Identifying a Qualified Written Request

QUESTION 

We are a medium-sized servicer with a servicing portfolio in almost all jurisdictions in the United States. I am an attorney who heads the team evaluating Qualified Written Requests (QWR). We recognize there are specific elements to a QWR. However, sometimes, it feels like a judgment call to determine what is or is not a QWR. 

I often find myself taking deep dives into RESPA’s Regulation X and case law to interpret whether a letter from a borrower constitutes a QWR or a complaint, each with obviously different – though sometimes overlapping – resolution criteria and statutory obligations. There are many instances where the letter is both a QWR and a complaint. 

My focus is on determining whether we have received a bona fide QWR. I was wondering if you could provide some guidance in navigating this legal jungle and provide a case that shows how a court has offered a way to identify a QWR. 

What constitutes the requirements for a Qualified Written Request? 

Is there a case with some guidelines for identifying a Qualified Written Request? 

COMPLIANCE SOLUTION 

Policies and Procedures 

ANSWER 

You have asked a question that involves one of the more litigious areas of servicing compliance. The Qualified Written Request (QWR) provisions of RESPA continue to produce an abundance of litigation. 

Generally, the court decisions typically use the more general statutory term QWR as they consider borrower claims regarding Notices of Error (NOEs) and Requests for Information (RFIs), the specific types of QWRs described in Regulation X[i].

Before proceeding with a possible case for you to consider, allow me to put down some foundation. 

RESPA[ii] specifies that 

“[d]uring the 60-day period beginning on the date of the servicer’s receipt from any borrower of a qualified written request relating to a dispute regarding the borrower’s payments, a servicer may not provide information regarding any overdue payment, owed by such borrower and relating to such period or qualified written request, to any credit reporting agency.” 

Similarly, Regulation X[iii] provides that, after receiving an NOE, a servicer may not, for 60 days, furnish adverse information to any consumer reporting agency regarding any payment that is the subject of the notice of error. 

This does not limit or restrict a servicer or lender from pursuing any remedy under applicable law, including initiating foreclosure or proceeding with a foreclosure sale, except for the Regulation X restrictions regarding assertions of errors relating to: 

(a) a first notice or filing required by applicable law for any judicial or nonjudicial foreclosure process in violation of Regulation X[iv]; or 

(b) a motion for foreclosure judgment or order of sale or conducting a foreclosure in violation of Regulation X[v]. 

Now, let's move on to a case that may be responsive to your inquiry. 

On remand from a decision of the U.S. Court of Appeals for the 4th Circuit, a federal district court in Maryland recently considered whether a borrower inquiry was a QWR and, if it were, then whether the servicer had violated the restriction on furnishing adverse information to a consumer credit reporting agency. The case is Morgan v. Caliber Home Loans, Inc.[vi] 

Here’s my outline. 

·       In 1998, Morgan borrowed from Nations Bank to refinance his home mortgage loan. Morgan modified the mortgage loan once to change the date of his monthly payment. 

·       In November 2014, after the loan matured, servicing was transferred from Bank of America to Caliber. At the time of the transfer, the loan documents showed an outstanding balance due on the loan. Morgan repeatedly contacted Caliber about the purported outstanding loan balance. 

·       Morgan learned through an employer-generated credit check that his credit report reflected a $16,806 arrearage on the loan. The employer told Morgan he needed to correct the adverse credit reports or he would lose opportunities for job promotions. 

·       Over the next year, Morgan continued receiving notices regarding the outstanding balance. 

·       On September 20, 2016, Morgan called Caliber to inquire about the notices because he believed the loan had been paid off. He learned during that call that the balance had increased to $30,656.89. 

·       On September 25, 2016, he sent Caliber a letter stating: 

o   “I called Caliber and talked to [an employee]…he stated I owe $36,656.89…Can you please correct your records. Your office’s reporting this wrong amount to this credit agency is effecting [sic] my employment. Please correct your records.” 

·       Caliber received the letter and responded in writing the next day. 

·       In its October 4, 2016 letter, Caliber acknowledged receipt and stated it would “perform the necessary research and respond within the time period required by law.” 

