On the heels of the Supreme Judicial Court’s decision in U.S. Bank, N.A. v. Schumacher eliminating the oft-cited defense to foreclosure and eviction that minor errors in a Chapter 35A notice of default and right to cure effectively voided a later foreclosure, the Consumer Financial Protection Bureau (CFPB) appears poised to provide a new round of foreclosure defenses. As part of a reform to almost all aspects of mortgage origination and servicing, the CFPB recently implemented new rules designed to ensure that distressed borrowers are reviewed for foreclosure avoidance options. And, if the past is prologue, these new regulations will create a replacement crop of foreclosure and eviction defenses over the next several months.

Of particular note are two new rules, the Early Intervention Requirements and the Loss Mitigation Procedures, which establish new procedures and timelines for servicing residential, government guaranteed loans in default, including:

• Prohibiting making the first notice or filing of foreclosure until a borrower is more than 120 days delinquent.
• Requiring servicers to speak to borrowers within 36 days of delinquency and inform them of available alternatives to foreclosure.
• Imposing deadlines on servicers to acknowledge receipt and review of complete loss mitigation applications.
• Creating a right to appeal adverse loss mitigation decisions.
• Prohibiting any steps toward foreclosure while review of a completed loss mitigation application is pending.

The rules provide borrowers with a private right of action to enforce compliance and/or penalize noncompliance for up to three years after the fact. Borrowers may seek damages for an amount equal to any actual damages (including emotional distress) resulting from a servicer’s actions or statutory damages of up to $2,000 per violation, plus costs and reasonable attorneys’ fees.

Successful borrower class actions may recover damages up to $1 million or 1 percent of a servicer’s net worth, whichever is less. While suits for injunctive relief are not allowed, the practical effect of alleging a claim will be delay because many servicers are loathe to foreclose during active litigation.

The recovery of reasonable attorneys’ fees all but invites litigation, particularly from plaintiffs’ attorneys who make a practice of filing mass actions in order to leverage a settlement and recover costs and fees. Plus, because the statute imposes a penalty per violation, servicers risk significant exposure if systemic noncompliance is identified.

Given the focus on timelines and procedures, servicers will most effectively mitigate liability by developing robust compliance protocols and by utilizing the CFPB’s model forms and clauses. In particular, servicers should create a procedure to identify when a loss mitigation application is deemed received and complete, so that these trigger dates can be uniformly applied. To ensure clarity, the status of a borrower’s delinquency, loss mitigation options and application should be accessible to all customer service representatives. Moreover, service-transferred loans should be scrutinized, as transferee servicers are deemed to have assumed responsibility for the review of any pending loss mitigation application.

Servicers are advised to conduct comprehensive reviews of the foreclosure processes of those states in which they operate because state law may alter the compliance analysis. For example, the 120-day prohibition against making a “first notice or filing” of foreclosure will hinge upon what documents initiate the foreclosure process in that particular state.

Ultimately, servicers cannot prevent a borrower from filing an action. However, having strong compliance protocols and maintaining clear and comprehensive records of actual correspondence with a borrower may serve to defeat claims in their infancy by providing critical support for a motion to dismiss or judgment on the pleadings, without needing to engage in further proceedings.

Recently, the CFPB released a report indicating that the number of consumer complaints it received nearly doubled in 2013. It is doubtful that consumers, equipped with these new regulations, will slow the momentum anytime soon.

Alison Kinchla is an attorney at Bernkopf Goodman focusing on complex business and real estate litigation.