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2.3 Understanding Default and Acceleration

The terms of the note and related security instrument will identify what constitutes default by the homeowner. By definition a default occurs when the borrower fails to comply with any of the requirements of the contract. Failure to make a mortgage payment on the day it is due is a technical default.21Yet lenders do not usually act on a default until after the late fee is triggered—typically either ten or fifteen days after the payment due date. While nonpayment is the most common event of default, the borrower’s noncompliance with other terms of the note or mortgage, such as the failure to maintain property insurance, can also constitute a default.

The question of whether the borrower is, or was, in default on a particular day is important because default can trigger coverage under, or exemption from, some laws. For example, the Fair Debt Collection Practices Act only applies to mortgage servicers if they obtained the mortgage servicing rights after the borrower was in default.22 And RESPA’s Regulation X states that, in some circumstances, a servicer’s obligation to make timely payments from escrow for taxes and insurance are suspended if the borrower is thirty days or more in default.23In addition, many of the loss mitigation requirements under Regulation X, including the early intervention efforts, take effect within certain time periods after the borrower becomes delinquent. All provisions of subpart C of Regulation X, as well as section 1026.41 (dealing with periodic mortgage statements) of Regulation Z, rely upon a definition of “delinquency” found in section 1024.31, which is: “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.”24

Whether the borrower is in default can also explain (although imperfectly) why the servicer is treating payments in a certain way and whether certain rights under the note and security instrument apply. For example, the Fannie Mae/Freddie Mac uniform notes and security instruments generally give the borrower the right to receive notice of a default and a right to cure the default prior to acceleration of the loan.25 State laws may also provide for notice of and the right to cure mortgage loan defaults.26 Failure to give notice of the default and right to cure, when required by the contract or state law, may render a foreclosure defective as a matter of law or give rise to a breach-of-contract claim.27

If a default has not been cured in the time specified by the notice, the lender may elect to accelerate the loan.28 Acceleration makes the entire debt mature and requires the borrower to pay all amounts due, including principal, accrued interest, escrow amounts, and fees as authorized by the contract. Acceleration must be clear and unequivocal, and is usually accomplished by notice to the borrower.29 In some states, however, pleading acceleration in a judicial foreclosure complaint is sufficient notice of acceleration. Once a mortgage is accelerated, periodic payments are no longer due. Therefore, most courts hold that the right to charge late fees ceases upon acceleration.30

Typically, a loan may be reinstated prior to acceleration by paying any arrearage amount (past due payments and permissible costs and fees). After acceleration, the lender need not accept anything less than the full amount due unless required to by the contract or by state law. For example, the standard Fannie Mae/Freddie Mac uniform security instruments specifically provide for reinstatement after acceleration if certain conditions are satisfied.31

The lender’s subsequent acceptance of payments may affect the accelerated status of the loan, and state law may include statutory right-to-cure provisions that apply even after acceleration.32 Acceleration of the loan often will trigger the running of the statute of limitations period for collecting the debt.33 Whether a lender may unilaterally revoke or undo the acceleration of a loan as a tool to avoid the statute of limitations is subject to debate. Litigation over this issue is discussed in Home Foreclosures § 5.3.3 (2019), updated at www.nclc.org/library.

Footnotes

  • 21 For example, the uniform promissory note used by Fannie Mae and Freddie Mac says: “If I do not pay the full amount of each monthly payment on the date it is due, I will be in default.” Multistate Fixed Rate Note—Single Family—Fannie Mae/Freddie Mac Uniform Instrument, (Form 3200 1/01) ¶ 6(B).

  • 22 See 15 U.S.C. § 1692a(1)(F); § 4.3, infra (discussing when a loan is considered in default for purposes of FDCPA coverage).

  • 23 See Reg. X, 12 C.F.R. § 1024.17(k)(1), (2); § 3.5.6, infra.

  • 24 Reg. X, 12 C.F.R. § 1024.31; § 3.7.2, infra.

  • 25 {22} See, e.g., Fannie Mae/Freddie Mac Uniform Instrument ¶ 22 (01/01) (“Lender shall give notice to Borrower prior to acceleration following Borrower’s breach of any covenant or agreement in this Security Instrument. . . . The notice shall specify: (a) the default; (b) the action required to cure the default; (c) a date, not less than thirty days from the date the notice is given to Borrower, by which the default must be cured; and (d) that failure to cure the default on or before the date specified in the notice will result in acceleration of the sums secured by this Security Instrument and sale of the Property. The notice shall further inform Borrower of the right to reinstate after acceleration and the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale. If the default is not cured on or before the date specified in the notice, Lender at its option may require immediate payment in full of all sums secured by this Security Instrument without further demand and may invoke the power of sale and any other remedies permitted by Applicable Law.”).

  • 26 {23} See National Consumer Law Center, Home Foreclosures § 5.2.5, Appx. F (2019), updated at www.nclc.org/library (summarizing state foreclosure laws).

  • 27 {24} See National Consumer Law Center, Home Foreclosures § 5.2.5 (2019), updated at www.nclc.org/library.

    In practice, advocates should always obtain a copy of the notice of default from either the borrower or the servicer. If the borrower claims not to have received a copy and the servicer cannot produce a copy, it may be possible to eliminate any foreclosure fees or costs incurred subsequent to when the notice should have been provided.

  • 28 {25} Older contractual provisions allowed a lender to accelerate the balance of the debt immediately upon the borrower’s failure to pay an installment, and without notice to the homeowner. Today many mortgages and deeds of trust, including the GSEs’ standard security instrument, require that the lender give the homeowner a notice with specific content before acceleration can be effective. See National Consumer Law Center, Home Foreclosures § 5.6 (2019), updated at www.nclc.org/library.

  • 29 {26} National Consumer Law Center, Home Foreclosures § 5.6 (2019), updated at www.nclc.org/library.

  • 30 {27} National Consumer Law Center, Home Foreclosures § 5.6 (2019), updated at www.nclc.org/library.

  • 31 {28} Fannie Mae/Freddie Mac Uniform Instrument ¶ 19 (Jan. 2001).

  • 32 {29} See National Consumer Law Center, Home Foreclosures § 5.6 (2019), updated at www.nclc.org/library.

  • 33 {32} National Consumer Law Center, Home Foreclosures § 5.3.2 (2019), updated at www.nclc.org/library.