On November 19, 2014 the Consumer Financial Protection Bureau (CFPB) published proposed changes to Regulations X (RESPA) and Z (TIL). Among other items the proposal contains extensive comment on the definition of the term “delinquency” when used for determining when the first notice regarding foreclosure under section 1024.41(f)(1)(i) may be sent.
Section 1024.31 contains definitions for various terms that are used throughout the provisions of subpart C of Regulation X. It does not contain a definition of the term “delinquency,” although it is defined for purposes of Early Intervention rules in §§ 1024.39(a) and (b) and Continuity of Contact rules in § 1024.40(a). Apparently the CFPB has received numerous inquiries about how servicers should calculate delinquency with respect to those provisions that refer to delinquency but do not define delinquency. In particular, stakeholders have asked the CFPB how servicers should calculate the 120-day foreclosure referral waiting period set forth in § 1024.41(f)(1)(i). The CFPB is proposing to add a single definition of “delinquency” that will apply to all provisions in subpart C of Regulation X, and to remove the definitions from the commentary to §§ 1024.39(a) and (b) and 1024.40(a).
Current Definition – Delinquency is currently defined for purposes of §§ 1024.39(a) and (b) and 1024.40(a) as beginning “on the day a payment sufficient to cover principal, interest, and, if applicable, escrow for a given billing cycle is due and unpaid, even if the borrower is afforded a period after the due date to pay before the servicer assesses a late fee.”
Proposed Definition – In the proposed rule the term 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 became due and unpaid, until such time as the outstanding payment is made.
The CFPB intends to provide servicers, borrowers, and others with clear guidance on how to determine whether a borrower is delinquent for purposes of Regulation X’s servicing provisions and when the borrower’s delinquency began. Servicers may use different definitions of “delinquency” for operational purposes, and servicers may use different or additional terminology when referring to borrowers who are late or behind on their payments—for example, servicers may refer to borrowers as “past due” or “in default,” and may distinguish between borrowers who are “delinquent” and “seriously delinquent.” Except as provided in the Mortgage Servicing Rules themselves, the CFPB does not intend the proposed definition of delinquency to affect industry’s existing procedures for identifying and dealing with borrowers who are late or behind on their payments.
Length of Delinquency – A borrower’s delinquency begins on the date an amount sufficient to cover a periodic payment of principal, interest, and, if applicable, escrow became due and unpaid, and lasts until such time as the payment is made, even if the borrower is afforded a period after the due date to pay before the servicer assesses a late fee.
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 1, the borrower makes a periodic payment. The servicer applies the payment it received on February 1 to the outstanding January payment. On February 2, the borrower is one day delinquent.
Many servicers credit payments made to a delinquent account to the oldest outstanding periodic payment. This method of crediting payments seems to provide greater consumer protection, because it advances the date the borrower’s delinquency began and therefore shortens the length of a borrower’s delinquency. Nonetheless, the CFPB is not requiring servicers to apply payments to the oldest outstanding periodic payment at this time.
This method of calculating delinquency means that, in light of the 120-day foreclosure referral waiting period in § 1024.41(f)(1)(i), servicers will not be able to foreclose on a borrower who misses one or two payments but does not become seriously delinquent—for example, a borrower who misses one payment over the course of a year but makes all other payments in full and on time.
Payment Tolerance – For any given billing cycle for which a borrower’s payment is less than the periodic payment due, a servicer that elects to advance the missing funds to the borrower’s mortgage loan account may elect not to treat the borrower as delinquent. If a servicer chooses not to treat a borrower as delinquent for purposes of any section of subpart C, that borrower is not delinquent as defined in section 1024.31.
Some servicers elect or are required to treat borrowers as having made a timely payment even if they make payments that are less than the amount due by some small amount. Servicers that apply a payment tolerance advance the outstanding payment amount to the borrower’s account, such that the account is reflected as current in the servicer’s systems. The maximum amount most servicers use for a payment tolerance generally ranges from $10 to $50. The clarification is intended to prevent the circumstance under which a servicer treats a borrower as current in order to avoid the early intervention, continuity of contact, or loss mitigation requirements, while treating the same borrower as delinquent for purposes of initiating foreclosure under § 1024.41(f)(1).