QUESTION
We are mortgage servicers and are considering having your Servicers Compliance Group conduct an audit of our policies and procedures. It is our understanding that the CFPB has revised the bankruptcy exemption to exempt a mortgage loan from the periodic statement requirements. Could you let us know when this exemption goes into effect? Also, exactly what does this exemption cover?
ANSWER
Thank you for considering our compliance support services for mortgage servicing!
As a general proposition, when there is a bankruptcy declared by a mortgage borrower, certain unique requirements are immediately mandated on the part of mortgage servicers. This is because, upon the filing of a bankruptcy petition, all collection efforts by a creditor are automatically stayed.
Most servicers recognized that Real Estate Settlement Procedures Act (RESPA), the Truth in Lending Act (TILA), and the Fair Debt Collection Practices Act (FDCPA) actually requires servicers to engage in certain communications with borrowers, even if the borrower is in bankruptcy, and despite the argument that some of these communications might appear to relate to debt collection. So, obviously, only a broad response can be provided here.
In specific reply to your question, in October 2016 the Consumer Financial Protection Bureau (CFPB) revised the bankruptcy exemption, with the compliance effective of April 19, 2018. The revised rule exempts a mortgage loan from the periodic statement requirements if any consumer on the loan is a debtor in bankruptcy under Title 11 of the U.S. Code or has discharged liability for the mortgage loan (pursuant to 11 U.S.C. § 717, 1141, 1228, or 1328).
With respect to any consumer on the mortgage loan, the exemption applies where:
(1) the consumer requests in writing that the servicer cease providing a periodic statement or coupon book;
(2) the consumer’s bankruptcy plan provides that the consumer will surrender the dwelling securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due;
(3) a court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan, lifting the automatic stay regarding the dwelling that secures the loan, or requiring the servicer to cease providing a periodic statement or coupon book; or
(4) the consumer files with the court overseeing the bankruptcy case a statement of intention to surrender the dwelling securing the mortgage loan and a consumer has not made any partial or periodic payment on the mortgage loan after commencement of the bankruptcy case.
It should be noted that the exemption ceases if the consumer affirms personal liability for the loan or any consumer on the loan requests in writing that the servicer provide a periodic statement or coupon book, unless a court enters an order in the bankruptcy case requiring the servicer to cease providing a periodic statement or coupon book.
Under the revised exemption, during the time any consumer on a mortgage loan is a debtor in bankruptcy or if the consumer has discharged personal liability for the mortgage loan (pursuant to 11 U.S.C. § 727, 1141, 1228, or 1328), a servicer must provide a modified periodic statement. The modified statement may omit the normally required information regarding late fees, length of delinquency, risks of delinquency, and delinquent account history, and need not show the amount due more prominently than other disclosures.
When the loan ceases to be subject to discharge, the debtor exits bankruptcy, or the bankruptcy exemption no longer applies, a servicer then transitions to providing the normal periodic statement. The periodic statement must include a statement identifying the consumer’s status as a debtor in bankruptcy or the discharged status of the loan, and a statement that the periodic statement is for information purposes only.
Jonathan Foxx
Managing Director
Lenders Compliance Group