·       Two days later, Caliber determined that the previously reported loan balance was incorrect. It recalculated the balance as $8,823. 

o   That same day, Caliber reported the new balance information to the credit reporting agencies using an Automated Universal Data form (AUD). 

·       Caliber also suspended its monthly report to the credit reporting agencies regarding the loan from October 6, 2016 through March 2017.

·       On October 11, 2016, Caliber informed Morgan that the credit report was “inaccurately reporting the amount past due.” 

o   The letter vaguely referred to Caliber having corrected the inaccuracy. Still, it did not explain what was inaccurate and how that error was corrected, and it did not share with Morgan that, in Caliber’s view, he still owed $8,823 on the loan.

o   The letter added that it might take up to four weeks before the “correct information” would appear in his credit report. 

·       Morgan continued to dispute that he owed anything and sent letters to the credit reporting agencies. According to Morgan, the notice from his employer regarding his poor credit and the dispute regarding the outstanding balance caused him emotional distress. 

·       On September 23, 2019, he sued Caliber for violating RESPA and Regulation X. 

The district court dismissed Morgan’s claim, holding that his September 25, 2016 letter did not meet RESPA’s requirements for a QWR. However, the U.S. Court of Appeals for the 4th Circuit reversed, finding that the letter was a QWR. 

On remand, Morgan moved for partial summary judgment as to liability only, and Caliber filed a cross motion for summary judgment as to liability and damages. 

The district court granted Morgan’s motion as to two of the three elements of the RESPA claim (QWR, and failure to refrain from credit reporting, but not as to damages). It granted Caliber’s motion as to the unavailability of statutory damages. 

Now, I want to break the foregoing decision into its three elements: QWR, Failure to Refrain, and Actual Damages. Thereafter, I will provide a few words about statutory damages. 

QWR 

First, the court concluded, as required by the 4th Circuit, that the letter was a QWR because it was “a written correspondence” that articulated a “statement of reasons” in “sufficient detail” to indicate to Caliber why Morgan believed the credit reporting was in error. The court granted summary judgment to Morgan on this element. 

Failure to Refrain 

Second, the parties did not dispute that within 3 days of receiving the QWR, Caliber submitted an AUD informing the credit reporting agencies that Morgan had $8,823 outstanding, and that this qualified as reporting an “overdue payment.” Accordingly, Caliber indisputably failed to refrain from reporting “any overdue payment” for 60 days after having received the QWR. The court also granted summary judgment to Morgan on this element. 

Actual Damages 

Third, the court determined that Morgan had produced sufficient evidence from which a reasonable juror could conclude that he suffered emotional distress as a result of the AUD Caliber sent to the credit reporting agencies. 

The mother of Morgan’s children had observed that Morgan was “worried and anxious,” which was “unlike Morgan.” When she asked what was troubling him, he would “almost always turn to Caliber.” His daughter recalled that while living with Morgan during this time, he was “anxious about Caliber hurting his financial status,” Morgan “regularly paced around,” he was “short tempered,” and could not eat. Morgan also sought medical assistance for his anxiety and depression. 

From this testimony, a juror could reasonably conclude that he suffered emotional distress due to Caliber’s failure to refrain from reporting adverse information in the AUD. This left a facial issue as to whether Caliber’s RESPA violation proximately caused Morgan’s emotional distress. Accordingly, the court denied summary judgment for Caliber as to actual damages. 

Statutory Damages 

Morgan also sought statutory damages, which RESPA allows when a servicer engages in a “pattern or practice of noncompliance” with RESPA. 

Morgan argued that Caliber’s single AUD constituted a pattern or practice because Caliber had forwarded it to three credit reporting agencies and violated multiple RESPA provisions. 

Not so, said the court, because Caliber submitted only one AUD on one occasion. If this alone were sufficient to establish a pattern or practice, then the pattern or practice requirement sufficient to trigger statutory damages would apply in almost every case. The court granted summary judgment to Caliber regarding statutory damages. 

I will conclude with an observation. 

