New 120 Day Mortgage Foreclosure Rule Protects Borrowers

The federal government has enacted new rules which will protect mortgage borrowers nationwide from abusive and wrongful foreclosures. Although the new standards do not officially take effect until January 2014, virtually all lenders will start following them this year to avoid reputational damage, the potential for litigation and additional regulatory oversight.

The Mortgage Servicing Rules under the Truth in Lending Act (Regulation Z) include 426 pages of regulations, guidelines and comments for mortgage servicers. While “lenders” originate loans and “mortgage investors” provide the capital used to create mortgages, “mortgage servicers” are in the business of loan maintenance – they are the people who collect monthly payments, make sure that property taxes and insurance are paid and – when loan payments are not made they are responsible for undertaking the foreclosure process.

The new rules from the Consumer Financial Protection Bureau deal with many issues but among the most important is the 120-day standard. The rules apply to “qualified mortgages” (QM) such as FHA mortgages, VA loans and conventional financing.

120-Day Mortgage Foreclosure Rule

The new consumer protection guidelines say that “servicers must not make the first notice or filing required for the foreclosure process until a mortgage loan account is more than 120 days delinquent. This will give borrowers reasonable time to submit modification applications.”

It can be argued – and has been argued – that a loan is “late” or “delinquent” if a payment was not made by the due date even though the borrower has the right to pay the loan later because the financing terms include an allowable grace period. For instance, a loan payment may be due on the first of the month but the mortgage contract may allow the borrower to pay by the 15th without penalty.

Lenders who have tried to collect money before the end of the grace period – usually with harassing “courtesy” phone calls – are simply trying to get cash as quickly as possible so they can benefit from the “float” that such faster payments can produce. (See: A Foul Call From Lenders)

If a loan can be considered “delinquent” if a payment is received even a minute after the due date then by the same logic that mortgage is also subject to foreclosure. Under the new consumer guidelines lenders cannot make such a foreclosure claim because at least 120 days must pass before a loan can be considered delinquent.

It should be plainly understood that under no conditions are the new rules an invitation to make late payments or to miss payments. Borrowers have an obligation to meet all loan terms and those terms surely include the full and timely payment which is due each month. Late and missed payments can result in significant late fees, credit score reductions and other costs which should be avoided.

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