Posted On Feb 11, 2016
Banks have now had two years of experience with the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB), the agency that implements the parts of the law that apply to mortgage servicers.
The foreclosure crisis and accompanying recession are in the rearview mirror, but the stringent consumer protection rules attached to the law continue to set tight boundaries for how banks handle loss mitigation. Dodd-Frank was a response to a period when many mortgage servicers were unresponsive to consumers as a result of being overwhelmed by the volume of defaults. As a result, the law severely tightened protections for borrowers, requiring mortgage loan servicers to follow strict procedures and documentation in loss mitigation.
The result has been the creation of a labyrinth of rules that banks must follow in order to move a property to foreclosure. If a bank misses any of these steps or doesn’t follow the letter of the law on deadlines, it jeopardizes efforts to recover a bad loan through foreclosure.
Two tracks in the foreclosure process
In South Carolina, loan servicers also must adhere to 2009 and 2011 administrative orders from the state Supreme Court that ensure all delinquent homeowners are given an opportunity to work out modifications of loans before foreclosure can proceed. The state and federal processes create two tracks for loan servicers.
Under the rules of the CFPB, banks must guard against inadvertently violating protocols involving the timeline that starts when a loan modification application is received from a borrower. Once an application is received, a loan servicer cannot file a complaint, seek a summary or default judgment, pursue a final foreclosure judgment or schedule a sale.
That’s not to say that a loan servicer has to drop all of its efforts to recover its losses. It can continue current litigation as long as it does not result in a judgment, and it can also continue mediation or arbitration. If a dispositive motion already has been filed, the bank must make reasonable efforts to delay the judgment, such as asking for a continuance.
One key date that may cause confusion is when an application is complete, which triggers the delay in the foreclosure process. The application is considered complete when the borrower gives the loan servicer all of the information it requires, even if the loan servicer is still waiting for information from third parties.
Rejections must be transparent
Rejection of requests for loan modifications are another area where loan servicers have exposure if they don’t carefully follow the process, which requires a high degree of transparency. A borrower cannot be rejected with a vague reason such as “insufficient.” The rejection must outline the criteria used for evaluation and explain why the borrower did not meet them.
For example, if income ratio is part of the criteria, the rejection must show the calculations. The rejection also must notify the applicant of the appeals process.
Under a 2009 administrative order of the South Carolina Supreme Court that applied to Fannie Mae or Freddie Mac loans, servicers must formally evaluate borrowers’ eligibility for a loan modification under the Home Affordable Modification Program before proceeding in foreclosure. Faced with a continuing logjam in loss mitigation efforts and a then-burgeoning number of foreclosure actions, in 2011 the state Supreme Court issued a second administrative order. Under that order, still in effect, all mortgage foreclosure actions – not just those of loans owned or guaranteed by Fannie Mae and Freddie Mac – are stayed until the attorney for the mortgagee certifies that the mortgagee has been served with notice of the right to seek a loan modification, given the opportunity to apply for the modification and has received a notice of the mortgagor’s decision. Notably, this applies to loans after foreclosure has been initiated, creating the potential for two separate reviews for modification. If the borrower contests the servicer’s rejection, a foreclosure can’t proceed until a Circuit Court judge rules.
These are general guidelines for loan servicers to follow in affording borrowers the opportunity to modify loans to forestall foreclosure. Dates and other details attached to each step of the process are critical, and we recommend that servicers develop a process checklist to ensure that they are satisfying each element required by both the CFPB and the South Carolina Supreme Court administrative orders. If followed carefully, the process gives borrowers a fair opportunity to seek a modification, but still allows services to foreclose when that is the only option.
Elizabeth A. Blackwell is an attorney in Turner Padget’s Banking and Finance, and Business and Commercial Litigation Practices. Based in the Charleston, S.C. office, she serves clients in business litigation matters, including contracts, bankruptcy, commercial law and litigation, foreclosure, debtor / creditor law and loan modification agreements. As an advocate for creditors’ rights, Blackwell has been recognized as a rising young attorney in South Carolina. She may be reached at (843) 579-8303 or by email at email@example.com.