With the implementation of the new servicing requirements under RESPA and TILA, stemming from the Dodd-Frank Act, came a federal regulation governing when a servicer can first initiate foreclosure proceedings. Under § 1024.41(f), a servicer cannot file its foreclosure action unless the loan is over 120 days past due, the loan is in default for violation of its due on sale clause, or a lienholder is joining the action of a subordinate lienholder. The regulation makes no mention of defaults for other non-monetary obligations, such as failure to pay non-escrowed real estate taxes or non-escrowed property insurance.(1) There is also no guidance in official commentary from the CFPB on this issue. So, what is a servicer to do when a consumer continues to pay its regular principal and interest payments on time, but has not paid his or her real estate taxes or property insurance?
With respect to property insurance, many servicers will force-place insurance to make sure the collateral is protected. Similarly, servicers may have to advance funds to pay real estate taxes to avoid losing the property at a tax deed sale. But can the servicer foreclosure on the property for these defaults if the consumer is paying current his or her regular principal and interest loan payments?
On the one hand, §1024.41(f) is an exclusive and exhaustive list, suggesting that a servicer cannot foreclosure for any reason other than what is set forth in the regulation. But, practically speaking, that doesn’t seem to make sense because it leaves a servicer without a remedy against a defaulted borrower. (Though I recognize that the word “practical” isn’t one we would generally use to describe banking regulations). The solution, it seems, would be for the servicer to accelerate the loan based upon the loan based upon the consumer’s failure to pay the insurance or taxes, and send notice of that acceleration to the consumer. Then, the servicer can file foreclose if the consumer does not pay the accelerated balance of the loan within 120 days.
Although no official commentary has been written on this point, the CFPB has verbally confirmed that this is a permissible course of action for the servicer during a webinar question and answer session with the American Servicer’s Association in April, 2014. The CFPB stated that there are a couple operational points if the servicer takes this approach. First, once the acceleration notice is sent to the consumer, the notice should include a notice to the consumer that any subsequent payments that are sent to the servicer will be applied as partial payment toward the fully accelerated balance. Second, when payments are received by the servicer, even if the payment is in the principle and interest amount, that amount should not be applied to principle and interest. Instead, it is applied as a partial payment to the fully accelerated balance in the order required under the loan documents.
A few other points of consideration would be that if the loan documents require the servicer to give the consumer an opportunity to cure a default for failure to pay insurance or taxes, the servicer should note that it will need to send a cure notice prior to the acceleration notice. Additionally, if the loan documents with the consumer allow the consumer to reinstate the loan, both the cure notice and the subsequent acceleration notice should notify the consumer of the amount that must be paid to cover the insurance or taxes in order to reinstate the loan.
On a final note, it should be noted that if the servicer has not accelerated the loan, and the consumer continues to send just the regular monthly principal and interest payment to the servicer, the servicer cannot unilaterally choose to apply the payments received to insurance or tax advances. The remedy in this situation, it seems, is limited to acceleration and demand.
Have any of you experienced this problem? What have you done to address the situation with your customer? Short of having to accelerate the loan and foreclose, have you been successful in getting the loan back on track with insurance and taxes?
(1) This Post does not generally apply to real estate taxes or property insurance that is paid into escrow as a part of a regular periodic payment on the loan. In those situations, the failure to pay the escrow amount would create a default on a regular periodic payment, which would lead to the loan being “past due”.
My practice includes the representation of financial institutions, banks, insurance companies, business owners and other corporate clients. I have a growing and focused practice dedicated to helping financial institutions navigate the complex and expanding area of government regulation and compliance with federal and state laws. This includes working with financial institutions to prepare best practices policies, procedures, and forms, as well as advising financial institutions as to avoiding litigation. When necessary, I will also represent those same institutions in court. I enjoy keeping current with the news and issues that affect banks and financial institutions in their business, and sharing that information along with my thoughts on the issue from a legal perspective based upon my experience.
My firm, Zimmerman, Kiser, & Sutcliffe, P.A.* is a full-service law firm located in Orlando, Florida. Established in 1984 and consistently recognized as one of the largest firms in Central Florida, our firm maintains a respected reputation within the southeast U.S. business and legal community. Our more than 30 attorneys provide comprehensive legal representation in an extensive range of practice areas including corporate, tax, real estate, litigation, banking and financial institutions, structured finance, bankruptcy & creditors’ rights, estate planning & probate, and workers’ compensation.
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