QUESTION
We are a servicer licensed in all states. As the company’s Associate General Counsel, I am tasked with monitoring the legal implementation of federal and state laws pertaining to mortgage servicing.
One of my concerns is the “catch-all” provision in Regulation X because it appears to offer borrowers a means to allege that we may implement proper error resolution procedures but still be held liable for violations of RESPA.
Recently, a borrower has retained counsel, and the “catch-all” provision was cited in the counsel’s letter to us. I don’t want to get into litigation with the borrower.
Is there some guidance you can provide about the “catch-all” provision that will help me decide how to resolve this matter quickly?
ANSWER
Your question did not contain specific information about the loan or the particular procedures you follow for error resolution. So, I will provide generalized guidance and use actual litigation to demonstrate the legal effect of the “catch-all” provision in RESPA.
The Real Estate Settlement Procedures Act (RESPA) includes error resolution procedures for mortgage loans. RESPA establishes “qualified written requests” or QWRs as part of its error resolution standards. Regulation X, RESPA’s implementing regulation, breaks QWRs into two categories: Notices of Error (NOEs) and Requests for Information (RFIs).[i]
Let’s list what an error is and what it is not.
Regulation X defines the term “error” by including a list of qualifying instances:
• Failure to accept a payment that conforms to the servicer’s written requirements for the borrower to follow in making payments.
• Failure to apply an accepted payment to principal, interest, escrow, or other charges under the terms of the mortgage loan and applicable law.
• Failure to credit a payment to a borrower’s mortgage loan account as of the date of receipt.
• Failure to pay taxes, insurance premiums, or other charges, including charges the borrower and servicer have voluntarily agreed that the servicer should collect and pay in a timely manner, or to timely refund an escrow account balance.
• Imposition of a fee or charge that the servicer lacks a reasonable basis to impose, such as a late fee for a payment that is not late, a default property management fee for borrowers not in a delinquency status, or a charge for force-placed insurance in a circumstance not permitted by Regulation X.
• Failure to provide an accurate payoff balance amount upon a borrower’s request.
• Failure to provide accurate information to a borrower regarding loss mitigation options and foreclosure.
• Failure to transfer accurate and timely information relating to the servicing of a borrower’s mortgage loan account to a transferee servicer.
• Making the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process in violation of Regulation X.
• Moving for foreclosure judgment or order of sale, or conducting a foreclosure sale in violation of Regulation X.
• Any other error relating to the servicing of a borrower’s mortgage loan (sometimes referred to as the “catch-all” provision). (Note my emphases in bold and italics.)
Regulation X offers several examples that are not “errors” subject to the NOE procedures:
• An error relating to the origination of a mortgage loan.
• An error relating to the underwriting of a mortgage loan.
• An error relating to a subsequent sale or securitization of a mortgage loan.
• An error relating to a determination to sell, assign, or transfer the servicing of a mortgage loan, not including an error relating to the failure to transfer accurately and timely information relating to the servicing of a borrower’s mortgage loan account to a transferee servicer.
To illustrate how the catch-all qualifying instance of an error is applied in litigation, consider the case of Naimoli v. Ocwen Loan Servicing, LLC.[ii] It is a recent decision by the U.S. Court of Appeals for the 2nd Circuit.
Here’s what happened.
1. Naimoli obtained a mortgage loan from IndyMac Bank to finance the purchase of her home. She then defaulted on her mortgage payments. To avoid foreclosure, she requested a Home Affordable Modification Program (HAMP) loan modification from her servicer, Ocwen Loan Servicing.
2. Ocwen approved her for a trial period mortgage loan modification plan, stating
“if you successfully complete the TPP [trial period plan] by making the required payments, you will receive a modification with an interest rate of 3.50000%, which will be fixed for 40 years from the date the modification is effective.”
The plan indicated that if Naimoli timely submitted her three payments, Ocwen would issue a permanent modification agreement for her to sign.
3. During the trial period, Ocwen told Naimoli that it could not implement the permanent modification agreement until she re-executed the mortgage and note that IndyMac (her lender) had failed to record and apparently lost.
4. In December 2015, Ocwen sent instructions and the documents for Naimoli to re-execute. She properly executed them and returned them to Ocwen. In September 2016, Ocwen said it would issue yet another set of documents for Naimoli to re-sign, but it never did so.
5. In October, Ocwen wrote Naimoli to state that it had identified issues during the title search that would prevent implementation of the modification but that she should “continue making the monthly payments outlined in the modification agreement.”
The title issue had arisen because Ocwen had failed to record the documents Naimoli had previously provided. Naimoli explained that Ocwen had already received the documents on August 12, 2016 and she provided Ocwen with UPS records verifying their delivery.
6. In December 2016, Ocwen notified Naimoli that she was no longer eligible for the loan modification. Naimoli appealed the denial, arguing that Ocwen had received the documents that needed to be recorded and that they had not been recorded because Ocwen had refused to pay the required recording fees. Ocwen denied the appeal, citing the loan title issues. In March 2017, Ocwen began rejecting Naimoli’s modification payments.
7. After Ocwen denied the modification, Naimoli submitted an NOE asserting that “Ocwen’s actions, in failing to honor the terms of the [trial period plan] and record the [] mortgage documents, constitute[d] an error in the servicing of the Borrower’s loan” under the catch-all provision. The NOE asked Ocwen to correct the errors related to the mortgage loan account.