The court noted that Morgan might wish to pursue an alternative argument that Caliber violated Regulation X[vii], which requires a servicer to respond to an NOE by either correcting the error and providing written notification of the correction, or conducting a reasonable investigation and providing a written notice that no error occurred. Thus, a legitimate argument could be made that Caliber did not satisfy the notification requirement, that is, it did not describe the error, how it was corrected, or the effective date of the correction. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Regulation X §§ 1024.35 (NOEs) and 1024.36 (RFIs), as amended by the 2013 Mortgage Lending Rules.

[ii] See RESPA § 6

[iii] § 1024.35

[iv] § 1024.41(f) or (g)

[v] §1024.41(g) or (j)

[vi] Morgan v. Caliber Home Loans, Inc., 2024 U.S. Dist. (D. Md. Feb. 22, 2024)

[vii] § 1024.35(e)(1)(i)(B)

Defining “Mortgage Loan Originator”

QUESTION 

The banking department claims that our “mortgage loan officer” category is incorrectly defined. As a result, they think we are not licensing MLOs who should be licensed, leading to us originating unlicensed loans. Now, they are auditing our loans for licensing violations. 

Our attorney believes that our policy clearly states how we define an MLO. However, she is concerned that we do not provide examples of the activities and services offered by Mortgage Loan Originators. 

We are in the process of preparing our defense but need some assistance in coming up with examples of MLO activities that the examiners will accept. They are currently auditing us, so we would appreciate your prioritizing our questions. Thanks for your commitment to us all! 

What is the definition of a Mortgage Loan Originator? 

What are some examples of MLO activities? 

COMPLIANCE SOLUTION 

MLO Tune-up 

Policies and Procedures 

ANSWER 

You have asked questions about the term Mortgage Loan Originator (“MLO”), a term that has been defined and redefined, construed and misconstrued, litigated and relitigated, embedded in and cross-referenced among several foundational regulations, and, to some extent, continues to be elucidated and attenuated ad nauseum. 

If your organization employs one or more mortgage loan originators, you must adopt and follow written policies and procedures designed to assure compliance. These policies and procedures must be appropriate to the nature, size, complexity, and scope of the financial institution's mortgage lending activities and apply only to those employees acting within the scope of their employment. 

If you have not recently done a deep dive into the written policy document, contact us, and we’ll get it done. Better yet, ask us to provide an MLO Tune-up, one of our pioneering Compliance Tune-ups. Banking departments expect you to perform such self-assessment reviews. 

I will give you a brief tour and promptly provide some examples. 

S.A.F.E. ACT AND REGULATION G

Let’s go first to the S.A.F.E. Act, implemented through Regulation G,[i] which defines a mortgage loan originator and which individuals within your organization must be registered (banks) or licensed (non-banks). 

This definition states that an MLO is an individual who: 

·       Takes a residential mortgage loan application and 

·       Offers or negotiates terms of a residential mortgage loan for compensation or gain. 

However, like many things in regulatory compliance, it is often not what a definition includes but what it excludes that counts! I don’t care what title you give a person because what the person does matters most, not what title he happens to hold. 

So, here are activities that are excluded[ii] from the MLO category: 

1.     An individual who performs purely administrative or clerical tasks on behalf of an individual who is an MLO under the broad definition above; 

2.     An individual who only performs real estate brokerage activities[iii] and is licensed or registered as a real estate broker under applicable State law, unless the individual is compensated by a lender, a mortgage broker, or other mortgage loan originator or by any agent of such lender, mortgage broker, or other mortgage loan originator, and meets the definition of mortgage loan originator in the above definition; or 

3.     An individual or entity solely involved in extensions of credit related to timeshare plans, as that term.[iv] 

Now, we are often asked if administrative and clerical tasks are excluded. If you can demonstrate purely “administrative or clerical tasks,”[v] as I’ve outlined above, then, for purposes of exclusion, it is necessary to explicate the “tasks” that would be considered administrative and clerical. 

In that context, “administrative or clerical” generally means the receipt, collection, and distribution of information common for the processing or underwriting of a loan in the residential mortgage industry and communication with a consumer to obtain information necessary for the processing or underwriting of a residential mortgage loan. 

