Foreclosure Sales and Untimely Loan Modification Applications

This piece originally appeared in the April 2023 edition of MortgagePoint magazine, online now.

Effective in 2019, California tweaked its groundbreaking Homeowner Bill of Rights (HOBR) to require that, in order to invoke its protections against dual tracking, a complete loan modification application (LMA) had to be received at least five business days before the scheduled foreclosure sale. This is according to California Civil Code § 2923.6(c) for servicers who foreclose annually on more than 175 qualifying CA foreclosures and § 2924.18(a)(1) for those under 175.

Both lenders and mortgage servicers applauded the change as it helped avoid the risk posed by the submission of last minute LMAs—some as late as minutes before a scheduled sale—and reduced the potential exposure for failing to postpone a foreclosure sale despite the lateness of the LMA.

To this point, the office of Wright, Finlay & Zak, LLP noticed considerably less litigation over this issue since the 2019 change.

Problem fixed … right? Well, mostly!

While it is clear that—under § 2923.6(c)—if the LMA is received less than five business days before the foreclosure sale, the LMA is untimely, and the servicer has the right to reject the application and proceed to sale; what if the sale is then postponed such that the LMA was now received more than five business days before the continued sale date? Does that render the untimely LMA timely? Most likely, no.

California’s HOBR does not specifically address this scenario, and there are no published decisions directly on point. But, logic dictates that once the LMA has actually been rejected as untimely, it’s dead and cannot be resurrected by continuing the sale. While not every judge may agree with this interpretation, it should be defensible.

Conversely, if the sale is postponed before the LMA has actually been rejected as untimely, a judge may find that the postponement restarted the five-business-day window. The result is less clear if the servicer has already determined the LMA to be untimely, but has not yet sent the rejection at the time the sale is postponed. Under that scenario, even if the LMA was originally untimely, the fact that it had not yet been rejected when the sale was continued, arguably, has made the LMA no longer untimely. In that situation, we would recommend reviewing the LMA as if received timely. All of that said, there is nothing preventing a servicer from voluntarily choosing to revive any LMA following the postponement of the foreclosure sale. However, we recommend having a designated policy and sticking to it.

Note that § 2923.6(e) gives borrowers a 30-day right to appeal any denial of their LMA. But, rejecting a LMA because it’s untimely is not a denial. Instead, it’s a rejection. We recommend that your letter specifically state that the LMA is “rejected as untimely,” not “denied as untimely.” It’s a subtle difference, but one that could save you time and money down the road.

Disclaimer: The above information is intended for information purposes alone and is not intended as legal advice. Please consult with counsel before taking any steps in reliance on any of the information contained herein.