For Borrowers in Trouble: Options for Avoiding ForeclosureSkip to issue
§1. Considering all possible options
Everybody pretty much agrees that, during the mortgage crisis, lack of information about options and lack of help from their mortgage servicer caused some borrowers to lose their homes to foreclosure, even though they might have qualified for a “loss mitigation option” (i.e., some new arrangement that would have let these borrowers work their way out of trouble, or at least reduce the amount they lost.) CFPB is proposing to require servicers to identify possible options for borrowers in trouble, help them do what’s necessary to apply, and make a prompt decision on their application. Helping people through this process is one of the most important jobs of the customer service representatives that servicers would now have to assign to borrowers as soon as they start to get into trouble. (See the Reliable Contact with People Who Can Help and Early Intervention Help posts.)
What this means for consumers. The law doesn’t require mortgage lenders to offer borrowers in trouble any alternatives to foreclosure. CFPB is not proposing to change this. But, since foreclosure isn’t a good outcome for lenders or consumers, at least some loss mitigation options (LMOs) are often available on certain conditions or to certain borrowers. CFPB is proposing that if a servicer offers LMOs in the ordinary course of business, and if the borrower applies, the servicer must figure out whether the borrower qualifies for any option the servicer offers, within 30 days of getting the complete application. (A single application would be enough to be considered for all possible LMOs.)
A “complete” application means that the servicer has all the information it usually considers in making LMO decisions. The servicer has to make reasonable efforts to get the borrower to complete his/her application. It can set a deadline for completion, but special steps would be required as the deadline approaches: If a borrower starts the application process at least 5 business days before the deadline but hasn’t completed it, the servicer would have to contact the borrower, and tell him/her what information is missing and how soon it must be submitted.
If the servicer decides to offer the borrower a loss mitigation option, it must give him/her at least 14 days to decide whether to accept. CFPB specifically asks whether borrowers should be able to give their decision orally (rather than in writing). Would benefits to borrowers justify problems this would create for servicers?
If the servicer denies the borrower’s LMO application, it must notify the borrower of its decision. If the denial involves a temporary or permanent ”loan modification” (such as reducing the interest rate, extending the loan term, or changing the kind of loan) additional rules would apply. First, the notice must include specific reasons why the borrower didn’t qualify. Second, servicers would have to set up an appeal process, and give borrowers at least 14 days to appeal. The denial would have to be reviewed by different people than the ones who made the initial decision. The borrower must get a written decision on the appeal within 30 days.
The requirement of specific reasons and an appeal would apply only to LMOs that involve loan modification. CFPB is trying to balance the interests of borrowers with the burdens on servicers. But it specifically asks, should it require reasons and appeal for denial of all kinds of LMOs? (Examples of non-loan modification options include forbearance, short sale, and deed-in-lieu of foreclosure.) Is the appeals process a good idea at all — or will it not fix enough mistakes to be worth the cost?
CFPB doesn’t want servicers to have to consider duplicate LMO requests, but it wants comment on whether a borrower should be able to get another evaluation if an appropriate time has passed since the original evaluation. If so, what is an “appropriate” amount of time?
As it is now, servicers are responsible to the mortgage owner for making bad LMO decisions. CFPB considered whether they should also be responsible to borrowers. For example, it could make incorrectly deciding an LMO application a covered error (see Getting Errors Fixed §2). But sometimes the factors being considered in LMO decisions are judgment calls that could go either way. CFPB is hoping the new appeals process will be enough to make sure that the most complicated LMOs – that is, loan modification options — are correctly decided. Should CFPB go further? If so, what would be the standards for judging whether the servicer made a “correct” LMO decision? Since lenders aren’t required to offer LMOs in the first place, would stricter requirements cause lenders to offer fewer, or no, LMOs?
What this means for servicers. CFPB is particularly looking for comment from small servicers about the impact of these new proposals.
Servicers would be required to have “reasonable information management policies and procedures” that enable them to:
- provide accurate information regarding LMOs
- identify all LMOs for which the borrower may be eligible
- identify information the borrower needs to submit to apply
- provide the assigned “continuity of contact” personnel with prompt access to all information and documents the borrower submits (see the “Reliable Contact with People Who Can Help” post)
- evaluate borrowers for all loss mitigation options for which they may be eligible
- review a denial if the borrower appeals
Failing to provide accurate information to a borrower about LMOs is one of the proposed new 9 covered errors. (see Getting Errors Fixed §2). If documents provided by borrowers are “lost or misplaced on a regular basis,” the servicer could be guilty of a “pattern and practice” of violations.
Servicers will want to review CFPB’s commentary on when a servicer offers LMOs in the “ordinary course of business.” The deadline for applying for an LMO can’t be more than 90 days before a scheduled (or anticipated) foreclosure sale. The requirement to use “reasonable diligence” in completing the borrower’s application would include taking steps to get all required information before the earlier of (i) the servicer’s own deadline for submitting a completed LMO application; or (ii) the time when anything the borrower has already submitted becomes stale. An authorized representative can submit an LMO application for a borrower.
