New York Court Finds Borrower Must Strictly Comply with Notice Requirements to Hold Servicer Liable Under Regulation X

by Ballard Spahr LLP

In an issue of first impression, the Supreme Court of New York refused to find a loan servicer violated Regulation X by initiating foreclosure when a borrower failed to strictly comply with the servicer’s instructions for submitting notice of a reconsideration request. Emigrant Savings Bank—Long Island v. Berkowitz, 25 N.Y.S.3d 862 (N.Y. Sup. Ct. Feb. 19, 2016). The court concluded, however, that a servicer could violate Regulation X by foreclosing on a borrower who did not strictly comply with the servicer's notice requirement, if the servicer had unambiguously promised that it would not foreclose.  See id. at 865.

The Consumer Financial Protection Bureau's Regulation X provides certain conditions precedent to foreclosure. Among these conditions, a mortgage servicer cannot hold a foreclosure sale if a borrower has appealed the servicer’s denial of a loss mitigation package “unless the servicer has rendered a determination on the appeal and advised the borrower how long the borrower has to accept or reject any prior offer.” Id. at 862 (citing 12 C.F.R. § 1024.41(h)(4)). Relying on this provision, the borrower in Berkowitz moved to stop her mortgage servicer from proceeding with a foreclosure sale because the servicer had neither made a determination on nor responded to her loss mitigation appeal.       

The servicer had previously obtained a judgment of foreclosure and sale and scheduled a foreclosure sale to take place on January 14, 2016. The borrower had submitted a loss mitigation proposal, but the servicer rejected the proposal in writing months earlier, on August 12, 2015. The written rejection advised the borrower that, to seek reconsideration, she must comply with certain notice requirements:

"You MUST notify Emigrant of your request for reconsideration IN WRITING within 14 days after this notice. Requests for reconsideration WILL NOT be taken by telephone. You may submit your request for reconsideration via email to Ms. Kandel at LossMitigation or in the form of a letter mailed to Ms. Kandel at 6 E. 43rd Street, 10th Floor, New York, N.Y. 10017.” 

Id. at 863 (emphasis in court's decision). The borrower claimed she submitted an appeal by email and by regular mail. Scrutinizing the borrower’s evidence, the court found two facts significant: the borrower used an incorrect email address and the proffered documents did not contain the regular address for the servicer’s agent. Id. at 863-64. The court further noted that these facts corroborated the servicer’s claim that it did not receive notice of the borrower’s appeal. 

The court next examined—and distinguished—federal court decisions for guidance on Regulation X’s “recent creation of procedural rights for debtors facing threat of foreclosure.” Id. at 864. It ultimately turned to established principles of statutory construction and concluded “that Title X, conferring rights in derogation of the common law of Contract and Real Property, requires strict compliance with its notification mandate in order for a party to claim protection under its rule.” Id. (emphasis added). Thus, because the borrower failed to properly serve her request for reconsideration pursuant to the servicer’s directions, she could not enforce the regulation.

Significantly, the court recognized an equitable exception. Despite a borrower’s failure to strictly comply with the servicer’s notice requirements, a court may overlook the strict compliance requirement where the servicer received actual notice of the appeal and the borrower relied on the servicer’s statements that it would not foreclose.  See id. at 864-65. The court declined to apply this exception in the case at bar, however. Even though the servicer continued to negotiate with the borrower, there was “no indication that Plaintiff made an unambiguous promise that it intended to refrain from enforcing its rights to proceed to foreclosure.” Id. at 865.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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