RESPA Violations: Inconsistent Enforcement

QUESTION 

I am the General Counsel and Compliance Officer of a mortgage lender in the Northeast. We originate retail and wholesale loans and are licensed in all states and territories. Recently, we had a multistate banking audit. The audit found that some of our Third-Party Originators (TPOs) had violated RESPA. 

After conducting a servicing quality control audit, we have decided to sue several TPOs for causing these RESPA violations. The problem we’re having is that RESPA does not address its enforcement consistently or comprehensively. It provides specific penalties in some sections but fails to mention remedies for violations in other sections. 

I want some guidance in navigating RESPA’s maze to determine where a private right of action is available and where it isn’t. In particular, I need some advice on how the TRID rule affected RESPA enforcement and private causes of action. 

COMPLIANCE SOLUTIONS 

Servicing Quality Control Audits 

Servicing Tune-up® 

Servicing Compliance 

ANSWER 

The Dodd-Frank Wall Street Reform (Dodd-Frank) and Consumer Protection Act (CPA) may have altered your scenario somewhat. Although courts generally have failed to examine this issue thoroughly, it is important to note that courts have given Chevron deference to the CFPB’s analysis of the topic. However, that approach may be about to change in light of Chevron's demise,[i] which I will discuss a bit below. 

If you’re using outside counsel for this litigation, be sure to retain a firm that has extensive experience in such matters. You can contact me here to discuss a referral. 

I will give you a brief overview with an emphasis on the TILA-RESPA Disclosure Integration Rule (TRID Rule). Let’s first talk history! 

RESPA PENALTIES 

The Real Estate Settlement Procedures Act (RESPA) contains penalty provisions for Section 6, which deals with mortgage servicing and escrow administration);[ii] Section 8, which prohibits kickbacks and unearned fees);[iii] Section 9, which deals with title companies;[iv] and the escrow statement requirements of Section 10.[v] 

RESPA does not include penalties for violations of other sections, such as Section 4 (HUD-1 Settlement Statements), Section 5 (Special Information Booklets and Good Faith Estimates), Section 10 (Limitations on Escrow Accounts), and Section 12 (Fees for Preparation of Truth-in-Lending or Settlement Statements). However, the absence of RESPA penalty provisions may no longer afford defendants the comfort it once did. 

RESPA’s HANDOFF TO TILA 

The TRID Rule, adopted in November 2013, and effective October 3, 2015, introduced another twist to RESPA enforcement. As just stated, RESPA does not provide private rights of action for violations of Sections 4 and 5, the sections regarding Good Faith Estimates and Settlement Statements. The TRID Rule extrapolated some of the RESPA Section 4 and 5 requirements that had previously appeared in Regulation X (implementing RESPA) over to Regulation Z (implementing TILA, the Truth in Lending Act). 

A HISTORY LESSON 

This transmogrification of RESPA Sections 4 and 5 had the effect of expanding RESPA liability by bringing those provisions into the purview of the TILA – and TILA provides for a private right of action. You might think of it as legal and regulatory prestidigitation! 

Now, there was considerable pushback to this switcheroo. One of the biggest gripes was that the TRID Rule would invite consumers to bring lawsuits seeking TILA remedies for RESPA violations. The upshot of this concern was to have the Consumer Financial Protection Bureau (CFPB or Bureau) specify which provisions of Regulation Z, as affected by the TRID Rule, relate to TILA requirements and which relate to RESPA requirements.[vi] 

The CFPB awkwardly responded in this way: 

“While the final regulations and official interpretations do not specify which provisions relate to TILA requirements and which relate to RESPA requirements, the section-by-section analysis of the final rule contains a detailed discussion of the statutory authority for each of the integrated disclosure provision.” 

And, having side-stepped a formal resolution, the 

“… detailed discussions of the statutory authority for each of the integrated disclosure provisions [in the section-by-section analysis] provide sufficient guidance for industry, consumers, and the courts regarding the liability issues raised by the commenters.” 