Since the servicer is in a better position than the borrower to know which LMOs might be appropriate, it must make at least a threshold eligibility determination for every LMO offered by it, a guarantor, an owner, or an assignee. (CFPB emphasizes that this is the servicer’s obligaton; the proposed rule would not impose an obligation on an owner, assignee, or guarantor that is not also a servicer.) If net present value calculation plays a role in denying a loan modification option, the notice must specify the monthly gross income and property value used. The goal of the proposed appeal process is having the loan modification decision reviewed by a fresh pair of eyes. This can be done by a supervisor of the people who made the initial decision, so long as he/she was not directly involved in that decision. Will this be a problem for small servicers? The servicer would have to allow a borrower to appeal denial of any loan modification concurrently with his/her accepting a different LMO.
Servicers would be allowed to set standards for acceptance and rejection. But, if a borrower who has been offered an LMO makes the first payment due under that option on time, the servicer must treat this as an acceptance, whether or not the borrower formally accepted the offer. A borrower who has not responded within 14 days could be deemed to reject the offered LMO. Is this a good idea?
§2. Avoiding premature foreclosure sales
During the mortgage crisis, there were times when a foreclosure sale took place even though the borrower was trying to work out, or even had worked out, an LMO. CFPB’s proposed new requirements for better recordkeeping, and more communication between servicers and borrowers in trouble, should help prevent such mistakes. One specific goal of the required recordkeeping is a system that lets servicers submit documents or filings for a foreclosure process that reflect “accurate and current information.” But CFPB is also proposing specific consumer protections around foreclosure sales.
What this means for consumers. Servicers would be forbidden from conducting a foreclosure sale for a borrower with a completed LMO application unless:
- the servicer sends a denial notice and the borrower hasn’t asked for an appeal within the time allowed (or an appeal isn’t available because the available LMOs did not include loan modification)
- the servicer denies the appeal, if the borrwer makes one
- the borrower rejects an LMO the servicer offered
- the borrower doesn’t comply with the terms of the LMO
CFPB emphasizes that nothing prevents servicers from taking other steps in the foreclosure process during this time. It is trying to balance borrowers’ interests in having LMO applications carefully considered against lenders’ interests in getting their money out of a loan situation that can’t be fixed. Has it got the right balance? In particular, CFPB wants to know if it should make servicers completely suspend foreclosure proceedings while evaluating LMO applications. (E.g., should a “substantially complete” loss mitigation application prevent the servicer from referring a loan to foreclosure?)
To help the borrower avoid premature action by other lenders who have an interest in the property, within 5 days of getting an LMO application servicers would be required to check whether there are other mortgages, etc. on the property and, if so, send those creditors a copy of the application. Also, if there is a change in servicers during the application process, the original servicer must make sure the new servicer knows about the application. (See Who’s Servicing Your Loan § 2.) (The new servicer might have different rules about LMOs, that could be better or worse for the borrower, but the new servicer will have the same responsibilities to help the borrower complete his/her application and decide whether he/she qualifies.)
What this means for servicers. Failing to stop a scheduled foreclosure sale once the borrower has applied for an LMO is one of the proposed new 9 covered errors. (See Getting Errors Fixed § 2.) Servicers will want to read CFBP commentary on how to treat short sales for these purposes. CFBP particularly wants to know whether the LMO proposals would require servicers to undertake practices that conflict with other federal regulatory requirements or state law.
Servicers would have to use reasonable diligence to discover others with an interest in the property; this could include asking the borrower to provide this information as part of the LMO application. A servicer on the receiving end of information that a borrower has an LMO application pending with another servicer would be equally responsible for complying with the new requirements. Note that one part of CFPB’s new proposals in general is that secondary lienholders will now have the same responsibilities to borrowers as primary lienholders.
Two of the specific criteria for judging reasonable information management practices are that the servicer can (1) provide owners or assignees of mortgage loans with accurate and current information about any mortgage loans they own, and (2) submit documents or filings required for a foreclosure process that reflect accurate and current information and comply with applicable law. Also, failing to promptly transfer accurate and current information about the borrower’s account to a new servicer is one of the proposed new 9 covered errors. (See Getting Errors Fixed § 2.)
See the text of the proposed rule and CFPB commentary:§ 1024.41(g),(j)
§3. Providing prompt and accurate payoff balance
Getting accurate information about the amount required to payoff a mortgage is essential if the borrower is hoping to refinance. However, consumer advocates have said that some servicers don’t respond to requests, refuse to give payoff statements to certain borrowers, or require borrowers to make up missed payments before giving them a payoff balance. This interferes with borrowers’ ability to avoid, or get out of, trouble with their mortgage.
What this means for consumers. CFPB proposes that servicers must provide an accurate payoff balance no later than 7 business days after getting the borrower’s written request. If a borrower complains that the balance is wrong, the servicer must either correct the error or explain why the number is correct within 5 business days.
Servicers could not require borrowers to make loan payments, but could charge a fee for this information. Right approach?
What this means for servicers. Failing to provide an accurate payoff balance is one of the proposed new 9 covered errors. (See Getting Errors Fixed § 2.) The 5-business day period for investigating or correcting this error claim could not be extended because CFPB thinks having this information is essential to pursuing options that protect the borrower — but it does want comment on whether 5 days is an appropriate timeframe.
Unlike many other parts of CFPB’s proposals, the new payoff statement requirement would apply to open-end, as well as closed-end, loans.