QUESTION
We are a mortgage servicer that
was recently gone through an extensive state regulatory examination.
Unfortunately, we were cited for not exercising “reasonable diligence” in
obtaining documents and information to complete a loss mitigation application.
This seems to be a gray area, from what we’ve been told by our own general
counsel. But I really want to know more. What is “reasonable diligence” in
connection with loss mitigation reviews?
ANSWER
It may seem like a ‘gray area’,
given the wording of this terminology. To be sure, the actions that would
satisfy this requirement depend on the facts and circumstances at hand. Regulation
X gives the following scenario:
“[R]easonable diligence might include promptly contacting the applicant to obtain the missing information; or, if the servicer has offered a short-term payment forbearance program based upon an evaluation of an incomplete application, actions like notifying the borrower about the option to complete the application to receive a full evaluation and, if necessary, contacting the borrower near the end of the forbearance period and prior to the end of the forbearance period to determine if the borrower wishes to complete the application and proceed with a full evaluation.” [Regulation X, 12 C.F.R. § 1024.41(b)(1); Comment 41(b)(1)-4.i-iii]
Obviously, it is critical for
mortgage loan servicers to ensure that their troubled customers know what
information they need to provide and when to provide it. The CFPB has taken
note. In the winter edition of the CFPB’s Supervisory
Highlights, there is a section about servicers that did not meet the
Regulation X “reasonable diligence” requirements. For example, some servicers
offered short-term payment forbearance programs during collection calls to
delinquent borrowers who expressed interest in loss mitigation and submitted
financial information that the servicer would consider in evaluating them for
loss mitigation. The short-term payment forbearance programs deferred some or
all of the borrower’s past due payments to the end of the loan, thereby
extending its maturity. [84 Federal Register 9762 (March 18, 2019)]
However, the servicers did not
notify the borrowers that the short-term payment forbearance programs were
based on an incomplete application evaluation. Near the end of the forbearance
periods, the servicers did not contact the borrowers as to whether they wished
to complete the applications to receive a full loss mitigation evaluation. As a
result, examiners found that the servicers had violated Regulation X
requirements to exercise reasonable diligence in obtaining documents and
information to complete a loss mitigation application.
In response to these findings, the
servicers used enhanced processes, such as a centralized queue, to track
borrowers receiving short-term forbearance programs and subsequently notify
them that additional loss mitigation options may be available and that they
could apply for options over the phone or in writing.
But I would like to expand this
response by citing a recent decision by the U.S. Court of Appeals for the 3rd
Circuit, which offers some comfort to lenders that find themselves in trouble
for violating a Regulation X requirement. Here’s the story.
In 2014, a serious car accident
and financial hardship caused the Bukowskis to fall behind on their home
mortgage loan payments. In April 2015, they applied to Wells Fargo Bank for a
HAMP loan modification. In September, Wells Fargo sent them a 3-month trial
period plan (TPP) stating that they would qualify for a permanent HAMP
modification if they made 3 timely payments and returned a subordination
agreement. The TPP did not mention any requirement to make deferred principal,
lump sum, or balloon payments, consistent with the HAMP guidelines that
prohibited those payments. [Bukowski v. Wells Fargo Bank, 2018 U.S. App. (3d
Cir. Dec. 13, 2018)]
The Bukowskis satisfied the
conditions in the TPP, prompting Wells Fargo to send them permanent HAMP forms
which, however, included language requiring them to make an “interest bearing
lump sum payment” of about $152,819.03, allegedly in violation of HAMP. Despite
the Bukowskis’ objections, and after months of correspondence, including a
Request for Information (RFI) and Notice of Error (NOE) to which Wells Fargo
did not respond, Wells Fargo allegedly sent a notice of intention to foreclose.
The Bukowskis submitted another RFI and NOE.
Wells Fargo answered that it would
not provide information about a purported HAMP exemption that permitted the lump
sum payment requirement. The Bukowskis sued, alleging violations of the Real
Estate Settlement Procedures Act (RESPA) and the New Jersey Consumer Fraud Act
(NJCFA). The district court dismissed the complaint.
Here’s why. The 3d Circuit agreed,
as to the RESPA claim, because the Bukowskis had failed to adequately plead
damages with regard to their RESPA claim. The Bukowskis had summarily requested
damages, without articulating any facts linking Wells Fargo’s alleged RESPA
violations to economic harm suffered “as a result” of those violations.
But under RESPA, borrowers usually
need to be able show details about how a RESPA violation hurt them in some way.
A borrower might get around this requirement if they can show a pattern or
practice of violations. In this case, the Bukowskis did not offer any basis for
concluding that Wells Fargo had engaged in a pattern or practice of
noncompliance so as to recover statutory damages.
However, getting past a RESPA or other federal
law claim may not end the matter. In this case, the court allowed a state law
claim to proceed because the Bukowskis had adequately alleged that Wells Fargo
violated the New Jersey Consumer Fraud Act by issuing a TPP that promised to
offer a permanent HAMP modification that complied with HAMP’s guidelines, and
then issuing a HAMP modification that allegedly contravened HAMP’s guidelines.
In other words, the court allowed the Bukowskis to pursue their state law
claim, something they would still have to prove back in the trial/district
court.
Jonathan Foxx, PhD, MBA
Managing Director
Lenders Compliance Group
