Daniel P. Callahan is a shareholder with Dallas, Texas-based firm Kessler Collins. Dan represents varied clients in litigation and arbitration involving securities regulation, debtor-creditor relations, contract disputes, security interests, oil and gas disputes, products liability, and employment issues. Dan has tried and arbitrated cases in Texas, New Mexico and Florida. He has authored many articles in different industry publications. Dan recently spoke with DS News about the Consumer Financial Protection Bureau and a relatively new rule that provides for a waiting period on a residential property before the mortgagee can begin the foreclosure process.
In January 2014, a CFPB regulation found at 12 CFR 1024.41 took effect. It mandates “Loss Mitigation Procedures” for mortgages secured by a borrower’s residence, and includes a waiting period before one can initiate foreclosure proceedings. “A servicer shall not make the first notice or filing required by applicable law for any judicial or non‐judicial foreclosure process unless [the mortgage] is more than 120 days delinquent”. 12 CFR 1024.41(f)(1)(i) [emphasis added]. A servicer is any “person responsible for the servicing of a federally related mortgage loan (including the person who makes or holds such loan if such person also services the loan).” 12 CFR 1024.2(b). Given that the regulation applies to non‐judicial foreclosures, the first statutorily required notice before a trustee’s sale can take place under a Deed of Trust cannot be sent until the borrower is at least 121 (“more than 120”) days delinquent. So–what is the first notice required by Texas law before a trustee’s sale can take place?
Property Code §51.002(b) requires serving the borrower with written notice by certified mail of the contemplated trustee’s sale, and posting that notice at the courthouse, at least 21 days before the “first Tuesday” on which the lender intends to conduct the sale. Several lenders have expressed a belief that this notice and posting is the first notice required by Texas for the purposes of complying with this regulation. That is incorrect.
The first notice required by Texas law before a mortgage lender can foreclose on the borrower’s residence is the notice of default and opportunity to cure that is required by Property Code §51.002(d), which requires (“notwithstanding anything in the agreement to the contrary”) that a mortgage lender serve a borrower in default under a deed of trust on the borrower’s residence with written notice by certified mail stating that the borrower is in default under the deed of trust or other contract lien and giving the borrower at least 20 days to cure the default before notice of sale can be given under Subsection (b).
Compliance with §51.002(d) is mandatory. Such notice of default and opportunity to cure must be sent to the borrower 20 days before the lender can send the notice and posting of a trustee’s sale of the borrower’s residence required under §51.002(b). Thus, the notice of default and opportunity to cure is the first notice required for the non‐judicial foreclosure process (a trustee’s sale) that is available under Texas law. In a case that was decided on January 7, 2015 in the federal court for the Eastern District of Texas, Judge Mazzant reached the same conclusion. “The first notice required by Texas law is the notice of default [required by] Tex. Prop. Code §51.002(d).” See, Lehman v. Select Portfolio Servicing, Inc., 2015 WL 123868 [Case No. 4:13–CV–720] (E. D. Tex. 1/7/2015). See also, Newman v. Woodhaven Natl. Bank, 762 S.W.2d 374 (Tex.App. – Fort Worth 1988, no pet.)(notice of default and opportunity to cure must be sent 20 days before notice and posting of foreclosure sale of borrower’s residence).
To avoid costly and time consuming arguments over whether the number of days has been counted correctly under the various authorities, when a mortgage is secured by the borrower’s residence, it is recommended that one let 164 days pass from the date the borrower goes into default before a trustee’s sale is conducted:
- Day X Borrower goes into default.
- Day X +121 Waiting period mandated by 12 CFR 1024.41(f)(1)(i) expires; 20- day notice and opportunity to cure letter can be sent under Property Code §51.002(d).
- Day X +142 21 day notice of trustee’s sale and posting can be sent under
- Property Code §51.002(b).
- Day X +164 Trustee’s sale can take place if this day is a “first Tuesday”, otherwise, it can take place on the next “first Tuesday”.
Caution is dictated because violation of the regulation can be the foundation of a RESPA claim for damages. See, 12 CFR 1024.41(a) [“A borrower may enforce the provisions of this section pursuant to section 6(f) of RESPA, 12 USC 2605(f).”] A successful RESPA plaintiff can recover actual damages, plus additional damages not to exceed $2,000 if the Court finds a pattern and practice of non‐compliance. 12 USC §2605(f)(1). Costs and reasonable attorney’s fees may also be awarded to a successful plaintiff. 12 USC §2605(f)(3). Actual damages, additional damages, and fees are also available in a class action1 to all class members. The additional damages are capped only at $1,000,000 or 1% of the Defendant’s net worth, whichever is less. 12 USC §2605(f)(2).
The CFPB regulation does not prohibit you from demanding that a borrower in default cure that default before the expiration of the 121 day waiting period. But, if those efforts are unsuccessful, it is recommended that that you send a formal notice of default and opportunity to cure letter under Property Code §51.002(d) after the waiting period has expired, and make it clear in that notice that it is the first notice being sent to trigger the right to conduct a trustee’s sale if the default is not timely cured.
11 If a plaintiff’s lawyer is going to try and prove a “pattern and practice” of non‐compliance, why would he or she not also seek to certify a class?
(Editor's note: Mr. Callahan offered the following statement: "I would like to clarify an issue that has been raised. There is a school of thought that the §51.002(b) notice of posting of foreclosure, not the §51.002(d) notice of default and opportunity to cure letter, is the 'first notice' for the purposes of the CFPB regulation. That school of thought relies on comments found in the federal register at 78 Fed.Reg. 60392, et seq. Those comments refer to a four part test that sets forth the CFPB’s interpretation of what would constitute the applicable 'first notice or filing.' The comments include CFPB’s interpretation that the 'first notice' which is 'required by applicable law' should be limited to mean notices which are filed or posted in public places or ones that 'establish, set, or schedule' the foreclosure in a state such as Texas that permits non-judicial foreclosure. This school of thought concludes that §51.002(d) notices do not qualify under this four part test. That school of thought may ultimately prevail if and when this issue is specifically addressed by courts. However, since the text of the regulation (as opposed to a comment) says 'first notice or filing required by applicable law,' and when the applicable law is Texas law, and Texas law requires the §51.002(d) notice before foreclosure can proceed, it is also possible that a court will decide §51.002(d) is the first notice required by the applicable state law when the question is expressly presented. The main point I was trying to convey is that it is wise to be cautious until the question is definitively answered by the courts, especially in view of holdings like Lehman v. Select Portfolio Servicing, which was issued in a different context. I regret any confusion that resulted from my own inarticulate expression of my opinion.")