Bankruptcy

Delaying Foreclosure: The Dodd-Frank Act 120-Day Rule

By Cara O'Neill, Attorney
The Dodd-Frank Act gives a homeowner facing foreclosure additional time to pursue ways to stay in the home and recover from a financial setback.

Under the Dodd-Frank Act, a homeowner must be more than 120 days behind on mortgage payments before a loan servicer (the company that collects payments on behalf of the mortgage owner) can start a foreclosure proceeding. During the waiting period, the homeowner can submit a loss mitigation application asking for an accommodation that would allow the owner to stay in the home. Once received, the lender must complete a review of the loss mitigation application before starting the foreclosure process.

Why Homeowners Facing Foreclosure Need Additional Protection

The foreclosure laws in some states allow a bank to sell a home quickly at a foreclosure auction—and in some cases, without much notice to the foreclosed owner. The speed of such processes can leave owners with inadequate time to request and receive assistance that might help them stay in the home. Frequent errors by loan servicers can cause the process to be even more chaotic.

In 2014, homeowners facing foreclosure received some long overdue relief. To lessen the impact on distressed homeowners, the Dodd–Frank Act instituted new rules aimed at curbing loan servicer abuses. One important rule precludes lenders from immediately starting state foreclosure actions, thereby giving homeowners more time to get back on their feet.

The Dodd-Frank Act Slows the Foreclosure Process

Under the Dodd-Frank Act, a servicer cannot start a foreclosure action until mortgage payments are more than 120 days past due. For instance, suppose that state law allows a lender to initiate a foreclosure sale 60 days after publishing a notice of default. (An owner “defaults” on a mortgage by failing to keep payments current.) Under the Dodd-Frank Act, the bank must first wait until the payment is more than 120 days overdue. After the period elapses, the servicer can follow the state foreclosure law by posting the notice of default and selling the home at auction 60 days later. To determine how much time you’ll have in your home, check the laws of your state.

A Loss Mitigation Application Could Extend the Waiting Period

The borrower can submit a loss mitigation application (requesting, for instance, a loan modification) during the 120-day waiting period. If the owner submits a completed application before the servicer starts the state foreclosure process, the servicer cannot foreclose until the following occurs:

  • the borrower doesn’t qualify for, or rejects, the lender’s loss mitigation options, or
  • the borrower accepts a loss mitigation offer but fails to fulfill its requirements.

You can learn about the types of accommodation you can request in your loss mitigation application by reading Foreclosure and Your Home: Understanding the Process, Your Rights, and Your Options.

Understanding Judicial and Nonjudicial Foreclosure

A lender can use one of two foreclosure types depending on the state law: judicial foreclosure or nonjudicial foreclosure. All states allow for judicial foreclosure, which is a process that requires the lender to seek court approval before selling a home at auction.

Some states give the servicer the additional option of proceeding with a streamlined nonjudicial foreclosure that doesn’t require court involvement. Here’s how both work.

Judicial foreclosure. The bank must wait until payments are more than 120 days delinquent before filing a legal complaint (the court document that starts a lawsuit) with the court. The lender might be required to wait longer to file the suit if the homeowner submits a loss mitigation application. If the bank wins the lawsuit, the court will issue a judgment allowing the lender to sell the home at auction.

Nonjudicial foreclosure. A creditor using the nonjudicial foreclosure process will follow procedural steps outlined in state law instead of filing a lawsuit with the court. However, under the Dodd-Frank Act, the lender must wait until the 120-day waiting period elapses (or until a review of the loss mitigation application is complete, whichever occurs later) before proceeding with state law foreclosure requirements. The servicer can sell the home after complying with the requirements outlined in the state’s foreclosure law.

If you’re facing foreclosure and the lender has not followed the law (or you’re not sure if the bank complied with all federal and state requirements), contact a foreclosure attorney.

Questions for Your Attorney

  • What loss mitigation options are available to me?
  • Can you help me submit a loss mitigation application to the loan servicer?
  • When can a creditor start foreclosing on my house under federal and state law?
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