Obviously, this was hardly a satisfying response. Nevertheless, industry participants implemented the TRID Rule while still expressing considerable concern about the CFPB's choice to fit the changes into Regulation Z. The apprehension stemmed from the fact that TILA and Regulation Z impose substantial liability for disclosure violations, compared to the general lack of liability under RESPA and its implementing Regulation X. 

THE CFPB’S SOLOMONIC DECISION 

The CFPB chose to exclude most closed-end consumer credit transactions secured by real property, other than reverse mortgages, from the early disclosure requirements of Regulation Z[vii] and the standard closed-end disclosure requirements of Regulation Z.[viii] In place of those requirements, the CFPB’s TRID Rule created three sets of provisions for the partially-excluded loans: 

1.     Loan Estimate. 

2.     Closing Disclosure. 

3.     Special Information Booklet. 

This partial exclusion of TRID Rule transactions from certain Regulation Z provisions leaves the rest of Regulation Z in effect for those transactions, as previously applied.[ix]

Conversely, the CFPB fit the TRID changes into the RESPA regime by excluding the loans covered by the TRID Rule from five provisions of RESPA Regulation X: 

·       Special Information Booklet. Regulation X § 1024.6. For loans subject to the TRID Rule, Regulation Z § 1026.19(g) imposes the same Special Information Booklet requirement. 

·       Good Faith Estimate. Regulation X § 1024.7. For loans subject to the TRID Rule, Regulation Z § 1026.19(e) imposes the Loan Estimate requirement. 

·       HUD-1/1A Settlement Statement. Regulation X § 1024.8. For loans subject to the TRID Rule, Regulation Z § 1026.19(f) imposes the Closing Disclosure requirement. 

·       HUD-1/1A Administration. Regulation X § 1024.10, one day advance inspection of HUD-1/1A Settlement Statement, delivery, and recordkeeping requirements. For loans subject to the TRID Rule, Regulation Z §§ 1026.19(e) and (f) impose corresponding requirements for Loan Estimates and Closing Disclosures. 

·       Servicing Transfer Application Disclosure. Regulation X § 1024.33(a). For loans subject to the TRID Rule, Regulation Z § 1026.37(m)(6) requires a corresponding disclosure on page three of the Loan Estimate. 

In general, the TRID Rule leaves these provisions of Regulation X in place for the loans not subject to TRID, that is, reverse mortgages and the few federally related mortgage loans made by creditors not subject to Regulation Z (i.e., lenders who make five or fewer mortgage loans per calendar year secured by dwellings, unless they make more than one High Cost Mortgage  (HCM)). All of the other provisions of Regulation X remain in place for federally related mortgage loans, including those subject to the TRID Rule. 

GOOD LUCK WITH THAT! 

A careful consideration of the CFPB’s detailed discussion in its section-by-section analysis of the TRID Rule suggests that the agency’s response can be summarized as follows: 

Bona Fortuna in separating disclosure liability between TILA and RESPA! 

Take a deep breath and consider this off-the-cuff outline of the TRID disclosures in the context of the statutory framework for each disclosure item through the lens of the following cascade: 

1.     Any prior implementation of that requirement,

2.     The CFPB’s research into the effectiveness of that disclosure from both a consumer and industry perspective,

3.     The Bureau’s alteration (if applicable) of the statutory requirement or previous regulatory implementation of the requirement to respond to its research,

4.     The Bureau’s agency’s reasons for implementing that disclosure as part of TILA-RESPA disclosure integration, and

5.     The statutory support for including the final version of the disclosure. 

And that’s just for starters! 

In most cases, the ultimate statutory support rested on a specific requirement stated in TILA, RESPA, and/or the Dodd-Frank Act, bolstered by the regulatory flexibility offered in TILA § 105(a) (sometimes also § 105(f)), RESPA § 19(a), and Dodd-Frank Act §§ 1032(a) and 1405(b). 

