Written By: Alan S. Wolf
Servicers won a surprising victory in respect to the requirement to send interim mortgage statements during bankruptcy, but may yet lose the war to the CFPB. The below history puts this into perspective: Section 1420 of the Dodd Frank Act established TILA section 128(f) requiring periodic statements for mortgage loans. 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 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 formats that would be acceptable to the whims of each individual bankruptcy judge. After an outcry by the mortgage industry, led by the USFN and other industry leaders, and after surprising support of the mortgage industry’s position from the NACTT (National Association of Chapter 13 Trustees), the CFPB thankfully 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. Accordingly, under the CFPB Rules a periodic statement does not need to be sent to a borrower when a borrower is in bankruptcy (Comment 41(e)(5)-1 to § 1026.41(e)(5)). That’s good news.
But it’s a hollow victory. First, the CFPB has made clear that it will revisit this issue and overall it believes that statements should be sent during bankruptcy. In short, the mortgage industry is merely awaiting the other shoe to drop.
Of more immediate concern is the CFPB requirement that statements be sent to the borrower after bankruptcy unless the borrower has received a discharge. Specifically, Comment 41(e)(5)-2 clarifies that with respect to any portion of the mortgage debt that is not discharged, a servicer must resume sending periodic statements in compliance with § 1026.41 within a reasonably prompt time after the next payment due date that follows the earliest of any of three potential outcomes in the consumer’s bankruptcy case: (i) the case is dismissed, (ii) the case is closed, or (iii) the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or 1328. The CFPB recognizes that this may be a problem and thus specifically provides that the resumption of periodic statements does not require a servicer to communicate with a consumer in a manner that would be inconsistent with applicable bankruptcy law or a court order in a bankruptcy case and that a servicer may adapt the requirements of § 1026.41 in any manner believed necessary.
Absent the CFPB requirements, providing post-bankruptcy statements is relatively easy. The problem with the CFPB’s instructions is that the servicer is forced to “adapt” the § 1026.41 requirements. Put another way, how does a servicer maintain the essence of the §1026.41 requirements after the bankruptcy? Section 1026.41 provides an exacting list of the disclosures that must be made. It assumes that these statements will be sent monthly so the format does not easily “adapt” to the information that occurred during the non-reporting bankruptcy period. And explaining what happened in the bankruptcy in the first post-bankruptcy statement is a daunting task. One example helps put this in perspective. Sections 1026.41(d)(4) and § 1026.41(d)(1)(iii) require disclosure of all transactions since the last statement. If no statements were sent during bankruptcy, how does a servicer comply with this requirement in its initial post-petition statement? What bankruptcy information needs to be provided? How is the bankruptcy information best disclosed to avoid confusion? How can it be presented in such a way that it does not overshadow the present contractual information?
Servicers need to carefully focus on the requirements of the first statement prepared after the borrower leaves bankruptcy. In addition, servicers should continue to prepare a methodology for presenting mortgage statements during bankruptcy because the CFPB has indicated that it will soon revisit this issue and strongly believes that mortgage statements should be sent during bankruptcy.