What Is “Loss Mitigation” and How Does It Affect a Foreclosure Proceeding in Maryland?
Most Maryland residents rely on a mortgage when purchasing their home or other real estate. If the borrower defaults on the mortgage, the lender has the right to foreclose on the property. But this can lead to significant financial losses for the lender.
To help avoid such outcomes, loan servicers–the middlemen who typically accept mortgage payments from the borrower on behalf of the lender–have a legal duty to try and mitigate the lender’s losses. Such “loss mitigation” can take several forms, including modifying the terms of the original mortgage loan or conducting a short sale of the property.
Judge Rules Servicer Followed Proper Procedures in Denying Loss Mitigation Application
The Real Estate Settlement Procedures Act (RESPA), a federal statute, governs the terms of mortgage loans and loss mitigation. The Consumer Financial Protection Bureau (CFPB) is currently responsible for administering RESPA, although individual borrowers may file a civil lawsuit against a lender or loan servicer that fails to comply with its terms.
For example, a federal judge in Maryland recently dismissed a RESPA lawsuit brought by a homeowner in Prince George’s County seeking to stop foreclosure proceedings against him. The plaintiff took out a mortgage loan for approximately $553,000 to purchase the house. The defendant was the loan servicer acting on behalf of the lender.
In 2015, the servicer initiated foreclosure proceedings, alleging the plaintiff defaulted on the mortgage loan back in 2010. In 2018, the plaintiff applied for a modification of the original loan. The servicer rejected the application, stating there were “no loss mitigation options” for which [the plaintiff] could be approved.
This prompted the plaintiff’s lawsuit. Specifically, the plaintiff alleged the defendant violated “violated RESPA by failing to provide specific enough reasons for denying Plaintiff’s loss-mitigation application.” The CFFB regulations implementing RESPA state that when a servicer denies an application for loss mitigation, it must give the borrower written notice explaining “the specific reason or reasons for the servicer’s determination for each such trial or permanent loan modification and, if applicable, that the borrower was not evaluated on other criteria.”
Additionally, the regulations state that if the investor–i.e., the lender or other party who controls the original loan–will “not allow some condition necessary” for the loss mitigation, then the servicer must explicitly “identify the owner or assignee of the mortgage loan and the requirement that is the basis of the denial.” In other words, the servicer must tell the borrower if the lender imposed any conditions that make modification of the original loan impossible.
In this case, however, the judge said the plaintiff’s lawsuit failed to provide any evidence that the lender imposed such conditions. Indeed, there was no indication “that a murky investor restriction resulted in the denial” of the plaintiff’s loss mitigation application. Rather, the servicer explained in sufficient detail the plaintiff simply did not qualify for any type of loan modification.
Speak with a Maryland Real Estate Lawyer Today
Loss mitigation is an important process for lenders, borrowers, and loan servicers alike. Given the complex nature of the statutes and regulations involved, it is always a good idea for an interested party to work with an experienced Maryland real estate attorney. Contact Henault & Sysko Chartered at 410-768-9300 if you need to speak with a member of our real estate legal team today.