The CFPB relied on regulatory flexibility given by these provisions because the agency found it necessary to reconcile differences between the RESPA and TILA statutes and between sometimes differing provisions within the TILA statute itself. The agency also found it appropriate to alter many of the statutory requirements (and even discard some) based on conclusions drawn from its research. Consequently, many resulting disclosure items are not derived solely from one statute or the other but from one or more statutory starting points and the broad rulemaking authority given to the CFPB by TILA, RESPA, and the Dodd-Frank Act. Obviously, unraveling the final result to separate a RESPA claim from a TILA claim can be a challenging task. 

So far, most courts have taken the CFPB at its word and relied on its analysis of the TRID Rule (and the 2013 RESPA and TILA Mortgage Servicing Rule) to determine whether a private right of action is available for a regulatory violation. But there has been litigation.[x] And now, after the U.S. Supreme Court’s overruling of the Chevron deference,[xi] I think we’re likely to see courts dive more deeply into this issue.

OBSERVATIONS

As suggested above, the U.S. Supreme Court’s overruling of Chevron deference may require courts to ignore the CFPB’s stated “intentions” and look more closely at the underlying statutory provisions.[xii] 

Conceivably, borrowers might add Dodd-Frank Act claims to their RESPA claims. That is, they might claim that violations of RESPA violate the Dodd-Frank Act. Section 1055 of the Dodd-Frank Act offers the possibility of substantially higher penalties than those specified by RESPA – ranging from $5,000 per day for any violation to $1 million per day for a “knowing violation” (adjusted annually to reflect inflation). Whether an enforcement agency must seek Dodd-Frank penalties or may be obtained by consumers in private actions is an open question courts may someday decide. 

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

Lenders Compliance Group

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[i] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024)

[ii] 12 USC §§ 2605(d) and 2614

[iii] 12 USC §§ 2607(d) and 2614

[iv] 12 USC §§ 2608(b) and 2614

[v] 12 USC §§ 2609(d)

[vi] Indeed, a rather convoluted view suggested that the CFPB should implement the TILA disclosure requirements in Regulation Z and the RESPA disclosure requirements in Regulation X in order to discourage litigation invoking TILA’s liability scheme for RESPA violations.

[vii] Regulation Z § 1026.19(a)

[viii] Regulation Z § 1026.18

[ix] For example, the Consumer Handbook on Adjustable Rate Mortgages (CHARM) Booklet and ARM Program Disclosure requirements of Regulation Z § 1026.19(b) continue to apply as they did prior to the TRID Rule.

[x] A recent decision by a federal district court in Texas illustrates this issue. Bassett v. PHH Mortgage, 2024 U.S. Dist. (S.D. Tex. June 27, 2024) (magistrate recommendation), approved and case dismissed by 2024 U.S. Dist. (July 16, 2024). Note: This litigation determined, in particular, that 12 U.S.C. §§ 2605(f) and 2614 do not create private causes of action, nor does RESPA provide private causes of action for violations of Regulation X §§ 1024.35 and 1024.39. As support, the court cited several other decisions within its district. The court acknowledged that Regulation X § 1024.41, “unlike the other RESPA provisions at issue…expressly provides for a private right of action.”

[xi] Op. cit. i

[xii] Op. cit. x

Fee Splitting Violations

QUESTION 

We were cited for two RESPA violations. The first thing we supposedly had was an undisclosed referral arrangement. But in our view, there was no increase in our charges, so we do not believe we did something wrong. 

The other violation was about fee splitting. I became a mortgage broker a year ago. I am not a compliance person, and I don’t even know what that is, but based on the banking department’s letter, it means we had an arrangement with a company to split the fees on a mortgage loan. Now, I disagree about us even having such an arrangement, let alone splitting any fees. I now have to prove it to the banking department. 

I need to know more. I want to understand how these violations could cause such a big response from the banking department. I have other questions, but these are the two that matter most to me. I contacted your Brokers Compliance Group to discuss everything. 

