On August 4, 2016, the Consumer Financial Protection Bureau issued the 2016 Mortgage Servicing Rule defining the word “delinquency” for specified mortgage servicing provisions of Regulation X, which established national mortgage servicing standards and imposed new requirements on lenders and servicers with respect to foreclosures. Specifically, under the Servicing Rule (Rule), the servicer cannot officially initiate judicial or non-judicial foreclosure proceedings, which are established by the first notice or filing, until the borrower is more than 120 days delinquent on loan payments. In a judicial foreclosure, the first filing is the earliest document the servicer files with the court, while in a non-judicial foreclosure, the first notice is the initial document a servicer records or publishes.

Constitutes delinquent
Borrowers are considered “delinquent” under the Rule beginning on the date that a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until the time when no periodic payment remains outstanding.  

The Rule does not require a servicer to treat a payment as being on time if the amount paid is not adequate to cover principal, interest and escrow. However, the Rule does address how a servicer calculates delinquency if the servicer has a policy of treating insufficient payments as timely.

Insufficient payments
Under these circumstances, the delinquency period does not begin and a borrower is not considered to be delinquent if the servicer treats a payment that is insufficient to cover a periodic payment of principal, interest or escrow as timely. Additionally, a servicer cannot rescind its decision to treat the insufficient payment as timely in regards to determining when the borrower’s delinquent period began. The Rule does not require that the difference between what is actually owed and what was paid to be within any specific dollar range.

In sum, the servicer should be aware of its specified mortgage servicing provisions before determining whether a borrower has started its delinquency period in relation to the 120-day prohibition rule with respect to filing the first notice in a foreclosure action.

Seek the counsel of a Chuhak & Tecson Banking attorney before initiating a foreclosure.

Client Alert authored by: Andrew G. Fullett, Associate

—A special thanks to Chuhak & Tecson P.C. law clerk Elisabeth Volk for her contribution to this article.