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CFPB’S New Final Rules: Periodic Statements during Bankruptcy

Posted By USFN, Monday, November 7, 2016
Updated: Wednesday, October 26, 2016

November 7, 2016

by Alan S. Wolf
The Wolf Firm
USFN Member (California)

On December 15, 2014, the Consumer Financial Protection Bureau (CFPB or Bureau) published its proposed rules amending and clarifying the 2013 Mortgage Servicing Rules and allowed the industry until March 16, 2015 to comment (2014 Proposed Rules). The CFPB received an onslaught of comments from the mortgage industry that were highly critical of the proposed rules. Then, on April 26, 2016, the CFPB released the results of its consumer testing of periodic statement forms which, it claimed, could safely be used during a pending bankruptcy. The Bureau reopened the comment period until May 26, 2016 to seek comment specifically on the report summarizing that consumer testing; the industry provided numerous comments as to why the sample forms were problematic.

On August 4, 2016, well after the expected release date of early summer, the final CFPB mortgage servicing rules were released (2016 Mortgage Servicing Rules or 2016 Rules). While the mortgage servicing industry dodged some bullets contained in the 2014 Proposed Rules and the April 2016 proposals, the 901 pages of 2016 Mortgage Servicing Rules are still dire.

This article covers the most onerous of the new rules: when and what types of periodic statements must be sent during and after bankruptcy.

Most of the 2016 Rules will be effective 12 months after publication of the rules in the Federal Register. However, because they are so complex and require systemic changes within the servicing industry, the rules pertaining to successors in interest and periodic statements in bankruptcy will not be effective until 18 months after that same publication date. At this writing, the Federal Register publication is to occur on October 19. Accordingly, the rules pertaining to successors in interest and periodic statements would be effective April 19, 2018. There is much that the mortgage servicing industry must do to prepare.

Background
The history of the Bureau’s treatment of periodic statements in bankruptcy is an important factor in understanding the requirements of the 2016 Mortgage Servicing Rules. It all starts with the Dodd-Frank Act, which in 2010 established Truth in Lending Act (TILA) section 128(f) requiring periodic statements for mortgage loans. Until Dodd-Frank there was no real federal requirement to provide periodic mortgage statements. Then, on January 17, 2013, the CFPB issued the 2013 TILA Servicing Final Rule implementing the periodic statement requirements and exemptions in § 1026.41.

In the preamble to the 2013 TILA Servicing Final Rule, the CFPB acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy but, nevertheless, stated that it did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan, and that servicers could make changes to the periodic statement to ensure compliance. Since most servicers do not send periodic statements during bankruptcy precisely because it is nearly impossible to send statements that comply with the Bankruptcy Code, this proposed rule caused great concern in the mortgage industry and a scramble to develop periodic statement formatting that would be acceptable to the constraints of individual bankruptcy judges.

After an outcry from the mortgage industry (including USFN and other industry leaders, as well as support of the mortgage industry’s position from the National Association of Chapter Thirteen Trustees) the CFPB changed course. In its interim final rule published October 23, 2013, the Bureau added new § 1026.41(e)(5) exempting a servicer from the periodic statement requirements in § 1026.41 for a mortgage loan while the consumer is a debtor in bankruptcy. Hence, under the currently effective CFPB Rules, a periodic statement does not need to be sent to a borrower when the borrower is in bankruptcy (Comment 41(e)(5)-1 to § 1026.41(e)(5)). Moreover, if there are multiple obligors on the mortgage loan, the exemption applies if any of the obligors is in bankruptcy (Comment 41(e)(5)-3).

Finally, there is no obligation to resume providing periodic statements with respect to any portion of the mortgage debt that is discharged in bankruptcy (Comment 41(e)(5)-2.ii). That was the good news and the industry rejoiced, passing over the CFPB’s comments that it was still studying the bankruptcy issues and would likely issue new rules regarding periodic statements during bankruptcy. True to its word, the CFPB issued proposed new rules on December 15, 2014 directly addressing — and limiting the exemption applicable to — periodic statements and bankruptcy. Those proposed rules were, to say the least, not good news. [See the accompanying text box below for the CFPB’s explanation of that portion of the 2014 Proposed Rules.]

 

Exactly what did the 2014 Proposed Rules pertaining to periodic statements in bankruptcy mean? No one quite knew. What was clear is that they were convoluted; the mortgage industry had no ability to make the nuanced decisions demanded by the rules nor the technology to implement the various requirements of the rules; and, even if the rules could somehow be followed, there was no protection from automatic stay or discharge injunction violations. As expected, the mortgage industry was very vocal in pointing out the numerous problems with the 2014 Proposed Rules and shared its comments with the Bureau.

 

 Excerpted from CFPB’s 2014 Proposed Rules
“Specifically, proposed § 1026.41(e)(5)(i) limits the exemption to when two conditions are satisfied. First, the consumer must be a debtor in a bankruptcy case, must have discharged personal liability for the mortgage loan through bankruptcy, or must be a primary obligor on a mortgage loan for which another primary obligor is a debtor in a Chapter 12 or Chapter 13 bankruptcy case. Second, one of the following circumstances must apply: (1) The consumer requests in writing that the servicer cease providing periodic statements or coupon books; (2) the consumer’s confirmed plan of reorganization provides that the consumer will surrender the property securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearages or the maintenance of payments due under the mortgage loan; (3) a court enters an order in the consumer’s bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with respect to the property securing the mortgage loan, or requiring the servicer to cease providing periodic statements or coupon books; or (4) the consumer files with the bankruptcy court a Statement of Intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the property securing the mortgage loan. The proposal also provides that the exemption terminates and a servicer must resume providing periodic statements or coupon books in two general circumstances. First, notwithstanding meeting the above conditions for an exemption, the proposal requires servicers to provide periodic statements or coupon books if the consumer requests them in writing (unless a court has entered an order requiring otherwise). Second, with respect to any portion of the mortgage debt that is not discharged through bankruptcy, a servicer must resume providing periodic statements or coupon books within a reasonably prompt time after the next payment due date that follows the earliest of the following outcomes in either the consumer’s or the joint obligor’s bankruptcy case, as applicable: the case is dismissed, the case is closed, the consumer reaffirms the mortgage loan under 11 U.S.C. 524, or the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or 1328.”

