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On March 19, the U.S. District Court for the Northern District of Ohio granted a mortgage lender’s motion for summary judgment, rejecting allegations that it had violated RESPA and Regulation X in handling plaintiffs’ loss mitigation application. The plaintiffs executed a promissory note and mortgage with the lender in 2017 and then initiated a loss mitigation application the following year. To complete the loss mitigation application process, the lender requested documents and information from the plaintiffs. The lender filed a foreclosure action after informing the plaintiffs that “required documents ‘remain outstanding.’” The plaintiffs filed suit, alleging the lender mishandled their loss mitigation application by, among other things, (i) failing to exercise reasonable diligence in obtaining documents and information to complete the loss mitigation application; (ii) failing to provide “the correct notices regarding the receipt of documents or with notice of a reasonable date by which Plaintiffs were required to submit additional documents to complete the loss mitigation application”; (iii) failing to evaluate the complete loss mitigation application for all available loss mitigation options within 30 days; (iv) requesting documents already received or impossible to obtain; and (v) filing a foreclosure action against the plaintiffs even though the loss mitigation application was either complete or facially complete.
The court disagreed, ruling that the lender “did not violate RESPA or Regulation X in either the handling of Plaintiffs’ loss mitigation application or in filing foreclosure litigation against Plaintiffs” because, among other things, “[t]here is no genuine issue of material fact that Plaintiffs did not comply with [the lender’s] request for additional information” and that “a complete, or even facially complete, loss mitigation application was not pending in this matter at the time of the filing of the foreclosure action.” As such, because an incomplete loss mitigation application does not carry foreclosure protections, the filed foreclosure action was not improper, the court wrote.
On December 18, the CFPB announced a settlement with a mortgage servicer for allegedly violating the CFPA and RESPA’s implementing regulation, Regulation X, due to widespread failures in the handling and processing of homeowners’ applications for loss mitigation options. According to the consent order, which was entered with the mortgage servicer’s successor in interest, the mortgage servicer violated Regulation X by, among other things, failing to (i) state in the acknowledgement notices the additional documents and information borrowers needed to submit to complete loss mitigation applications; (ii) provide a reasonable due date for submission of borrower documents; (iii) properly evaluate borrowers for all loss mitigation options available to them; and (iv) treat certain applications as “facially complete” in accordance with Regulation X. Additionally, the consent order states that the servicer’s alleged failure to “accurately review, process, track, and communicate to borrowers information regarding their applications for loss mitigation options” is an unfair act or practice and the alleged failure to send accurate acknowledgement notices is a deceptive act or practice. The Bureau asserts that the servicer’s failures delayed or deprived some borrowers of a reasonable opportunity to obtain the benefits of a loss mitigation option, resulting in additional harm such as negative credit reporting, additional late fees, and additional interest.
The consent order requires the successor in interest to pay nearly $5 million in total redress to over 11,000 consumers. The consent order also imposes a $500,000 civil money penalty and includes requirements for operational changes should the successor in interest resume mortgage servicing operations.
On October 7, the CFPB issued FAQs covering RESPA Section 8 and corresponding Regulation X sections. The FAQs provide a general overview of Section 8 and its prohibited activities. The FAQs also address the application of Section 8 to common scenarios involving gifts and promotional activities and marketing services agreements (MSAs). Highlights of the examples include:
- Gifts. The FAQs note that if a gift ( “thing of value”) is given or accepted as part of an agreement or understanding for referral of business related to a real estate settlement service involving a federally related mortgage loan then it is prohibited under Section 8. The FAQs emphasize that the agreement or understanding need not be in writing or oral and can be established by a practice, pattern, or course of conduct.
- Promotional activities. The FAQs state that promotional or educational activities connected to a referral source would be allowed under Regulation X if the activities (i) are not conditioned on referral of business; and (ii) do not involve defraying expenses that otherwise would be incurred by the referral source. The FAQs describe these conditions in more detail and provide example of activities that meet and do not meet Regulation X’s conditions.
