REQUIRED READING: Loan servicers will now face more scrutiny in their efforts to assist distressed North Carolina borrowers. In November 2009, North Carolina's Office of the Commissioner of Banks (OCOB) – acting pursuant to rule-making authority under the recently adopted North Carolina Secure and Fair Enforcement (SAFE) Mortgage Licensing Act – proposed two new rules to regulate the loss mitigation activities of mortgage servicers.
The banking commission approved these rules this past spring. These rules are expressly inapplicable to banks organized under federal law or servicers that are wholly owned subsidiaries of federally organized banks.
Effective June 1, 2010, servicers must follow strict guidelines for communicating loss mitigation results to borrowers and must cease foreclosure while evaluating loss mitigation options. The rules were enacted in response to a perceived abuse in which servicers pursue loss mitigation alternatives simultaneously with foreclosure.
Servicers will unquestionably face an adjustment period, but they may ultimately benefit, because the new procedure will provide proof that foreclosure cannot be avoided in many cases. It also remains to be seen just how many loans will be affected by North Carolina's rules, given that the U.S. Treasury Department's Supplemental Directive 10-02 requires a formal denial under the Home Affordable Modification Program (HAMP) before the servicer starts foreclosure.
OCOB Rule 702, or the "communication rule," specifies how servicers must respond to a borrower's request for assistance to avoid foreclosure. Rule 702 is triggered when a borrower contacts the servicer's loss mitigation department in writing or by calling the loss mitigation telephone number provided to the borrower on North Carolina's 45-day pre-foreclosure notice. Once the borrower requests assistance, the servicer must acknowledge the request in writing within 10 business days.
This acknowledgement will be a letter either outlining all information the borrower must provide for the servicer to evaluate the request or, if appropriate, confirming receipt of the borrower's package and informing the borrower of any additional information required. The regulation is silent on how long the borrower has to provide the required information before the request is denied.
Similarly, if the financial package is incomplete, servicers must make the borrowers aware of the information that is missing and give them time to provide it before issuing a final denial. Servicers are left to determine their own guidelines on how long borrowers will have to supply the original and any supplemental information.
Once borrowers have provided all of the information, servicers will have 30 business days to respond to the request and provide a final denial to the borrowers if they do not qualify for a loss mitigation program. If the investor will not be able to comply within 30 business days, servicers should send the borrowers a letter advising them that their request is being reviewed by the investor.
For those borrowers who are ultimately denied, the final denial must include contact information that the borrower can use to seek reconsideration of the denial, as well as a statutory statement informing the borrower that if she believes she has been wrongly denied, she may file a complaint with the OCOB.
The upside is that after servicers and their loss mitigation representatives become accustomed to these rules, they will be able to offer definitive answers to the courts, which are increasingly delving into the loss mitigation process when borrowers contest foreclosure proceedings.
The Consumer Economic Protection Act of 2009 gave North Carolina courts express authority to continue foreclosure hearings for loss mitigation upon a borrower's motion. Courts may be less inclined to grant the motion for an extended period when it can be shown that the borrowers have not complied with information requests or have previously been denied.
OCOB Rule 703, the so-called "cessation rule," prohibits servicers from initiating or continuing a foreclosure while evaluating a loss mitigation request. If the loan has already been referred to foreclosure, the servicer may not recover any charge for postponing a foreclosure hearing or sale. The servicer may, however, continue to recover other default charges, such as fees for broker price opinions or property preservation. The servicer may only initiate or resume a foreclosure after it has issued a final denial.
The cessation rule recognizes that there are instances where it is futile to cease the foreclosure when reviewing borrowers' requests. For instance, the rule does not apply when borrowers have been afforded ample opportunity to perform under their obligations, when borrowers request assistance too late in the process or when borrowers simply cannot afford their homes.
Although the communication rule applies to every request for loss mitigation, the cessation rule only applies to borrowers who request loss mitigation in a timely manner and have not been previously denied or failed a sustainable plan. Foreclosure may proceed, pending a loss mitigation request when any of the following occurs:
- a borrower has failed a "sustainable" loss mitigation plan within the past 12 months;
- a borrower's bankruptcy has been dismissed or the servicer has obtained relief from the bankruptcy stay within the past 12 months;
- a borrower has been denied for loss mitigation within the past 12 months and the servicer believes the current request is not in "good faith";
- the request for assistance comes after the time to appeal the foreclosure order (i.e., 10 days after the foreclosure hearing) has expired; or
- delaying the foreclosure would violate the terms of the servicing contract, so long as the contract was entered into before Oct. 1, 2009.
The cessation rule defines a "sustainable" loss mitigation plan as one offered under the terms of HAMP, another government-sponsored program or a plan that reduced the monthly payment by at least 6% and resulted in a monthly debt-to-income ratio of no more than 31%. Similarly, if a borrower defaults in a bankruptcy plan, the cessation rule would not stop her foreclosure if she made a loss mitigation request after the servicer obtained relief from stay.
The cessation rule also does not protect against serial requests from borrowers who have been previously denied for loss mitigation. A borrower's request is considered to be in "bad faith" when the borrower cannot demonstrate improved financial circumstances that have occurred since the last denial. Although the natural tendency may be to ignore multiple requests from the same borrower, servicers should carefully evaluate serial requests to see whether the borrowers have improved financial circumstances that might now qualify them for a workout plan.
Servicers must still comply with the communication rule, even when borrowers cannot show improved circumstances; however, foreclosures need not be delayed. When dealing with serial requests, servicers may want to alert their foreclosure counsel so they can be proactive in minimizing delays resulting from abusive tactics.
The timing of borrowers' requests for assistance also plays into whether the cessation rule applies. Although North Carolina is considered a nonjudicial state, a hearing must be held before the clerk of court to authorize foreclosure. If the clerk enters an order, borrowers have 10 days to appeal that order after the hearing is complete. If a request is made after that appeal period has expired, servicers are not required to cancel or postpone the foreclosure sale. Therefore, effective communication between loss mitigation and foreclosure departments will be key to ensuring files are not placed on hold when the cessation rule does not apply.
Finally, servicers do not have to abide by the cessation rule if delaying the foreclosure will violate the terms of any servicing contract entered into on or before Oct. 1, 2009. Servicers should review their pooling and servicing agreements (PSAs) to determine if compliance with the cessation rule will violate agreements with its investors. If the PSA imposes strict deadlines for foreclosures, servicers may not have to delay foreclosure to comply with the cessation rule.
Overall, the new regulations are a reaction to the perception that servicers are non-responsive to loss mitigation requests and are completing foreclosure sales even though the borrower would have qualified for a modification. Regardless of whether the perception is valid, servicers will be forced to modify their long-standing procedures of considering loss mitigation while pursuing foreclosures.
Unfortunately, servicers and investors have already become accustomed to delays in North Carolina foreclosures, given the Legislature's approval of loss mitigation continuances. The silver lining is that servicers may benefit from the new rules, because counsel will now be able to produce appropriate documentation when a borrower moves for a loss mitigation continuance or engages in litigation challenging the servicer's loss mitigation practices.
Jeffrey Bunda is a resolution associate with Charlotte-based Shapiro & Ingle LLP. The firm provides legal representation in foreclosure, bankruptcy, collections, REO and mortgage-related litigation in both state and federal courts. Bunda can be reached at (704) 831-2320 or firstname.lastname@example.org.