Ronald S. Deutsch & Michael Mckeefery
Cohn, Goldberg & Deutsch, Towson, MD
A USFN member
Whether dual-tracking is permissible has been the subject of several important recent developments.
As background, the recent foreclosure crisis was the worst the United States has ever experienced, both in duration and in depth. At times, the foreclosure rate was more than triple the rate experienced at the height of the Great Depression. According to RealtyTrac, a real estate information company and an online marketplace for foreclosed and defaulted properties in the United States, more than 7.2 million consumers lost their homes between 2007 and 2014. Of these 7.2 million consumers, 5.4 million consumers lost their homes through a foreclosure sale, while 1.8 million consumers participated in a short sale program. Although the economic crisis began in September of 2007, the effects of this crisis are being experienced even today. The resulting losses have had a significant negative impact on investors, borrowers, and communities.
As a result of this crisis and actions by various parties, Congress implemented several protections for consumer borrowers. These protections include the creation of the Consumer Financial Protection Bureau (“CFPB”), the Home Affordable Modification Program (“HAMP”) and amendments to the Real Estate Settlement Procedures Act (“RESPA”).
Borrowers have increasingly utilized the various defenses created by these protections when attempting to retain their homes. One such protection raised in litigation is the prohibition of dual-tracking. The United States District Court for the District of Maryland recently dealt with this issue in an unreported case, Sherry L. Weisheit v. Rosenberg & Associates, LLC Civil No. JKB-17-0823.
In Weisheit, the Plaintiff executed a mortgage in 2007, which mortgage became delinquent in 2009. The servicer assumed responsibility for the servicing of the loan in 2012. Foreclosure proceedings began on April 26, 2016. Then, almost five (5) months later, but more than thirty-seven (37) days prior to a scheduled foreclosure sale, the Plaintiff submitted a “complete” loan modification application to the servicer under HAMP.
Pursuant to RESPA and its implementing regulations, if a borrower submits a complete loss mitigation application by a certain, specified date prior to a scheduled foreclosure sale, a loan servicer must evaluate that application before moving for foreclosure judgment or order of sale, or conducting a foreclosure sale. 12 C.F.R. § 1024.41(g). If a borrower submits a loss mitigation application to a servicer forty-five (45) days or more prior to a foreclosure sale, then that service is required to promptly review the application to determine if the application is complete. 12 C.F.R. § 1024.41 (b) (2) (i) (A). Within 5 business days after receiving a loss mitigation application, a servicer must notify a borrower in writing “that the servicer acknowledges receipt of the loss mitigation application, and that the servicer has determined that the loss mitigation application is either complete or incomplete.” 12 C.F.R. § 1024.41
(b) (2) (i) (B). If the loss mitigation application is incomplete, the notice shall state the additional documents and information that the borrower must submit to complete the application. Id. Provided that a complete loss mitigation application is submitted to service more than thirty-seven (37) days prior to any scheduled foreclosure sale, then a foreclosure servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale. If the servicer does so, then that service is engaging in a prohibited practice known as dual-tracking.
In Weisheit, after a failed attempt at mediation, the servicer denied the Plaintiff’s loss mitigation application by letter. The stated reason for the denial was that the resulting modified payment was outside the required range of 10-55% of the Plaintiff’s monthly gross income. The servicer concluded that, based on the financial information provided, the Plaintiff did not meet the debt to income ratio requirement established for a HAMP Tier 1 loan modification option.
Under RESPA and its regulations, a borrower is entitled to appeal the denial of a loan modification application. 12 C.F.R. §1024.41(h). In Weisheit, the Plaintiff timely appealed the servicer’s denial of the Plaintiff’s loss mitigation application on November 29, 2016. In the appeal, the Plaintiff alleged that the servicer did not calculate the debt to income ratio correctly and that the Plaintiff’s financial information established that she qualified for a loan modification. On December 29, 2016, the servicer sent a letter to the Plaintiff in response to her appeal (the “Response Letter”). In the Response Letter, the servicer did not dispute the Plaintiff’s calculations. Instead, the servicer asserted that an investor restriction prevented it from extending the term of the loan. However, in the Response Letter, the servicer did not name the investor and did not describe the specific nature of the alleged investor restriction. Furthermore, the servicer indicated in the Response Letter that “we have enclosed all supporting documentation used to complete the review of your account,” but no documentation was enclosed with the Response Letter. The Plaintiff responded to the servicer on January 12, 2017, and advised the servicer that she would appeal the denial set forth in the Response Letter once she had received the supporting documentation from the servicer. The Plaintiff also notified the foreclosure firm that she intended to appeal the denial decision so that the foreclosure firm would not improperly proceed with the foreclosure sale during the appeal process. However, on March 9, 2017, the Plaintiff’s home was rescheduled for sale. On February 22, 2017, the Plaintiff received a communication from the servicer that the reference to supporting documentation in the Response Letter had been an inadvertent error, and, thus, the servicer would not be providing the Plaintiff with any such documentation. On February 28, 2017, without receiving any supporting documentation, the Plaintiff submitted a further appeal to the servicer. In this appeal, the Plaintiff asserted that the servicer violated RESPA because a foreclosure sale had been scheduled while the Plaintiff was still engaged in loss mitigation. The servicer did not respond to the Plaintiff’s appeal. As a result, the Plaintiff filed an Emergency Motion to stay the sale, which Motion was granted by the Circuit Court on March 8, 2017.