Did we actually violate RESPA if there was no increase in our charges? 

Are there exemptions to the prohibitions on referral fees and fee splitting? 

COMPLIANCE SOLUTIONS 

Brokers Compliance Group 

Policies and Procedures 

ANSWER 

RESPA (Real Estate Settlement Procedures Act) refers to a “thing of value” as including, but not limited to, any payment, advance, funds, loan, service, or other consideration.[i] To broaden this concept, a “thing of value” includes, without limitation, monies, things, discounts, salaries, commissions, fees, duplicative payments of a charge, stock, dividends, distributions of partnership profits, franchise royalties, credits representing monies that may be paid at a future date, the opportunity to participate in a money-making program, retained or increased earnings, increased equity in a parent or subsidiary entity, special bank deposits or accounts, special or unusual banking terms, services of all types at special or fee rates, sales or rentals at special prices or rates, lease or rental payments based in whole or in part on the amount of business referred, trips and payment of another person’s expenses, or reduction in credit against an existing obligation. My firm has come across many types of “thing of value” arrangements at one time or another. You get the point! 

By the way, the term “payment” is effectively synonymous with the giving or receiving of any “thing of value” and does not require a transfer of money.[ii] 

If you have a particular arrangement for referrals, and you are not sure if the arrangement violates RESPA, contact a competent compliance professional to discuss your plans. 

With respect to your view that there was no increase in the charge, therefore, there should be no violation of RESPA, you are 100% wrong. The fact that the transfer of a thing of value does not result in an increase in any charge made by the entity giving the thing of value is irrelevant in determining whether the act is prohibited.[iii] 

The answer about exemptions[iv] to the referral and fee splitting prohibitions is both specifically outlined in RESPA with examples. I will provide a brief outline here; however, a compliance evaluation should be undertaken to ensure any plan based on an exemption is thoroughly vetted by a compliance professional. 

The RESPA specifically provides seven exemptions to referral and fee splitting prohibitions. 

The RESPA exemptions are: 

1.   A payment to an attorney at law for services actually rendered; 

2.   A payment by a title company to its duly appointed agent for services actually performed in the issuance of a policy of title insurance; 

3.   A payment by a lender to its duly appointed agent or contractor for services actually performed in the origination, processing, or funding of a loan; 

4.   A payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed; 

5.   A payment pursuant to cooperative brokerage and referral arrangements or agreements between real estate agents and real estate brokers;[v] 

6.   Normal promotional and educational activities that are not conditioned on the referral of business and that do not involve the defraying of expenses that otherwise would be incurred by persons in a position to refer settlement services or business incident thereto; or 

7.  An employer’s payment to its own employees for any referral activities. 

I would argue that each of these examples requires significant explication by a compliance professional who has core competency in interpreting and applying the requirements of RESPA and Regulation X. 

There has been some confusion about different versions of exemptions for payments to employees. The exemptions from the referral fee and fee splitting prohibitions are contained in Regulation X, the implementing regulation of RESPA.[vi] The Code of Federal Regulations includes an Effective Date Note[vii] that sets forth a second version of the same version with different provisions regarding payments to employees. Congress prohibited the Department of Housing and Urban Development (HUD) from implementing the revised version until July 31, 2007, and it required HUD to provide advance public notice if it ever intended to implement the different provisions. But, HUD has never acted to implement the revised version. 

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

Lenders Compliance Group

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[i] 12 USC § 2602(2)
[ii] 12 CFR 3500.14(d)
[iii] 12 CFR § 3500.14(g)(2)
[iv] 12 CFR 3500.14(g)(1)
[v] The statutory exemption refers only to fee divisions within real estate brokerage arrangements when all parties are acting in a real estate brokerage capacity and has no applicability to any fee arrangements between real estate brokers and mortgage brokers or between mortgage brokers.
[vi] Regulation X § 3500.14(g)(3)
[vii] 12 CFR § 3500.14(g), Effective Date Note

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)

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