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2.12 Failure to Consider Loss Mitigation Alternatives

In the past decade, industry standards related to loss mitigation have changed dramatically. Previously, mortgage holders and servicers were reluctant to evaluate any but the simplest proposals for straightforward repayment agreements to avoid foreclosure. In the wake of the foreclosure crisis, numerous private and government-sponsored programs were initiated to encourage and require servicers to affirmatively consider loan modifications before foreclosure.232

For example, the Federal Housing Administration (FHA) has long had extensive rules requiring servicers to engage in loss mitigation before foreclosing on property. Although homeowners do not have a private right of action against the servicer for failing to follow the FHA loss mitigation guidelines, many courts have held that the servicer’s failure to follow these guidelines provides a defense to the foreclosure.233 The Department of Treasury’s Home Affordable Modification Program (HAMP)234 guidelines were analogous to the FHA rules requiring servicers to engage in loss mitigation. Specifically, the HAMP guidelines required servicers to refrain from referring a loan to foreclosure or conducting a scheduled foreclosure sale until either (a) the borrower had been evaluated for HAMP and determined to be ineligible or (b) reasonable attempts to solicit the borrower had been unsuccessful.235 Fannie Mae, Freddie Mac, the FHA, and the Department of Veterans Affairs each have their own loss mitigation programs.236 Other options, such as short sales, deeds in lieu of foreclosure, forbearance, and so forth, may also be available to the borrower through government-sponsored or privately created programs.

The Consumer Finance Protection Bureau (CFPB) has mandated a framework within which the evaluation of loss mitigation options must take place.237 Borrowers have the right to seek remedies when the servicer fails to conduct an evaluation in accordance with this framework’s procedural requirements, which include giving certain notices, evaluating loss mitigation applications within certain time frames, and refraining from foreclosing during certain periods of the review process. States, local governments, and courts have also instituted processes to ensure that loss mitigation alternatives are considered before foreclosure.238

Despite the emphasis placed upon and the benefits of loss mitigation alternatives, servicers may still refuse to appropriately evaluate borrowers for these options. Borrowers may be improperly denied loan modification based on purportedly missing documents, errors in calculating income or property value, or the servicer’s failure to acknowledge successors in interest. Borrowers may also receive contradictory information about the status of their loan or modification application. Servicers may fail to honor a modification agreement that they or a previous servicer entered into with the borrower, or may fail to convert a borrower from a trial to a permanent modification. Servicers may also proceed to foreclosure despite having a modification application under review (a practice called dual tracking).

Failure to engage in appropriate loss mitigation may give rise to the following claims:

  • • Breach of contract;
  • • Breach of the implied covenant of good faith and fair dealing;
  • • Unjust enrichment;
  • • Negligent servicing;
  • • Unfair and deceptive acts and practices (UDAP);
  • • Fraud;
  • • Promissory estoppel; and
  • • Violation of state mediation law or a contempt-of-court order requiring mediation prior to foreclosure.

These claims are discussed in detail in Chapter 10, infra.

Footnotes

  • 232 {227} See Chs. 7, 8, infra (discussion of various loss mitigation programs). See also § 3.8, infra (describing RESPA rules related to loss mitigation).

  • 233 {228} See § 8.2.7, infra.

  • 234 {229} See § 6.7.2.2, infra (discussing the termination of the HAMP program Dec. 31, 2016).

  • 235 {230} Dep’t of the Treasury, Supplemental Directive 10-02 (effective June 1, 2010). A servicer could refer a loan to foreclosure or continue with a planned foreclosure sale for other reasons, including if the borrower failed to make payments under an offered trial period plan or declined to participate in the HAMP program.

  • 236 {231} See Ch. 7, Ch. 8, infra (discussing various loss mitigation programs).

  • 237 {232} See § 3.8, infra.

  • 238 {233} See National Consumer Law Center, Home Foreclosures § 5.13 (2019), updated at www.nclc.org.