With less than one month remaining until the April 19, 2018 effective date of bankruptcy-related amendments to Regulation X and Regulation Z, the Consumer Financial Protection Bureau (“CFPB”) has issued “Mortgage Servicing FAQs” to address several questions it has received regarding the new bankruptcy statement requirements. Specifically, the FAQs provide some clarification regarding periodic statements, coupon books, reaffirmation, successors in interest, and the effective date.
The bankruptcy-related amendments to Regulation X and Regulation Z are poised to force significant and controversial changes to the mortgage servicing industry, for several reasons.
First, the servicing rules will now require mortgage servicers to provide periodic statements to borrowers with bankruptcy protection subject to a few exemptions (such as where a borrower has opted out). Previously, servicers generally suppressed statements for borrowers with bankruptcy protection, because periodic statements and similar communications have been found by courts to violate the protections afforded to consumers who are in active bankruptcy or have discharged their liability through bankruptcy. Now, under the CFPB’s amendments, many mortgage servicers are preparing for the first time to send statements to borrowers in bankruptcy, and must quickly finalize new forms and procedures in order to comply with the CFPB’s content and timing requirements, before the April 19 deadline.
Second, many participants in the mortgage markets had hoped that under the leadership of Acting Director Mick Mulvaney, the Bureau might be more sympathetic to industry concerns regarding the bankruptcy-related amendments. Notably, on February 7, 2018, a number of trade groups (including the Consumer Mortgage Coalition, the Credit Union National Association, and the Independent Community Bankers of America, among others) submitted a joint letter (“Trade Letter”) to Acting Director Mulvaney requesting that the CFPB repeal the amendments or, at the very least, delay their implementation.
The CFPB, under its new leadership, has issued FAQs that sidestep industry requests in the Trade Letter. Specifically, the Trade Letter highlighted the conflicts between the CFPB’s bankruptcy-related amendments and the Bankruptcy Code. The Trade Letter also sought guidance on 10 significant industry concerns. For example, one concern relates to the timing of statements after a service-transfer has occurred for a mortgage in active bankruptcy. For any mortgage in active bankruptcy, it is a best practice for the acquiring servicer to complete a thorough review of the loan’s servicing history as part of the onboarding process. However, the CFPB’s amendments do not allow sufficient time to conduct post-service transfer loan reviews before the new servicer is required to send a statement. The practical result of this is that servicers could be sending statements to borrowers in bankruptcy that contain inaccurate information, which would not only lead to borrower confusion but could expose the servicer to litigation risks. Unfortunately, this legitimate consumer protection concern, and several other concerns raised in the Trade Letter, are not addressed in the CFPB’s newly-released FAQs. Moreover, the CFPB has provided no indication that any repeal or delay will be forthcoming.
Third, the CFPB’s responses in the FAQs provide little comfort to mortgage servicers in other major respects. For example, some in the industry have wondered whether strict adherence to the amendments will provide a safe harbor from bankruptcy liability for violation of the automatic stay or discharge injunction. The CFPB’s FAQs concede that it lacks the authority to provide protection from bankruptcy liability and thus the CFPB’s amendments can offer no safe harbor. However, the CFPB assures servicers that it believes that mortgage servicers are not “likely” to violate the automatic stay if they comply with the revised rules and sample forms.
Fourth, the FAQs clarify that when a borrower reaffirms personal liability for a loan, the borrower is no longer considered a debtor in bankruptcy for the purposes of the revised rules. However, this clarification ignores a related (and perhaps more significant) industry question: whether the applicable triggering date for the exemption should be the date on which the reaffirmation agreement was finalized, the date it was filed with the court, the date the rescission period ended, or some other date altogether.
Fifth, the late publication of the CFPB’s FAQs follows the belated release of a final rule that replaced the controversial single billing cycle exemption with a single statement exemption, which applies regardless of when in the borrower’s billing cycle the triggering event has occurred. Pragmatically speaking, this means that, for example, where the original amendments may have allowed a servicer as little at 14 days after a customer’s bankruptcy filing to begin sending bankruptcy versions of the statement, under the new protocol, that servicer could now have a month and a half until bankruptcy statements are required. Although this is a positive and welcome development for the industry, many servicers were unable to program their statement procedures in reliance on it because it was not certain whether the rule would be finalized prior to April 19. Consequently, many servicers had already been forced to prepare for the more stringent deadline and thus, as a practical matter, will not immediately benefit from the change. Had the CFPB set forth the more lenient timing requirement in the original amendment, the industry could have actually benefited from the additional cushion of time.
On the other hand, the FAQs do provide clear answers to some of the industry’s questions. For example, if a confirmed successor in interest is in bankruptcy, then the servicer must send the applicable modified periodic statement. The CFPB suggests that servicers may enhance their ability to comply with this requirement by including confirmed successors in interest in their bankruptcy scrubs.
Overall, the CFPB’s eleventh-hour issuance of the FAQs appears to manifest an intent by the Mulvaney-led Bureau to continue the CFPB’s pursuit of regulations that impose new requirements related to mortgage servicing procedures, especially with respect to financially distressed borrowers. As mortgage servicers move forward with implementation of the amendments, we would recommend that they consult with counsel to ensure compliance with the requirements both of the servicing rules and bankruptcy law.