There’s an App for That: Processing Applications for Loss-Mitigation Assistance in Bankruptcy under Regulation X and District-Specific Loss-Mitigation Programs

In the wake of the financial crisis of 2008, many homeowners found themselves in dire straits with respect to their residential mortgage loans, and some sought protection in bankruptcy. Even with the ability to cure mortgage payment defaults within a reasonable time,[1] some debtors still lacked the financial ability to maintain their non-modifiable mortgage payments[2] while also making the other payments required under the Bankruptcy Code. In response, bankruptcy courts in numerous jurisdictions have implemented loss-mitigation procedures in an attempt to bring debtors and mortgage creditors to the negotiating table. In essence, while the courts cannot in most instances require a mortgage creditor to modify loan terms, they can require good-faith negotiations regarding potential loss-mitigation options. Likewise, the Consumer Financial Protection Bureau (CFPB) has implemented rules requiring mortgage creditors to promptly process requests for loss-mitigation assistance, regardless of bankruptcy status. Mortgage creditors must carefully navigate these parallel loss-mitigation requirements.

CFPB Servicing Rules

On Jan. 17, 2013, the CFPB released a comprehensive set of mortgage-servicing regulations (the “Final Servicing Rules”)[3] through amendments to Regulation X,[4] which implements the Real Estate Settlement Procedures Act of 1974 (RESPA), and amendments to Regulation Z,[5] which implements the Truth in Lending Act (TILA). Although the CFPB continued to issue clarifications and revisions throughout 2013, the regulations became effective on Jan. 10, 2014, and have remained unchanged since that date.[6]

Many of the CFPB’s amendments were required by the Dodd-Frank Wall Street Reform and Consumer Protection Act to implement the mortgage-servicing requirements that were added to RESPA and TILA. Other parts of the Final Servicing Rules were discretionary and based on provisions of RESPA that authorize the CFPB to prescribe rules that advance the consumer-protection purposes of RESPA,[7] such as default servicing. With respect to default servicing, the CFPB enacted early intervention,[8] continuity of contact[9] and loss-mitigation requirements that apply once a borrower first becomes delinquent on a mortgage loan.

The CFPB’s Final Servicing Rules take an expansive approach toward loss mitigation. The CFPB broadly defines a “loss mitigation option” as any alternative to foreclosure that a servicer can offer on behalf of the owner or assignee of the loan, which may include refinancing, trial or permanent modifications, repayment of the amount owed over an extended period of time, forbearance, short sale and deed-in-lieu.[10] Any time a borrower verbally, or in writing, requests an alternative to foreclosure and provides any information that the servicer could evaluate, the servicer is considered to have received a loss-mitigation application.[11]

Upon receipt of an application, a servicer must promptly evaluate the documents and information provided by the borrower and, within five business days, send the borrower an acknowledgment letter stating whether the borrower’s application is complete or incomplete.[12] If the application is determined to be incomplete, the acknowledgment letter must contain, among other things, the information and/or documents needed to complete the application and a reasonable date by which the borrower should submit what is missing.[13]

If a complete application is received more than 37 days before a scheduled foreclosure sale, or when no sale is scheduled, the servicer must, within 30 days, evaluate the application for all loss-mitigation options that are available to that borrower and send a written notice stating its determination of which options, if any, it is able to offer.[14] The determination notice must also contain a deadline for accepting or rejecting any offered options, which generally must be either seven or 14 days, and specific reasons for the denial of any loan-modification options.[15] If the application was made complete 90 days or more before a scheduled foreclosure sale, or if no sale was scheduled at that time, the servicer must give the borrower at least 14 days to appeal the denial of any loan-modification options.[16] If the borrower does appeal, the servicer must have different personnel re-evaluate the loss-mitigation application.[17] Within 30 days of the borrower’s appeal, the servicer must complete the re-evaluation and provide the borrower notice of its new determination.[18]

The Final Servicing Rules regarding loss mitigation generally apply to any “mortgage loan that is secured by a property that is a borrower’s principal residence”[19] and do not contain a bankruptcy exception. However, “[a] servicer is only required to comply with the requirements of this section for a single complete loss mitigation application for a borrower’s mortgage loan account.”[20]

Bankruptcy Loss-Mitigation Programs

While Regulation X provides uniform rules related to the processing of loss-mitigation applications, servicers face unique compliance challenges when the borrower is in bankruptcy. Among the nearly 100 bankruptcy courts across the country, approximately 20 courts or individual bankruptcy judges have adopted local rules, entered administrative orders or published formal guidelines permitting debtors and creditors to engage in loss-mitigation negotiations under court supervision.

The bankruptcy loss-mitigation programs share some common traits. Without limitation, the bankruptcy court generally will enter an order setting deadlines and establishing certain ground rules for the loss-mitigation process. Likewise, the servicer is typically required to provide the debtor with a list of all documents and information required to evaluate loss-mitigation options and to designate a single point of contact with settlement authority. Moreover, the automatic stay will typically remain in place while the loss-mitigation action is pending, although the servicer may request termination of the loss-mitigation process and relief from stay for cause. Finally, most programs require the parties to act in good faith when applying for and evaluating loss-mitigation options.

Despite these common traits, many variations exist. For example, some programs permit – and others require – use of an electronic portal for all communications related to the loss-mitigation process. Likewise, while some courts do not contemplate use of a meditator, other districts permit it, and still others require it. Some courts permit telephonic or video participation in negotiating sessions, while others do not. Some, but not all, courts require the debtor to make adequate-protection payments during the loss-mitigation process. Perhaps most importantly, at least one judge requires compliance with his loss-mitigation procedures with respect to any proposed loan modification,[21] while most courts are silent on whether the parties must utilize the court’s published procedures when exploring loss-mitigation options.

What remains nearly universal among the court’s programs is a lack of recognition that Regulation X imposes its own set of timelines and communication requirements with respect to the processing of loss-mitigation applications.[22] Accordingly, mortgage creditors must attempt to comply with sometimes-divergent requirements in a manner that consistently meets the most restrictive requirements. Mortgage creditors may, for example, communicate with borrowers in bankruptcy using Regulation X-compliant correspondence, but might also need to utilize additional scripting to facilitate court-mandated use of a portal. Similarly, a servicer may be required to give a borrower more time to submit required documents or accept a loss-mitigation offer than is required under Regulation X because of court-directed deadlines. In any event, mortgage creditors should – to the extent they have not already done so – design and implement policies and procedures to ensure that they properly handle loss-mitigation applications in bankruptcy.