- Marketing Services Agreements. The FAQs emphasize that MSAs that involve payments for referrals are prohibited under RESPA Section 8(a), whereas MSAs that involve payments for marketing services may be permitted under RESPA Section 8(c)(2), depending on certain facts and circumstances. MSAs are lawful under RESPA when structured and implemented as an agreement for the performance of actual marketing services and the payment reasonably reflects the value of the services performed. The FAQs provide examples of prohibited MSAs under Section 8(a) and Section 8(b), including (i) agreements structured to provide payments based on the number of referrals received; or (ii) the use of split charges, either being paid to a person that does not actually perform the services or the amount paid exceeds the value of the services performed by the person receiving the split.
Notably, with the release of the FAQs, the Bureau is rescinding its Compliance Bulletin 2015-05, entitled RESPA Compliance and Marketing Services Agreements, noting that the Bulletin “does not provide the regulatory clarity needed on how to comply with RESPA and Regulation X.” The Bureau emphasizes that with the rescission, MSAs will still “remain subject to scrutiny, and [the Bureau] remain[s] committed to vigorous enforcement of RESPA Section 8.”
On August 5, the U.S. District Court for the Northern District of West Virginia granted a mortgage servicer’s motion for summary judgment, concluding that the servicer “maintained contact and regularly worked” with the consumer to complete her loss mitigation application and thus did not violate Regulation X. According to the opinion, after obtaining the rights to the property and assuming mortgage responsibilities pursuant to a divorce decree, the consumer stopped making mortgage payments in July 2018. The mortgage servicer confirmed the consumer as the successor in interest to the mortgage on March 7, 2019 and on March 14, 2019, the consumer sent the servicer an incomplete loss mitigation application. Between March 2019 and June 2019, the consumer submitted additional loss mitigation application materials and partial application materials for a loan assumption, with the servicer regularly contacting the consumer to obtain documents necessary to complete the applications. The consumer asserted that the servicer, in violation of §1024.41(b)(1), failed to exercise reasonable diligence in obtaining documents and information from her to complete her loss mitigation application and, in violation of §1024.41(c)(1) and §1024.41(c)(2), failed to evaluate her complete loss mitigation application for all loss mitigation options available.
The court granted summary judgment in favor of the servicer. The court reasoned that “undisputed evidence” establishes that the servicer “maintained contact and regularly worked” with the consumer to obtain the paperwork it needed. Moreover, the court noted that while Regulation X requires a servicer to “evaluate a borrower for all loss mitigation options available, that does not mean it must offer every option it considered—or any option at all.” The court rejected the consumers’ claims that the servicer should have offered a loan modification that did not require information from her ex-husband, concluding that Regulation X “required” her ex-husband’s inclusion and nonetheless, “[u]nder the regulatory framework, [the servicer] has discretion to determine which option(s), if any, it offers an applicant.” Lastly, the court disagreed that the mortgage servicer’s actions caused the consumer to incur “substantial damages,” concluding that “evidence of record is clear that her damages were not caused by or even attributable to [the servicer].”
On June 23, the CFPB issued an interim final rule that provides relief to mortgage servicers from certain Regulation X requirements when offering Covid-19 related loss mitigation options. Among other things, the interim final rule amends Regulation X to temporarily permit servicers to offer eligible loss mitigation options without obtaining a complete loss mitigation application from borrowers who have experienced a financial hardship due to Covid-19. In order to qualify for the exception, the loss mitigation option must satisfy certain criteria, including that (i) it must permit the borrower to delay paying certain amounts until liquidation, refinance, maturity, or, for a mortgage insured by FHA, the mortgage insurance terminates; (ii) the servicer cannot charge interest on delayed payment amounts, cannot charge fees in connection with the option, and must waive all existing penalties and fees upon acceptance; and (iii) the borrower’s acceptance must resolve any prior delinquency. The interim final rule is effective on July 1.
