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Illinois App. Court (1st Dist) Holds ‘Small Servicer’ Exempt from RESPA Loss Mitigation Rules

Illinois mortgage lawThe Appellate Court of Illinois, First District, recently held that a borrower failed to identify any meritorious defense sufficient to stop or undo a judicial foreclosure sale. In so ruling, the Appellate Court rejected the borrower’s arguments that the servicer failed to comply with the loss mitigation rules under the federal Real Estate Settlement Procedures Act (RESPA) that she claimed would have allowed her to cure her default, because the servicer qualified as a “small servicer” under 12 C.F.R. 1026.41(e)(4), and was therefore exempt from the loss mitigation rules.

A copy of the opinion in Eastern Savings Bank, FSB v. Andrews-Lewis is available at:  Link to Opinion.

In 2007, a borrower executed a mortgage and note for $87,000 in favor of a lender (“mortgagee”). The borrower fell behind on her payment obligations.

In 2016, prior to the ending of the Home Affordable Modification Program (HAMP), the borrower applied for a HAMP modification with the mortgagee. The mortgagee denied the mortgagor’s HAMP modification request and filed a verified complaint for mortgage foreclosure in March of 2017. After a period of contested motion practice, the trial court entered an order of summary judgment and judgment of foreclosure and sale.

The foreclosure sale was scheduled for May 15, 2018. Prior to the sale, the borrower filed for Chapter 13 bankruptcy which was later converted into a Chapter 7 bankruptcy. In the bankruptcy proceeding, the borrower also brought UDAP claims against the mortgagee. The Bankruptcy Court dismissed the borrower’s claims against the mortgagee and allowed the mortgagee to proceed with the foreclosure sale at the trial court.

In the trial court, the foreclosure sale was approved and occurred in January of 2020. The mortgagee repurchased the property and sought court approval of the sale in February 2020. In March of 2020, the mortgagor, pro se, raised new arguments and the trial court granted her leave to file a response to the motion for an order approving the sale by March 31, 2020, and the hearing was continued until May of 2020.

COVID-19’s impact on the court system and moratorium on confirmation of judicial sales resulted in a delay of the approval of the sale. In January of 2021, the borrower filed a pro se answer, affirmative defenses, and counterclaim, which was subsequently stricken. Furthermore, the suspension of the borrower’s prior lawyer resulted in further delays while the parties litigated what misrepresentations were made by the borrower’s prior lawyer. Ultimately, in February of 2022, the trial court entered an order confirming the judicial sale. The borrower timely appealed.

On appeal, the borrower raised three issues. First, she argued that the trial court erred in confirming the sale of the property because she never received a loss mitigation denial letter on her loan modification application as required by section 1024.41 of the Real Estate Settlement Procedures Act (RESPA) and Regulation X (12 C.F.R. § 1024.41). Second, the borrower argued that the trial court erred by confirming the sale of the property despite learning that she submitted a HAMP loan modification application which was not appropriately processed in accordance with RESPA or Regulation X by the mortgagee, causing the borrower to no longer be eligible for the program. Third, the mortgagor argued that the trial court erred by confirming the sale of the property by ignoring a preponderance of the evidence that showed that the mortgagee neglected the borrower’s numerous attempts to modify her loan and end her delinquency.

In Illinois, a judicial foreclosure sale is not complete until it has been approved by a trial court. Under section 15-1508(b), the trial court shall confirm a sale unless it finds that: (i) a notice required in accordance with subsection (c) of Section 15-1507 was not given, (ii) the terms of the sale were unconscionable, (iii) the sale was conducted fraudulently, or (iv) justice was otherwise not done. 735 ILCS 5/15-1508(b). The burden of the party opposing confirmation of the sale must prove that sufficient grounds exist to disprove the sale.

The Appellate Court noted that in order for the borrower to properly vacate the sale, she must demonstrate that “justice was not otherwise done because either the lender, through fraud or misrepresentation, prevented the borrower from raising [her] meritorious defense to the complaint at an earlier time in the proceedings, or the borrower has equitable defenses that reveal she was otherwise prevented from protecting her property interests.” Wells Fargo Bank, N.A. v. McCluskey, 2013 IL 115469 ¶ 26.

Here, the mortgagee argued that it was a small servicer under RESPA (12 CFR § 1026.41(e)(4)) and was therefore effectively exempt from the pre-foreclosure violations complained of by the mortgagor. The Appellate Court agreed that the mortgagee qualified as a “small servicer” and was exempt from the specific RESPA loss mitigation rules at issue.

As a result, the Appellate Court affirmed the trial court’s judgment on the first two arguments raised by the borrower.

Lastly, the Appellate Court disagreed with the borrower’s argument that a preponderance of the evidence showed that the mortgagee neglected her numerous attempts to modify her loan and end her delinquency across the life of the loan and afterward and that section 15-1508(b)(iv) applied. The Appellate Court disagreed because the borrower admitted to her prior inability to make her mortgage payments, failed to respond to the mortgagee’s motion for summary judgment, and that the borrower defaulted on several forbearance options and was unable to make payments under her Chapter 13 bankruptcy plan.

Therefore, the Appellate Court held that the borrower failed to identify any meritorious defense sufficient to stop or undo the judicial sale and confirmed the trial court’s judgment.

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Jake VanAusdall is Senior Counsel in the Nashville office of Maurice Wutscher LLP. He practices in the firm’s Consumer Credit Litigation and Commercial Litigation groups predominantly representing financial institutions. Jake also has substantial litigation experience representing clients involved in intellectual property, construction, contract, and business disputes. Jake has been recognized as a “Mid-South Super Lawyers – Rising Star” in the area of Business Litigation (2018-2022), and is a former member of the Tennessee John Marshall American Inn of Court. For more information, see

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