Recent Changes to RESPA Regulations

By Michael Sugar

Recently the Consumer Financial Protection Bureau (“CFPB”) promulgated new regulations (the “Regulations”) which modify Regulation X of the Real Estate Settlement Procedures Act (“RESPA”).  The Regulations go into effect on January 10, 2014 and they affect many entities that service (the “Servicers”) loans secured by residential real property.  Most of the Regulations do not preempt more stringent state regulations and statutes and the Regulations are not meant to reduce the obligations owed by parties to certain mortgage settlements.  The Regulations contained in 12 C.F.R. §§1024.38-41—which address loss mitigation, internal servicer procedures and continuity of contact with borrowers—do not apply to reverse mortgages or Servicers which are also qualified lenders under the Farm Credit Act of 1971.  Many of those Regulations do not apply to Servicers that service fewer than 5,000 loans for which the Servicer or an affiliate is the creditor or assignee.  12 C.F.R. §1024.30(b).  Generally the Regulations do not apply to home equity lines of credit secured by a borrower’s residence.  Some important aspects of Regulations are described below.[1]       

A.    Continuity of Contact and Loss Mitigation Procedures

The Regulations also provide protections for a borrower’s principal residence.  In cases where a borrower falls behind on payments on his principal residence, Servicers must contact the borrower within thirty-six days with information about loss mitigation options and provide a letter outlining loss mitigation options within forty-five days and provide the borrower with a point of contact.  12 C.F.R. §1024.39(a)-(b).  The Regulations contain strict rules outlining what must be included in the written notice.  Id.  Additionally, Servicers must develop and maintain policies and procedures that allow a borrower to contact the Servicer by telephone and receive a timely and accurate response regarding loss mitigation options, the status of any loss mitigation applications and other pertinent information about the loan and loss mitigation deadlines and requirements.  12 C.F.R. §1024.40 (a)-(b).

The Regulations also restrict a Servicer’s ability to “dual track” borrowers in default when the loan is secured by the borrower’s principal residence.  Dual tracking occurs when a lender continues to pursue a foreclosure while considering a borrower’s loss mitigation application.  Servicers are prohibited from making the first foreclosure recording until the borrower is at least one hundred and twenty days past due.  12 C.F.R. §1024.41 (f).  If the borrower submits a loan modification request prior to the first notice being recorded, the Servicer cannot record a notice until it renders a final decision, not subject to appeal, indicating that the borrower does not qualify for any loss mitigation options, the borrower rejects all loss mitigation options or the borrower defaults during a trial period.  12 C.F.R. §1024.41 (f)(2).  If the borrower submits its loan modification request more than thirty-seven days before the scheduled foreclosure sale, the foreclosure sale may not go forward until one of the aforementioned criteria is satisfied.  12 C.F.R. §1024.41 (g). 

The Regulations also contain detailed requirements on how Servicers must consider borrowers for loss mitigation options.  If a Servicer receives a complete or incomplete loss mitigation application forty-five or more days before a foreclosure sale, the Servicer must review the application for completeness and, within five business days, inform the borrower about whether the application is complete and what information is necessary to complete the application.  12 C.F.R. §1024.41 (b).  If a complete application is received more than thirty-seven days before a foreclosure sale, the Servicer must evaluate the borrower for all applicable loss mitigation options.  12 C.F.R. §1024.41 (b). 

If a Servicer receives a complete application ninety or more days before a foreclosure sale, the borrower can appeal the denial of any permanent or trial loss mitigation plan.  12 C.F.R. §1024.41 (h). The appeal must be requested within fourteen days of the Servicer’s decision, and the Servicer must have independent personnel evaluate the appeal and render a determination within thirty days of the appeal. 12 C.F.R. §1024.41 (h)(2)-(4). 

Small Servicers are only required to not make a first notice or filing before a mortgage obligation has become at least 120 days delinquent and small servicers cannot foreclose on borrowers that are performing pursuant to a workout plan.  12 C.F.R. §1024.41 (j). 

Borrowers have a private right of action to enforce compliance with the requirements of 12 C.F.R. §1024.41. 

