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Ninth Circuit Holds Mortgage Servicers Have No RESPA Duty To Respond to Request for Loan Terms
On December 11, the U.S. Court of Appeals for the Ninth Circuit held that letters sent by two borrowers challenging the monthly payment due on their mortgage loan were not “qualified written requests” and therefore did not trigger the servicer’s duty under RESPA to respond. Medrano v. Flagstar Bank, FSB, No. 11-55412, 2012 WL 6183549 (9th Cir. Dec. 11, 2012). The borrowers alleged that their mortgage servicer failed to respond adequately to three letters in which the borrowers challenged the monthly payment due on their loan. RESPA grants borrowers a private right of action against servicers who fail to respond to a “qualified written request.” Following the Seventh Circuit’s decision in Catalan v. GMAC Mortgage Corp., 629 F.3d 676 (7th Cir. 2011), the court held that RESPA provides that such requests must (i) reasonably identify the borrower’s name and account, (ii) either state the borrower’s reasons for the belief that the account is in error or provide sufficient detail to the servicer regarding other information sought, and (iii) seek information relating to the servicing of the loan. The court held that because the letters did not seek information relating to the servicing of the loan, but rather challenged the loan’s terms, the letters were not qualified written requests and the servicer had no duty to respond. The court affirmed the district court’s dismissal of the borrowers’ RESPA claims and remand of the borrowers’ remaining state law claims.
Fannie Mae Updates Servicing Guide to Implement Harmonized Contracts Directive
On December 5, Fannie Mae issued Servicing Guide Announcement SVC-2012-21, which provides numerous Servicing Guide updates to further conform to the FHFA’s directive that Fannie Mae and Freddie Mac align their servicing contracts and policies. The announcement provides new and revised policies regarding (i) metrics for performing and non-performing loans, (ii) servicer violations and remedies, (iii) compensatory fees, (iv) default events constituting a breach of a servicer’s contractual obligations, (v) servicing terminations and transfer of servicing remedies, (vi) response time frames and appeal process for remedies, and (vii) miscellaneous contractual changes.
New York DFS Requires Mortgage Servicer to Retain an Independent Monitor
On December 5, the New York Department of Financial Services (DFS) announced that it is requiring a major mortgage servicer to retain, within 20 days, an independent monitor to conduct a comprehensive review of the firm’s servicing operations and make recommendations for improvements. The servicer is required to develop written action plans to address the monitor’s findings, subject to approval by the DFS. The DFS claims that the monitor is needed to address “preliminary evidence of non-compliance” with state regulations and an earlier agreement from the servicer to alter certain servicing practices. The prior agreement generally required the servicer to: (i) establish and maintain sufficient capacity to properly board and manage its significant portfolio of distressed loans, (ii) engage in sound document execution and retention practices to ensure that mortgage files were accurate, complete, and reliable, and (iii) implement a system of robust internal controls and oversight with respect to mortgage servicing practices performed by its staff and third-party vendors. The DFS obtained that prior agreement as a condition to approving the servicer’s acquisition of another mortgage servicing entity, due to the DFS’s “concerns regarding [the servicers’] rapid growth.”
California Publishes Summary of New Mortgage Foreclosure Laws
On December 4, the California Department of Corporations published Release No. 65-FS regarding implementation of key parts of the Homeowner Bill of Rights that established new foreclosure requirements. The Release details how the new requirements apply to different groups of servicers depending on the number of foreclosures conducted in the prior year, and identifies and summarizes the requirements that take effect January 1, 2013 and those that are not operative until January 1, 2018. The Release also provides a summary of the key elements of other foreclosure laws enacted in 2012, including those related to enhanced protections for servicemembers, restrictions on loan modification fees, and language requirements for certain default servicing obligations.
Fannie Mae Releases Standard Deed-in-Lieu of Foreclosure Requirements, Announces Other Servicing Policies
On November 28, Fannie Mae introduced new requirements for Fannie Mae Mortgage Release, Fannie Mae’s deed-in-lieu of foreclosure process. Servicing Guide Announcement SVC-2012-25 announced three exit options for borrowers under Mortgage Release: (i) immediate move, (ii) three-month transition with no rent payment, and (iii) 12-month lease with market rent payment. The new policy applies to mortgage loans evaluated for a Mortgage Release on or after March 1, 2013, though Fannie Mae encourages servicers to implement the policy changes earlier. The Announcement details Mortgage Release requirements, including borrower eligibility, documentation requirements, servicer duties and responsibilities, and mortgage insurer approval. The new requirements were developed in response to the FHFA’s directive to Fannie Mae and Freddie Mac to simplify and streamline the Mortgage Release processes, and they parallel those announced last week by Freddie Mac. SVC-2012-25 also updates certain short sale requirements originally addressed in SVC-2012-19, which are to be implemented immediately.
Also on November 28, Fannie Mae issued Servicing Guide Announcement SVC-2012-24, which, effective immediately, applies Servicing Guide terms and conditions regarding temporary suspension of foreclosure proceedings to all mortgage loans that have been referred to foreclosure prior to receipt of a complete Borrower Response Package, regardless of the length of the delinquency. The Announcement states that Fannie Mae approval is no longer required to postpone a foreclosure sale for a mortgage loan that is more than 12 months past due (as measured from the last paid installment date). Finally, on November 21, Fannie Mae issued Servicing Guide Announcement SVC-2012-23 to update the maximum foreclosure attorney fees allowed for certain states.
