On July 30 the CFPB entered into a consent order with Residential Credit Solutions, requiring RCS to reimburse borrowers $1,500,000 for, among other allegations, the failure to honor HAMP and proprietary loan modifications negotiated by transferor servicers, and for coercing borrowers to relinquish all legal defenses in pending and threatened litigation in return for agreeing to allow borrowers to pay off delinquent payments in installments.

As with most, if not all, CFPB administrative proceeding consent orders, the respondent did not admit any of the allegations.  Of particular concern to both servicers and their attorneys should be the allegations concerning the coerced waiver of legal rights as a condition for a payment plan.  While the consent order is light on facts, it appears from the wording of the order that with respect to some borrowers foreclosure proceedings were in progress when RCS and the borrowers negotiated payment plans.  The plans included agreements that “[i]n the event of the cancellation of this Payment Plan and the continuation of foreclosure proceedings, you agree to waive any and all defenses, jurisdictional and otherwise, associated with the continuation of the foreclosure proceedings and possible subsequent public auction of your property.” The borrowers also agreed ““not to file any opposition to a motion for relief from the automatic stay filed on behalf of RCS” in any bankruptcy.”  The CFPB labelled these conditions as unfair under 12 U.S.C. § 5536(a)(1)(B).  According to the CFPB “[a]n act or practice is unfair if it causes or is likely to cause consumers substantial injury that is not reasonably avoidable and if the substantial injury is not outweighed by countervailing benefits to consumers or to competition.”

The reader is left to speculate, among other things, about exactly what litigation was pending or threatened, whether the “legal defenses” the borrowers gave up had any substance, or whether the borrowers were represented by counsel.  Particularly unhelpful is the complete absence of any explanation why the waiver of “legal defenses” by these borrowers caused “substantial injury” when the agreements reached presumably provided the borrowers the opportunity to save their homes from foreclosure, and why such an outcome would not qualify as a “countervailing benefit to consumers” so as to outweigh the alleged injury. 

Presuming a servicer (or the investor it serves) has no legal obligation to even offer a payment plan to a borrower in foreclosure status, what incentive does a servicer have to provide a foreclosure avoidance option for the borrower if it cannot at the same time obtain some satisfaction that the borrower will not try to place roadblocks in the path of foreclosure proceedings in the event the payment plan fails?  Why should one of the core principles of dispute resolution – the settling of actual or perceived claims between the parties – be abrogated in the context of mortgage servicing?

To be clear, the Order does not prohibit RCS from requiring borrowers to waive legal defenses in future payment plans, or other loss mitigation agreements, but in order to pass the “fairness” test RCS and, presumably, all other servicers, must meet certain conditions.  The Order regulates future conduct by providing that RCS would be violating 12 U.S.C. §§ 5531 and 5536 by: “Requiring consumers to waive legal defenses as a condition of receiving any form of loss mitigation, except in the context of the resolution of a pending or threatened legal action, where RCS provides clear and conspicuous disclosure of the legal defenses the consumer is waiving and an opportunity for the consumer to review such disclosures.”

While this provision appears to provide a safe harbor to RCS (and other servicers), the devil is in the details.  Interpreting this provision in the light most favorable to the borrower, as the CFPB would most likely do, make careful note of the following:

  1. It makes no difference if the consumer is represented or not.
  2. There must be a pending or threatened legal action.  This statement raises a number of questions. 
    1. Must the “pending or threatened legal action” be the one prosecuted by the servicer (e.g., the foreclosure action), or does it include a legal action brought or threatened by the borrower?
    2. Is a waiver permissible in a non-judicial foreclosure state, where there is normally no legal action “pending or threatened” by the servicer. 
    3. What does CFPB consider to be included within the phrase “legal defenses”?  Is the phrase intended to exclude equitable defenses? 
    4. Does CFPB consider affirmative causes of action or claims a borrower could assert in his own lawsuit, or counterclaim to a foreclosure complaint, to be “legal defenses”?
    5. However ill-defined, it seems a servicer (and its counsel) would have to identify every legal defense either actually raised or that could be raised, and then include these in the “clear and conspicuous disclosure of the legal defenses the consumer is waiving”.  This is likely to be very difficult, especially where litigation is only threatened.
    6. Catch-all waiver clauses may be unfair, even if there is also a detailed list of defenses clearly and conspicuously disclosed in the agreement.
    7. A servicer would be acting unfairly by obtaining a waiver of defenses it believes may be raised in a future action, if that action is not pending or threatened at the time of the waiver.
  3. Does the “clear and conspicuous” requirement mean describing the legal defenses in larger or bolder font, or separate from the rest of the loss mitigation agreement?
  4. If the consumer does not understand English, would the servicer have to provide the disclosure in the borrower’s native tongue in order for it to be “clear and conspicuous” to someone without an adequate command of English?  At the servicer’s expense, and risk for translation errors?
  5. There would have to be some waiting period while the borrower has the opportunity to contemplate the effect of the waiver.  Given the sometimes tight foreclosure deadlines and last-minute negotiations, time is not always in abundance. 

What appears on its face to be a bright line prohibition in fact leaves a lot of room for interpretation.  This is unfortunate given that many contested foreclosures are resolved by each party compromising its position, recognizing that a foreclosure sale may be the least desired outcome for both.  Servicers may now be left with this unpalatable choice:  negotiate a settlement that cuts off a borrower’s opportunities to challenge subsequent foreclosure action if the settlement fails, but risking the wrath of the CFPB for overreaching in the breadth and clarity of the waiver language; or, limit the scope of the litigation waiver to avoid CFPB sanctions, while leaving the borrower with plenty of options to disrupt and delay subsequent foreclosure efforts.