Does a Servicer Have to Dismiss Their Case When They Have Received a Complete Modification Application from a Borrower?

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Section 12 C.F.R. §1024.41(g) covers issues regarding what is referred to as “dual tracking”. “Dual tracking is the term given to situations in which the lender actively pursues foreclosure while simultaneously considering the borrower for loss mitigation options. See Gresham v. Wells Fargo Bank, N.A., 642 F. App’x 355 (5th Cir. 2016); see also Herrera v. Bank of Am., N.A., No. 15-CV-62156, 2016 WL 4542105, at *8 (S.D. Fla. Aug. 31, 2016)(internal citations omitted). Where Section 1024.41(g) provides the prohibition on dual tracking, 12 C.F.R. §1024.41(a) expressly provides consumers like the Plaintiff, a private right of action in the event the servicer ignores that prohibition. Gresham v. Wells Fargo Bank, N.A., 642 F. App’x 355, 359 (5th Cir. 2016).

The typical scenario goes like this:

The borrower gets sued for Foreclosure of their home. Borrower hires a Florida foreclosure defense attorney in the hopes of defending the Foreclosure of their home. Borrower decides they want to save their home via a loss mitigation option and explores that option with the Attorney. Borrower’s Attorney (if they are properly equipped to do so) submits Borrower’s loss mitigation application despite Borrower’s Foreclosure proceeding. Borrower continues to ensure, via their counsel that they provide the Bank/Servicer everything needed for a review of their loss mitigation application. Borrower’s Foreclosure proceeding gets set for Trial. The Bank/Servicer’s review of the Borrower’s loss mitigation application is not yet finished. The trial is in two days. Bank/Servicer files a bland and non-descriptive motion to continue the Trial in the Borrower’s Foreclosure proceeding. Both the Bank/Servicer and Borrower plead with the Court to continue the Foreclosure Trial. The court denies the motion to continue from Bank/Servicer. Although at this point Borrower’s concern is magnified beyond compare with a combination of both uncertainty and fear of the future for their family and home, the Bank/Servicer is relieved because they have taken the reasonable steps of filing their motion to continue the Trial in Borrower’s Foreclosure Proceeding.

STOP RIGHT THERE! The question is did the Bank/Servicer actually fulfill their requirements under the law? The short answer is not exactly, and here is why…

The operative regulation, 12 C.F.R. §1024.41(g) states as follows:

(g) Prohibition on a foreclosure sale. If a borrower submits a complete loss mitigation application after a servicer has made the first notice or filing required by applicable law for any judicial or non-judicial 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) The servicer has sent the borrower a notice pursuant to paragraph (c)(1)(ii) of this section that the borrower is not eligible for any loss mitigation option and the appeal process in paragraph (h) of this section is not applicable, the borrower has not requested an appeal within the applicable time period for requesting an appeal, or the borrower’s appeal has been denied;

(2) The borrower rejects all loss mitigation options offered by the servicer; or

(3) The borrower fails to perform under an agreement on a loss mitigation option.

(Emphasis added). 12 C.F.R. §1024.41(g).

The two (2) operative Official Bureau Interpretations of 12 C.F.R. §1024.41(g) (the “Official Interpretation”) as found in Supplement I to Part 1024 and copied below provide more clarity on just what a servicer can and cannot do once having received a borrower’s complete loss mitigation application[1]:

The first section of the Official Interpretation formally known as “Comment 41(g)-1” involves a specifically dispositive motion for foreclosure judgment. Here is what it says:

41(g) Prohibition on a foreclosure sale.

Dispositive motion. The prohibition on a servicer moving for judgment or order of sale includes making a dispositive motion for foreclosure judgment, such as a motion for default judgment, judgment on the pleadings, or summary judgment, which may directly result in a judgment of foreclosure or order of sale. A servicer that has made any such motion before receiving a complete loss mitigation application has not moved for a foreclosure judgment or order of sale if the servicer takes reasonable steps to avoid a ruling on such motion or issuance of such order prior to completing the procedures required by §1024.41, notwithstanding whether any such action successfully avoids a ruling on a dispositive motion or issuance of an order of sale. (Emphasis added).

12 C.F.R. §1024.41(g) Supplement I.

Now here is the interesting twist, the Bureau’s interpretations delineate between dispositive motions and trials when they issued the following sub-part 2 to their Official Interpretation, commonly referred to as “Comment 41(g)-2”:

2. Proceeding with the foreclosure process. Nothing in §1024.41(g) prevents a servicer from proceeding with the foreclosure process, including any publication, arbitration, or mediation requirements established by applicable law, when the first notice or filing for a foreclosure proceeding occurred before a servicer receives a complete loss mitigation application so long as any such steps in the foreclosure process do not cause or directly result in the issuance of a foreclosure judgment or order of sale, or the conduct of a foreclosure sale, in violation of §1024.41. (Emphasis added).

