Mortgage loan servicers have a wide range of responsibilities. However, does everything servicers do constitute “servicing”? Or do servicers do some things that are not “servicing”?
The answer is important because the Real Estate Settlement Procedures Act and its Regulation X impose strict obligations on servicers to respond to certain borrower communications related to “servicing,” but not to nonservicing. The courts, including two recent federal courts of appeals, are drawing fine lines between the two.
RESPA requires a mortgage loan servicer to respond in a timely manner to a borrower’s request to correct errors relating to “allocation of payments, final balances for purposes of paying off the loan, or avoiding foreclosure, or other standard servicer’s duties.” Section 1024.35 of Regulation X specifies that a servicer must acknowledge, investigate, and respond to a borrower’s “notice of error” within strict timeframes, so long as the notice is in writing and provides enough information for the servicer to identify the account and the asserted error. In addition, after receipt of a notice of error, a servicer is prohibited, for 60 days, from furnishing 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 those requirements. The list includes errors that could arise in typical servicing activities – errors related to the acceptance, application, or crediting of borrower payments; and to disbursing amounts for taxes, insurance premiums, or other charges. The list of covered errors also includes those that could arise in default servicing – errors related to providing information regarding loss mitigation options, making foreclosure notices or filings, moving for foreclosure judgments or orders of sale, or conducting foreclosure sales.
Then, the Consumer Financial Protection Bureau (“CFPB”) included a catch-all provision to section 1024.35, such that a covered error includes “any other error relating to the servicing of a borrower’s mortgage loan.”
Courts have been considering the scope of those responsibilities since even before the CFPB issued that list in 2013. Recently, two circuit courts of appeals have indicated that some activities of servicers do not constitute “servicing,” particularly where loan modifications are involved.
In one recent case, the Court of Appeals for the Second Circuit considered errors the borrower asserted related to seeking a permanent loan modification. The servicer had denied the borrower’s request due to title issues related to the nonrecordation of mortgage documents. (The borrower also asserted that the servicer lost certain documents and wrongly rejected a payment.) The lower court held that the error was not related to servicing, but rather to the servicer’s decision to deny her a loan modification, and as such was not a covered error. The court explained that the asserted error (a failure to record) did not relate to the receipt or making of payments and thus did not constitute “servicing.” The court also pointed to the preamble discussion in the CFPB’s 2013 rulemaking, explaining that the agency declined to include, in its list of covered errors, a servicer’s evaluation of loss mitigation options.
However, in January the Second Circuit reversed that holding, deciding that the catch-all provision – covering any other error relating to servicing – is broad enough to cover the borrower’s asserted errors. The Second Circuit had requested an interpretation from the CFPB, which stated its belief that the asserted error related to the underlying mismanagement of the mortgage loan documents. Consistent with that interpretation (addressed further below), the court held that the mismanagement of loan documents constitutes an error in “servicing,” because that mismanagement affected the borrower’s eligibility for modified payments, and the receipt of payments is “servicing.”
In February, the Fourth Circuit Court of Appeals considered somewhat similar facts but went the other way. In that case, the servicer had denied a borrower’s request for a loan modification due to certain title issues. The Fourth Circuit looked back to a Ninth Circuit case that predated the CFPB’s 2013 catch-all provision, holding that challenges to loan terms are not related to servicing. The Fourth Circuit held that the only error the borrower challenged was the servicer’s decision on a loan modification application – which is related to loan terms, the court held, and not “servicing.”
While those two courts (and certain others) appear to agree that failure to properly evaluate a borrower for a loss mitigation option is not a covered error, they obviously came to opposite conclusions as to the coverage of the catch-all provision. However, Regulation X does provide that certain activities beyond just accepting and making payments are related to “servicing” and as such are covered. For instance, as mentioned above, a covered error expressly includes a servicer’s failure to provide accurate information regarding loss mitigation options. Difficult line-drawing exercises will, then, continue to plague servicers, which face forbearance expirations and piles of unique loss mitigation circumstances, in addition to their payment-receiving and payment-making duties.
It is worth noting that the CFPB, in its interpretation requested by the Second Circuit, stated that “in determining that a servicer’s failure to correctly evaluate a borrower for a loss mitigation option was not an error under § 1024.35, the Bureau did not conclude that errors related to loss mitigation were generally excluded from § 1024.35’s reach. Just the opposite.” The CFPB reminded the court of a preamble statement in 2016 that “even absent 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 to the servicing of the loan, and servicers must comply with the applicable provisions of § 1024.35 regarding such notices of error.” The CFPB stated that in practice, “a large fraction of error assertions relate to loss mitigation,” and that “the Bureau did not categorically exclude complaints related to loss mitigation from § 1024.35’s error resolution procedures, or otherwise establish a bright line between ‘servicing’ on one hand and ‘loss mitigation’ on the other.” It seems, then, that although the CFPB declined to include a servicer’s evaluation of loss mitigation options in its codified list of covered errors, the agency is now asserting a broad scope for its catch-all provision.
The CFPB’s interpretation appears to go beyond the findings of certain courts. While a full survey of relevant case law is beyond the scope of this piece, one court held that a notice of error cannot be used simply to assert the servicer’s failure to respond to a borrower request for information. Although section 1024.36 of Regulation X requires servicers to respond to covered “requests for information,” the court emphasized that the failure to do so is not listed as a covered error, nor does it fit within the catch-all provision as “related to servicing.” Other courts have dissected a borrower’s communication to consider how much of it relates to servicing as opposed to non-servicing activities. One court stated that a passing reference to servicing issues, among non-servicing issues, is insufficient to “shoehorn” a communication into a “notice of error.” Another court reviewed a borrower’s lengthy communication and concluded that while it was possible that one or more of the borrower’s requests for information may have touched on servicing practices, the court could not fairly hold that the letter sought information related to the “servicing” of the loan.
With the varying conclusions regarding what constitutes covered “servicing” errors under Regulation X’s strict “notice of error” requirements, it can be difficult for servicers to manage compliance. What is at stake if a servicer fails to comply with the strict “notice of error” requirements for a borrower’s covered communication? Regulatory enforcement is obviously a possibility. In addition, RESPA provides the borrower the right to bring an action against the servicer (including a class action), although the borrower must show actual damages, or a pattern or practice of noncompliance, in order to succeed.
Of course, Regulation X imposes other requirements on servicers besides the strict “notice of error” obligations. Servicers must have policies and procedures to ensure they can (among other things) provide accurate and timely information in response to borrowers’ requests, and that they can investigate, respond to, and make appropriate corrections in response to borrower complaints (including oral requests and complaints). In addition, the policies and procedures must ensure that they can identify documents and information required for a complete loss mitigation application and can properly evaluate an application for all eligible loss mitigation options. Regulation X also imposes strict loss mitigation procedures on servicers. However, as certain courts have held, the extent to which the “notice of error” obligations apply to those loss mitigation procedures could be subject to some fine line-drawing.