This past July, the American Bankers Association sent a letter to the CFPB requesting several clarifications to the mortgage servicing rules.  One of such clarifications concerned application of the “120-day rule,” meaning the rule that prohibits a servicer from sending the first notice or filing for foreclosure unless a borrower’s mortgage loan is more than 120 days delinquent.  Rather than leave it to the courts to determine if a bank has correctly applied the 120-day rule, the ABA asked the CFPB to specify how the rule applies to “rolling delinquencies,” meaning delinquencies that occur when delinquent borrowers resume making payments without making up past missed payments.

As a follow up to its July 2014 letter, the ABA sent another letter to the CFPB last week providing the results of a rolling delinquency survey conducted by the ABA to assess how often such delinquencies occur and gather information regarding how banks manage delinquent mortgage loans on a rolling basis.  32 banks participated in the survey and 63% of such banks had assets of $1 billion or less.

According to the ABA’s analysis, the survey results show that bank practices involving rolling delinquencies are not uniform and may differ from bank to bank based on various considerations.  By way of examples, the ABA points to the variety of policies that banks have adopted for accepting and crediting payments and partial payments on rolling delinquencies.  It also points to the multiple methods banks use for determining when to commence foreclosure on loans that have been delinquent on a rolling basis.

The ABA observes that the survey results, taken in conjunction with feedback from ABA members, indicate that banks may weigh a variety of factors when establishing policies and procedures for handling rolling delinquencies.  In the letter, the ABA lists seven common considerations, including whether the servicer holds the credit risk for the loan (which creates strong incentives to seek foreclosure alternatives) or services the loan for another entity and is therefore subject to investor guidelines, servicing incentives and compensatory  fees.

The ABA notes that in responding to inquiries as to how banks should apply the 120-day rule to rolling delinquencies, the CFPB has informally recommended that servicers look to common interpretations of “delinquency” which may be found in best practices, industry standards, state law and contract law.  Because the 120-day rule is subject to a private right of action, the ABA requests that the CFPB, at a minimum, incorporate this informal guidance into the official servicing rule commentary.

In the new letter, the ABA reiterates its call for official regulatory clarification on how the
120-day rule applies to rolling delinquencies, and observes that such clarification is needed to prevent legal and regulatory uncertainty from being “additional factors that encourage banks to scale back their mortgage servicing activities.”