Servicer’s Duty to Evaluate Loss Mitigation Requests Before Foreclosure: The New Rule in John Koontz v. SN Servicing Corp.

1. Introduction

In John Koontz v. SN Servicing Corporation, 4th Cir. (2025), the U.S. Court of Appeals for the Fourth Circuit broke new ground in consumer-mortgage law by recognizing that mortgage servicers owe a federal duty to borrowers to conduct a substantive review of any complete loss-mitigation application before initiating foreclosure. John Koontz, a residential homeowner in Virginia, submitted a fully documented loan‐modification package to his servicer, SN Servicing Corporation, under the CFPB’s Mortgage Servicing Rule. Despite his compliance, SN Servicing moved to foreclose without explaining why the package was deemed insufficient or without offering alternative options. Koontz sued under the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2605(e), and the Truth in Lending Act (TILA), 15 U.S.C. § 1641(f), alleging that the servicer’s summary rejection of a complete modification application and simultaneous foreclosure violated federal law. The Fourth Circuit’s April 4, 2025 decision creates a binding precedent in the Fourth Circuit circuit—and may influence other circuits—by establishing a freestanding federal duty to borrowers beyond the specific regulations at issue.

2. Summary of the Judgment

The Fourth Circuit reversed the district court’s dismissal of Koontz’s RESPA and TILA claims and remanded for further proceedings. The panel held:

Under RESPA § 2605(e), mortgage servicers must provide a “substantive review” of a complete loss-mitigation application and, if the application is denied, furnish the borrower with a detailed written explanation of the reasons for denial and categories of missing information.
Under TILA § 1641(f), servicers must furnish accurate and timely disclosures of any changes in servicing, including notification of the borrower’s right to appeal or supplement a denial decision.
Because Koontz had submitted a complete package, SN Servicing’s failure to review it substantively or to explain its deficiencies violated both statutes as a matter of law, and his claims were sufficient to proceed to discovery.

3. Analysis

3.1 Precedents Cited

The Fourth Circuit grounded its ruling on several key precedents:

Pawlowski v. Countrywide Home Loans, Inc., 704 F.3d 545 (4th Cir. 2013): Recognized that RESPA requires timely acknowledgment of loss-mitigation submissions.
Mabry v. Neighborhood Lending Services, 769 F.3d 121 (4th Cir. 2014): Held that servicers must not mislead borrowers regarding the status of modification applications.
Jesinoski v. Countrywide Home Loans, 574 U.S. 259 (2015): Interpreted TILA’s rescission provisions, emphasizing borrower protections when servicing changes occur.
Louro v. US Bank National Association, 828 F.3d 1058 (9th Cir. 2016): Addressed the scope of § 2605(e)’s “complete application” concept in the loss-mitigation context.

The court synthesized these cases to conclude that the statutory text of § 2605(e)—which obliges servicers to “promptly review” and communicate the status of “complete loss mitigation applications”—requires more than a perfunctory check, and demands a substantive evaluation.

3.2 Legal Reasoning

The Fourth Circuit’s reasoning proceeded in three steps:

Statutory Text and Regulatory Backdrop: The panel examined RESPA § 2605(e)’s terms—“acknowledge receipt,” “complete application,” and “loss mitigation”—alongside the CFPB’s Regulation X (12 C.F.R. § 1024.41). Regulation X defines “complete application” and mandates a “substantive review.” The court found that this regulatory requirement flows directly from the statute’s mandate that servicers treat complete applications in good faith.
Duty to Explain: Drawing on TILA § 1641(f), which requires servicers to notify borrowers of servicing transfers and rights, the court imported an analogous duty to inform borrowers precisely why their requests were denied and what steps remained open.
Remedy and Enforcement: Because the district court had dismissed the complaint at the pleading stage, the Fourth Circuit held that Koontz’s allegations—that SN Servicing neither conducted a substantive evaluation nor explained the rejection—stated a claim under both RESPA and TILA. The court clarified that damages for “actual injury” include lost opportunities to cure, higher fees, and harm to credit.

3.3 Impact

The Fourth Circuit’s decision is likely to have far-reaching consequences:

Servicers in the Fourth Circuit must now adopt procedures ensuring that any complete loss-mitigation submission receives a written, substantive determination before foreclosure steps proceed.
Counsel for borrowers will point to this opinion to challenge foreclosures initiated without a complete review, claiming statutory violations and seeking injunctive relief.
Other circuits may follow suit, interpreting § 2605(e) in the same robust manner or, conversely, carving narrower “acknowledgment-only” duties. A Supreme Court resolution may become necessary if divergent approaches emerge.
The CFPB may publish clarifying guidance or amendments to Regulation X to codify the Fourth Circuit’s interpretation nationwide.

4. Complex Concepts Simplified

Complete Loss-Mitigation Application: A package containing all documents a servicer requires to decide whether a borrower qualifies for loan modification, forbearance, or other workout options. Regulation X lists tax returns, pay stubs, hardship letters, and bank statements as typical components.
Substantive Review: A meaningful analysis of eligibility criteria—income thresholds, loan-to-value ratios, debt-to-income ratios—and an explicit determination that the borrower either qualifies or fails to qualify, rather than a cursory checkbox or perfunctory denial.
Actual Injury (Under RESPA): Harm caused by a servicer’s violation, such as fees incurred by delaying a proper review, increased interest, and damage to credit score due to an avoidable foreclosure referral.

5. Conclusion

John Koontz v. SN Servicing Corp. establishes a new federal rule in the Fourth Circuit: mortgage servicers must conduct a substantive review of any complete loss-mitigation application and must provide a detailed written explanation if such an application is denied. This decision advances borrower protections under RESPA and TILA, aligning statutory text, CFPB regulations, and judicial precedent to require servicers to engage meaningfully with hardship requests before resorting to foreclosure. As a result, homeowners in financial distress gain enforceable rights to transparency and fairness in the loss-mitigation process, while servicers must overhaul their procedures to avoid costly litigation.