United States: The 120 Days Before Foreclosure Requirement

Many of you still have questions about the CFPB's RESPA (Regulation X) Mortgage Loan Servicing Rule that requires a delinquency period of more than 120 days before you can initiate a foreclosure. That provision states:

(F) Prohibition on Foreclosure Referral.

(1) Pre-foreclosure review period. A servicer shall not make first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless:

(i) A borrower's mortgage loan obligation is more than 120 days delinquent;

(ii) The foreclosure is based on a borrower's violation of a due-on-sale clause; or

(iii) The servicer is joining the foreclosure action of a subordinate lien holder.

The term "delinquency" is not presently defined for purposes of this prohibition on foreclosure which appears in Section 1024.41(f) of Regulation X. The CFPB has now issued an amendment to Regulation X that would define "delinquency" for all parts of Regulation X, including the 120 days delinquency requirement.

The CFPB is proposing to define delinquency as a period of time during which a borrower and the borrower's mortgage loan obligation are delinquent, and to clarify within the proposed definition that a borrower and a borrower's mortgage loan obligation are delinquent beginning on the day a periodic payment sufficient to cover principle, interest, and, if applicable, escrow, became due and unpaid until such time as the payment is made. Delinquency under the proposed definition is not triggered by a borrower's failure to pay a late fee.

By proposing to define "delinquency," the CFPB intends to provide servicers, borrowers, and other stakeholders with clear guidance on how to determine whether a borrower is delinquent for purposes of Regulation X's servicing provisions and when the borrower's delinquency begins. Servicers may use different definitions of "delinquency" for operational purposes, and servicers may use different or additional terminology when referring to borrowers who are late or behind on their payment. For example, servicers may refer to borrowers as "past due" or "in default," and may distinguish between borrowers who are "delinquent" and "seriously delinquent." Except as provided in the Mortgage Servicing Rules themselves, the CFPB does not intend the proposed definition of delinquency to affect the industry's existing procedures for identifying and dealing with borrowers who are late or behind on their payments.

Of particular note is Proposed Comment 31 (Delinquency) – 2 which explains how delinquency should be calculated if a servicer applies a borrower's payment to the oldest outstanding periodic payment (a common practice). The Comment addresses how to calculate the length of a borrower's delinquency for purposes of the greater than 120 day delinquency requirement. The CFPB points out that it is not requiring creditors to apply late payments to the oldest outstanding payment, but provides that if you apply payments to the oldest outstanding payment, then you must advance the borrower's delinquency accordingly. The CFPB is of the opinion that a borrower who chronically remains one or even two payments behind does not present a serious collection or servicing problem. That remains to be seen.

Although the CFPB does not require you to apply late payments to the oldest outstanding payment, your Deed of Trust may specify that you will do so. Don't confuse regulatory flexibility with contractual obligations. You should do as your Deed of Trust requires.

Another proposed comment deals with partial payments. In particular, this comment deals with the situation where a payment is made, but not in the full amount, so the creditor advances funds against the borrower's account to make up the short fall. A creditor might do that to avoid the requirement to initiate early intervention communications, continuity of contact requirements or loss mitigation procedures. The comment clarifies that such treatment would mean that the borrower is also not delinquent for foreclosure purposes. This approach prohibits the servicer from avoiding servicing requirements while beginning foreclosure proceedings.

Although not yet final, this change seems likely to take place. You should review your Deed of Trust language, your payment application process, and your foreclosure procedures to see what if any changes you may need to make.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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