On April 24, the CFPB outlined new guidance to help facilitate compliance with mortgage servicing rules when transferring mortgage servicing rights to a servicer or a sub-servicer. According to the CFPB, after significant changes were made to Regulation X (RESPA) that took effect in 2014, the Bureau found weaknesses in the management of mortgage transfers. The new guidance provides “a roadmap for servicers that will prevent consumer harm,” and notes that when transferring a loan, “servicers should have policies and procedures reasonably designed to transfer all of the information and documents in their possession or control relating to a transferred mortgage loan, such as, a unique identifier for each loan, the terms of the loan, current unpaid principal balance as of a specific date, information concerning any escrow, and copies of any loss mitigation applications submitted by a borrower and of any loss mitigation agreements agreed to with a borrower.” According to the Bureau’s press release, servicers should also consider: (i) developing a servicing transfer plan, including an escalation plan for potential problems; (ii) engaging in quality control work to validate data; (iii) determining servicing responsibilities for legacy accounts; (iv) conducting post-transfer reviews to determine the effectiveness of a transfer plan; (v) monitoring consumer complaints and loss mitigation performance metrics; and (vi) identifying defaulted loans, active foreclosures, bankruptcies, or any forbearance agreements entered into with a borrower, and including loss mitigation activity for each loan where applicable.
The Bureau recognizes that entities may face particular challenges as a result of the Covid-19 pandemic and states it intends to consider such challenges, including operational and time constraints related to the transfer, and will “be sensitive to good-faith efforts demonstrably designed to transfer the servicing without adverse impact to consumers.”
On June 11, the U.S. Court of Appeals for the 11th Circuit affirmed the dismissal of a RESPA action against a mortgage servicer, concluding that rescheduling a foreclosure sale is not a violation of Regulation X’s prohibition on moving for an order of foreclosure sale after a borrower has submitted a complete loss-mitigation application. According to the opinion, a consumer’s home was the subject of an order of foreclosure, and the mortgage servicer subsequently approved a trial loan-modification plan for a six-month period. The servicer filed a motion to reschedule the foreclosure sale so that the sale would not occur unless the consumer failed to comply with the modification plan during the trial period. The consumer filed suit, alleging that the servicer violated Regulation X––which prohibits loan servicers from moving for an order of foreclosure sale after a borrower has submitted a complete loss-mitigation application––because the servicer rescheduled the foreclosure sale instead of cancelling it. The district court dismissed the action.
On appeal, the 11th Circuit agreed with the district court, concluding that the consumer failed to state a claim for a violation of Regulation X. The appellate court reasoned that Regulation X does not prohibit a servicer from moving to reschedule a foreclosure sale as that motion is not the same as the “order of sale,” a substantive and dispositive motion seeking authorization to conduct a sale at all, as referenced in Regulation X. Moreover, the appellate court argued that the consumer’s interpretation of the prohibition is inconsistent with the consumer protection goals of RESPA because it would disincent loan servicers from offering loss-mitigation options and helping borrowers complete loss-mitigation applications, if a foreclosure sale has already been scheduled. Lastly, the appellate court noted that the motion to reschedule is consistent with the CFPB’s commentary that, “[i]t is already standard industry practice for a servicer to suspend a foreclosure sale during any period where a borrower is making payments pursuant to the terms of a trial loan modification,” rejecting the consumer’s argument that the servicer should have cancelled the sale altogether.
On April 9, the U.S. Court of Appeals for the 11th Circuit held that a consumer’s insurance repayment plan on her reverse mortgage did not qualify as an escrow account under RESPA’s Regulation X. According to the opinion, a consumer’s reverse mortgage required her to maintain hazard insurance on her property, which she elected to pay herself, and did not establish an escrow account with the mortgage servicer to pay her insurance and property taxes. After her insurance lapsed, the mortgage servicer advanced her over $5,000 in funds paid directly to her insurance carrier to ensure the property was covered, subject to a repayment agreement. After the consumer failed to make any payments under the agreement, the servicer initiated a foreclosure action against the consumer and obtained a forced-placed insurance policy when the insurance lapsed for a second time. Ultimately, a state-run forgivable loan program brought the consumer’s past due balance current and excess funds were placed in a trust to cover future insurance payments on the property. The consumer filed an action against the mortgage servicer alleging the servicer violated RESPA’s implementing Regulation X when it initiated forced-placed insurance, because the repayment agreement purportedly established an escrow account, which required the servicer to advance the funds for insurance. The district court entered judgment in favor of the servicer.
