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Loan Servicers’ Obligation to Maintain Appropriate Database Systems

The background to the Eleventh Circuit’s decision in Marchisio v. Carrington Mortgage Services, LLC, — F. 3d — (11th Cir. March 25, 2019)(2019 WL 1320522) demonstrated repeated recklessness by a lender in updating its reporting databases after repeated litigation and settlements.

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The borrowers defaulted on their home loans in 2008; the loan servicer brought a foreclosure action; in 2009, the parties settled with a deed in lieu of foreclosure that extinguished first and second loans and required the loan servicer to report to the credit reporting agencies that nothing more was due on the loans. The loan servicer failed to correct the credit reporting and continued to try to collect on the nonexistent debt, prompting the borrowers/Plaintiffs in 2012 to file a lawsuit under the Fair Credit Reporting Act. The parties settled the FCRA suit in 2013, with the loan servicer/Defendant agreeing to correct the credit reporting. The loan servicer failed to timely comply with this correction requirement within 90 days and issued three erroneous reports that the second loan was delinquent.

The Plaintiffs then disputed with the credit reporting agencies the reporting of a balloon payment due on the second loan. In response, the loan servicer investigated the dispute. However, because the loan servicer had not updated its database to reflect the settlements, it erroneously verified to the credit reporting agencies that the Plaintiffs were delinquent, and then in 2014 charged them for lender-placed insurance on the property, which the Plaintiffs no longer owned. This led in 2014 to the second lawsuit with the FCRA claim that the 11th Circuit addressed. This lawsuit “caught Defendant’s attention” and immediately prompted it to update its database, correct its previous errors and accurately report the status of Plaintiffs’ second loan, finally.

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New Mortgage Servicing Rules for “Successors in Interest”

Effective as of April 19, 2018, successors in interest to property secured by mortgage loans that are covered by the Real Estate Settlement Procedures Act (“RESPA”) and Truth In Lending Act (“TILA”) now have certain rights under those acts.

These amendments are part of the Consumer Financial Protection Bureau’s 2016 Mortgage Servicing Rule amendments to RESPA and TILA.  The CFPB issued the new rules because “it had received reports of servicers either refusing to speak to a successor in interest or demanding documents to prove the successor in interest’s claim to the property that either did not exist or were not reasonably available.”  81 Fed. Reg. 72,160 at 72,165. The rules are therefore designed to make it easier for potential successors in interest to communicate with servicers and establish that they are successors in interest.

At the outset, the new rules define a “successor in interest” as anyone who obtains an ownership interest in a property secured by a mortgage loan, provided that the transfer occurs under one of the scenarios listed in the new rule.  The scenarios range from a transfer resulting from the death of the borrower to a transfer from the borrower to a spouse or child.  The person does not have to assume the loan in order to be a successor in interest.

The amendments create several potential pitfalls for servicers because certain obligations are triggered when a servicer receives actual or inquiry notice that someone might be a successor in interest.  As discussed below, the amendments require servicers to “promptly” communicate with anyone who may be a successor in interest.  Servicers must also only request documents “reasonably” required to confirm whether that person is in fact a successor in interest.  And a “confirmed” successor in interest now has the same rights as the original borrower under RESPA and TILA mortgage servicing rules.

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3 Takeaways (a Litigator’s Perspective) from CFPB Supervisory Highlights

The CFPB recently issued its newest edition of Supervisory Highlights Mortgage Serving Special Edition, Issue 11 (June 2016).

From a litigator’s perspective, the Supervisory Highlights do more than summarize recent supervisory findings, they also shine a light on future examination and putative class action risks that are emerging. The CFPB is providing key insights into what it believes should be industry standards. Banks and mortgage servicers should read carefully both the specific findings summarized and slightly more subtle clues to evolving future CFPB requirements.  Here are three takeaways on the Highlights from a financial services class action litigator’s perspective:

  1. ECOA & Special Servicing Populations Continue to be a Strong CFPB focus.

In section 2, “Our approach to mortgage servicing examinations,” the CFPB uses a fair amount of real estate to highlight ECOA requirements. In fact, the report states clearly “…Supervision will be conducting more comprehensive ECOA Targeted Reviews of mortgage servicers in 2016.” (See Supervisory Highlights, p.5).  The report specifically indicates that the ECOA Baseline Modules in the CFPB Supervision and Examination Manual will be a tool used by CFPB examination teams. Banks and servicers would do well, if you are not already, to consider the modules and how your data may be viewed. The CFPB specifically flags Module IV fair lending risks related to servicing including staff training, monitoring and “servicing those customers with Limited English Proficiency.” (See Supervisory Highlights, p.5, and ECOA Examination Modules). Among the module’s areas of inquiry are: whether personnel who are available for limited English speaking customers receive the same training and have the same authority as do other personnel, and the level(s) of discretion that servicing personnel may have in making loss mitigation decisions and referrals for customers with limited English (including controls to monitor such discretion usage).  The Highlights appear to signal that the CFPB will increase focus on these areas in the coming months. Banks and servicers may wish to re-evaluate their progress and operations capabilities in these areas. As always, the plaintiff’s consumer bar may be watching CFPB pronouncements and enforcement, and may initiate consumer class action(s) asserting such claims.

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CFPB Clarifies Mortgage Servicing Rules

In January of 2013, the Consumer Financial Protection Bureau (“CFPB”) issued the new Mortgage Servicing Rules (the “Rules”), which go into effect on January 10, 2014.  The Rules establish extensive protections for borrowers, particularly delinquent borrowers who are facing foreclosure.

