Troubled Borrowers Given Right to Sue Under Servicing Rule

The Consumer Financial Protection Bureau has given borrowers the right to sue their servicers for not complying with the loss mitigation requirements outlined in a new servicing rule that was issued on Thursday.

This private right of action will go into effect next January and it will open the door for existing borrowers to the use the courts to block foreclosures.

“Borrowers now have a legal right to loss mitigation considerations,” according to Richard Andreano, a partner at Ballard Spahr law firm. It will make the foreclosure process longer and more expensive if servicers have to fight these lawsuits in court, he said.

For example, the servicing rule states that a servicer cannot start the foreclosure process before a borrower is 120 days delinquent.

If the servicer files earlier than 120 days, the borrower could sue.

Andreano noted the regulators have the option to take enforcement actions to keep servicers in line.

By giving borrowers the right to sue, it is a way to ensure “robust” servicer compliance with the new loss mitigation procedures.

But it will add to the cost of servicing, which the industry wasn’t expecting. “I’m sure servicers are pulling out their pooling and servicing agreements and taking a very close look to see” how they can be reimbursed for these costs, Andreano said. He is a practice attorney in Ballard Spahr’s mortgage banking group.