At what point is it appropriate after a borrower defaults to initiate foreclosure proceedings? As soon as the borrower defaults? Few, if any, servicers follow this rule. During a review of loss mitigation options? During a trial modification? Servicers long have felt that the extraordinary delays in completing foreclosures based on some state laws weigh in favor of starting the foreclosure process as soon as possible. Of course, the servicer always can call off the foreclosure if the loss mitigation option succeeds, but a decision to delay the initiation of foreclosures can result in investor claims. On the other hand, borrowers who think they are in the running for a loan modification often are angry and dismayed when the foreclosure notice arrives. The national foreclosure settlement between the country’s five largest residential mortgage loan servicers and the federal government and 49 state attorneys general places a number of restrictions on the controversial but common practice of “dual tracking” foreclosures and loan modifications.
In many ways, the standards imposed on mortgage loan servicers through the national foreclosure settlement are similar to those that Fannie Mae and Freddie Mac (the “GSEs”) already impose for the servicing of delinquent loans they own or guarantee. But while both the GSE guidelines and the settlement standards generally operate in favor of delaying foreclosure, the GSEs impose strict foreclosure timelines that limit the number of days a servicer can wait before completing a foreclosure sale. Further, unlike the settlement standards, the GSE guidelines require prior GSE approval for postponing a foreclosure sale on certain severely delinquent loans (notwithstanding rules to the contrary).
Additionally, the GSE guidelines provide clearer expectations of the specific action a servicer may take while evaluating a borrower for a loan modification. For example, GSE guidelines outline when the “next legal action” (i.e., the next step required by law to proceed with the foreclosure action, such as publication or service of process) must be taken or halted. By comparison, the national foreclosure settlement prohibits a servicer under certain circumstances from “proceeding with a foreclosure sale” (which could be read to encompass the legal actions leading up to the sale or just the sale itself).
The settlement agreement’s description of when a servicer may refer a borrower to foreclosure or conduct a foreclosure sale is extraordinarily rules-based and laborious. With respect to dual tracking of foreclosure and loan modification efforts, the settlement agreement provides two classes of rules—one for before a servicer refers a borrower to foreclosure, and the other for after the servicer has referred a borrower to foreclosure.
If the loan has not yet been referred to foreclosure and a servicer receives a complete loan modification application from the borrower by day 120 of delinquency, under the terms of the settlement agreement, the servicer must review and make a determination on the application before referring the loan to foreclosure. If the package is substantially complete but is missing only any required documentation of hardship, the borrower has an extra 10 days to provide the hardship documentation to the servicer. If a borrower qualifies for a trial modification offer and accepts it, the servicer is prohibited from referring the borrower to foreclosure while the borrower is performing on the trial.
The settlement agreement’s pre-foreclosure referral procedures mirror those found in GSE guidelines, except with respect to borrowers who are denied a loan modification. First, the settlement agreement requires an independent “automatic review” of most denials before a denial notice is sent to the borrower. Second, the settlement agreement provides the borrower a 30-day window to appeal the denial (unless inconsistent with federal or state law or investor directives). If the borrower appeals the denial, the servicer is prohibited from “proceeding to a foreclosure sale” during the appeal process (again, unless inconsistent with otherwise applicable requirements). By contrast, under the GSE guidelines, a servicer is expressly prohibited from postponing referral to foreclosure upon receiving a borrower’s appeal of a loan denial. Such a conflict is sure to raise issues about whether it is appropriate to impose compensatory fees for delays in foreclosure based on considering a borrower’s appeal.
Within five business days after referral to foreclosure, the servicer must send the borrower a letter soliciting the borrower’s loan modification application (“Post Referral to Foreclosure Solicitation Letter”). The letter must indicate that the borrower can still be evaluated for alternatives to foreclosure, even if he or she had previously shown no interest.
Where the servicer has already referred a borrower to foreclosure, the settlement agreement adopts a sliding scale of rules based on when the servicer receives the borrower’s complete loan modification application package. If the borrower submits a complete application package to the servicer within 30 days after the Post Referral to Foreclosure Solicitation Letter, then the servicer must delay foreclosure (i.e., must not move for foreclosure judgment or order of sale, or seek a foreclosure sale) and review the borrower’s application. In general, the servicer must review and make a determination on a borrower’s completed application within 30 days of receipt.
If the borrower submits a complete modification application more than 30 days after the Post Referral to Foreclosure Solicitation Letter, then the required response depends on the timing of any scheduled foreclosure sale:
• If the complete package is received more than 37 days before the date of a scheduled sale, then the servicer must not “proceed with the foreclosure sale” and must review the borrower’s application.
• If the complete package is received more than 15 days but less than 37 days before the date of a scheduled sale, then the servicer must perform an expedited review of the borrower’s application (but the servicer has no affirmative obligation to delay foreclosure proceedings during the expedited review).
• If the complete package is received less than 15 days before the date of a scheduled sale, then the servicer must notify the borrower of its determination (if it completes its review) or inability to complete its review of the application (but the servicer has no affirmative obligation to delay foreclosure proceedings during the evaluation).
In all cases, if the servicer makes an offer of a loan modification, it must allow the borrower 14 days to decide whether to accept the offer. If the borrower accepts the servicer’s offer, the servicer must suspend the foreclosure sale until the borrower fails to perform under the trial loan modification.
While the borrower is performing under the trial loan modification, the servicer is prohibited from moving to judgment or order of sale or “proceeding with a foreclosure sale.” The settlement standards are not as clear on this point as the GSE guidelines, which clarify that a servicer must delay the next legal action while a borrower is performing on a trial.
If the borrower is denied a trial modification after the loan has been referred to foreclosure, the servicer has differing responsibilities regarding the automatic “independent review” and appeals process, depending on when the servicer receives the complete application package. For example, when the servicer receives a complete application more than 30 days after the Post Referral to Foreclosure Solicitation Letter and it is within 37 days of a scheduled foreclosure sale, an automatic review is not required, and the servicer may continue with foreclosure proceedings during the appeal process.
Comparison to HAMP
The dual tracking provisions of the settlement agreement differ somewhat from HAMP rules. For example, the HAMP guidance generally does not provide a sliding scale of rules based on when the borrower application is received (with an exception for those requests that occur within seven business days of a scheduled sale, known as the “deadline”). Similar to the settlement standards, HAMP guidance provides the borrower a 30-day appeal window after a denial in which the servicer cannot proceed with a foreclosure sale. The difference, however, is that servicers under HAMP must delay a foreclosure sale if an appeal is received before the deadline, whereas servicers under the settlement agreement must delay the foreclosure sale only in connection with a borrower application received 37 days before the scheduled date. HAMP can also be distinguished from the settlement standards as it does not require a servicer during the evaluation to halt certain events in the foreclosure process (such as moving for foreclosure judgment) but does prohibit the actual sale.
In sum, the settlement standards’ restrictions on dual tracking of foreclosure and loan modification are extremely rules-based, and although similar to existing rules of the GSEs, servicers should review the timelines carefully to determine how best to implement their foreclosure procedures.