On October 15, 2013, the CFPB issued new guidance on the Rules in order to resolve certain issues of interpretation regarding servicer communications with borrowers.  The bulletin (CFPB Bulletin 2013-12) and interim final rule issued on October 15, 2013 clarify three main issues: (1) how mortgage servicers should communicate with family members of a deceased borrower; (2) how mortgage servicers should contact delinquent borrowers under the Early Intervention Rule; and (3) how certain provisions of the Rules interact with the “cease communications” requirement of the Fair Debt Collection Practices Act.

1. Communications with Family Members of a Deceased Borrower

The Rules require mortgage servicers to implement policies and procedures for identifying and communicating with the successor in interest of a deceased borrower regarding the property securing the deceased’s mortgage loan.  (See 12 CFR 1024.38(b)(1)(vi)).  The CFPB designed the successor in interest requirement in response to consumer complaints that servicers were refusing to speak with successors or were requesting documents that may not exist from a deceased borrower’s successor, thus potentially preventing successors from assuming the loan or pursuing a loan modification.  The CFPB’s guidance is intended to help servicers implement the policies and promote home retention by the successors in interest.

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CFPB Finalizes Amendments To New Mortgage Servicing Rules

On September 13, 2013, the Consumer Financial Protection Bureau (“CFPB”) issued final amendments and clarifications to its mortgage servicing regulations, which go into affect January 10, 2014.  These rules were initially issued in January 2013 and have been amended based on comments received during the implementation period.  The rules relating to loss mitigation procedures are set out in Regulation X of the Real Estate Settlement Procedures Act.  (12 CFR § 1024.41.)  Among the important loss mitigation rules that go into effect on January 10, 2014:

I.    Rules Affecting Foreclosures.

  • Servicers may no longer begin a foreclosure until the borrower is more than 120 days delinquent.  In some states it is not uncommon for foreclosures to begin when borrowers are delinquent by as a little as 60 days.  It is therefore important that servicers take note of this new restriction.  Servicers must delay first legal action until the borrower is at least 121 days delinquent, unless the foreclosure is based on a due-on-sale clause or the servicer is joining the foreclosure action of a subordinate lienholder.
  • Servicers may not begin a foreclosure while considering a pending “Complete Loss Mitigation Application.”  Foreclosures may not begin until the servicer has sent the borrower written notice denying the application, and either (1) any borrower appeal has been concluded; (2) the borrower has rejected all offered loss mitigation options; or (3) the borrower has failed to perform under a loss mitigation agreement.  Facially complete applications must be treated as complete until the borrower has had a reasonable opportunity to respond after being notified that additional information is required.
  • Where first legal action has already occurred, servicers may not conduct the sale or move for an order of sale if a Complete Loss Mitigation Application is received more than 37 days before the sale.  In nonjudicial states where foreclosure sales are typically scheduled with less than 37 days notice, this rule may have little effect.
  • Servicers need only comply with these requirements for a single Complete Loss Mitigation Application.  However, if servicing is transferred to a new servicer, the transferee servicer must still comply regardless of whether the borrower received an evaluation of a complete loss mitigation application from the previous servicer.
  • Small servicers, though exempt from many requirements, remain subject to certain rules.  These include the prohibitions on starting a foreclosure where the borrowers is less than 121 days delinquent and where the borrower is performing under a loss mitigation agreement.
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Financial Services Update – April 15, 2011

Shutdown Averted, House Passes Budget, Debt Ceiling Vote Next

Last Friday night, Senator Harry Reid (D-NV), Speaker John Boehner (R-OH), and President Obama came to an agreement to fund the federal government for the remainder of the fiscal year, averting a possible shutdown.  On Thursday, the House passed the legislation by a bipartisan vote of 260-167.  59 Republicans voted against the bill, and 81 Democrats voted for it.  Hours later, the Senate acted with far less suspense but again on a bipartisan 81-19 roll call.  With over six months of the current fiscal year already completed, the funding bill reduces the spending level by nearly $38 billion below what it was when the new Congress began in January, making it the largest one-year cut from the President’s budget request in the nation’s history.

This Friday, the House approved a fiscal year 2012 budget resolution drafted by Budget Committee Chairman Paul Ryan (R-WI), which imposes $5.8 trillion in spending cuts over the next decade.  The final tally was 235-193, with four Republicans and every Democrat opposing it.  The GOP resolution will not be approved by the Senate, and budget resolutions do not go to the president or hold the force of law.  However, Ryan has said that the GOP will deem his budget as the ceiling for spending for 2012.  For this reason, the most important aspect of the resolution is the allocation it gives to the Appropriations Committee for next year: $1.019 trillion in non-emergency spending.  This number will play a big role in a looming spending fight in the fall.  If Republicans and Democrats cannot agree on appropriations spending by September 30, the end of the current fiscal year, the government will shutdown. 

Congress will now turn to the issue of raising the so-called “debt ceiling,” or the statutory limit on federal debt.  The U.S. government had $14.216 trillion in total debt outstanding as of Monday, and the cap is $14.294 trillion.  The U.S. Treasury Department released a statement saying the ceiling is projected to be breached in the next 30 days, although it could make adjustments to postpone default until early July.  On Thursday, Majority Leader Harry Reid (D-NV) said he wants a clean vote to raise the debt ceiling, but Republicans have insisted they want the vote paired with other budget reform measures.

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