I use the term “residential mortgage loan” to mean[vi] any loan primarily for personal, family, or household use that is secured by a mortgage, deed of trust, or other equivalent consensual security interest on a dwelling (as defined in the Truth in Lending Act,[vii] or residential real estate upon which is constructed or intended to be constructed a dwelling, and includes: 

·       Refinancings; 

·       Reverse mortgages; 

·       Home equity lines of credit; and 

·       Other first and additional lien loans that meet the qualifications listed in this definition. 

In short, virtually any consumer loan secured by a dwelling falls under this definition, meaning employees who originate these loans must be registered or licensed as MLOs. 

DE MINIMIS EXCEPTION

Another question that usually comes up regards the so-called “de minimis exception.” Some people think that de minimis means “at a minimum.” But that is not the case. The term is Latin for “at least.” Generally, in the context of regulatory compliance, de minimis action is slight, minor, nearly trivial, or even insignificant. What constitutes de minimis is codified in applicable regulations not only in mortgage banking but also in a wide spectrum of regulations. 

From a regulatory point of view, there is a de minimis exception[viii] from registration and licensing requirements for individuals who originate very few mortgage loans during the year. Under this exception, the registration and licensing requirements do not apply to an employee who has never been registered or licensed through the Nationwide Mortgage Licensing System and Registry or Registry[ix] (“Registry”) as a mortgage loan originator if, during the past 12 months, the employee acted as a mortgage loan originator for five or fewer residential mortgage loans. 

However, before engaging in mortgage loan origination activity that exceeds the five-loan exception limit, the employee must register or license via the Registry under the rules. In addition, institutions are prohibited from engaging in any act or practice to evade the limits of the de minimis exception. 

Also, once employees are registered or licensed, they cannot go back and rely on the de minimis exception even if their originations fall below the five-loan threshold. The de minimis exception only applies to employees who have never been registered or licensed. 

You have asked for some examples of MLO activities. Please keep in mind that my answer is not meant to be comprehensive. The examples I offer are suggestive and generally illustrative. If you are unsure about activities performed by your MLOs, you should contact us or consult a competent compliance professional. 

SOME EXAMPLES OF MLO ACTIVITIES 

To help clarify the definition of mortgage loan originator and aid in the understanding of activities that would cause an employee to fall within or outside the definition of mortgage loan originator, the S.A.F.E. Act provides Appendix A,[x] which provides examples illustrating the application of the definition of an MLO. 

As the Appendix makes abundantly clear, these examples are “not all-inclusive and illustrate only the issue described and do not illustrate any other issues that may arise under the rules.”[xi] 

Taking a Loan Application 

The following examples illustrate when an employee takes or does not take a loan application. 

Taking an application includes: 

·       Receiving information provided in connection with a request for a loan to be used to determine whether the consumer qualifies for a loan, even if the employee: 

o   has received the consumer’s information indirectly to make an offer or negotiate a loan;

o   is not responsible for verifying information;

o   is inputting information into an online application or other automated system on behalf of the consumer; or

o   is not engaged in approving the loan, including determining whether the consumer qualifies for the loan. 

Taking an application does not include: 

·       Any of the following activities performed solely or in combination: 

o   contacting a consumer to verify the information in the loan application by obtaining documentation, such as tax returns or payroll receipts;

o   receiving a loan application through the mail and forwarding it, without review, to loan approval personnel;

o   assisting a consumer who is filling out an application by clarifying what type of information is necessary for the application or otherwise explaining the qualifications or criteria necessary to obtain a loan product;

o   describing the steps that a consumer would need to take to provide information to be used to determine whether the consumer qualifies for a loan or otherwise explaining the loan application process;

Policy Statement for Artificial Intelligence

QUESTION 

You have been writing about Artificial Intelligence since it became popular. Most of us in my company only have a superficial understanding of AI. As the Compliance Manager, I surveyed those who were using it. It turns out that it’s only used in chats and searches. Meanwhile, our Board wants to introduce it into our loan origination procedures. 

Several companies are now pitching Senior Management and the Board regarding their AI capabilities. Frankly, I see a massive training, monitoring, and auditing future—and they have tasked me with writing a risk/benefit outline for using AI. They plan to use my outline as a scorecard to vet potential AI partners. 

