Recently, I had a
conversation with an attorney whose clients are in bankruptcy. Knowing that we
have an entire group devoted to servicing compliance, he wanted to know why his
clients were receiving loan statements again. It made no sense to him, since
there was a time when borrowers in bankruptcy stopped receiving loan statements.
Actually, withholding of
loan statements stems from confusion by courts. But I’ll get to that in a moment.
The fact is that, if
you’ve represented borrowers in bankruptcy, you may remember a time when they
received periodic residential loan statements from their mortgage servicer,
much like they did before filing for bankruptcy protection. But you might also
remember a time when the delivery of these loan statements to debtors suddenly ceased,
with no explanation.
So, under the
circumstances, my interlocutor certainly had a right to be confused.
The practice of
withholding statements when a borrower files bankruptcy emerged out of
confusion by courts, debtors, creditors, and the financial industry over
whether sending statements was a violation of the automatic stay.
Case law was the
culprit. For instance, in Garske v.
Arcadia Financial, Ltd. (287 B.R. 537 (9th Cir. B.A.P. 2002) and Ramirez v. General Motors Acceptance
Corporation (273 B.R. 620; Bankr. C.D. Cal. 2002), the bottom line is that
there was no violation of the automatic stay or discharge injunction if the
debtor intends to keep the property. Furthermore, In re Ennis (Case No. 14-02188-5-SWH; Bankr. E.D. N.C 2015) held
that a motion for sanctions was denied because the court did not find that the debtor
was damaged by erroneously generated post-petition statements, although the court
deemed the generation of statements a willful violation of automatic stay. I
know; I know. Kind of a distinction without a difference. Finding it too risky
to be dragged into court, the financial industry veered hard right and took the
most extreme approach and stopped sending statements to borrowers who had filed
bankruptcy until the automatic stay was modified by the courts.
Confused yet?
Not yet? Good. So, let’s
move on.
The confusion was
heightened by subsequent actions taken by the Consumer Financial Protection
Bureau (CFPB). In 2014, the CFPB proposed new mortgage loan servicing
requirements to section 1026.41 of Regulation Z that included guidance on the
delivery of loan statements. The proposed amendments at that time required mortgage servicers to send a
borrower the periodic statement showing information about the mortgage. However,
the proposal was criticized on the basis that the requirement would conflict
with the bankruptcy automatic stay provision prohibiting creditors from
collecting a debt from a consumer in bankruptcy. As a result of this criticism,
the CFPB changed its stance and exempted mortgage servicers, in most
situations, from sending borrowers in bankruptcy a periodic statement. [See 12 C.F.R. § 1026.41(e)(5) (2014)]
Then, in 2016, the CFPB
went back to its original position, to wit, that loan statements must contain
necessary information for delinquent borrowers. Thus, CFPB’s stronger stance
now was a kind of declaration that sending loan statements to borrowers in
bankruptcy who intended to retain their residences is not contrary to the
bankruptcy automatic stay provisions. As such, effective April 19, 2018,
the CFPB eliminated the prior Regulation Z exemption, and financial
institutions would once again be mandated to provide borrowers with residential
loan statements, in a modified form. [See the CFPB’s Amendments to the 2013 Mortgage Rules under the Real Estate Settlement
Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z)
at 8. You can download it HERE.]
By the way, in addition to periodic statements, early intervention
efforts via written communication to borrowers in bankruptcy is now required. [12
C.F.R. § 1024.39(c) (2016)]
By hardening its
position, the CFPB has once again endorsed the view that the lack of a monthly
statement can create problems for a debtor who wishes to retain and continue
payments on a residence after filing bankruptcy.
So, these are a few “new
rules” I outlined to my caller with respect to periodic mortgage statements, as
they relate to borrowers in bankruptcy, which include the following:
(1) Mortgage servicers
must generally provide a modified residential mortgage loan statement to
borrowers in bankruptcies who intend to keep their home. Borrowers who intend
to surrender their home are not required to receive statements.
(2) Consumers in
bankruptcy may either opt in or opt out of these rules, ultimately giving them
the authority to determine whether statements are beneficial for them.
(3) The modified
content of the statements will vary, depending on whether the consumer is a
debtor in a Chapter 7 or 11 bankruptcy case, or a Chapter 12 or 13 bankruptcy
case. The CFPB created sample forms to ensure compliance.
The new rules also
clarify certain periodic statement disclosure requirements relating to mortgage
loans that have been accelerated, have been permanently modified, or are in
temporary loss mitigation programs.