Id.

The fact is that it would appear that the Bureau has provided specific and narrow circumstances in which the Bank/Servicer must actually dismiss their Foreclosure action because there is no reasonable step available. To lend support for the suggestion Bank/Servicer’s responsibilities have not been satisfied by the mere filing of a motion before trial when still reviewing a borrower’s complete loss mitigation application submission, we must review the legislative history behind the regulation at issue, namely again 12 C.F.R. §1024.41(g). Legislative is certainly useful when a Court needs to ascertain the intent behind a regulation such as Regulation X, which the CFPB promulgated to afford protections to consumers as of January 10, 2014. See Polycarpe v. E&S Landscaping Serv., Inc., 616 F.3d 1217, 1224 (11th Cir. 2010) (citing United States v. Fields, 500 F.3d 1327, 1330 (11th Cir. 2007)) (noting that the use of legislative history, while generally avoided, “may become necessary where the statutory text is doubtful”). Further, Courts have noted that statements by the CFPB are a source of persuasive authority. See Stern v. Int’l Bus. Machines Corp., 326 F.3d 1367, 1372 (11th Cir. 2003) (citing Williams v. Wright, 927 F.2d 1540, 1545 (11th Cir.1991) (acknowledging that “the views of the agency entrusted with interpreting and enforcing [a statute] carry considerable weight”); see also Polycarpe, 616 F.3d at 1225 (citing Christensen v. Harris Cnty., 529 U.S. 576, 588, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000); Pugliese v. Pukka Dev., Inc., 550 F.3d 1299, 1305 (11th Cir. 2008)) (stating that the court should “accord respect to the [regulatory agency’s] views and give it weight as a source of persuasive authority”). By imposing an effective date of January 10, 2014, the CFPB intended to institute a clear starting point with respect to when a servicer’s obligations under Regulation X would be triggered. Some of those obligations, and certainly the thrust of the obligations at issue here, concern a Bank/Servicer’s required conduct when facing the possibility that a Court might issue a foreclosure judgment or order of sale amidst the Bank/Servicer’s review of the Borrower’s complete loss mitigation application.

The Bureau’s Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X) (hereinafter, “CFPB Final Rules and Official Interpretations”) notes in the sections pertaining to the “prohibition on foreclosure sale”, that prohibiting a servicer from proceeding with a foreclosure sale until termination of the loss mitigation discussion will “eliminate the clearest harms to borrowers resulting from servicers’ pursuit of loss mitigation and foreclosure proceedings concurrently.” Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10695-01, 10833 (Feb. 14, 2013). The Bureau stated that “comment 41(g)-2 clarifies how servicers may proceed with a foreclosure process. As stated in comment 41(g)-2, “nothing in 1024.41(g) prohibits a servicer from continuing to move forward with a foreclosure process (assuming that the first notice or filing was made before a servicer received a complete loss mitigation application) so long as the servicer does not take an action that will directly result in the issuance of a foreclosure judgment or order of sale, or a foreclosure sale. Id. Interestingly enough, the more specific issue of when a Servicer is or is not absolved from their responsibilities under RESPA at §1024.41(g), was recently (relatively) reexamined in the Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) found at 81 Fed. Reg. 72160 (Oct. 19, 2016).

Here is what the Bureau had to say (it’s long so be prepared):

“As noted above, § 1024.41(g)’s prohibition applies to two distinct types of actions in the foreclosure process: Moving for judgment or an order of sale and conducting a foreclosure sale. A servicer’s obligations under § 1024.41(g) will vary depending on whether the foreclosure is non-judicial (requires no court action) or judicial (requires court action or order). If the applicable foreclosure procedure is non-judicial and does not require any court proceeding or order, then § 1024.41(g)’s prohibition on moving for judgment or order of sale is inapposite. Thus, in a non-judicial proceeding, when there is no court action, where § 1024.41(g) applies, it addresses only the conduct of a sale and not a non-existent court proceeding. However, where the foreclosure process requires court action or a court order and § 1024.41(g) is applicable, a servicer must comply with both the prohibition against moving for judgment or order of sale and the prohibition against conducting a foreclosure sale.

Existing comment 41(g)-2 provides that § 1024.41(g) does not prevent a servicer from proceeding with any steps in the foreclosure process, so long as any such steps do not cause or directly result in the issuance of a foreclosure judgment or order of sale, or the conduct of a foreclosure sale, in violation of § 1024.41(g).