To complicate matters, they want me to present the outline as a policy statement they can adopt. From it, full policies and procedures are supposed to be based on the policy statement. Overnight, I am supposed to be an expert in Artificial Intelligence involving mortgage banking! 

I need help drafting a risk/benefit outline and a policy statement. 

What AI benefits and risks can be listed in the outline? 

What elements constitute a policy statement about AI? 

COMPLIANCE SOLUTION 

Policies and Procedures 

ANSWER 

Virtually since the inception of the Artificial Intelligence (AI) craze, I have been writing and speaking on its pros and cons. Here are some articles. Although I see numerous benefits, I also see numerous risks. Do the benefits outweigh the risks? 

A new technology is often unpredictable with respect to its consequences. Currently, self-driving trucks are promoted as the future of delivery methods. As I write, about two dozen states specifically allow driverless operations of vehicles, and another 16 states have no regulations at all specific to “autonomous vehicles.” Only ten states place limits on autonomous vehicles.[i] 

Now, let's hold the self-driving trucks up to the light of the risks/benefits type thinking. I’m sure there are plenty of benefits, as is the case with new technologies, but the risks can be catastrophic in view of the fact that the livelihoods of human truckers are at stake. Long-haul truckers are estimated to lose at least 500,000 jobs. That amounts to a financial catastrophe for their families. Add in the maintenance and support staff, truck stop employees, and all their families, and the overall consequence is devastating on nearly every level – except it does provide benefits to the self-driving companies since their robotic trucks do not need to feed their families, can be readily replaced, and can drive 24 hours a day, 7 days a week. Millions of lives are impacted adversely. So, you tell me, what are the foreseeable consequences of new technology? Some consequences are “known-known.” The consequences of the self-driving truck are a known-known. 

Artificial intelligence has a few known-known consequences, and I will mention some of them. However, the vast area of the unknown consequences is not entirely apprehended at this early stage of its implementation. When drafting the risk outline and policy statement, I suggest you insert a proviso that the known-known is incomplete and the unknown vastly overwhelms the known. 

Regulators have expressed concern about how we use AI, so you need to be aware of the measures to take to ensure an understanding of its risks. I will provide a brief risk outline in the context of a policy statement because they cannot and should not be separate aspects of AI. Each policy statement must reflect a company's size, products, services, complexity, risk profile, and business strategy. My generic synopsis is not and is not meant to be comprehensive. 

RISK OUTLINE AND POLICY STATEMENT 

Flagging Unusual Transactions 

AI may identify potentially suspicious, anomalous, or outlier transactions (i.e., fraud detection and financial crime monitoring). This involves using different forms of data (i.e., emails and audio data – both structured[ii] and unstructured) to identify fraud or anomalous transactions with greater accuracy and timeliness. It also includes identifying transactions for the Bank Secrecy Act’s Anti-Money Laundering investigations, monitoring employees for improper practices, and detecting data anomalies. 

Personalization of Customer Services 

AI technologies, such as voice recognition and Natural Language Processing (NLP),[iii] may improve the customer experience and increase efficiency in allocating financial institution resources. One example is using chatbots[iv] to automate routine customer interactions, including account opening activities and general customer inquiries. AI is leveraged at call centers to process and triage customer calls to provide customized service. These technologies may be implemented to target marketing efforts better. 

Credit Decisions 

AI may inform credit decisions to enhance or supplement existing techniques. This application of AI may use traditional data or employ alternative data[v] (such as cash flow transactional information from a bank account). 

Risk Management 

AI may be used to augment risk management and control practices. For instance, AI may provide a resource to complement and provide a check on another, more traditional credit model. It may also enhance credit monitoring (including through early warning alerts), payment collections, loan restructuring and recovery, and loss forecasting. AI can assist internal audit and independent risk management functions to increase sample size (such as for testing), evaluate risk, and refer higher-risk issues to human analysts. AI can be used in liquidity risk management, for example, to enhance monitoring of market conditions or real estate collateral management. 