 

CFPB: August 2016
Based upon its review of the comments received, and its study of the intersection of the periodic statement requirements and bankruptcy law, the Bureau once more changed the rules. [See the accompanying text box below for the relevant excerpt of the CFPB’s August 4, 2016 Final Rules release (New Rule).]

 

The New Rule removes some, but not all, of the troubling provisions of the 2014 Proposed Rules. For example, the 2014 version required a borrower-level, as well as a bankruptcy chapter-level, analysis. If one borrower was involved in a bankruptcy proceeding and a second was not, each was independently analyzed as to whether or not a periodic statement should be sent. Further, depending on the chapter, it could be required that each of the borrowers receives a periodic statement, with each statement needing a unique format.

How would a servicer do that? Fortunately, the New Rule employs loan-level and all-bankruptcy-chapters analyses — making it much easier to implement. The 2014 Proposed Rules also mandated certain provisions in a confirmed bankruptcy plan to prove that the borrower did not intend to keep the property before exempting the requirement of sending a periodic statement. The New Rule only insists that a proposed plan contain those provisions.

However, the New Rule also makes things more difficult by limiting the exemption in ways not restrained by the 2014 Proposed Rules. For example, despite the filing of a Statement of Intention to surrender the property (which alone was sufficient to invoke the exemption under the 2014 Proposed Rules) if the borrower makes any payments, the exemption no longer applies and periodic statements must be sent under the New Rule.

 Excerpted from CFPB’s 2016 Final Rules (New Rule)
“Except as provided in paragraph (e)(5)(ii) of this section [the consumer’s reaffirmation of the loan or a consumer’s written request to get periodic statements during bankruptcy], a servicer is exempt from the requirements of this section [sending periodic statements to borrowers involved in a bankruptcy] with regard to a mortgage loan if:
(A) Any consumer on the mortgage loan is a debtor in bankruptcy under title 11 of the United States Code or has discharged personal liability for the mortgage loan pursuant to 11 U.S.C. 727, 1141, 1228, or 1328; and
(B) With regard to any consumer on the mortgage loan: (1) The consumer requests in writing that the servicer cease providing a periodic statement or coupon book; (2) The consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan; (3) A court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. 362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or (4) The consumer files with the court overseeing the bankruptcy case a statement of intention pursuant to 11 U.S.C. 521(a) identifying an intent to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the consumer’s bankruptcy case.
* * *
(ii) Reaffirmation or consumer request to receive statement or coupon book. A servicer ceases to qualify for an exemption pursuant to paragraph (e)(5)(i) of this section with respect to a mortgage loan if the consumer reaffirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.”


The best way to make sense of this is by understanding that the CFPB believes that there is no stay violation, and no violation of the discharge injunction, if statements are sent during a bankruptcy, or after a discharge, where either the bankruptcy court or the debtor evidences an intent that the property and loan be kept. The CFPB reasons that since the debtor wants to keep the property and loan, sending properly fashioned informational statements simply aids the debtor and does not violate the stay or discharge injunction. In other words, the Bureau believes that the benefit of sending a properly drafted statement to the debtor outweighs the risk of violating the stay. Of course, it’s not the CFPB at risk here — it’s the loan servicer.

Conversely, if the bankruptcy court or the debtor evidences that the property or loan will not be kept, the CFPB reasons that there is no point in providing information to the debtor and risking a stay or discharge violation. Accordingly, in these limited cases a servicer is exempt from sending a periodic statement during a bankruptcy.

How to determine that the property or loan will not be kept? A bankruptcy court typically evidences its intent that the property or loan will not be kept by the debtor through an order lifting the stay or an order avoiding the lien.

Turning to the debtor, a borrower in bankruptcy normally evidences that he does not intend to keep the property or the loan by any of the following: (1) requesting in writing that the servicer cease providing periodic statements or coupon books; (2) filing a bankruptcy plan (or filing a Chapter 7 Statement of Intention) that provides for the surrender of the property; (3) providing for the avoidance of the lien in the plan; or (4) not providing for the loan in the plan.

Furthermore, any indicia that the borrower does not intend to keep the property or the loan can be overturned by later actions. For example, if the borrower files a notice of intent to surrender the property, but then makes payments, the payments indicate that the debtor intends to keep the property. Consequently, the exemption no longer applies and statements must be sent. Similarly, if the debtor reaffirms a debt subject to discharge, this evidences the debtor’s intent to keep the property; the exemption is not applicable and statements must be sent. And, of course, if the debtor simply requests that statements be sent, this evidences that the debtor intends to keep the property and statements must be sent.

Final Words
It is important to remember that any debtor action can be preempted by the bankruptcy court. In other words, a court order trumps the intent of the debtor. For example, even if a debtor states clearly that he wants periodic statements, a court order that provides that no periodic statements be sent is superior and must be followed.

Copyright © 2016 USFN. All rights reserved.
Autumn USFN Report

Note for consideration of the USFN Award of Excellence: This article is a "Feature."

 

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