Freddie Mac Provides New Tools for Managing Law Firms
On November 28, Freddie Mac released new tools to help servicers select and manage law firms to handle default-related services. The new web page contains resources regarding (i) training opportunities, (ii) program facts and details, (iii) frequently asked questions, and (iv) links to current firms in the Designated Counsel Program. The new tools help implement Freddie Mac’s recent policy change that allows servicers to choose and manage their own attorneys effective June 1, 2013.
National Mortgage Settlement Monitor Issues Progress Report
On November 19, Joseph Smith, Jr., the Monitor of the national mortgage settlement, released a report on the consumer relief activities of the five banks that are parties to the settlement. Between March 1, 2012 and September 30, 2012, those banks extended more than $26 billion in relief to more than 300,000 borrowers. The relief provided by the banks, discussed in detail in the report includes (i) first and second lien modifications, (ii) enhanced borrower transitional funds, (iii) facilitation of short sales, (iv) deficiency waivers, (v) forbearance for unemployed borrowers, (vi) anti-blight activities, (vii) benefits for members of the armed services and (viii) refinancing programs. The report also provides an update regarding the status of implementation of the mortgage servicing standards required by the settlement, noting that as of September 25, 2012, the Monitor and the banks had agreed to a series of work plans that will guide reviews of each banks’ compliance with the new standards.
Iowa Supreme Court Opens Door to Potential Servicer Liability for Flood Hazard Disclosure Failures
On November 16, the Iowa Supreme Court held that a mortgage servicer may be liable to borrowers for failing to disclose information it acquired about the borrowers’ flood hazard risks. Bagelmann v. First Nat’l Bank, No. 11-1484, 2012 WL 5642039 (Iowa Nov. 16, 2012). After their home flooded, the borrowers sued their mortgage lender and servicer and alleged that at the time of origination and two years later during a refinance transaction, the lender incorrectly informed them that the property was not in a special flood hazard area and that no flood insurance was required. According to the borrowers, several years later the servicer was advised that the property was in a special flood hazard area and failed to inform the borrowers prior to their property flooding. The Iowa Supreme Court affirmed the district court’s holdings that (i) the borrowers cannot use the requirements of the National Flood Insurance Act as a basis for a state-law claim, (ii) the lender and servicer did not breach a contract with the borrowers, and (iii) the borrowers do not have a viable negligent misrepresentation claim. However, the Supreme Court determined that the borrowers provided evidence from which a fact finder could infer that the servicer knew prior to the flood that the property was in a flood zone and that prior representations to the contrary were incorrect. Therefore, the court reversed the grant of summary judgment to the servicer and remanded the case for further consideration of a possible claim based on Restatement (Second) of Torts section 551(2) against their servicer. The court also affirmed the lower court’s grant of summary judgment to the lender on the grounds that the lender no longer had a banking relationship with the borrowers.
Freddie Mac Announces Standard Deed-in-Lieu of Foreclosure
On November 15, Freddie Mac announced the new Freddie Mac Standard Deed-in-Lieu of Foreclosure (DIL), which is designed to serve as a workout option for borrowers for whom neither a home retention alternative to foreclosure nor a Freddie Mac Standard Short Sale is a workable solution. As described in Freddie Mac Bulletin 2012-27, effective for new DIL evaluations conducted on or after March 1, 2013, mortgage servicers will have delegated authority to approve a DIL that meets all Freddie Mac requirements for eligible borrowers who: (i) are 90 or more days delinquent, (ii) are current or less than 90 days delinquent but meet certain hardship criteria, or (iii) do not have an eligible hardship but were previously discharged from the debt obligations in a Chapter 7 bankruptcy. Also effective for new DIL evaluations conducted on or after March 1, 2013, Freddie Mac will offer mortgage servicers a $1,500 incentive for each DIL completed in accordance with Freddie Mac requirements, an increase from the current $275 incentive. Further, effective immediately, mortgage servicers have the authority to postpone any foreclosure sale for mortgages that are more than 12 months delinquent without obtaining Freddie Mac’s prior approval, provided the servicers have determined that doing so will protect Freddie Mac’s interests. The new Standard DIL was developed as part of the Servicing Alignment Initiative and completed under the direction of the Federal Housing Finance Agency.
State Law Update: Massachusetts Proposes Loan Servicing and Debt Collection Rules, Announces Public Hearing
Recently, the Massachusetts Division of Banks issued proposed amendments to the state’s rules governing the conduct of debt collectors and loan servicers. The proposed rule would (i) prohibit third-party mortgage servicers from initiating a foreclosure when an application for a loan modification is in process, (ii) require that servicers ensure that a creditor has the right to foreclose and that any foreclosure-related documents are properly prepared and executed based on personal knowledge, and (iii) mandate that third-party servicers provide a single point of contact for a borrower, follow detailed loan modification procedures, and communicate with borrowers in a timely manner under the new regulations. The amendments also would, amongst other changes, (i) amend the definition of "debt collector" to include active debt buyers, (ii) clarify the definition of net worth for debt collectors, (iii) expand the limitations on contact with a consumer by a debt collector to include cellular telephone and text messaging and (iv) expand the number of significant events of a debt collector and third party loan servicer which must be reported. The Division will host a public meeting about the proposed amendments on November 29, 2012, and will accept written comments through December 6, 2012.