While Borrowers have always had the ability to request Loss Mitigation as a way of resolving a foreclosure, both the public awareness and the legal requirements for Loss Mitigation have dramatically increased since the foreclosure crisis began in 2008.
Historically, Lenders would continue prosecuting a foreclosure, notwithstanding that the Borrower had submitted an application and “package” of documents for them to review in order to resolve the foreclosure. This process, known as “Dual Tracking” was intended to avoid delays in the foreclosure process should the Loss Mitigation efforts fail.
Judgments of Foreclosure were routinely submitted and foreclosure sales were scheduled and sometimes held, even though though the Borrower may have been under the impression that they had resolved the foreclosure. To avoid such scenarios, Congress included in the Dodd-Frank Act specific provisions prohibiting this practice.
Dodd–Frank Wall Street Reform and Consumer Protection Act
Commonly referred to simply as Dodd-Frank, the act contains many Consumer Protection provisions, such as the prohibition against Lenders initiating the foreclosure until the borrower is at least 120 days in arrears. Notwithstanding the terms of the mortgage contract agreed to by both parties, Lenders must wait at least 120 days before starting a foreclosure. Fortunately for New York Lenders, Dodd-Frank does not prohibit sending the “90-day letter” required by RPAPL 1304 during this time.
Additionally, Dodd-Frank prohibits Lenders from submitting a Judgment of Foreclosure, or from scheduling a Foreclosure sale, if a “complete” loss mitigation package was submitted at least 37 days before the sale date.
Loss Mitigation applications, however, are rarely, if ever, submitted with a 100% complete package. Inevitably, there is missing information or documents that Servicers require in order to complete their review. Accordingly, the question that has yet to be answered when a Lender is ready to submit a Judgment of Foreclosure, or from scheduling a Foreclosure sale and had previously received a Loss Mitigation application, is whether a “complete” Loss Mitigation package is one which is 100% complete or if it includes those that are “substantially” complete, and are missing only minor information or documents.
While it is too soon for case law to answer this question, it is this author’s recommendation, to “err on the side of caution” and assume that the courts, the CFPB and other Regulatory Agencies will apply a liberal construction as to whether or not a Loss Mitigation package was complete.
Should there be any doubt that a “complete” loss mitigation package may be deemed to have been submitted, a letter should be sent to the Borrower providing a reasonable time within which to provide the missing information or documentation required. Should the Borrower fail to provide the missing information or documentation required, another letter formally advising the Borrower that his/her Loss Mitigation application was denied due to incompleteness of the loss mitigation package.
In this way, the Lender avoids the Borrower being under the impression that they had resolved the foreclosure and can demonstrate compliance with both the “spirit” as well as the “letter” of the law while incurring only a minor expense to do so.