The Impact of the CFPB 120 Day Rule on Foreclosures in Pennsylvania

In January 2013 the Consumer Financial Protection Bureau ("CFPB") issued wide reaching rules governing the mortgage industry which became effective as of January 10, 2014. Since publication of the rules, confusion on their application and effect have reigned supreme.  While certain financial institutions are exempt from certain portions of these new rules, all financial institutions are subject to the provisions of what has become know as the "120 day rule."  Specifically, the 120 day rule requires lenders to wait a minimum of 120 days from the date a mortgage became delinquent before making the "first notice or filing required by applicable law," to initiate a foreclosure. 12 C.F.R. §1024.41(f)

At first glance, the 120 day rule is in direct contradiction to the laws governing foreclosures in Pennsylvania.  In Pennsylvania, a lender is required to wait for a borrower to be at least sixty (60) days delinquent on their mortgage before sending out the required pre-foreclosure notices, better known as the combined Act 6/91 Notice ("act notices").  As the act notices give a borrower thirty (30) days to either seek relief under the HEMAP program or otherwise cure the delinquency, a foreclosure lawsuit therefore could not be filed with the court until at least ninety (90) days from the date of delinquency.  However, the CFPB's 120 day rule as originally written appeared to change these deadlines as the rule required lenders to wait 120 days before taking any action that would be construed to be the institution of foreclosure proceedings.  Therefore, when taking into account Pennsylvania's requirement to send the act notices and the corresponding thirty (30) day waiting period, a lender would then be required to wait 150 days from the date of delinquency before filing a foreclosure complaint with the court.  The resulting change was an additional two (2) month delay to the current foreclosure process. 

In October 2013 at the request of various groups including the Pennsylvania Housing Finance Agency (PHFA), the CFPB issued amendments to the 120 day rule in an effort to account for the foreclosure procedures in the various states and to also further clarify the initial rule. See 78 Fed. Reg. 60,382, 60,404-07 (Oct. 1, 2013). In judicial foreclosure states like Pennsylvania, the CFPB clarified that the "first notice or filing required by applicable law" was the actual filing of the foreclosure lawsuit with the court and not the service of the act letters.  As a result under the 120 day rule, a Pennsylvania lender can institute a foreclosure lawsuit once a borrower is at least 120 days delinquent on their mortgage as opposed to 150 days as originally contemplated by the rule, provided the act notices have been served at least thirty (30) days prior as required by Pennsylvania law.

While the effectiveness of the CFPB's 120 day rule as a tangible consumer protection mechanism will be debated in the years ahead, the immediate practical application for Pennsylvania lenders is that they now must wait an additional thirty (30) days to file a foreclosure complaint than they had prior to January 10, 2014.  Despite the delay in the time to file however, the 120 day rule does not preclude a lender from sending out the act notices once a borrower is sixty (60) days delinquent since the notices have been deemed not to be the first notice or filing.  Although agencies such as the PHFA are encouraging lenders to continue to serve the act notices on borrowers after they become sixty (60) days delinquent, the current substance of the act notices may lead to unnecessary confusion for the borrower as the notices contain language directing a borrower that he/she has thirty (30) days from the date of the notice to take action such as applying for the HEMAP program or otherwise cure the delinquency or face the filing of a foreclosure complaint thereafter.

As the language of the act notices does not contemplate the 120 day rule, they are not consistent with the changes that have been implemented.  Therefore, in order to avoid any possible confusion by the borrower or to provide them with a possible technical challenge to the foreclosure action itself, the prudent course of action at this time is to delay the service of the act notices until the member is at least ninety (90) days delinquent. Therefore, if the lender wishes to immediately foreclose at the end of the thirty (30) day waiting period required by the notices, it may do so while remaining in compliance with Pennsylvania law and the CFPB 120 day rule.