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The New Bankruptcy Periodic Statements: A Look at What the CFPB’s 2016 Study Can Tell Us

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Neil Jonas
Brock & Scott, PLLC
USFN Member (North Carolina)

Regulation Z § 1026.41(e)(5), as amended by the 2016 Mortgage Servicing Final Rule, became effective April 19, 2018. Doubtless, upon the implementation of the new statement requirements, there were — and continue to be — questions and confusion about the statements themselves; how they should be read; what they mean; and how they will impact the default industry.

Foretelling the Issues?
In February 2016, the CFPB issued the results of a study entitled “Testing of Bankruptcy Periodic Statement Forms for Mortgage Servicing” (2016 Study). A review of this study is useful in (1) forecasting possible sources of confusion; and (2) helping to develop responses to future questions and challenges regarding the periodic statements.

The 2016 Study clearly declared at the outset that its purpose was to explore consumers’ perceptions and comprehension of bankruptcy-specific disclosures. This was assessed through three rounds of consumer interviews. The forms were revised between rounds of testing to address issues revealed by the testing. (For a full text of the study, visit https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Bankruptcy_Report_FINAL_2_29_16.pdf.)

The bulk of the CFPB’s study was directed toward understanding a hypothetical bankruptcy debtor’s understanding of the proposed statements, particularly, the correct ongoing payment amount, the status of post-petition versus pre-petition balances, and the consequences of non-payment. The “Conclusions of the Study” (featured on pp. 57-59) found that: (1) participants preferred receiving the statements; (2) participants preferred the use of non-technical language; (3) statements that payments were “voluntary” did not facilitate comprehension; (4) participants looked at the “Payment Amount” box, the payment coupon, and the “Explanation of Payment Amount” boxes to understand how much to pay; (5) information about the consequences of non-payment was considered threatening but helped participants’ understanding; (6) distinction between post- and pre-petition payments was not immediately clear; (7) participants’ understanding of information that would only appear in a bankruptcy context was lower than their understanding of information that would appear on a statement outside of bankruptcy.

The 2016 Study anticipated two major potential debtor complaints regarding the periodic statements and offers possible avenues for servicers to consider in rebutting those objections. The first likely contention is that the statements are threatening or constitute an invalid attempt to collect a debt. The second expected criticism is that the statements cause confusion about the allocation of pre-petition versus post-petition payments.

Using the 2016 Study in Mortgage Servicing?
For a discussion of how the CFPB’s research might be used by mortgage servicers as a defensive tool against charges of bankruptcy stay violations and confusion by a debtor-borrower, read on.

Responding to “The Statements are an attempt to collect a debt” — It seems inevitable that debtors will assert that the periodic statements constitute an attempt to collect a debt, possibly giving rise to claims of stay violations under 11 U.S.C. § 362. As particularly relevant to mortgage servicer creditors, Section 362 of the Bankruptcy Code expressly prohibits:

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;

(2) the enforcement, against the debtor or against property of the estate, of a judgment obtained before the commencement of the case under this title;

(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.

In the past, periodic statements sent to borrowers during (or after) bankruptcy have been found — under some circumstances — to be violations of the stay. See In re Draper, 237 B.R. 502 (Bankr. M.D. Fla.1999) (“The only credible reason to send such invoices on a monthly basis is to try to collect payments from debtors protected by the automatic stay.”); In re Connor, 366 B.R. 133, 138 (Bankr. D. Haw. 2007) (“The only purpose for sending the monthly statements after [debtor expressed intent to surrender in a Chapter 7 case] was to induce [Debtor] to make payments on a prepetition debt which was dischargeable and has now been discharged.”)

Further, “Outstanding amounts to be paid to prevent foreclosure should generally be described as voluntary, rather than as ‘due,’ and the communication must omit language that demands payment. … A statement lacks a valid informational purpose, and is an enjoined act to collect a discharged debt as personal liability, if it is identical to the statement a discharged debtor received prior to filing for bankruptcy. Such statements inescapably convey the message that the creditor sending them seeks to collect a discharged debt as a personal liability.” In re Biery, 543 B.R. 267, 287–88 (Bankr. E.D. Ky. 2015).

