When a borrower has been delinquent for at least ninety days, we used to send a letter demanding the entire amount past due, with a lockout preventing payments from processing. Under the latest mortgage servicing amendments that went into effect in October of 2017, can we still send out this letter and refuse to credit loan payments? Will we be able to file a foreclosure action after 120 days of delinquency? We are a small servicer.

Yes, we believe that your bank may send demand letters and refuse to credit monthly loan payments on a delinquent closed-end consumer mortgage loan, provided that you already have accelerated the loan because of the delinquency.

The general rule under Regulation Z for closed-end consumer mortgage loans is that servicers must credit periodic payments covering principal, interest and escrow as of the date of receipt.

However, when the CFPB issued its final mortgage servicing rule in 2013, it explained that “the definition of ‘periodic payment’ is intended to reflect the consumer’s contractual obligation.” If a bank has formally accelerated a loan under its loan agreement, then “the periodic payment constitutes the total amount owed for all principal and interest” — a mere monthly loan payment would not constitute the “periodic payment.” Consequently, for an accelerated loan, your bank is not required to credit monthly payments that are for less than the total payoff amount.

Additionally, we believe that a borrower’s failure to pay off an accelerated loan in its entirety would constitute a delinquency for purposes of Regulation Z’s 120-day foreclosure grace period. The CFPB recently amended its definition of “delinquency” and its official interpretations to clarify that a borrower’s “failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency.”

For resources related to our guidance, please see:

Regulation Z, 12 CFR 1026.36(c)(1) (“Payment processing. In connection with a closed-end consumer credit transaction secured by a consumer’s dwelling: (i) Periodic payments. No servicer shall fail to credit a periodic payment to the consumer’s loan account as of the date of receipt . . . . A periodic payment, as used in this paragraph (c), is an amount sufficient to cover principal, interest, and escrow (if applicable) for a given billing cycle. A payment qualifies as a periodic payment even if it does not include amounts required to cover late fees, other fees, or non-escrow payment a servicer has advanced on a consumer’s behalf.”)
Final Rule, Mortgage Servicing Rule, Supplementary Information, 78 Fed. Reg. 10902, 10954 (February 14, 2013) (“Because the definition of ‘periodic payment’ is intended to reflect the consumer’s contractual obligation, to the extent a consumer’s mortgage loan has been accelerated (such that the periodic payment constitutes the total amount owed for all principal and interest), or that certain obligations for force-placed insurance or delinquent taxes have been paid through the escrow account, those amounts may be appropriately accounted for within this definition of a periodic payment.”)
Official Interpretations, Paragraph 36(c)(1)(ii), Comment 1 (“Handling of partial payments. If a servicer receives a partial payment from a consumer, to the extent not prohibited by applicable law or the legal obligation between the parties, the servicer may take any of the following actions: (i) Credit the partial payment upon receipt. (ii) Return the partial payment to the consumer. (iii) Hold the payment in a suspense or unapplied funds account. . . .”)
Regulation X, 12 CFR 1024.41(f)(1) (“A servicer shall not make the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process unless: (1) A borrower’s mortgage loan obligation is more than 120 days delinquent; . . .”)
Regulation X, 12 CFR 1024.31 (“Delinquency means a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. A borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and, if applicable, escrow becomes due and unpaid, until such time as no periodic payment is due and unpaid.”)
Regulation X, Official Interpretations, Paragraph 31, Delinquency, Comment 4 (“Creditor’s contract rights. This subpart does not prevent a creditor from exercising a right provided by a mortgage loan contract to accelerate payment for a breach of that contract. Failure to pay the amount due after the creditor accelerates the mortgage loan obligation in accordance with the mortgage loan contract would begin or continue delinquency.”)
Final Rule, Mortgage Servicing Rule Amendments, Supplementary Information, 81 Fed. Reg. 72160, 72194 (October 19, 2016) (“The Bureau explained that, because the definition of ‘periodic payment’ is intended to reflect the consumer’s contractual obligation, to the extent a consumer's mortgage loan has been accelerated (such that the periodic payment constitutes the total amount owed for all principal and interest), this total accelerated amount may be appropriately accounted for within this definition of a periodic payment, and would constitute the new amount due.”)