Payoff Statements - Foreclosure Conundrum

QUESTION

Thank you for these weekly mortgage FAQs. We use them in sales, operations, and compliance meetings. We even include them in our company newsletter. Now, we finally have a question of our own.

We had an audit of our timing to respond to payoff statements. The audit was conducted by an independent compliance firm, such as yours, and they found that there were several instances where we did not respond in a timely manner.

It is our understanding that we have seven business days to respond to a request for a payoff statement. So, admittedly, there were a few times we missed the deadline. But one of those missed deadlines involved a foreclosure. 

The attorneys delayed in sending us their request, but we responded within seven business days. In our view, the auditor’s finding should be removed. 

What is considered a reasonable time to respond to a payoff statement request in such a situation?

ANSWER

I appreciate your kind words. Thank you for sharing our FAQs with your staff!

To begin, it is important to provide the guideline to follow for being responsive to a payoff statement request. With respect to consumer credit secured by a consumer’s dwelling – whether or not the dwelling is the consumer’s “principal dwelling” – Regulation Z states that a creditor, assignee, or servicer that currently owns the loan or servicing rights must provide an accurate statement (as of the date issued) of the total outstanding balance required to pay the obligation in full as of a specified date. This “payoff statement” must be sent within a reasonable time, not more than seven business days, after receiving a written request from the consumer or someone acting on behalf of the consumer. [Regulation Z (TILA) § 1026.36(c)(3)]

The scenario you describe includes a foreclosure. A recent case by the federal district court in Ohio may be enlightening. [Larkins v. Fifth Third Mortgage Co., 2019 U.S. Dist., S.D. Ohio Apr. 22, 2019] Keep the various notification and response dates in mind, as I describe the litigation.

Here are some of the salient facts in this case. 

• The Larkins faced foreclosure after default on their home mortgage loan, but they received an offer to purchase their home and needed a payoff quote by April 30, 2017 to prevent the offer from expiring.
• Because of the pending foreclosure action, their counsel sent an April 19 email payoff request to the creditor’s foreclosure counsel, Bennett, rather than directly to the loan servicer.
• Bennett emailed back that she would request a payoff from the creditor.
• On April 24, the creditor received Bennett’s request for a payoff quote. 
• On April 28, the creditor generated the quote and sent it to Bennett. 
• On May 4, after receiving clarifying information she had requested about the quote, Bennett both mailed and emailed the quote to the attorney of record for the Larkins.
• Then, on May 15, Larkins’ foreclosure counsel asserted in an email to the creditor’s foreclosure counsel that the creditor had failed to furnish a payoff quote. The creditor’s counsel responded the next day, re-sending the quote and noting that it had been sent on May 4.

The Larkins sued the creditor, alleging that it had violated TILA by failing to provide an accurate payoff balance within seven business days after receiving a written request. The court granted summary judgment for the creditor.

Now, follow the reasoning: the creditor had responded within the 7-day period. 

• In compliance with TILA, on April 24 (a Monday), the creditor had received the request for a payoff balance from Bennett, on behalf of the Larkins.
• On Friday, April 28, the creditor had generated the payoff balance and on May 1, sent a payoff quote to Bennett, which Bennett received on Monday, May 1. This means the creditor had sent the payoff statement within five business days after receiving the request on behalf of the borrower.

By the way, neither the Larkins nor any evidence suggested that the payoff balance was inaccurate at the time the creditor sent it. Being “not more than seven business days,” this behavior complied with TILA and Regulation Z.

In an attempt to salvage their claim, the Larkins argued that agency principles should apply to qualify the bank’s foreclosure counsel as a “creditor” subject to the payoff statement requirements. But TILA clearly limits this requirement to “creditors,” the definition of which, in both TILA and Regulation Z, does not include agents. (It is worth noting, as did the court, that (in contrast) other provisions of TILA do include agents, for example, TILA’s definition of “card issuer.”) The court showed that there was no agency involved. Indeed, the lender’s foreclosure counsel did not have access to the lender’s internal systems or the information necessary to generate a payoff quote. In sum, while the creditor’s agreement to allow foreclosure counsel to represent it in foreclosure proceedings might qualify the counsel as agent for certain purposes, that agreement did not extend to payoff requests.

The court noted that Regulation Z supported its decision because the regulation provides that

“[w]hen a creditor, assignee, or servicer, as applicable, is not able to provide the statement within seven business days of such a request because the loan is in bankruptcy or foreclosure…the payoff statement must be provided within a reasonable time.” [Regulation Z § 1026.36(c)(3)]

Thus, even if the creditor were deemed to have received the payoff request on April 19 (the day the Larkins’ counsel sent the email payoff request to the creditor’s foreclosure counsel), the creditor had provided the payoff statement on May 4 (the 11th business day following). Under the circumstances of this case, the period of eleven business days was a “reasonable time” to provide the statement.

The court rested its opinion on the 5-day time period within which the creditor received a request from Bennett and responded by providing a payoff quote to Bennett. Recall, Bennett was the foreclosure counsel for the creditor, not for the Larkins. Yet it was Bennett who asked for the payoff quote “on behalf of the Larkins,” not the Larkins’ own foreclosure counsel. Regulation Z requires the creditor to respond within a reasonable time, but in no case more than 7 days, “after receiving a written request from the consumer or any person acting on behalf of the consumer.” The regulation does not specify, although the court probably was correct in assuming, that the payoff quote must be provided to the person who requested it on behalf of the consumer.

I would also like to mention that in January 2013 the CFPB’s Regulation Z Servicing Rule changed the regulation’s previous requirement that the creditor, assignee, or servicer provide an accurate payoff statement within a reasonable time.

Regulation Z Comment 36(c)(1)(iii)-1 had indicated that five business days normally would be a reasonable time. The 5-day period was a safe harbor, not a requirement, meaning a servicer would be in compliance by providing a payoff statement within five business days of a request, but would not necessarily be out of compliance if it took longer than five days (such as when the market was experiencing an unusually high volume of refinancing requests).

The January 2013 amendment changed the “reasonable time” requirement to “not more than seven business days after receiving a written request.” This 7-day period, however, is not a safe harbor; it is mandatory. But the regulation provides a limited exception, as the court recognized in the case described herein, to wit, if the creditor, assignee, or servicer is not able to provide the statement within seven business days because a loan is in bankruptcy or foreclosure or is a reverse mortgage or shared appreciation mortgage, or because of a natural disaster or similar circumstance, the creditor must provide the statement within a “reasonable time.”

Furthermore, as the CFPB acknowledged when it amended Regulation Z in January 2013, state or local laws sometimes address the timeline for payoff statements, allowing 3 to 21 days for a response. The CFPB decided those laws would not cause a conflict because creditors, assignees, or servicers could comply with both state law timelines and Regulation Z’s timeline by providing a payoff statement within the shorter of the two timelines.

One final point, another discrepancy should be noted. For high-cost mortgage loans (HCMs), TILA requires payoff statements to be provided within five, not seven, business days of a written request. The statute and regulation do not include the bankruptcy / foreclosure exception for HCMs. [TILA, as amended by § 1433(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act) and Regulation Z § 1026.34(a)(9)(v)]

Jonathan Foxx Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group