The Plaintiff then brought an action against the servicer and the foreclosure firm (collectively, the “Defendants”) in the United States District Court for the District of Maryland. In her lawsuit, the Plaintiff alleged that the servicer violated RESPA and that both Defendants violated the federal Fair Debt Collection Practices Act (“FDCPA”). The Defendants moved to dismiss the Plaintiff’s complaint.
However, the Defendants’ Motions to Dismiss were both denied by the Court. The reasons for these denials are discussed below.
The Court noted that RESPA is a consumer protection statute, designed to protect mortgagors from “certain abusive practices in the real estate mortgage industry.” RESPA is implemented by CFPB regulations, which are collectively known as Regulation X. See 12 C.F.R. § 1024.1, et seq. The Court stated that dual-tracking is the practice of moving towards foreclosure while the loss mitigation process is ongoing and further indicated that such action is prohibited. The Court further noted that the loss mitigation process begins when a borrower submits a complete loss mitigation application and ends when the servicer denies that application on appeal (or, the loss mitigation process ends after the servicer’s first denial if the borrower fails to timely appeal that denial decision). A denial of a loan modification application must state the “specific reason or reasons for the servicer’s determination.” According to the CFPB’s official interpretation, if the denial is due to a restriction by the investor – that is, if the modification cannot be made by the servicer because the owner of the mortgage would not allow some condition necessary for the modification, then the explanation for the denial “must identify the owner or assignee of the mortgage loan and the requirement that is the basis of the denial.” Simply stating that the denial is based on an investor requirement, without additional identifying information or explaining the restriction, is insufficient. Therefore, the Court found that the denial contained in the servicer’s Response Letter was insufficient because the servicer did not name the investor, and did not describe the specific nature of the alleged investor restriction. According to the Court, an insufficient denial such as the denial letter issued by the servicer, in this case, did not end the loss mitigation process. As a result, since the loss mitigation process was not ended, the servicer and the foreclosure firm were prohibited from moving towards a foreclosure sale. By moving towards a sale under these circumstances, the servicer and the foreclosure firm essentially created a situation whereby the servicer was simultaneously pursuing loss mitigation and a sale of the property.
The Court also held that the Plaintiff’s letter, dated February 28, 2017, could be found to be a Qualified Written Request (“QWR”) under RESPA. This letter included the borrower’s name as well as a statement of the reasons for why the borrower believed that the servicer was in error and/or the specific information that the borrower sought. The servicer’s failure to respond to that letter plausibly falls within the requirements of QWR protections under Regulation X.
Next, the Court noted that Congress enacted the FDCPA after being confronted with “abundant evidence of the use of abusive, deceptive and unfair debt collection practices….” 15 U.S.C. § 1692. Debt collectors are prohibited under §§ 1692e and 1692f of the FDCPA from utilizing any false representations or unfair practices, including threatening to take any action to proceed with foreclosure if the debt collector has no right to take possession of the property at issue. The Plaintiff asserted that scheduling a foreclosure sale and issuing a notice of sale when no right to proceed with the foreclosure action existed constituted a false representation and also constituted an unfair practice to collect a debt under §§ 1692e and 1692f of the FDCPA. Guided by the legal standard established by the Fourth Circuit, the Court found that such a representation is material and that such a representation would affect “a least sophisticated consumer’s decisionmaking” with regard to a debt. Goodrow v. Friedman & MacFadyen, P.A. Civil Action No. 3:11cv20, 2013 WL 38948442.
In summary, the Court ruled that the Plaintiff alleged sufficient facts to state a claim for relief against the servicer for violations of RESPA’s prohibition of dual-tracking and for violations of the FDCPA. Similarly, the Court held that the Plaintiff alleged sufficient facts to support a claim that the foreclosure firm violated the FDCPA. By ruling in this manner, the Court dismissed the servicer’s and the foreclosure firm’s Motions to Dismiss, and permitted the Plaintiff’s lawsuit to continue.
What is clear is that dual-tracking prohibitions must be strictly followed. Lenders would be well served to either review or have their local counsel review their procedures as to whether they are in strict compliance with the law. Failing to be in compliance can be costly.