Textual Analysis 

Textual analysis refers to using NLP to handle unstructured data (generally text) and obtain insights from that data or improve existing processes' efficiency. Applications could include analysis of regulations, news flow, earnings reports, consumer complaints, analyst rating changes, and legal documents. 

Cybersecurity 

AI may be able to detect threats and malicious activity, reveal attackers, identify compromised systems, and support threat mitigation. For instance, it could monitor real-time investigation of potential attacks, use behavior-based detection to collect network metadata, flag and block new ransomware and other malicious attacks, identify compromised accounts and files involved in exfiltration, and conduct deep forensic analysis of malicious files. 

KNOWN RISKS 

Several risks are particular to AI: explainability, data usage, and dynamic updating. These are the top three known risks. 

Explainability 

“Explainability” refers to an AI approach using inputs to produce outputs. 

Some AI approaches can exhibit a “lack of explainability” for their overall functioning (sometimes referred to as “global explainability”) or how they arrive at an individual outcome in a given situation (sometimes referred to as “local explainability”). Lack of explainability can pose different challenges in different contexts. 

Lack of explainability can also inhibit management's understanding of the conceptual soundness of an AI approach (that is, the quality of the theory, design, methodology, data, developmental testing, and confirmation that an approach strategy is appropriate for the intended use) which can increase uncertainty around the AI approach's reliability, and increase risk when used in new contexts. 

And, importantly, lack of explainability can also inhibit independent review and audit and make compliance with laws and regulations, including consumer protection requirements, more challenging. 

Broader or More Intensive Data Usage 

Data plays a particularly important role in AI. 

AI algorithms identify patterns and correlations in training data without human context or intervention and then use that information to generate predictions or categorizations. Because the AI algorithm depends on the training data, an AI system generally reflects dataset limitations. As a result, AI may perpetuate or even amplify bias or inaccuracies inherent in the training data or make incorrect predictions if that data set is incomplete or non-representative. 

Dynamic Updating 

Some AI approaches can update on their own, sometimes without human interaction, often known as “dynamic updating.” 

Monitoring and tracking an AI approach that evolves independently can present challenges in review and validation, particularly when changes in external circumstances may cause inputs to vary materially from the original training data. An example would be changes relating to economic downturns and financial crises. 

Dynamic updating techniques can produce changes ranging from minor adjustments to existing model elements to the introduction of entirely new elements. 

POTENTIALS FOR AI 

AI has the potential to offer improved efficiency, enhanced performance, and cost reduction, as well as benefits to customers. It can identify relationships among variables that are not intuitive or not revealed by more traditional techniques. Furthermore, it may also help to process certain forms of information, such as text, that may be impractical or difficult to process using conventional methods. 

AI also facilitates processing significantly large and detailed datasets, both structured and unstructured, by identifying patterns or correlations that would be impracticable to ascertain otherwise. 

Other potential AI benefits include more accurate, lower-cost, and faster underwriting and expanded credit access for customers who may not have obtained credit under traditional credit underwriting approaches. AI applications may also enhance the ability to provide products and services with greater customization. 

ready for artificial intelligence? 

Does a financial institution have adequate processes in place to identify and manage the potential risks associated with AI? I don’t think so, certainly not at this early stage of AI development. 

Many of the risks associated with using AI are not unique to AI. For instance, using AI could result in operational vulnerabilities, such as internal process or control breakdowns, cyber threats, information technology lapses, risks associated with using third parties, and model risks, all of which could affect safety and soundness protocols. 

The use of AI could also create or increase consumer protection risks, such as risks of unlawful discrimination, unfair, deceptive, or abusive acts or practices, or privacy concerns. 

We may know some known-known risks and benefits. 

But we simply do not know the unknown consequences. 

And therein lies the test of time! 

As Banquo said to the witches in Macbeth:[vi] 

If you can look into the seeds of time,
and say which grain will grow and which will not,
speak then unto me.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Ready or Not, Self-driving Semi-trucks are Coming to America’s Highways, Thadani, Trisha, March 31, 2024. The Washington Post

[ii] “Structured data” generally refers to a set of data that has been systematically organized or arranged.

[iii]  “Natural Language Processing” (“NLP”) generally refers to the use of computers to understand or analyze natural language text or speech.

