Amendments to Regulation X Effective on October 19, 2017 Clarify How Creditors May Handle “Rolling Delinquencies”

By: Courtney Kirtley (ckirtley@kaycasto.com) and Thomas Ewing (tewing@kaycasto.com)

Since the adoption of Regulation X by the Consumer Financial Protection Bureau (“CFPB”) in 2013,[1] lenders have struggled with situations where they are not able to foreclose on collateral because a borrower is delinquent but never becomes more than 120 days delinquent.  These situations, referred to as “rolling delinquencies,” involve a borrower who becomes delinquent, resumes making payments but does not make all outstanding payments to cure the delinquency, and the servicer’s application of payments to the oldest outstanding payment advances the borrower’s delinquency. See, 81 F.R. 72160, 72193 (Oct. 19, 2016). In these situations, lenders have found that § 1024.41(f)(1)(i) of Regulation X prohibits them from making “the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process[2] [because] . . . [a] borrower’s mortgage loan obligation is [not] more than 120 days delinquent[3].” 12 C.F.R. § 1024.41(f)(1)(i). [4] Accounts with these “rolling delinquencies” have burdened and frustrated lenders.

When the CFPB sought comments on proposed amendments to Regulation X, the American Bankers Association and other commenters “expressed concern that the proposal did not specifically address ‘rolling delinquencies’”. 81 F.R. 72160, 72193 (Oct. 19, 2016). “Industry commenters urged the Bureau to provide clarity on the application of § 1024.41(f)(1)(i) to rolling delinquencies.” Id. Despite these concerns voiced by the American Bankers Association and others, the CFPB declined to provide the requested clarity in the Amendments to Regulation X. Instead, with respect to “rolling delinquencies”, the CFPB (1) added a new, regulatory definition of “delinquency,” and (2) provided guidance regarding “rolling delinquencies” in the form of official comments to the definition of “delinquency.” Although these provisions do not provide the specificity desired by commenters, they do provide lenders with guidance on how they can still achieve foreclosure in situations where a borrower is habitually delinquent.

The Amendments to Regulation X were issued by the CFPB on October 19, 2016, and the majority of those amendments become effective on October 19, 2017, including the definition of “delinquency.” Therefore, as of October 19, 2017, “delinquency” is defined in 12 C.F.R. § 1024.31, as follows:

§1024.31   Definitions.
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Delinquency means a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. A borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid.

12 C.F.R. § 1024.31 (emphasis added) (Oct. 19, 2017); see, 81 F.R. 72160, 72371 (Oct. 19, 2016); see also, 81 F.R. 72160, 72161 (Oct. 19, 2016).

This new definition in the Amendment to Regulation X is accompanied by four (4) official comments, which are intended to provide lenders with guidance regarding “rolling delinquencies” and application of payments to a delinquent account. The CFPB first addresses application of funds to a delinquent account and explains that:

. . . if a servicer applies payments to the oldest outstanding periodic payment, a payment by a delinquent borrower advances the date that the borrower’s delinquency began.  . . .  Therefore, if a servicer credits a payment by a delinquent borrower to the oldest missed payment, the result is that the 120-day foreclosure referral waiting period in § 1024.41(f)(1)(i) is advanced.

81 F.R. 72160, 72193-94 (Oct. 19, 2016) (emphasis added). The new Comment to § 1024.31 (Delinquency) – 2 gives an example of how this would work:

  1. Application of funds. If a servicer applies payments to the oldest outstanding periodic payment, a payment by a delinquent borrower advances the date the borrower’s delinquency began. For example, assume a borrower’s mortgage loan obligation provides that a periodic payment sufficient to cover principal, interest, and escrow is due on the first of each month. The borrower fails to make a payment on January 1 or on any day in January, and on January 31 the borrower is 30 days delinquent. On February 3, the borrower makes a periodic payment. The servicer applies the payment it received on February 3 to the outstanding January payment. On February 4, the borrower is three days delinquent.

