CFPB Legislates Loss Mitigation Through Proposed Servicing Regulations

By: Laurence E. Platt

For those who wondered how the Consumer Financial Protection Bureau (the “Bureau”) would seek to convert portions of the global foreclosure settlement into federal law, last Friday’s proposed servicing rules provide an answer. The Dodd-Frank Act (“DFA”) amended the Real Estate Settlement Procedures Act (“RESPA”) in several ways to address discrete loan servicing issues, such as escrow accounts, flood insurance, and qualified written requests. What it did not do, however, is address loss mitigation or foreclosure. Many thought that the Bureau would use its general authority to issue regulations prohibiting unfair, deceptive or abusive acts and practices to craft loss mitigation requirements, but that authority would not afford consumers with a federal private right of action.

Instead, the Bureau relied on the DFA’s amendment of Section 6 of RESPA, which provided a new subsection (k) that a servicer of a federally related mortgage must “comply with any other obligation found by the Consumer Financial Protection Bureau, by regulation, to be appropriate to carry out the consumer protection purposes of this Act.” According to the Bureau, “this provision gives the Bureau broad authority to adopt additional regulations to govern the conduct of servicers of federally related mortgage loans. In light of the systemic problems in the mortgage servicing industry, the Bureau is proposing to exercise this authority to require servicers of federally related mortgages to: establish reasonable information management policies and procedures; undertake early intervention with delinquent borrowers; provide delinquent borrowers with continuity of contact with staff equipped to assist them; and require servicers that offer loss mitigation options in the ordinary course of business to follow certain procedures when evaluating loss mitigation applications.”

This is quite a stretch. Without regard to the reasonableness of the content of the proposed regulations, the question is whether the Bureau has or should have the purported authority to impose loss mitigation requirements on loan servicers. Basically, Congress never needs to issue another law to address mortgage loan servicing because the Bureau reads subsection (k) to give it virtually unfettered authority to legislate through regulation merely by proclaiming an initiative to further the consumer protection purposes of RESPA. Never mind that RESPA never addressed loss mitigation, it did address loan servicing and, in the Bureau’s view, that empowers the Bureau to regulate loan servicing in all respects.

Section 6 provides a federal cause of action to consumers to sue servicers for monetary damages for violations of the substantive provisions. Thus, according to the Bureau, Congress has provided a private right of action to consumers for violations of regulations that the Bureau in its sole discretion (of course, subject to notice and comment rulemaking) deems to further the consumer protection purposes of RESPA. In other words, if these regulations are enacted as proposed, consumers will have a federal private right of action to challenge a servicer’s alleged failure to engage in proper loss mitigation providing another means to stop foreclosures in their tracks.

Many in the financial services industry worry that the Bureau’s authority to issue regulations prohibiting unfair, deceptive and abusive practices is too open-ended given the singularity of purpose of the Bureau’s mission. Its broad reading of Section 6 of RESPA only exacerbates this concern. Notice and comment rulemaking will provide one check on the Bureau’s exercise of its rulemaking authority, but wouldn’t it be nice if Congress actually played the lead role in determining the law of loan servicing.

Comments on the proposed rules are due by October 9, 2012.

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