additionally, the servicer must instruct foreclosure counsel not to make any further dispositive motion, to avoid a ruling or order on a pending dispositive motion, or to prevent conduct of a foreclosure sale, unless one of the specified circumstances is met. Counsel’s failure to follow these instructions does not relieve a servicer of its obligations not to move for foreclosure judgment or order of sale, or conduct a foreclosure sale.”
The onus this puts on mortgage servicers and their law firms cannot be understated. Already, the industry had seen a recognizable rise in both class-action and loan-level litigation since the January 2014 RESPA changes. Consumers and their counsel have already commenced or threatened countless new lawsuits against servicers for alleged failures to sufficiently and respond in a timely way to Notices of Error and Requests for Information.
Practical Problems and Dilemmas
The CFPB has itself acknowledged the need for some foreclosures to move forward, and it is sometimes an impending milestone like judgment or sale, which pushes parties into action—something that only exacerbates potential problems. Avoidance of these problems can best be achieved through ACTing, or actively communicating in a timely manner. Servicers and their counsel must ACT together in order to avoid these potential violations.
The need to ACT underscores the importance of written policies and practices at both the servicer and counsel levels to avoid potential violations. Even though the dual tracking violations really speak only to two milestones (foreclosure judgment and judicial sale), those milestones can each really be broken down into two types: a prohibition against asking a court to move past the next milestone and a requirement for preventative action when either milestone is already pending.
Compliance is always less difficult when the servicer and its counsel are in full control of a situation. Thus, it is far easier to prevent a request for judgment or for an order of sale while loss mitigation is pending than it is to impede the actions of a third-party from performing an authorized, empowered, and requested duty. Consequently, though it is extremely important to ACT before a request to move milestones is made, that onion has one less layer to be peeled.
So often, a potential violation happens because these dual tracks are proceeding parallel and independent of one another. To illustrate, the author’s youngest son is a budding, enthusiastic railroader at the tender age of four. He constantly has many trains in simultaneous motion weaving on and around his crisscrossing tracks, and all his freight and passenger trains chug merrily along until their paths inevitably cross in a collision of unfortunate timing. He can’t help it; he is just watching one train at a time and is paying no mind to the other trains he’d already sent in motion. He is, after all, only a preschooler who just loves trains.
Avoiding the Impending Crisis
It should not work this way for counsel and servicers, who are most definitely not young children incapable of skilled multi-tasking; the industry can ACT. As in life (and train-play), sometimes a collision proves inescapable: A loss mitigation application arrives at the servicer’s offices on the same morning in which a state court has set the foreclosure case for an afternoon hearing on the pending judgment application. Even though foreclosure counsel is working on the foreclosure while a servicer simultaneously solicits and receives financial information from a consumer for loss mitigation, these violent collisions do not have to be inevitable.
Perhaps they can be narrowly averted at the last minute. A phone call from a highly-trained servicer employee to an astute legal assistant in counsel’s office and a second call to appearance counsel might just avert this potential problem. It is likely that the CFPB would accept an after-the-fact cleanup of this unavoidable situation. In today’s technological age, it is often overlooked that a simple phone call can allow one to simultaneously convey to another a time-sensitive message, and then confirm actual receipt, delivery, and understanding of that message. People have become so used to emails and automated inboxes that the old-fashioned telephone is an afterthought but may still be a valuable tool in times of need.
Because Regulation X only hands out sticks and no carrots, no one will reward either party for this; ACTing is, unfortunately, an extremely necessary but largely thankless task.
Conversely, what the CFPB is unlikely to accept is a failure that occurs because an attorney does not tell the servicer in a timely fashion that a judgment has already been requested and/or that the judgment has been set for hearing (or that the court in question sets all pending judgments for a decision date), or because a servicer fails to tell its attorney at the right time that a loss mitigation package has been received. In those cases, the CFPB could find that a dual tracking violation occurred and that the servicer is liable for it regardless of the reason.
Navigating this issue will be inherently difficult for servicers and attorneys. Not all law offices in a servicer’s attorney network are created equal. Can a servicer trust that each of its firms will undertake an automatic file review when a hold request comes in from a client due to pending loss mitigation? Can a servicer rely on its firms to always notify it of a pending judgment or sale so that it might explicitly instruct the law firm to attempt to continue, cancel, or postpone the milestone?
Controlling the Outcome
What is clear is that the CFPB expects servicers and attorneys to ACT; and, unlike Jon Lovitz’s Master Thespian character, the industry cannot just proclaim “ACTing!” and be done with it. There must be real-time communication specifically meant to ensure that dual tracking violations are prevented. From an industry standpoint, that communication must necessarily derive from clear, written, and enforced policies at all ends to account for the very real possibility that the foreclosure and loss mitigation tracks might necessarily cross at a critical juncture. The industry cannot leave such communication to chance and hope that its employees remember everything, avoid all possible mistakes, and ACT at every opportunity.
For foreclosure counsel, there must be some acceptance that the CFPB has fundamentally altered both an attorney’s ability to practice law and to use one’s own judgment and training to navigate each situation in a way deemed most appropriate. Resistors to this concept should consider how recent FDCPA lawsuits and decisions have deeply changed the practice of creditor representation. Recent authority suggesting that even pleadings, wrought with legalese and terms of art, must rise above misinterpretation of the least-sophisticated consumer, illuminates the general lack of empathy within the judiciary.
For those in search of a silver lining, the bright side is that the new servicing rules may actually help prevent the discoverability of communications between a servicer and its counsel while jointly defending a consumer’s lawsuit for a dual tracking violation, since the inquiry should begin and end with whether the violation occurred (chalk it up to the baleful humor of a seasoned litigator). Anything further is between co-defendants and immaterial to a reviewing court. The industry, however, should ACT so that there is no need for a consumer lawsuit.