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Massachusetts Appeals Court: Plaintiffs’ counterclaim under PHLPA filed after foreclosure sale is untimely
On April 7, the Massachusetts Appeals Court held that plaintiffs could not assert a violation of the Massachusetts Predatory Home Loan Practices Act (PHLPA) in connection with a foreclosure proceeding. In 2005, the plaintiffs obtained a loan to purchase a home but later defaulted on their mortgage. In 2016, the defendant loan servicer began foreclosure proceedings, and sent plaintiffs a right to cure letter followed by an acceleration notice more than 90 days later. Approximately a year later, the servicer sent the plaintiffs a notice of the foreclosure sale, purchased the property, and ultimately filed a summary process eviction action and motion for summary judgment, which the state housing court granted. The plaintiffs then filed a counterclaim alleging the servicer violated PHLPA § 15(b)(2). The servicer maintained, however, that it is “entitled to judgment as a matter of law because more than five years had passed between the time the [plaintiffs] closed on the loan and the time they brought their counterclaim for violation of the PHLPA,” and that, as such, “the five-year statute of limitations in § 15(b)(1) bars their counterclaim.”
On appeal, the Appeals Court majority determined that while the five-year statute of limitations under § 15(b)(1) did not apply to the borrowers’ counterclaim, § 15(b)(2)—under which the plaintiffs brought their counterclaim—“provides that a borrower may employ a defense, claim, or counterclaim ‘during the term of a high-cost home mortgage loan.’” However, because a foreclosure sale following acceleration of a note and mortgage “concludes the term of a mortgage loan,” the Appeals Court deemed the plaintiffs’ counterclaim was untimely.
Fannie and Freddie update General QM Rule loan eligibility
On April 8, Fannie Mae issued Lender Letter LL-2021-09 announcing updates to eligibility for loans subject to the CFPB’s revised General Qualified Mortgage (QM) Rule (covered by InfoBytes here). Among other things, Fannie notes that because its preferred stock purchase agreement (PSPA) with the U.S. Department of Treasury requires that acquired loans meet the General QM Rule’s loan definition that became effective March 1, it will no longer, in accordance with the dates below, acquire GSE Patch loans that fail to meet to the revised General QM Rule. Specifically, in order to be eligible for purchase by Fannie (certain exceptions are provided for government loans), such loans “must have application dates on or before June 30, 2021” and must “be purchased as whole loans on or before August. 31, 2021, or in MBS pools with an issue date on or before August 1, 2021.” Fannie further notes that it continues to assess the impact of the revised General QM Rule and PSPA on its policies and operations and anticipates further eligibility and underwriting requirement changes. The same day Freddie Mac also issued Bulletin 2021-13, which provides similar updates for loans with application received dates on or after July 1, 2021, and all mortgages with settlement dates after August 31, 2021.
Arkansas amends FMLA mortgage licensing provisions
On April 1, the Arkansas governor signed SB 149, which amends provisions related to licensing requirements under the state’s Fair Mortgage Lending Act (FMLA). Among other things, the act (i) modifies certain definitions, including expanding the definition of a mortgage servicer to include a person that makes a payment to a borrower in the case of a home equity conversion mortgage or a reverse mortgage; (ii) clarifies the qualifications for licensure under the FMLA and outlines licensing renewal requirements; (iii) provides a process for the Arkansas Securities Commissioner to allow loan officers to work from a location that is not licensed as the principal place of business or branch office; (iv) modifies the process concerning notice of a change in name or address; and (v) requires licensees to establish and enforce written cybersecurity policies and procedures that comply with the FMLA and any regulations or orders promulgated thereunder. The act takes effect 90 days after adjournment of the legislature.
