The Critical Importance of a Coordinated Collection and Loss Mitigation Effort

As foreclosure volumes continue at record levels across the country, mortgage lenders and servicers are now, more than ever, focusing on loss mitigation efforts to help reduce the number of foreclosures and REO’S. In doing so, lenders and servicers must be careful to implement sound policies to avoid confusion on the borrower’s part that may convert those well-intended loss mitigation activities into a trap of unwelcome consequences for the lender.

In a recently published opinion, an Ohio Court of Appeals upheld a trial court’s decision in which not only was the foreclosure dismissed, but the mortgage was deemed reinstated without the right to collect five past due payments.  The case[1] underscores the importance of unambiguous and coordinated communications to the borrower, and the need to anticipate and be prepared for issues to overcome at trial.

The facts set forth in the Court’s opinion, which illustrate a typical snafu that can occur, were as follows: 

5/1/07:  Borrowers (the Barkers) defaulted on their mortgage payments.

6/1/07:  The original lender, First Financial (“FF”) sold the loan to PHH.

7/07:  Mrs. Barker contacted a branch office of FF, and was directed to contact its loss mitigation department.  The loss mitigation department informed her that it would send a loss mitigation assistance packet.  

7/31/07:  FF sent a letter notifying the Barkers that the loan was in default, and offering assistance if they were experiencing difficulties in making the payments.
 
Early 8/07:  The Barkers received a loss mitigation packet from a servicing operation affiliated with the lender, completed and returned it. 

8/20/07:  FF sent a letter demanding that $1,288.64 be paid within 30 days to avoid foreclosure, and sent a second demand letter on 8/29/07.
 
Late 8/07:  The Bakers received a new payment coupon book in the mail, unaccompanied by any correspondence or explanation.  Upon receipt of the coupon book, Mrs. Barker believed that the mortgage had been reinstated as a result of the loss mitigation packet that she had returned.

End of 8/07 and in 9/07:  Although the coupons called for payments of $312.06 beginning 10/1/07, Mrs. Barker delivered two $400 payments at the lender’s branch.

10/22/07 and 10/29/07:  FF sent letters together with two checks in different amounts, totaling $800, stating that the loan remained in default and that foreclosure review or proceedings were pending.  The Barkers testified that they did not receive those two letters, and no evidence was presented that the checks were ever cashed. 

10/29/07:  Mrs. Barker delivered a payment of $800 to the lender’s branch and was given a receipt. 

11/07:  The formal assignment of the note and mortgage to PHH was recorded. The Court mentioned in a footnote that the plaintiff is affiliated with the original lender, but the court did not delve into any reason why the original lender had continued to correspond with the borrower after 6/1/07.   

11/7/07:  PHH filed the foreclosure.

11/14/07:  PHH sent a refund of the Barkers $800 payment, but the Barkers testified that they did not receive it until 2/08 or 3/08.

12/07 and 1/08:  Mrs. Barker continued to make payments to FF.  There was no attempt to return those payments. 

2/4/08:  Mrs. Barker attempted to make another payment to FF’s branch, and the payment was refused. 

No evidence was presented at the trial that PHH had notified the Barkers that PHH had purchased the loan.  PHH’s records showed that after the sale of the loan, the borrower requested a new payment coupon book.  PHH’s representative testified that its collection records and loss mitigation records where logged separately, and she had not brought the loss mitigation log to the trial, and therefore, she was unable to testify about the loss mitigation records.  The loan history that PHH presented only covered the period from 12/30/05 to 6/1/07.

The Trial Court found that the Barkers reasonably believed that the loan had been reinstated and that they attempted to follow through, but were prevented from doing so by the lenders’ actions.  The Court dismissed the case and ordered PHH to deem the mortgage reinstated at the amount owed as of 10/1/07, which was the date shown in the new coupon book.    

PHH appealed, and the Court of Appeals affirmed the decision, stating that the Barkers made every good faith effort to get back on track, despite receiving conflicting communications from FF, while at the same time FF’s loss mitigation department was working with them to resolve the default.   

In the Court’s opinion, the Barkers had no reason to know that the loan had been sold and therefore, they had reason to believe that the mortgage was still with FF as a result of the payments accepted by FF, despite the pending foreclosure that had been filed by PHH.   The Court went on to note that PHH’s evidence of the borrower’s failure to make payments when due was insufficient for the Court to issue a foreclosure decree in favor of PHH, and the Court held that it would not be equitable, under the circumstances, to order a foreclosure.    

Although the Court’s jurisdiction only covers a number of rural counties in Western Ohio, the case illustrates some important issues for lenders and servicers:  

• Collectors and loss mitigation representatives should coordinate their efforts to ensure that the borrower is provided with an accurate and unambiguous status of the account. 
• Any loss mitigation correspondence or other items sent to the borrower should contain complete and accurate information, including a clear statement that the status of the loan will not be changed until a final written loss mitigation agreement is in place. 
• Representatives testifying at hearings should bring both the complete collection records and loss mitigation records; they should be prepared to discuss and overcome allegations by the borrower. 
• Purchasers of mortgage loans must provide a “welcome letter” to the borrower, in order for the borrower to have a clear understanding that they are no longer dealing with the prior lender.  This is also a clear requirement of RESPA. 
• Payments that are to be rejected as insufficient to cure a default, should be returned promptly.

¹ PHH Mtge. Corp. v. Barker, 190 Ohio App.3d 71, 2010-Ohio-5061