[iv] The term “chatbot” generally refers to a software application used to conduct an on-line chat conversation via text or text-to-speech, in lieu of providing direct contact with a live human agent.

[v] “Alternative data” means information not typically found in the consumer's credit files of the nationwide consumer reporting agencies or customarily provided by consumers as part of applications for credit.

[vi] Macbeth, Act 1, Scene 3

Bankruptcy Still Requires Periodic Statements

QUESTION 

Recently, our internal auditors found that we were not sending our borrowers periodic statements for the billing cycle. As a servicer, we are well aware that this should be done. However, what happened is the borrowers who did not receive the statements were in bankruptcy, so we stopped sending them statements. 

Our position was that there could be no more periodic statements because no more borrower payments were expected, so no more billing was needed. However, the internal auditors said we were wrong to stop billing. 

Frankly, sending periodic statements to a borrower who filed for bankruptcy makes no sense. Maybe you could shed some light on whether the auditors are correct. You may know of a situation or case where periodic statements should still be sent, even if the borrower went into bankruptcy. 

Is a servicer required to provide periodic statements for loans involving bankruptcy? 

COMPLIANCE SOLUTION

Servicing Quality Control Audits

ANSWER 

The answer to your question may surprise you. The Truth in Lending Act (TILA) requires a servicer to provide a periodic statement “for each billing cycle.”[i] A federal district court in California recently considered and rejected a servicer’s argument that it was not required to provide statements for loans it considered “matured.” 

Let's set forth some foundational information before I get to the servicer’s defense. The January 2013 Regulation Z Servicing Rule amended Regulation Z.[ii] In particular, the amendment generally requires mortgage loan servicers (other than small servicers) to provide periodic statements for any closed-end consumer credit transaction secured by a dwelling.[iii] The provision deals primarily with content requirements.[iv] 

Now, for that sample “situation or case” you requested. I have in mind the case of Naranjo v. Bank of America.[v] The moral of this story is to continue sending mortgage statements until a loan is paid off or forgiven. That said, TILA offers an exception for bankruptcy cases. But I get ahead of myself. 

In August 2006, the Naranjos obtained a secondary mortgage loan from Golden Empire and secured the loan with a Deed of Trust on their home. Bank of America, Veripro Solutions, and West Coast were successive servicers of the loan. The documents required the loan servicers to provide monthly statements. 

Sometime between 2006 and 2012, the Naranjos defaulted on their loan, and in February 2012, they filed for Chapter 7 bankruptcy protection. When the Naranjos received a notice of default and foreclosure a decade later, in January 2023, they filed a temporary restraining order application, which the court converted to a motion for a preliminary injunction. The complaint asserted claims for TILA and Real Estate Settlement Procedures Act (RESPA) violations, breach of contract, and other claims. 

However, the Naranjos alleged that they had thought their bankruptcy case had extinguished their debt. 

The court granted in part and denied in part the motion for a preliminary injunction and also granted in part and denied in part the servicers’ motion to dismiss. 

The court found that the Naranjos had properly alleged that their loan servicers had failed to send any statements since at least 2012, violating TILA. They were not required to allege causation to establish the TILA violation, a finding that the 9th Circuit had previously emphasized, stating that 

“even technical or minor violations of the TILA impose liability…to ensure that the consumer is protected.” 

The court further found that, even if there were a causation requirement, the Naranjos plausibly stated a claim because they alleged injury in the form of the threat of foreclosure and the interest that had accrued during the time they believed the loan had been discharged – both injuries the Naranjos plausibly could have avoided had they received timely statements. 

The court noted that the reasonableness of the Naranjos’ belief that their loan had been extinguished was a factual issue not properly resolved on a motion to dismiss. 

According to the court, the Naranjos had sufficiently pled that the servicers had violated Regulation Z by failing to send monthly statements. The court rejected the argument that servicer West Coast had no obligation to send statements because the loan had “matured” before it became the servicer; that is, because the loan had “matured,” no billing cycles remained within the meaning of the regulation’s requirement that a loan servicer must provide a statement “for each billing cycle.” 

