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RESPA Servicing Rules and the CFPB Partial Removal of BK Exemptions for Early Intervention: It Could Have Been Worse!

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

November 7, 2016

by Wendy Walter
McCarthy & Holthus, LLP
USFN Member (Washington)

In a clarifying amendment to the mortgage servicing rules, contained within the Real Estate Settlement Procedures Act (RESPA), the Consumer Financial Protection Bureau (CFPB or Bureau) recently peeled back certain exemptions that shielded servicers from having to comply with early intervention requirements if the borrower was in an active bankruptcy. After a long deliberative process (18 months), the Bureau announced on August 4, 2016 that the early intervention requirements would partially apply to borrowers in bankruptcy.

Taking a step back, it is important to note that the original mortgage servicing rules published in February 2013 to be effective January 10, 2014 didn’t exempt bankruptcy loans from their provisions. In October 2013, after many comments and concerns were made to the newly announced rules, the Bureau issued an interim final rule providing bankruptcy exemptions to the early intervention requirements and announcing that the rules would be revised to address the concerns in contacting a borrower (who is in bankruptcy) with any communication that could be determined to potentially be in violation of the automatic stay.

This article will address the recent bankruptcy-related revisions to the live contact and written notice requirements contained within RESPA regulation 12 CFR 1024.39.

Live Contact — Bankruptcy Exemption Remains
RESPA requires that within the 36th day of delinquency the servicer will make good faith efforts to contact the borrower in order to discuss the availability of loss mitigation options. The definition of delinquency has been added to the rules in 12 CFR 1024.31 and states: “Delinquency means a period of time during which a borrower and a borrower’s mortgage loan obligation are delinquent. A borrower and a borrower’s mortgage loan obligation are delinquent beginning on the date a periodic payment sufficient to cover principal, interest, and if applicable, escrow, becomes due and unpaid, until such time as no periodic payment is due and unpaid.”

Examples of live contact are speaking on the telephone or conducting an in-person meeting and may include contact established on the borrower’s initiative. In the updated rules, the Bureau has colored in the picture of what it thinks might constitute a good faith effort to make live contact and mentioned items in its official interpretation, such as making telephone calls on multiple occasions and sending written and electronic messages.

In the amendments to the live contact requirements, the Bureau cleaned up its original proposal to create a different rule depending on the applicable bankruptcy chapter and whether the consumer in bankruptcy was a borrower or co-borrower. After soliciting feedback and recognizing the limitations in loan servicing systems, it came back with a much cleaner rule and establishes a permanent exemption from the live contact requirements for borrowers in bankruptcy. In the new section 12 CFR 1024.39(c), the Bureau will provide an exemption to the live contact requirements if the borrower is in any chapter of bankruptcy. The duty to resume compliance will come into effect after the next payment due date that is the earliest of dismissal, closure, or reaffirmation. There is no duty to resume live contact requirements if the borrower obtains a discharge.

The Bureau has taken this approach because the live contact might be more intrusive and add less value when a borrower is in bankruptcy. Bankruptcy is used as a method to protect borrowers from overwhelming creditor calls and communications; requiring live contact would disturb the purpose of many consumer bankruptcies.

Written Notice — Partial Exemption for Borrowers in Bankruptcy
Under 12 CFR 1024.36(c), the servicer must send a borrower a written notice no later than the 45th day after the borrower’s delinquency. The written notice must include: a statement encouraging the borrower to contact the servicer, the telephone number and mailing address for the loss mitigation/continuity of contact team, a brief statement of available loss mitigation options, application instructions or a statement advising on how the borrower can find out more about loss mitigation, and a list of HUD counselors or the website with the list of counselors. The rule also contains some model clauses and states that the requirement shouldn’t force the servicer to violate another law when communicating with the borrower in this manner.

The original regulation and interim final rule from October 2013 contained an exemption for borrowers in bankruptcy. The recent amendment to the rule adjusts and now describes it as a “partial exemption.” The exemption for borrowers in bankruptcy doesn’t apply if there are no loss mitigation options available or if the borrower has requested that the servicer cease communication under the FDCPA section 805(c). If those exemptions do not apply, the servicer must send a written notice no later than the 45th day after the borrower files bankruptcy if the borrower was delinquent when the case was filed. If the borrow becomes delinquent after the filing, the normal 45-day rule applies and the notice must be sent within the 45th day of delinquency. For the notice sent while the borrower is in bankruptcy, it “may not contain a request for payment.” The 180-day rule doesn’t apply in that the notice doesn’t have to be sent more than once in a bankruptcy setting. The official interpretation also allows the servicer to comply with this section by sending the notice to the borrower’s attorney as a representative. This rule also applies if the borrower revives a bankruptcy case; however, if the servicer already sent a notice once during that case, it will be deemed to have complied for the life of that case.

Effective Date
The rule changes related to early intervention are effective 12 months after the date that the final rules are published in the Federal Register. As of the date of this article, the final rule is to be published in the register on October 19. The amendments would then be effective October 19, 2017.

Servicers should be relieved that the Bureau opted to simplify the rule, to not differentiate between bankruptcy chapters or borrowers, to not distinguish those cases where a borrower was intending to surrender or avoid the lien, and to only require notices where the borrower was proposing to repay through a Chapter 13 plan. While it might be a challenge determining whether loss mitigation is available, and tailoring the notice to outline options for the specific bankruptcy scenario might not be possible (rendering the exemption for borrowers in bankruptcy, if no loss mitigation, unusable in many cases), when comparing the final rule to the proposed rules of late 2014, one thing is clear: it could have been worse.

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Note for consideration of the USFN Award of Excellence: This article is not a "Feature."


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