It is possible that the new CFPB statements will receive similar challenges. The statements tested did contain language regarding payments being due:
Round 1 Forms (p. 61), Account History references: “Total $4,339.13 unpaid amounts.”

The statements tested also included various sets of bankruptcy disclaimer language, with each having slightly alternative wording through the three rounds of testing. One sample is below:


Bankruptcy Notice (an example tested)
Our records reflect that you are presently a debtor in an active bankruptcy case or you previously received a discharge in bankruptcy. This statement is being sent to you for informational and compliance purposes only. It should not be construed as an attempt to collect a debt against you personally.

Generally, participants understood disclaimer language of this nature. “Almost all participants in the first round of testing said the form was for informational purposes rather than attempting to collect a debt, and they could correctly identify that the borrower was in bankruptcy.” See 2016 Study (p. 13) at https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/CFPB_Bankruptcy_Report_FINAL_2_29_16.pdf. Still, some participants did express confusion, with one commenting, “If this is for information only, then why are they sending you a bill that is terrifying?” Id. at 13-14.

Another observed that the statement says “’This is for your informational purposes only,’ and ‘This is a debt,’ so I don’t understand that part. Language is kind of confusing ....” Nevertheless, the study concluded that “Clear information about consequences of non-payment — although this information can appear somewhat threatening — helped participants understand their various courses of action and what would happen if they did not take action. In fact, some participants wanted even clearer, more direct language about these consequences.” Id. at 58.

Based upon the study’s findings, a mortgage creditor facing a challenge that the periodic statements constitute an attempt to collect a debt could respond that: (1) the statements are expressly required by applicable regulations; (2) that the statements contain bankruptcy disclaimer language; and (3) that although the language may “appear threatening” to some, the results of extensive research conducted by the CFPB prior to finalization of the statement rule were that — on the whole — this language aided potential recipients in understanding the consequences of non-payment.

Responding to Confusion about Post-Petition vs. Pre-Petition Arrearage
— A thornier issue exists for mortgage creditors whose claims are provided for in a Chapter 13 plan. In addition to concerns about the bankruptcy disclaimer language, Chapter 13 presents the possibility for confusion about the allocation of payments between pre-petition arrearage amounts and ongoing post-petition contractual payments. The 2016 Study revealed significant cause for unease on this point. Chapter 13 participants noted that “there were many different subtotals on the form that could be interpreted as how much they owe …” Id. at 36. In the second round, in particular, the study notes that “[c]omprehension for all pre-petition arrearage information was low across versions of the Chapter 13 forms …” Id. at 38.

Ability in distinguishing between pre- and post-petition payments varied through the rounds and the study concluded that “[o]verall, participants in Rounds 1 and 3 generally understood the pre-petition arrearage disclosures and that these disclosures represented a separate stream of payments from the post-petition payments …” Id. at 58. It seems that the study concluded that context was key and that individuals “undergoing bankruptcy might know whether they are behind on their payments before filing for bankruptcy and, as such, might be able to identify this information …” Id.

Based upon these conclusions, the 2016 Study does give some clues as to how a servicer may rebut a debtor’s charge that the statements are confusing or misleading:

1. The statements are an acceptable explanation of issues that are, by their nature, confusing. However, the third-round form (which is similar to the version that was implemented) generally gave participants an understanding that pre-petition arrearage disclosures “represented a separate stream of payments from the post-petition payments.” Id. Therefore, the statements provide a proven adequate explanation of the account status.

2. The 2016 Study determined that Chapter 13 debtors should know whether they are behind on their mortgage payments when they file a bankruptcy petition.

3. Despite the potential for confusion, the 2016 Study still resolved that participants preferred receiving these statements and that the statements assisted in understanding the debtor’s accounts.

The CFPB’s 2016 Study is a comprehensive analysis of the understanding and usefulness of the new bankruptcy statements. It details specific testing of the statements themselves among participants similar to the target audience. Most importantly for mortgage servicers, this study presents robust research that explains the servicers’ obligations in sending periodic statements in bankruptcy. The 2016 Study also shows, based upon empirical evidence, that the language in the statements cannot be reasonably construed as an inappropriate attempt to collect a debt. The statements also contain adequate information to allow debtors to distinguish between pre- and post-petition payments.

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


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