However, the fact that the loan had “matured” made no difference in the obligation; such an unstated limitation would not serve the purpose of the regulation, which was to provide mortgagors with information about the amount they were expected to pay on their loans. 

The court denied the motion to dismiss a claim that the servicers’ conduct was unfair under California’s Unfair Competition Law. The Naranjos sufficiently alleged that the defendants had neglected their obligations to the Naranjos for a decade, leaving them to believe that the loan had been forgiven, only to be revived once they had built up enough equity in their home for it to be worth being foreclosed upon. 

They also asserted that the activity that led them to believe the loan had been forgiven allowed interest and fees to accumulate that would not otherwise have accumulated. 

Regarding the moral of this story, on October 16, 2013, the CFPB added to Regulation Z an exemption for a servicer concerning periodic statement requirements while the consumer is a debtor in bankruptcy.[vi] 

The CFPB modified this exemption, effective April 19, 2018. The CFPB had received comments seeking more detail on statements in the original Servicing Rule’s preamble regarding bankruptcy. The preamble had acknowledged that the Bankruptcy Code might prevent attempts to collect a debt from a consumer in bankruptcy, but stated that the Bureau did not believe the Bankruptcy Code would prevent a servicer from sending a consumer a statement on the status of the mortgage loan. The CFPB had also specified that the final rule allows servicers to make changes to the periodic statement they believe are necessary when a consumer is in bankruptcy. For example, a servicer could include a message about the bankruptcy and alternatively present the amount due to reflect payment obligations determined by the individual bankruptcy proceeding.[vii] 

The exemption was part of an interim rule exempting servicers from the TILA requirements[viii] while the consumer was a debtor in bankruptcy. To exempt a mortgage loan from the normal periodic statement requirements where any consumer on the loan is a debtor in bankruptcy[ix] or has discharged liability for the mortgage loan[x], the following must take place: 

(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 with regard to the dwelling securing the loan, or requiring the servicer to cease providing a periodic statement or coupon book; or 

(4) the consumer files a statement of intention to surrender the dwelling securing the mortgage loan with the court overseeing the bankruptcy case, and the consumer has not made any partial or periodic payment on the mortgage loan after the commencement of the bankruptcy case. 

This 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).[xi] 

Instead of the normal periodic statement, while any consumer on a mortgage loan is a debtor in bankruptcy or if the consumer has discharged personal liability for the mortgage loan[xii], a servicer must provide a modified periodic statement. The modified periodic statement may omit the normally required information regarding late fees, length of delinquency, risks of delinquency, and delinquent account history, and it need not show the amount due more prominently than other disclosures. A servicer then transitions to providing the normal periodic statement when the loan ceases to be subject to discharge, the debtor exits bankruptcy, or the bankruptcy exemption no longer applies.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] § 1026.41

[ii] Including § 1026.41, which implements TILA § 128(f), added by § 1420 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

[iii] Ibid

[iv] Appendix H-30 offers sample forms, which are properly used to provide a safe harbor for compliance.

[v] Naranjo v. Bank of America, 2023 U.S. Dist. (C.D. Cal. Nov. 17, 2023)

[vi] § 1026.41(e)(5)

[vii] Commenters sought clarification on reconciling the periodic statement requirements with various bankruptcy law requirements. They expressed concerns that bankruptcy courts, under certain circumstances, might find a servicer in violation of bankruptcy’s automatic stay or discharge injunction if the servicer provided a periodic statement, whether or not it included a disclaimer. Also, servicers had expressed concern about fulfilling the Regulation Z requirements in a way that did not confuse consumers regarding their status in bankruptcy, and that servicers were not attempting to collect on accounts. Others had asked questions about possible consumer confusion depending on what “amount due” and “payment due date” servicers would disclose in a Chapter 13 case that has different pre-petition arrearage cure payments and post-petition monthly payments, which might be due on different dates.

[viii] Op. cit. i

[ix] Under Title 11 of the U.S. Code

[x] Pursuant to 11 U.S.C. § 717, 1141, 1228, or 1328

[xi] A servicer may establish an exclusive address that a consumer must use to submit a written request under this provision.

[xii] Op. cit. x