The NOE asserted that Ocwen had: (1) failed to provide Naimoli with the promised permanent loan modification despite Naimoli having accepted the offer; (2) neglected to record the documents it had received over a year earlier; and (3) wrongfully rejected Naimoli’s February 2017 payment.
8. Ocwen responded that it was currently in the process of resolving th[e] title issue and that its denial was valid.
9. Naimoli sued, alleging that the errors Ocwen had committed were errors relating to the servicing of her mortgage loan and were subject to RESPA’s NOE procedures.
In litigation, Ocwen at first prevailed but then lost.
The district court granted summary judgment to Ocwen, holding that the asserted errors challenged the denial of her loan modification, that they did not relate to the servicing of the loan, and that the errors were not “errors” under Regulation X. In the court’s view, Ocwen’s failure to record the documents did not relate to the receipt or making of payments and therefore was not an “error” within the meaning of Regulation X.
The court also found that Ocwen’s refusal to accept Naimoli’s February 2017 payment was not an “error” because Ocwen had already refused to implement the final modification agreement and was no longer obligated to accept her modification payments.
The 2nd Circuit reversed.
It held that the errors listed in Naimoli’s NOE fell within Regulation X’s catch-all provision. The catch-all provision’s references to “any other errors” and “relating to” were sufficiently expansive to cover the errors she asserted.
The 2nd Circuit found the catch-all provision to be unambiguous and to clearly include the kind of errors Naimoli raised. A covered error has occurred when a loan servicer mishandles loan documents in the manner Naimoli alleged.
Digging deeper, note that Regulation X requires loan servicers to respond to
“any written notice from the borrower that asserts an error and that includes…information that enables the servicer to identify the borrower’s mortgage loan account, and the error the borrower believes has occurred.”
The regulation triggers this obligation only if the asserted error is covered by Regulation X, which includes “[a]ny other error relating to the servicing of a borrower’s mortgage loan.”[iii]
Granted, both “any” and “relating to” are broad terms. By way of comparison, the 2nd Circuit noted that the regulation does not limit its catch-all provision to errors “in” the servicing of a loan, which would mean that only errors directly involved with loan servicing would be covered. Instead, the regulation uses the broad term “relating to.” The 2nd Circuit read this to mean that any error with some connection to or pertaining to loan servicing is covered, except where the regulation expressly excludes an error.
Thus, the 2nd Circuit concluded that Naimoli’s NOE “related to” the servicing of her loan, “servicing” being defined by RESPA to mean
“receiving any scheduled periodic payments from a borrower pursuant to the terms of any…loan…and making the payments to the owner of the loan or other third parties of principal and interest and such other payments with respect to the amounts received from the borrower as may be required by the terms of the mortgage servicing loan documents or servicing contract.”
In other words, the catch-all provision covers an error if the error relates to or is connected with either the loan servicer’s receipt of payments from borrowers or the loan servicer’s making of payments to the loan’s owners or third parties.
Also take note that Naimoli’s NOE implicated both of these definitions of servicing:
(A) Her notice related to Ocwen’s receipt of payments from borrowers because Ocwen’s loss of the loan documents made Naimoli ineligible for the loan modification and new interest rate; and
(B) The NOE also related to Ocwen’s making of payments to the loan’s owners or third parties because Ocwen’s failure to record the documents and preserve the priority of the loan on Naimoli’s home jeopardized Ocwen’s ability to make payments to the loan’s owners in the event of foreclosure.
You might assert that Regulation X excludes loss mitigation eligibility determinations. However, the 2nd Circuit went on to say that the fact that Naimoli identified the errors while in pursuit of a loss mitigation option did not impair their connection to the servicing of her loan. Although all the parties agreed that a loan servicer’s failure to properly evaluate a borrower for a loss mitigation option is not a covered error under Regulation X, the fact that Naimoli sought loss mitigation did not mean the errors she identified were unrelated to servicing.
Yes, Regulation X does exclude loss mitigation eligibility determinations but not because loss mitigation is unrelated to loan servicing, but because the CFPB determined that allowing consumers to enforce the loss mitigation standards set by the loan’s owner against a servicer would risk discouraging consumer-friendly loss mitigation standards.
Therefore, the errors Naimoli claimed were correctable without overturning Ocwen’s determination regarding her loss mitigation application. Ocwen could have located and recorded the documents without changing its decision regarding loss mitigation. As a result, the narrow exception to the catch-all provision for challenges to the merits of a servicer’s loss mitigation determination did not apply to Naimoli’s asserted errors.
Finally, the 2nd Circuit rejected Ocwen’s argument that Naimoli had failed to address the issue of damages and therefore abandoned it on appeal. In its view, Naimoli did not need to make an additional showing of damages to survive summary judgment. The record already included evidence of actual damages because Naimoli alleged that Ocwen had not provided any “substantive response” to her NOE and that such a response would include either “correcting the error” or “conducting a reasonable investigation.”
The errors prevented Naimoli from obtaining the loan modification she sought and which would have had an interest rate of 3.5% rather than the 6.25% she was required to pay absent the modification. She also alleged that Ocwen “continues to send reinstatement demands for the Loan,” meaning she would be required to repay the loan without modification.
Chairman & Managing Director
[i] This expansion of QWRs occurred with the RESPA
Servicing Rule by which the CFPB amended Regulation Z in 2013.
[ii] Naimoli v.
Ocwen Loan Servicing, LLC, 2022 U.S. App. (2nd Cir. January 7, 2022)
[iii] Regulation X
§ 1024.35(b)