CFPB settles with California-based company for debt collection violations
On April 6, the CFPB announced a consent order against a California-based debt collector and its former owner for allegedly harassing consumers and threatening to take legal action if they did not pay their debts. According to the CFPB, the respondents violated the FDCPA and the CFPA’s prohibition against deceptive acts or practices by mailing letters to consumers printed with “Litigation Notice” that threatened recipients with legal action if they did not repay their debts. However, the Bureau stated that the respondents did not file lawsuits against the consumers, nor did they hire law firms or lawyers to obtain any judgments or collect on any such judgments. Under the terms of the consent order, the respondents are permanently banned from the debt collection industry and are ordered to pay $860,000 in redress to its victims, which has been suspended due to an inability to pay, as well as a $2,200 civil money penalty. This is the CFPB’s latest action taken against debt collectors that have used false threats to collect debts. As previously covered in InfoBytes, in 2019 the CFPB and New York attorney general announced proposed settlements with a network of New York-based debt collectors to resolve allegations that the defendants engaged in improper debt collection tactics in violation of the CFPA, the FDCPA, and various New York laws. Also, in 2018, the CFPB announced a settlement with a Kansas-based company and its former CEO and part-owner that allegedly engaged in improper debt collection tactics in violation of the CFPB’s prohibitions on engaging in unfair, deceptive, or abusive acts or practices (covered by InfoBytes here).
California regulator reminds mortgage lenders and servicers of pandemic-related relief
On April 9, the California Department of Financial Protection and Innovation issued guidance to mortgage lenders and servicers to remind them of state law protections for homeowners and encourage them to work with impacted borrowers to avoid foreclosure. The regulator noted that, under California’s Homeowner Relief Act, if a mortgage servicer denies a forbearance request between August 31, 2020 and September 1, 2021, the servicer must provide written notice to the borrower that specifies why relief was not provided, and provide certain information to assist the borrower with defects in the application. The regulator also encouraged mortgage services to work with their customers to propose solutions to avoid foreclosure and stated that prudent efforts to do so will not be criticized by examiners.
California regulator reminds debt collectors of rental protections
On April 9, the California Department of Financial Protection and Innovation issued a bulletin reminding debt collectors of protections associated with “Covid-19 rental debt,” which includes unpaid rent or other unpaid financial obligation of a tenant that came due between March 1, 2020 and June 30, 2021 (see previous coverage here). Starting July 1, creditors are prohibited from charging or attempting to collect late fees for Covid-19 rental debt if the renter has submitted the requisite declaration of financial distress, among other restrictions. Actions to recover Covid-19 rental debt cannot be commenced before August 1, 2021, and any action to recover such debt that was pending on January 29, 2021, is stayed until August 1.
11th Circuit affirms dismissal of RESPA suit
On March 31, the U.S. Court of Appeals for the Eleventh Circuit affirmed dismissal of an action for failure to state a claim against a mortgage servicer, agreeing with the district court that the consumer failed to plausibly allege a “causal link” between the alleged RESPA violation and actual damages. According to the opinion, the plaintiff alleged he never received notice of a foreclosure sale on his deceased mother’s property, although he was the administrator of her estate. He filed suit, claiming the servicer failed to respond to his qualified written requests within 30 days as required under RESPA, and that as a result of the foreclosure, he allegedly “suffered actual damages from the loss of his mother’s home, loss of her belongings, and his mental anguish.” The servicer countered that the alleged “actual damages” did not result from the servicer’s failure to respond properly to the plaintiff’s letters, but rather were a result of the estate’s failure to pay the mortgage and the resulting foreclosure. In affirming the dismissal of the plaintiff’s claims, the 11th Circuit agreed with the district court that the plaintiff never asked the servicer to rescind the foreclosure sale (noting that under RESPA, a borrower is not authorized to request rescission of a foreclosure sale), and that, moreover, the servicer’s failure to do what the plaintiff actually asked it to do—provide information about the mortgage—did not cause his damages.
5th Circuit: Oral agreement to accept past-due mortgage payments is unenforceable under statute of frauds
On March 26, the U.S. Court of Appeals for the Fifth Circuit affirmed summary judgment for a national bank, upholding its foreclosure sale in a 2-1 opinion. According to the opinion, after the borrowers missed several payments the bank foreclosed on their property. The borrowers filed suit alleging, among other things, that the bank “violated the deed of trust and the Texas Property Code” by failing to send proper notices prior to the foreclosure of their home, and also violated the Texas Debt Collection Act (TDCA). The bank argued that it had properly served notice, and the district court agreed, granting summary judgment on the foreclosure-sale claims, concluding “that there was no genuine dispute over whether [the bank] properly sent notice in compliance with both the deed of trust and the Texas Property Code.” The district court also agreed with the bank that an oral agreement between the borrowers and a bank representative to accept a $14,000 payment “to bring the loan current” was “unenforceable under the statute of frauds because it modified the terms of the loan agreement.”
