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Big Changes Are Underway Regarding Periodic Mortgage Statements for Consumers in Bankruptcy. Is Your Institution Ready?

Nobody really thinks about sending periodic mortgage statements to borrowers in a bankruptcy proceeding or after a discharge order is entered in a bankruptcy case discharging a borrower’s personal liability on her debts.  Except perhaps the Consumer Financial Protection Bureau (“CFPB”). 

One of the important aspects of CFPB’s August 4, 2016 final mortgage servicing rule, which will take effect on April 19, 2018, is the sweeping changes it will make respect to periodic statements for residential mortgage loans under the Truth-in-Lending Act, as implemented by Regulation Z, and codified in 12 C.F.R. 1026.41.  With some exceptions, Section 1026.41 requires lenders to send periodic mortgage statements to borrowers of closed-end mortgages secured by a dwelling.

New Bankruptcy Periodic Mortgage Statement Exemption

On April 19, 2018, the new rule will go into effect and will not be as simple to administer as the existing (soon-to-be “old”) rule which allowed lenders/servicers to stop sending periodic statements as soon as the debtor filed for bankruptcy.  Now, lenders or their servicers will need to proactively review each bankruptcy case throughout the entire proceeding.   Under the new rule, Section 1026.41(e)(5) will allow lenders to stop sending statements only if:

  1. The consumer is a debtor in a bankruptcy proceeding or has discharged personal liability for the mortgage loan; and
  2. With regard to any consumer on the mortgage loan:
    1. The consumer requests in writing that the servicer cease providing a periodic statement or coupon book;
    2. The consumer’s bankruptcy plan surrenders the dwelling securing the mortgage, provides for the avoidance of the lien securing the mortgage, or does not provide for the cure of pre-petition arrearage payments or the maintenance of regular mortgage payments;
    3. The court enters an order in bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay pursuant to 11 U.S.C. §362 with regard to the dwelling securing the mortgage loan, or requiring the servicer to cease providing a periodic statement or coupon book; or
    4. The consumer files a statement of intent evidencing her intention to surrender the dwelling and the consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the bankruptcy case.

This rule is much more difficult to administer because it requires an active review of any pending bankruptcy case, and any changes that might occur in the case, to determine whether to send the borrower periodic statements.  A lender or its servicer needs to quickly review bankruptcy case developments and quickly determine whether it should start, stop, or resume sending mortgage statements.  There are numerous situations where a lender will need to react to a Bankruptcy Plan and subsequent amendment(s).

CFPB Cannot Provide Any Assurances Regarding Compliance With Bankruptcy Code

To further complicate matters, the CFPB cannot (and does not) provide any assurances that a lender’s compliance with this rule will not get lenders “in trouble” with bankruptcy judges for violating the automatic stay injunction of the discharge injunction.  While a lender’s/servicer’s conduct may satisfy the new periodic notice requirements, it may still be found to run afoul to the bankruptcy code in certain circumstances. The issues surrounding the new rule can be extensive and detailed, and lenders are well advised to carefully consider the impact on their institution.