81 F.R. 72160, 72378 (Oct. 19, 2016) (emphasis added).

Under the West Virginia Consumer Credit and Protection Act (“WVCCPA”), creditors in West Virginia are required to apply “installments in the order in which they fall due.” W. Va. Code § 46A-3-111. Therefore, West Virginia lenders do apply payments to the oldest outstanding periodic payment. As made clear by the new Comment to § 1024.31 (Delinquency)-2, each such payment on a delinquent account advances the date that the delinquency began for purposes of the 120-day requirement. Stated another way, the 120-day period does not begin to run anew upon a payment being made. Rather, the start-date of the 120-day period is “advanced” to the date of the next, past-due payment.  This is often the situation that results in the “rolling delinquency” that prevents lenders from reaching the 120-day point at which they can begin foreclosure proceedings.

With respect to “rolling delinquencies,” the CFPB explained in the issuing regulations that:

. . . the Bureau declines to adopt an exception to § 1024.41(f)(1) for rolling delinquencies. The Bureau does not want to encourage servicers to proceed to foreclosure in situations, where, as explained above, a borrower may have only missed one or two payments. Additionally, the Bureau believes that servicers may have alternative means for addressing situations where a borrower is delinquent but does not become more than 120 days delinquent, including acceleration of the loan where permitted under the contract and applicable law, as discussed in comment 31(Delinquency)-4.

81 F.R. 72160, 72195 (Oct. 19, 2016) (emphasis added).     Therefore, rather than providing an exception for “rolling delinquencies”, the CFPB added a new Comment addressing a creditor’s right to accelerate payment under the contract or loan documents. The new Comment to § 1024.31 (Delinquency) – 4 provides:

  1. Creditor’s contract rights. This subpart [the definition of delinquency] does not prevent a creditor from exercising a right provided by a mortgage loan contract to accelerate payment for a breach of that contract. Failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency.

81 F.R. 72160, 72378 (Oct. 19, 2016) (emphasis added). In the issuing regulations, the CFPB discusses this new Comment and its intent as follows:

The Bureau is adopting new comment 31(Delinquency)-4 to address a creditor’s right to accelerate payment under the contract. Comment 31 (Delinquency)-4 provides that subpart C of Regulation X does not prevent a creditor from exercising a right provided by a mortgage loan contract to accelerate payment for a breach of that contract. Comment 31 (Delinquency)-4 further explains that failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency.

* * *

The Bureau previously explained the relationship between acceleration and delinquency in the preamble to the 2013 TILA Servicing Final Rule. The Bureau explained that, because the definition of ‘‘periodic payment’’ is intended to reflect the consumer’s contractual obligation, to the extent a consumer’s mortgage loan has been accelerated (such that the periodic payment constitutes the total amount owed for all principal and interest), this total accelerated amount may be appropriately accounted for within this definition of a periodic payment, and would constitute the new amount due.

Comment 31 (Delinquency)-4 applies to permissible acceleration permitted based on any breach of the underlying mortgage loan obligation. Depending on the contract, this could include, for example, the borrower’s failure to pay the monthly periodic payment amount on the payment due date as well as the borrower’s failure to comply with other components of the contract, such as requirements to pay property taxes, maintain insurance, or pay late fees. If the borrower reinstates the loan or otherwise cures the arrearage following acceleration, the borrower would no longer be delinquent under the definition set forth in § 1024.31.

81 F.R. 72160, 72194 (Oct. 19, 2016) (emphasis added).

In other words, servicers’ “alternative means for addressing situations where a borrower is delinquent but does not become more than 120 days delinquent,” referenced by the CFPB, depends upon the terms of the contract with the borrower. The official Comments now explain that a creditor may still exercise its rights provided by contract to accelerate payment for a breach of contract. For instance, if the note, loan agreement or other contract with the borrower permits the creditor to accelerate the balance upon delinquent or past-due payments (or other defaults under the contract), then the creditor may accelerate the balance. Once a balance has been accelerated under the terms of the applicable contract, the “periodic payment” due would be the entire accelerated amount or balance. Therefore, in that situation, a borrower’s delinquency would continue (from the date of the original default) until the borrower paid the entire accelerated amount.