On appeal, the majority opinion considered, among other things, whether the statute of frauds barred consideration of the alleged oral agreement under the TDCA. The majority concluded that alleged oral agreement “cannot alone” sustain the borrowers’ claims under the TDCA. In order for the $14,000 to be considered “an actual, enforceable acceptance” as either part of the repayment plan or to bring the loan current, the agreement would have to be in writing under Texas law, the majority held. The dissenting judge argued, however, that the bank violated the TDCA by “misrepresenting, in a March 2017 phone call, that $14,000 would be automatically deducted from the [borrowers’] account to pay off the bulk of their past-due mortgage payments.” According to the dissent, “the phone call plausibly muddled the [borrowers’] understanding of whether they had a past-due mortgage debt, how much they owed, and whether they were in default,” thus creating a false sense of security about their mortgage—the kind of conduct the TDCA is intended to guard against.
Special Alert: CFPB proposes to halt foreclosure starts from August 31 until 2022 and create new loss mitigation requirements for servicers
The Consumer Financial Protection Bureau on Monday issued a proposal that would broadly halt foreclosure initiations on principal residences from August 31, 2021 until 2022, and change servicing rules to promote consumer awareness and processing of Covid-relief loss mitigation options. Although the proposal would give servicers some flexibility in streamlining the modification process, most already have been offering many of these types of modifications since the early days of the pandemic. The proposal also would create new and detailed obligations for communicating with borrowers to ensure they are aware of their loss mitigation options for pandemic-related hardships.
The CFPB indicated that a final rule implementing the proposal will take effect Aug. 31 — a tight timeline to address public comments, which are due May 10. The proposal comes as the housing market is strengthening, loans in Covid-related forbearance are dropping, the unemployment rate is ticking down, and the nation’s vaccination program is gathering momentum.
Restrictions on foreclosure initiation through Dec. 31 for principal residences
The CFPB proposes prohibiting servicers from making the first notice or filing for foreclosure from the effective date on Aug. 31, 2021 until after Dec. 31, 2021, on all principal residences, regardless of whether the loan default was related in any way to the Covid-19 pandemic. Regulation X currently requires a servicer to generally refrain from making the first notice or filing to initiate foreclosure until the borrower reaches the 120th day of delinquency. Although the CFPB has previously taken the position that a borrower generally is not obligated to make a lump sum payment upon expiration of the forbearance period (See for example: Slides - Housing Counseling Webinar Forbearance Options and Resources - March 22, 2021 (hudexchange.info)), the proposal acknowledges that borrowers who enter forbearance programs and do not make payments during the forbearance period become increasingly delinquent on their mortgage obligation. As a result, without additional action, servicers likely would have a right under Regulation X to initiate foreclosure in the event a borrower comes off of a forbearance plan and does not cure the delinquency through reinstatement, deferral, or some other loss mitigation alternative to foreclosure. The proposal said a temporary foreclosure prohibition would address this concern.
The CFPB indicated it is considering creating exemptions from this restriction that would allow for the commencement of foreclosure proceedings if the borrower is not eligible for any nonforeclosure loss mitigation options or has failed to respond to servicer outreach.
It is possible that loan investors who had expected to instruct servicers to foreclose on defaulted loans will raise a legal challenge to the broad proposed foreclosure restriction, which appears to be principally based upon the CFPB’s authority to issue regulations creating mortgage servicer obligations as “appropriate to carry out [the Real Estate Settlement Procedures Act’s] consumer protection purposes.” It is an open question whether a blanket prohibition on foreclosures — including those unrelated to the pandemic — and applicable to all mortgage servicers is within the CFPB’s statutory authority under RESPA or the Dodd-Frank Act
Modifications based on evaluation of an incomplete loss mitigation application
The proposal also would allow servicers to offer borrowers with a Covid-19 related hardship a loan modification based on an incomplete application, as long as the modification met the following criteria:
- Term and payment limitations: The modification may not cause the borrower’s principal and interest payment to increase and may not extend the term of the loan by more than 480 months from the date of the modification.
