Do the CFPB Mortgage Servicing Rules Provide For Rescission?

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Do the CFPB Mortgage Servicing Rules Provide For Rescission?The Consumer Financial Protection Bureau’s (CFPB) mortgage servicing rules have now been in place for nearly 18 months. These rules have set forth extensive loss mitigation procedures that nearly all servicers must follow. In particular, 12 C.F.R. § 1024.41 requires servicers to stop foreclosure proceedings when a borrower submits a timely application for loss mitigation.

Perhaps the most widely availed provision of the new mortgage servicing rules is 1024.41(g), which bars most forms of dual tracking. Under 1024.41(g), a servicer cannot proceed to foreclosure if a borrower has submitted a complete loss mitigation application 37 days or more before the scheduled sale date until the evaluation process has finished. In a handful of scenarios the provision does not apply, but for the most part the rule is simple: Any complete application submitted six weeks and a day prior to sale will usually postpone a foreclosure.

Although 1024.41(g) is a strict requirement for mortgage servicers, it does provide clarity for the defense of borrower lawsuits. For one, borrowers who submit untimely applications for a modification do not have a cognizable cause of action. That means a bare assertion of dual tracking should not survive a dispositive motion if the servicer can show that the completed application came in, for example, a few days before the scheduled sale.

In addition, 1024.41(g) does not appear to allow borrowers to unwind a foreclosure, but the mortgage servicing rules, which went into effect in January 2014, haven’t yet generated a lot of case law. But the text of 1024.41 seems clear enough.

Let’s look at the language: § 1024.41 states that borrowers “can enforce the provisions of this section pursuant to section 6(f) of RESPA,” or the Real Estate Settlement Procedures Act (12 U.S.C. 2605(f)). Critically, section 6(f) only allows recovery of monetary damages, including “actual damages to the borrower as a result of the failure” to comply, any additional damages “in the case of a pattern or practice of noncompliance” in an amount not to exceed $2,000, and the costs of the action. There is no provision in section 6(f) for injunctive relief.

At least one court looking at the issue noted that an alleged breach of 1024.41 cannot trigger a foreclosure rescission. In Servantes v. Caliber Home Loans, Inc., the plaintiffs alleged that that Defendant violated the Real Estate Settlement Procedures Act (RESPA) by prematurely abandoning the loss mitigation process in violation of 12 C.F.R. § 1024.39–41.  The district court, however, dismissed the claim. The court noted that the principal relief sought by Plaintiffs—to stay or set aside the sheriff’s sale—“is unavailable to them under RESPA because 12 U.S.C. § 2605(f), authorizes monetary damages only.”

A few words of caution: A search on Westlaw indicates only 29 cases that specifically cite 1024.41(g). So the case law is still, obviously, inchoate. Adding to the caveats, a court could look at a violation of 1024.41, in conjunction with other factors, as grounds to rescind a sale. But a bare assertion that the servicer breached 1024.41(g) should only allow for a recovery of monetary damages—if any are alleged—and not the kind of injunctive relief necessary to unwind a foreclosure.