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., MBAChairman & Managing Director
[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