B.     Restrictions on the Use of Force Placed Insurance

Force-placed insurance is insurance that a Servicer places on a property when the owner has not adequately insured the property against potential harm.  Force-placed insurance can be a significant point of contention between Servicers and borrowers because the insurance is expensive and it often provides little to no protection for the homeowner’s interest in the property.  The Regulations require that Servicers continue to pay the premiums on the borrower’s insurance policy if the borrower sets up an escrow account to pay insurance premiums unless the house is vacant or the insurance policy has been cancelled for reasons other than non- payment.  12 C.F.R. §1024.17(k)(5).  A Servicer may be required to advance funds to pay the insurance policy even if inadequate funds remain in the escrow account.  Id.  Small Servicers may purchase force-placed insurance if the cost of the force-placed insurance is less than the amounts that the small Servicer would have to advance to maintain the existing policy.  12 C.F.R. §1024.17(k)(5)(iii).

When Servicers believe that a property is no longer adequately insured, they must contact the borrower, by letter, at least forty five days prior to purchasing the force-placed insurance.  12 C.F.R. §1024.37(c)(1)(i).  The letter must describe force-placed insurance and warn the borrowers about the costs of force-placed insurance.  12 C.F.R. §1024.37(c)(2).  The Servicer must follow-up with another letter at least fifteen days prior to the force-placed insurance being put into place.  12 C.F.R. §1024.37(d)(1).  The Regulations contain very specific directions on what information must be included in these notices.  When the borrower actually obtains new insurance, the force-placed insurance must be lifted within fifteen days of the borrower demonstrating the existence of hazard insurance.  12 C.F.R. §1024.37(g)(1).  The Servicer must also refund any fees collected for force-placed insurance during the overlap period.  12 C.F.R. §1024.37(g)(2).

C.    Transfers of Mortgage Servicing Obligations

In cases where the Servicer transfers the servicing of a mortgage note to a new, non-affiliated Servicer, the old Servicer must provide the borrower notice of the change at least fifteen days prior to the servicing transfer becoming effective.  12 C.F.R. §1024.33 (b).  If the old Servicer is subject to a bankruptcy proceeding, FDIC receivership proceeding, or the servicing contract is terminated for cause, notice may be provided up to 30 days after the servicing transfer becomes effective.  12 C.F.R. §1024.33 (b)(3)(ii).  The Regulations describe the contents of the notice.  This portion of the Regulations preempts contradictory state statutes and regulations.  12 C.F.R. §1024.33 (d). 

D.    Error Resolution Procedures and Information Requests

The Regulations require that a Servicer respond to a borrower’s written notice of error by correcting the error or conducting a reasonable investigation and by sending the borrower a written determination that no error has occurred.  12 C.F.R. §1024.35(e).  The Regulations enumerate the list of potential errors, which include the failure to provide accurate information regarding loss mitigation, failure to accurately transfer to borrower’s mortgage loan account to a transferee servicer, imposition of an incorrect charge, failure to credit payments, refund escrow account, and improperly moving to foreclose or other errors.  12 C.F.R. §1024.35(b).  The Servicer must substantively respond to a notice of error within seven to thirty business days, depending on alleged error, however, there is a possibility of a fifteen business day extension. 12 C.F.R. §1024.35(e)(2).  If an error is related to the foreclosure of the property and asserted more than seven days prior to the foreclosure, the servicer must respond prior to the foreclosure sale.  Id.  A Servicer does not need to substantively respond to a notice of error that is untimely, overbroad or duplicative.  12 C.F.R. §1024.35(g).

The Regulations require that a Servicer acknowledge a borrower’s written request for information within five days of the request being received.  12 C.F.R. §1024.36(c).  A Servicer must conduct a reasonable investigation of the information request and respond within ten to thirty business days after the request is received, depending on the information requested. 12 C.F.R. §1024.36(d).  A Servicer does not need to substantively respond to requests for confidential information or requests for duplicative, irrelevant or untimely requests, or requests that are overbroad or unduly burdensome.  12 C.F.R. §1024.36(f)(1).  A request is untimely if the request is submitted more than a year after the Servicer transfers servicing of the loan or the loan is paid in full.  Id.  A Servicer, however, must inform the borrower that it will not substantively respond to the request.  Generally, the Servicer may not charge for responding to a borrower’s requests unless otherwise allowed.  12 C.F.R. §1024.36(g).

[1] The below description does not describe or discuss every section of the new Regulations or every modification contained in the new Regulations.