In January of 2013, the Consumer Financial Protection Bureau (“CFPB”) finalized extensive new mortgage rules, which became effective on January 10, 2014. These rules affect many lending regulations, including but not limited to Regulations X and Z. Among the changes were new limitations that impact litigation against a borrower by a mortgage servicer. These limitations include new delinquency requirements and effectively created a limited stay of litigation when loss mitigation applications are received by a mortgage servicer.

Under these new rules, mortgage servicers are prohibited from making “the first notice or filing required by applicable law for any judicial or non-judicial foreclosure process” until a borrower is more than 120 days delinquent. This rule raised immediate questions about what constituted a first notice of filing and created widespread concern that lenders would not be permitted to send notices which are otherwise required under state law and internal lending rules.

On October 15, 2013, the CFPB clarified this rule, explaining, “[w]hether a document is considered the first notice or filing is determined on the basis of foreclosure procedure under the applicable State law.” The official commentary to the rules further explain that for judicial foreclosure, the first document is first document filed in court, and for a non-judicial foreclosure, the first document is the earliest document required to be recorded or published to initiate the foreclosure process.

For example, in Arkansas, should a lender choose to pursue judicial foreclosure procedures, the lender cannot file its foreclosure complaint or notice of lis pendens until the borrower is more than 120 days delinquent in payment. The CFPB has made it clear that a notice which is required to be sent to a borrower but which is not initially required to be filed is not a first notice or first filing simply because it may later be a attached to a complaint filed with a court.

There are two exceptions to this 120 day rule. First, the rule does not apply where a borrower violates a due-on-sale clause. For example, where a borrower sells her home and does not use the proceeds to pay off her mortgage, the lender can immediately begin foreclosure proceedings. Second, if a junior lienholder files a foreclosure action against property upon which a lender holds a senior mortgage, the lender can join the foreclosure of the subordinate lienholder.

Where a lender offers loss mitigation options to borrowers, there are other prohibitions against a lender beginning foreclosure litigation which extend beyond the 120 day rule. For example, a mortgage servicer which receives a completed loss mitigation application on the 119th day of delinquency cannot initiate a foreclosure action against the borrower until that loss mitigation application is reviewed and denied (and any appeal exhausted or expired), or until the borrower has rejected or breached a loss mitigation agreement.

Even after a foreclosure proceeding has begun, if a borrower submits a complete loss mitigation application more than 37 days before a foreclosure sale, the lender must abstain from moving for a judgment (including default or summary judgment), an order for sale, or an actual sale, until the loss mitigation application is reviewed and denied (and any appeal exhausted or expired), or until the borrower has rejected or breached a loss mitigation agreement.

Even if a motion for default or summary judgment is pending when a loss mitigation application is completed, the lender must refrain from obtaining an order on the motion until the loss mitigation procedures are complete. Other litigation or mediation of the dispute can continue during the loss mitigation process so long as it does not include the activities already discussed as being prohibited. It is vital that a lender inform its attorneys when a loss mitigation application is received so that steps can be taken to prevent a violation of these rules.

This is a brief overview of some of the changes these new rules bring and it in no way addresses all of the changes made by these rules. Creditors should take care to ensure that all necessary changes to policies and procedures are made. If you have questions or concerns about these new rules, please contact Owens, Mixon, Heller & Smith, P.A. at (870) 336-6505 or via email at