Before applying the guidance set forth in these new Comments to accelerate a loan with “rolling delinquencies” and pursue foreclosure, a lender must look carefully at state law and the applicable loan documents and/or deed of trust.

In West Virginia, a creditor my provide a consumer with a notice of default[5] (including for failure to make a scheduled payment on an installment obligation) and notice of right to cure such default after the consumer has been in default for five (5) days.  W. Va. Code § 46A-2-106.  Pursuant to that same provision of the WVCCPA, a creditor may not accelerate maturity of the unpaid balance of an installment obligation until ten (10) days after notice of right to cure such default has been given to the consumer. Id.  During that ten (10) day period, the consumer has the right to cure the default by paying all unpaid sums due, without acceleration. Id.  If the consumer fails to cure the default within ten (10) days, the creditor may then accelerate the maturity of the unpaid balance of the installment obligation, provided such acceleration is permitted by the underlying loan documents and/or deed of trust.[6] Id.

Based on the CFPB’s recent guidance, a creditor retains its contractual right to provide this notice of right to cure and to accelerate the loan balance under the terms of the loan documents and applicable state law (the WVCCPA). Once the creditor has properly accelerated, the total accelerated amount becomes the “periodic payment” due, for purposes of continuing a “delinquency.”  Accordingly, if the borrower does not then pay the full accelerated amount within 120 days of the initial delinquency, contemplated by 12 C.F.R. § 1024.41(f)(1)(i), the creditor may begin foreclosure proceedings.

In conclusion, the Amendments to Regulation X, which become effective October 19, 2017, do not directly address “rolling delinquencies,” but they do provide guidance for how lenders should credit payments on a delinquent account and how lenders may exercise their contractual rights to accelerate a loan. It is now clear that when a borrower is habitually delinquent, a lender retains the right to accelerate the loan. Rather than a borrower being able to continually advance the 120-day foreclosure referral period by repeated late payments, a lender may now accelerate the maturity date of the loan (in accordance with the contract and WVCCPA), and the borrower will not be able to “advance” the delinquency date and will have to pay the accelerated balance to cure the delinquency for purposes of Regulation X.

For more information or to discuss your options for handling specific accounts with “rolling delinquencies,” please contact Kay Casto & Chaney PLLC.

 

Notes:

[1] In response to the 2008-2009 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), which imposed requirements on servicers and gives the CFPB the authority to both implement the requirements, as well as adopt new rules. One of the new rules issued by the CFPB in January 2013 was the Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (“RESPA”) (Regulation X), 12 C.F.R. Part 1024. See, 78 F.R. 10695 (Feb. 14, 2013).

[2] A question has arisen as to whether this prohibits lenders from issuing the notice of right to cure default required by West Virginia Code Section 46A-2-106 (discussed in more detail below). The comments to 12 C.F.R. § 1024.41 have clarified that this “first notice of filing” means the “earliest document required to be recorded or published [by the state law] to initiate the foreclosure process.”  Comment 2 to 12 C.F.R. § 1024.41(f).  Under West Virginia law, this first “notice” would be the notice of sale for a non-judicial foreclosure, not the notice of default pursuant to West Virginia Code Section 46A-2-106.

[3] The word “delinquent” was never defined for purposes of § 1024.41(f), until the Amendments to Regulation X, effective October 19, 2017.

[4] These provisions apply to any mortgage loan.  Although “small servicers” (12 C.F.R. 1026.41(e)(4)) are exempted from some of the requirements of Regulation X, “small servicers” are not exempted from the 120-day period under § 1024.41(f). See, 12 C.F.R. § 1024.41(j); see also, 12 C.F.R. 1024.30.

[5] The existence of a default will be determined under the applicable loan documents.

[6] Sometimes, deeds of trust, including the Fannie Mae form, require a contractual notice of default and right to cure be sent that provides greater than the ten (10) days to cure the default under West Virginia law.

 

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