Mortgage Services “Error Notice” – Does the Tote Catch All? – Finance and banking
Mortgage managers have a wide range of responsibilities. However, does everything repairers do constitute “service”? Or do repairers do things that aren’t “service”?
The response is important because the Property Settlement Procedures Act and its Regulation X impose strict obligations on managers to respond to certain borrower communications related to “easement,” but not non-easement. Courts, including two recent federal appeals courts, are drawing fine lines between the two.
RESPA requires a mortgage servicer to respond in a timely manner to a borrower’s request to correct errors relating to “the allocation of payments, ending balances for the purpose of repaying the loan or avoiding foreclosure, or other standard manager tasks”. Section 1024.35 of Regulation X specifies that an administrator must acknowledge, investigate, and respond to a borrower’s “error notice” within strict time limits, so long as the notice is in writing and provides sufficient information for the administrator can identify the account and the insured. Error. In addition, after receiving a notice of error, a repairer is prohibited for 60 days from providing adverse information to a consumer reporting agency regarding any payment that is the subject of the notice.
Section 1024.35 then provides a list of covered errors that are subject to these requirements. The list includes errors that might occur in typical service activities – errors related to accepting, applying, or crediting borrower payments; and pay amounts for taxes, insurance premiums or other costs. The list of errors covered also includes those that could arise during default processing – errors related to providing information regarding loss mitigation options, writing foreclosure notices or filings, requesting foreclosure judgments or sale orders, or the completion of foreclosure sales.
Then the Consumer Financial Protection Bureau (“CFPB”) included a catch-all provision in Section 1024.35, so that a covered error includes “any other error related to the servicing of a borrower’s mortgage.”
Courts have been considering the extent of these responsibilities since even before the CFPB published this list in 2013. Recently, two circuit appeals courts have ruled that certain repairer activities do not constitute “services,” particularly when loan modifications are involved.
In a recent case, the Court of Appeals for the Second Circuit considered errors the borrower asserted related to the request for a permanent loan modification. The repairer had rejected the borrower’s request due to title issues related to the failure to register the mortgage documents. (The borrower also claimed that the repairman lost certain documents and wrongly rejected a payment.) The lower court held that the error was not related to the service, but rather to the repairman’s decision to refuse him a payment. loan modification, and as such was not a covered error. The court explained that the alleged error (a failure to record) was unrelated to the receipt or execution of payments and therefore did not constitute “service”. The court also pointed to the discussion of the preamble in the CFPB’s 2013 regulations, explaining that the agency declined to include a repairer’s assessment of loss mitigation options in its list of covered errors.
However, in January, the Second Circuit overturned that decision, ruling that the catch-all provision — covering any other service-related errors — is broad enough to cover errors alleged by the borrower. The Second Circuit had requested an interpretation from the CFPB, which asserted its belief that the alleged error related to the underlying mismanagement of the mortgage documents. Consistent with this interpretation (discussed below), the court held that the mishandling of the loan documents constituted a “service” error, as such mishandling affected the borrower’s eligibility for modified payments, and the receipt payments constituted a “service”.
In February, the Fourth Circuit Court of Appeals considered somewhat similar facts but went the other way. In this case, the servicer had denied a borrower’s request for a loan modification due to certain title issues. The Fourth Circuit looked into a Ninth Circuit case that predated the 2013 CFPB catch-all provision, finding challenges to loan terms are not service-related. The Fourth Circuit ruled that the only mistake the borrower disputed was the service officer’s decision on a loan modification request — which relates to the terms of the loan, the court said, not the ‘service’ .
Although these two courts (and some others) seem to agree that failure to properly assess a borrower for a loss mitigation option is do not a mistake covered, they obviously came to opposite conclusions as to the scope of the catch-all provision. However, Regulation X provides that certain activities beyond simply accepting and making payments are related to the “service” and are therefore covered. For example, as mentioned above, a covered error expressly includes a repairer’s failure to provide accurate information regarding loss mitigation options. Difficult line-drawing exercises will then continue to plague repairers, who face forbearance expirations and slew of unique loss-mitigation circumstances, in addition to their duties of receiving and executing payments.
It should be noted that the CFPB, in its interpretation requested by the Second Circuit, stated that “in determining that a director’s failure to properly assess a borrower for a loss mitigation option was not a error under section 1024.35, the Bureau did not conclude that errors relating to loss mitigation were generally excluded from the scope of § 1024.35. 2016 that “even in the absence of appeal rights under § 1024.41(h), borrowers may still submit a notice of error under § 1024.35 relating to the loss mitigation or foreclosure process and servicing the loan, and repairers must comply with the applicable provisions of § 1024.35 regarding such notices of error.” The CFPB stated that in practice, “a large portion of assertions of error relate to loss mitigation” and that “the Bureau has not s categorically excluded claims related to loss mitigation from the error resolution procedures of § 1024.35, nor drew a clear line between ‘maintenance’ on the one hand and ‘loss mitigation’ on the other.” It seems so that although the CFPB declined to include a repairer’s assessment of loss mitigation options in its codified list of covered errors, the agency now asserts broad scope for its catch-all provision.
The CFPB’s interpretation appears to go beyond the findings of some courts. Although a full review of the relevant case law is beyond the scope of this article, one court has held that a notice of error cannot be used simply to assert that the administrator has failed to respond to a request for borrower information. Although Section 1024.36 of Regulation X requires repairers to respond to covered “requests for information”, the court pointed out that failure to do so is not listed as a covered error, nor does it fall within the catch-all provision as “related to repair”. .” Other courts have dissected a borrower’s communication to determine how much it relates to management as opposed to non-management activities. One court said that a passing reference to service issues, among issues unrelated to service, is insufficient to turn a communication into a “notice of error.” Another court reviewed a borrower’s lengthy communication and found that while it was possible that one or more of the Borrower’s inquiries related to service practices, the court could not reasonably conclude that the letter requested information related to the lender’s “service”.
With varying conclusions about what constitutes “repair” errors covered by the strict “error notification” requirements of Regulation X, it can be difficult for repairers to manage compliance. What’s at stake if a service agent fails to comply with strict “error notification” requirements for a borrower’s covered communication? Enforcement is obviously a possibility. In addition, RESPA provides the borrower with the right to bring an action against the repairer (including class action), although the borrower must demonstrate actual damages, or a pattern or practice of noncompliance, for to succeed.
Of course, Regulation X imposes other requirements on repairers in addition to strict “error notification” obligations. Service agents should have policies and procedures to ensure that they can (among other things) provide accurate and timely information in response to borrower inquiries, and that they can investigate, respond to, and make appropriate corrections responding to borrower complaints (including oral inquiries and complaints). In addition, the policies and procedures must ensure that they can identify the documents and information required for a complete loss mitigation request and that they can properly assess a request for all eligible loss mitigation options. Regulation X also imposes strict loss mitigation procedures on repairers. However, as some courts have held, the extent to which “notice of error” obligations apply to these loss mitigation procedures could be the subject of fine elaboration.
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This article by Mayer Brown provides information and commentary on interesting legal issues and developments. The foregoing is not a complete treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action regarding the matters discussed here.