On appeal, the 11th Circuit agreed with the district court, concluding that no escrow account existed between the consumer and the servicer, emphasizing that nothing in the repayment agreement set aside funds for the servicer to pay insurance or taxes on the property in the future. The 11th Circuit rejected the consumer’s characterization of the repayment agreement as an arrangement under Regulation X “where the servicer adds a portion of the borrower’s payment to principal and subsequently deducts from principal the disbursements for escrow account items.” The 11th Circuit reasoned that not only did the consumer never make a principal payment to the servicer, the consumer’s characterization is “entirely inconsistent” with the reverse mortgage security instrument. Because the servicer never deducted anything from the principal when it disbursed funds to pay the insurance, the repayment agreement did not qualify as an escrow agreement under Regulation X.
5th Circuit: Loan originators cannot be liable for loan servicers’ violations of RESPA loss mitigation requirements
On December 21, the U.S. Court of Appeals for the 5th Circuit held that a mortgage loan originator cannot be held vicariously liable for a loan servicer’s failure to comply with the loss mitigation requirements of RESPA (and its implementing Regulation X). According to the opinion, in response to a foreclosure action, a consumer filed a third-party complaint against her loan servicers and loan originator alleging, among other things, that the loan servicers had violated Regulation X’s requirement that a servicer evaluate a completed loss mitigation application submitted more than 37 days before a foreclosure sale. In subsequent filings, the consumer clarified that the claims against the loan originator were for breach of contract and vicarious liability for one of the loan servicer’s alleged RESPA violations. The district court dismissed both claims against the loan originator and the consumer appealed the dismissal of the RESPA claim.
On appeal, the 5th Circuit affirmed the dismissal for two independent reasons. First, the 5th Circuit noted it is well established that vicarious liability requires an agency relationship and determined the consumer failed to assert facts that suggested such a relationship existed. Second, in an issue of first impression at the circuit court stage, the court ruled that, as a matter of law, the loan originator could not be vicariously liable for its servicer’s alleged violations of RESPA, as the applicable statutory and regulatory provisions only impose loss mitigation requirements on “servicers,” and therefore only servicers could fail to comply with those obligations. The appellate court reasoned that Congress explicitly imposed RESPA duties more broadly in other sections (using the example of RESPA’s prohibition on kickbacks and unearned fees that applies to any “person”), but chose “a narrower set of potential defendants for the violations [the consumer] alleges.” The court concluded, “the text of this statute plainly and unambiguously shields [the loan originator] from any liability created by the alleged RESPA violations of its loan servicer.”
On August 14, the U.S. District Court for the Northern District of Illinois held that RESPA (and its implementing Regulation X) does not require a plaintiff to wait until a property is foreclosed upon to bring an action for a violation of Regulation X’s loss mitigation requirements. The plaintiff filed a complaint against her mortgage servicer for (among other claims) allegedly violating RESPA when the company initiated a foreclosure action while she had a pending loss mitigation application, even though the company did not ultimately foreclose on the property. The company moved to dismiss the RESPA claim as unripe and the court disagreed, finding there is no language in the statute or implementing regulation that states a plaintiff must wait. Conversely, the implementing regulation “expressly states that the prohibited action is a servicer making ‘the first notice or filing required by applicable law…’” and, therefore, the plaintiff’s claim did not fail for lack of ripeness. The court ultimately dismissed the plaintiff’s action against the company, however, finding the plaintiff did not adequately plead actual damages, and granted the plaintiff leave to file an amended complaint.
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