Existing comment 41(g)-3 explains that a servicer is responsible for promptly instructing foreclosure counsel retained by the servicer not to proceed with filing for foreclosure judgment or order of sale, or to conduct a foreclosure sale, in violation of § 1024.41(g), when a servicer has received a complete loss mitigation application. Such instructions may include instructing counsel to move for continuance with respect to the deadline for filing a dispositive motion.

As the Bureau noted in the proposal, since the Mortgage Servicing Rules went into effect, borrowers have not always received the benefits of the protections intended by § 1024.41(g), specifically, that borrowers who timely submit a complete loss mitigation application would not lose their homes at a foreclosure sale while evaluation of that application was pending with the servicer. These instances of foreclosure proceedings continuing in spite of § 1024.41(g)’s prohibitions may occur for several reasons, including impeded communications between servicers and their counsel, confusion about the reasonable steps framework, and difficulties managing judicial expectations.

The Bureau has received reports that counsel retained by servicers to conduct the foreclosure proceeding sometimes lacked current and accurate information about whether borrowers’ loss mitigation applications are complete. Foreclosure counsel in some situations may not be taking adequate steps to avoid a judgment or order of sale and may fail to seek the delay or continuance of a sale when necessary to provide adequate time for the servicer to evaluate the loss mitigation application. The Bureau has also received reports that, in some cases, foreclosure counsel may not represent accurately to the court the status of the loss mitigation application. Some reports indicated that even when servicers, through their foreclosure counsel, took some steps to avoid a judgment or sale, they may not have been impressing sufficiently upon the courts the significance of § 1024.41(g)’s prohibition on sale. Consequently, some borrowers lost their homes at foreclosure sales despite their timely submission of complete loss mitigation applications to the servicer.

The Bureau also has received a substantial number of inquiries concerning what steps a servicer must take to comply with § 1024.41(g) where a court orders a foreclosure sale date that does not afford sufficient time for the servicer to complete the evaluation process required by § 1024.41. Some inquirers suggested that the “reasonable steps” framework in comment 41(g)-1, applicable only to pre-sale activities in a judicial proceeding, such as a motion for judgment or order of sale, might apply to the conduct of the sale, in spite of the absolute prohibition on the conduct of a sale contained in § 1024.41(g).

The Bureau had learned that some courts have ruled on a pending dispositive motion and set a date for the foreclosure sale despite the servicer’s attempts through counsel to delay the ruling or order as required under § 1024.41(g). In many cases, the initially scheduled foreclosure sale date set by the court may not have provided the servicer adequate time to complete the loss mitigation evaluation and appeals process. Servicers indicated that, in some instances, courts have required that the foreclosure continues to a sale even when the servicer needs additional time to complete the loss mitigation process. Media accounts as well as reports from consumer advocacy groups suggested that some courts might have been refusing to continue cases when presented with a motion to do so, although the Bureau was not able to confirm the extent of that practice or distinguish between its prevalence when the servicer, as distinct from the borrower, was the moving party.

Based upon the reports and information received, the Bureau was concerned that the absence of express commentary requiring a servicer to take affirmative steps to delay the sale may have encouraged some servicers to fail to instruct foreclosure counsel appropriately and, further, might have led courts to discount servicer obligations under the rule, depriving borrowers of the important consumer protections against dual tracking that are provided under § 1024.41. Accordingly, the Bureau proposed several revisions to commentary to address servicers’ obligations in instructing foreclosure counsel, the general nature of the reasonable steps obligation, and the absolute prohibition on conducting a foreclosure sale pending review of a complete loss mitigation application, even if a motion for judgment or order of sale was excused as a violation of the rule because of the servicer’s reasonable steps to prevent entry of such a motion.”

81 Fed. Reg. 72160, at 72263-72264 (Oct. 19, 2016).

Then the Bureau went on to say:

“[T]he Bureau noted that, although the proposed commentary clarifications would not alter existing requirements under § 1024.41(g), the Bureau had considered the potential burdens for servicers in dismissing a foreclosure proceeding, in particular in jurisdictions where significant foreclosure backlogs exist or when a subsequent foreclosure brought by a servicer may encounter procedural challenges or defenses. Nonetheless, the Bureau stated its belief that dismissal would be appropriate in the limited circumstances contemplated by the proposal where a servicer fails to take reasonable steps to avoid a ruling or issuance of an order or to delay the sale to protect borrowers from the dual tracking harms that § 1024.41(g) aims to prevent. The Bureau noted that dismissal would be required only when necessary to avoid a violation of § 1024.41(g), i.e., the conduct of the foreclosure sale while a loss mitigation evaluation is pending, or to mitigate the harm to the borrower arising from the servicer’s prior violation of § 1024.41(g) in failing to take reasonable steps to delay a foreclosure sale. Thus, only those services that fail to act to delay issuance of the order or judgment would incur any costs related to dismissal.”