- Non-interest-bearing deferred amounts: Any amounts that the borrower may delay paying until the loan is refinanced, the property is sold, or the loan modification matures, must not accrue interest.
- Fee restrictions: No fees may be charged for the loan modification and all existing late charges, penalties, stop-payment fees, and similar charges must be waived upon acceptance (the CFPB said it was aware that certain agencies, including the Federal Housing Administration, only require waiver of fees incurred after the beginning of the pandemic, and that such modifications would not fall within this safe harbor).
- Covid-related hardship: The loan modification is made available to borrowers experiencing a Covid-19-related hardship, which is very broadly defined in the regulation as “a financial hardship due, directly or indirectly, to the Covid-19 emergency.”
- Delinquency cure: The modification must be designed to end any preexisting delinquency.
Interestingly, investors and agencies have largely eliminated documentation requirements in response to the pandemic, and servicers have been successfully offering streamlined loan modifications under Regulation X’s current requirements. The lack of documentation requirements has seemingly blurred the lines of what constitutes a complete loss mitigation application.
Additional borrower outreach required
The proposed rule would require servicers, for one year after the effective date, to give borrowers Covid-forbearance-related information regarding the current Regulation X early intervention requirements, as follows:
- For borrowers not currently in forbearance, when live contact is made with the borrower, and the investor makes available to that borrower a Covid--related forbearance program, the servicer must inquire whether the borrower has a Covid-related hardship, then list and briefly describe available programs and actions the borrower must take to be evaluated for them. The CFPB noted that this could include listing federal, state, and/or investor-specific options.
- If the borrower is on forbearance, during the last live contact made pursuant to the early intervention rules prior to the program’s expiration, the servicer must inform the borrower of the date on which the current forbearance period ends and each type of post-forbearance option that is available to the borrower to resolve the post-forbearance delinquency, along with the actions that must be taken to be evaluated for such options. Importantly, this list would include all available loss mitigation options—not simply Covid-specific options.
The proposed rule would also require a servicer to contact the borrower no later than 30 days before the end of the forbearance period to determine if the borrower wishes to complete the loss mitigation application and proceed with a full loss mitigation evaluation. If the borrower requests further assistance, the servicer must exercise reasonable diligence to complete the application before the end of the forbearance program period.
The compliance requirements the proposal contemplates seems likely to present additional complexity and liability for mortgage servicers as they gear up to address the upcoming wave of delinquent borrowers who will be coming out of Covid-related forbearances.
If you have any questions regarding the CFPB’s proposal, please visit our Mortgages practice page or our Covid-19 Legal Resources & Capabilities page or contact a Buckley attorney with whom you have worked in the past.
CFPB urges servicers to stave off foreclosure wave
On April 1, the CFPB urged mortgage servicers “to take all necessary steps to prevent a wave of avoidable foreclosures this fall.” Citing to the millions of homeowners currently in forbearance due to the Covid-19 pandemic, the Bureau’s compliance bulletin warns servicers that consumers will need assistance when pandemic-related federal emergency mortgage protections begin to expire later this year. The Bureau notes that it “will closely monitor how servicers engage with borrowers, respond to borrower requests, and process applications for loss mitigation,” and “will consider a servicer’s overall effectiveness in helping consumers when using its discretion to address compliance issues that arise.” According to the Bureau, industry data suggests that almost 1.7 million borrowers will exit forbearance programs starting in September, many of whom will be a year or more behind on mortgage payments. The Bureau cautions servicers to take proactive measures to prevent avoidable foreclosures, including by (i) contacting borrowers before the end of the forbearance period; (ii) working with borrowers to ensure they obtain all necessary information; (iii) addressing language access and maintaining compliance with ECOA and other applicable laws; (iv) evaluating income fairly when determining loss mitigation options; (v) handling inquiries promptly; and (vi) preventing avoidable foreclosures through compliance with foreclosure restrictions under Regulation X and other federal and state restrictions.