Do regulations recently proposed by the Massachusetts Division of Banks disregard servicers’ duties under servicing agreements when considering borrowers for a modification under the Commonwealth’s new mandatory modification review statute?
In August 2012, Governor Deval Patrick signed emergency legislation aimed at “preventing unlawful and unnecessary foreclosures.” The new law, among other things, requires servicers to notify borrowers who are obligated on “certain mortgage loans” of the right to be considered for a loan modification. In reviewing borrower requests for loan modifications, servicers are now required to “take reasonable steps and make a good faith effort to avoid foreclosure.” According to the statute, that standard is met where the servicer considers: (1) the borrower’s ability to make an affordable monthly payment; (2) the net present value (“NPV”) of receiving payments under a modified mortgage as compared to the anticipated recovery at foreclosure; and (3) the “interests of the creditor, including but not limited to, investors.” Mass. Gen. Laws ch. 244 s. 35B (emphasis added).
The reasonable construction of this Massachusetts statute is that “the creditor” (which includes servicers) may consider its “interests” which arguably encompass contractual restrictions on providing loss mitigation options. Implementing regulations should clearly recognize the contractual obligations of servicers when servicers review for loss mitigation. At present, the draft regulations (which are still open to written comment through mid-February) do not show how a creditor should take into account its “interests” when evaluating the borrower for loss mitigation.
Other sources of authority recognize that a servicer, generally speaking, has no legal duty to provide loss mitigation options, and may be contractually precluded from doing so by the terms of its servicing agreement. For example, the HAMP Servicer Participation Agreement (“SPA”) provides that where a “servicing agreement … prohibits Servicer from” providing loan modifications, “Servicer shall not be required to [provide a loan modification] with respect to such loan.” Similarly, the CFPB’s final RESPA rule (effective 1/10/2014) provides, in part, that “[n]othing in section 1024.41 imposes a duty on a servicer to provide any borrower with any specific loss mitigation option.” The CFPB also affirms that servicers are not required to offer loss mitigation options that are inconsistent with any contractual requirements. The Massachusetts Division of Banks should recognize this fact as well, and should clarify its proposed regulations so that they are in line with the plain language of the statute that they are designed to implement.
K&L Gates is prepared to author a comment letter addressing these points on behalf of anyone who is interested and agrees that these important points should be brought to the attention of the Division of Banks.