Id. at 72265-72268.

“While the Bureau believes, as discussed below, that servicers have many options available to them for avoiding a sale short of dismissal, dismissal may in some instances be necessary to avoid violation of § 1024.41(g), particularly if the servicer has, in fact, failed to take reasonable steps to avoid the sale in a timely way. Moreover, even if the Bureau were to adopt a standard that dismissal is not required where a servicer has taken reasonable steps, the rule would still lack clarity regarding what steps are reasonable. This uncertainty would leave servicers subject to litigation over the reasonable steps standard, and borrowers subject to different outcomes and harm, based upon different interpretations of what is reasonable.”

Id.

The Bureau believes that the means to prevent foreclosure sales should be readily available to servicers. In jurisdictions where there is no court action required, the Bureau understands that servicers exercise significant, if not entire, control over the conduct of the sale. Where courts are involved [like they are in Florida], procedures are generally available to delay proceedings and, in many jurisdictions, to delay the conduct of the sale specifically. As the plaintiff in the proceeding, a servicer generally has a determinative voice as to the timing and nature of any court-ordered remedies, including a foreclosure sale. Servicers may be able to minimize any difficulties obtaining necessary delays through timely communication with counsel and, through counsel, with the court, as to the status of the loss mitigation application and the servicer’s obligations under § 1024.41. And, as consumer advocacy groups noted, such delays are not novel in court proceedings. For example, delays or stays are available in other contexts, such as when a borrower is protected by bankruptcy law …The Bureau believes it is appropriate to clarify that a servicer’s responsibilities under § 1024.41(g) are not relieved upon foreclosure counsel’s action or inaction.”

Id.

It is not all about the “reasonable step”, there are in fact instances in which dismissal is necessitated in order for a Bank/Servicer to avoid violating RESPA and moreover, both the Courts and counsels do not inculcate Banks/Servicers from liability under RESPA nor do they eliminate responsibility under the same. The Consumer Financial Protection Bureau (CFPB) made that clear and emphasized that the requirements under §1024.41(g) are not merely a part of the soon-to-be-implemented Amendments, but rather the requirements were intended in the rule as originally codified on January 10, 2014. A servicer cannot do things that would cause a foreclosure sale to occur. A trial directly causes that to occur in a Judicial Foreclosure State like Florida. In Fox v. Manley, Deas, & Kochalski, LLC, the court concluded that the borrower stated a claim under 1024.41(g) by alleging that the loan servicer ‘was engaged in conduct that would cause a foreclosure sale’—namely, actively participating in rescheduling the foreclosure sale which was averted due to the borrower’s unilateral actions. (Emphasis added). Fox v. Manley, Deas, & Kochalski, LLC., No. 16 C 5715, 2016 WL 6092638 (N.D. Ill. Oct. 19, 2016).

The court in Fox took exception to the servicer’s conduct which amounted to reviewing him for a permanent loan modification while at the same time it ensuring that a new foreclosure date was on the calendar for its own convenience. Id. The court reasoned that the loan servicer was “not permitted to evade RESPA [(Real Estate Settlement Procedures Act)] liability purely because of the borrower’s steps to thwart a foreclosure sale.” (Emphasis added). Id. Lastly, the Fox Court commented on the servicer’s assertion that the Plaintiff, in that case, had failed to state a cause of action by virtue of the servicer’s conduct had not ultimately and directly resulted in a sale. Id. The court in Fox found the servicer’s assertion as unavailing and without merit because the actions of the servicer would have caused a sale, but for Fox’s independent action to stop that sale from being reset. Id. Overall, this means we must remember that Regulation X while ensuring the Court follows particular guideposts (more on that in another blog post) through legislation, was specifically designed to command Banks and Servicers alike to conduct themselves fairly while Borrowers across the country are still digging themselves out from underneath a heavy burden of debt.

[1] See also 41(c)(2)(iv) Facially complete application.

1. Reasonable opportunity. Section 1024.41(c)(2)(iv) requires a servicer to treat a facially complete application as complete for the purposes of paragraphs (f)(2) and (g) until the borrower has been given a reasonable opportunity to complete the application. A reasonable opportunity requires the servicer to notify the borrower of what additional information or corrected documents are required and to afford the borrower sufficient time to gather the information and documentation necessary to complete the application and submit it to the servicer. The amount of time that is sufficient for this purpose will depend on the facts and circumstances. (Emphasis added).