The CFPB is About to Enact New Requirements for Mortgage Servicers - Is Your Organization Prepared?
On April 19th, changes made by the Consumer Financial Protection Bureau (CFPB) via the Mortgage Servicing Final Rule to Regulation Z will take effect, and mortgage servicers will be required to make changes to the periodic statements or coupon books that they send to borrowers who have filed bankruptcy. Whereas the previous version of Regulation Z contained a blanket exemption to the periodic statement rule for borrowers who have filed bankruptcy, the new rule requires servicers to send periodic statements containing certain bankruptcy-specific modifications.
The changes to Regulation Z create a single-statement exemption from the Truth in Lending Act (TILA) requirement to send periodic statements – essentially, skipping a month upon notice of the bankruptcy filing – and then require the mortgage servicers to send modified statements for the duration of the borrower's bankruptcy. The exemption applies regardless of whether the bankruptcy was filed under Chapter 7, Chapter 13, or any other type of bankruptcy. If the debtor's mortgage was not discharged, or survived a Chapter 13 case, the mortgage servicer can begin sending the unmodified version of its periodic statements or coupon books to the consumer. If the mortgage loan was discharged during the bankruptcy, however, then the servicer must continue to send the modified periodic statements for the life of the loan, or until its lien is satisfied.
The original reason for this rule was the practical need for mortgage servicers to continue to communicate with consumers in Chapter 13 cases about the amount due, whether the consumer is expected to continue making direct payments outside the Plan, or if the consumer has mortgages being paid through the Plan that will survive the bankruptcy. The same problem often arises in Chapter 11 or 12 cases; there is a risk of an arrearage developing during the bankruptcy – either due to a misunderstanding about the need to make direct payments, or otherwise – that the consumer could be unaware of until after his or her bankruptcy case has closed.
The bankruptcy-specific modifications to periodic statements include omitting certain otherwise-required disclosures – such as late payment fees, length of delinquency, the potential risks of failing to cure a delinquency – and the addition of other new disclosures for borrowers who have filed bankruptcy – such as pre-petition arrearage, etc. There are also different disclosures required depending on whether the borrower filed a Chapter 7 or 13.
The changes to Regulation Z also exempt servicers from the "live contact early intervention" requirement for borrowers in default who have filed bankruptcy. Although the CFPB stated in its comments accompanying the Rule that it did not believe this would violate the automatic stay, the Bureau acknowledged that it was placing mortgage servicers at risk by requiring them to contact consumers who are in an active bankruptcy case and still covered by the automatic stay.
To ensure that you and your organization are prepared to implement the new Mortgage Servicing Final Rule, please reach out to your regular Weltman attorney or contact the author.
Jason K. Wright is an attorney in the Bankruptcy Group at Weltman, Weinberg & Reis Co., LPA, where he handles consumer bankruptcy matters and the litigation of Adversary Proceedings brought in the U.S. Bankruptcy Court.