April 19, 2018
Consumer Financial Protection Bureau News: New Mortgage Regulations that Will Affect Borrowers
by Adam Hall, Manley Deas & Kochalski LLC
On April 19, 2018 the Consumer Financial Protection Bureau's (CFPB) amendments to certain Regulation Z mortgage servicing rules go into effect. What does this mean for mortgage servicers?
They will now be required to send periodic statements to borrowers who have filed for protection under the United States Bankruptcy Code. Importantly, that statement will require accounting specific to the loan’s bankruptcy status (e.g. amounts applied to pre and post-petition loan balances). In addition to the accounting hurdle, the rule change also represents a shift for servicers who have been reluctant to send statements to a debtor for fear of violating the Bankruptcy Code.
Under the pre-amendment § 1026.41(a)(2) in Regulation Z, a servicer was required to provide a consumer, for each billing cycle, a periodic statement meeting certain requirements, but § 1026.41(e)(5) provided a blanket exemption for mortgage loans while a consumer was a debtor in bankruptcy. The amendments do away with the exemption during the life of the bankruptcy case and instead exempt servicers from sending a statement for the first month after the debtor files bankruptcy only. After the first month exemption period, the servicer is required to send "modified" statements to debtor during the pendency of debtor's case. Of course, there are times when the modified statement will not be required, including instances when a debtor requests in writing that the statements stop, the mortgage/property is surrendered in the confirmed plan or when the court lifts the automatic stay.
In addition, the modified statements can vary based upon the bankruptcy particulars (e.g. chapter, conduit or direct pay, pre-petition arrearage, etc.) and servicers are not required to use sample statements from the CFPB. However, it is likely that many servicers will adopt the sample statements, and add their own disclaimer language as well.
The purpose of the rule change was to provide debtors with ongoing account information early and often to avoid surprises at the end of a case. Whether the utility of the CFPB’s solution (modified statements) outweighs the cost, especially compared to existing data sources (including the Trustee ledger system) is an open question. For a complete version of the rule changes, including an errata section, please see the Small Entity Compliance Guide, Consumer Financial Protection Bureau, March 29, 2018.