ICYMI: Mortgage Servicing FAQs
Hi, Compliance Friends! Here in Arlington, we are anxiously awaiting some consistent warmer weather. We currently have a couple of potential snow showers in our weather forecast. Yikes!
Late last month the CFPB released a set of Mortgage Servicing FAQs. Beginning April 19, 2018, the new requirements for bankruptcy modified periodic statements and bankruptcy periodic statement exemptions will become effective. The CFPB's most recent FAQ's are organized into subtopics, which include: Bankruptcy Periodic Statements; Bankruptcy Coupon Books; Bankruptcy Reaffirmation; Bankruptcy Successors in Interest; and Bankruptcy Provisions Effective Date. This blog will highlight some of the CFPB's Mortgage Servicing FAQs. Here are some of the FAQs:
Bankruptcy Periodic Statements
According to the Bureau, for certain borrowers in bankruptcy, credit unions are exempt from sending periodic statements. For other borrowers in bankruptcy, credit unions are not exempt from sending periodic statements, but instead are required to send modified periodic statements. Additionally, in certain circumstances a credit union may be required to send modified periodic statements. Additionally, in certain circumstances, a credit union may be required to resume sending unmodified periodic statements after a borrowers bankruptcy case has completed. To determine if a credit union is required to send modified periodic statements to a borrower in bankruptcy, please review Regulation Z, sections 1026.41(e) and (f).
Question: Does a credit union receive a safe harbor under the Bankruptcy Code by sending periodic statements in compliance with the Bureau's rule?
Answer: No, the credit union does not receive a safe harbor under the Bankruptcy Code by sending periodic statements to a borrower in bankruptcy in compliance with Regulation Z, sections 1026.41(e) and (f). The Bureau does not have authority to create safe harbors under the Bankruptcy Code.
However, based on the Bureau's understanding of bankruptcy case law, the CFPB does not believe that a credit union is likely to violate the automatic stay by providing a periodic statement in circumstances required by sections 1026.41(a) and (e) that contains the information required by sections 1026.41(c) and (d) as modified for bankruptcy by section 1026.41(f).
Question: If a borrower in bankruptcy is represented by counsel, to whom should the periodic statement be sent?
Answer: In general, the periodic statement should be sent to the borrower. However, if bankruptcy law or other law prevents the credit union from communicating directly with the borrower, the periodic statement may be sent to the member borrower's counsel.
Bankruptcy Coupon Books
The Bureau notes that for certain borrowers in bankruptcy, credit unions are exempt from sending coupon books. For other borrowers in bankruptcy, credit unions that send coupon books in accordance with Regulation Z, section 1026.41(e)(3) are required to send modified coupon books. Additionally, in certain circumstances, a credit union may be required to resume sending unmodified coupon books after a member borrower's bankruptcy case has concluded.
Question: Does a credit union have to send a new coupon book immediately upon learning that a borrower enters bankruptcy, or can a credit union continue to send coupon books on its normal schedule (e.g., annually)?
Answer: A credit union is not required to alter its schedule for sending coupon books due to a member borrower's bankruptcy filing. For example, a credit union who ordinarily provides a member borrower with a 12-month coupon book in January of each year may continue to send 12-month coupon books in January of each year for the duration of a borrower's bankruptcy case.
Please see the CFPB's Mortgage Servicing Small Entity Compliance Guide for more information about the modifications to the coupon book when a borrower is in bankruptcy.
The mortgage servicing rule discusses certain events when the credit union must transition to providing a modified or an unmodified periodic statement or coupon book. For example, the member borrower in bankruptcy reaffirms personal liability for a mortgage loan or the member borrower's bankruptcy case is closed or dismissed without the borrower having discharged personal liability.
Question: Can a borrower's reaffirmation of personal liability for the mortgage loan affect whether a credit union is exempt from the periodic statement requirements?
Answer: Yes, Regulation Z provides that the bankruptcy exemption for providing periodic statements and coupon books ceases to apply if the member borrower reaffirms personal liability for the loan. For purposes of the modified periodic statement requirements in Regulation Z, Comment 41(f)-6 explains that a member who has reaffirmed personal liability for the loan is not considered a debtor in bankruptcy.
Comment 41 (e)(5)(ii)-2 states that upon a consumer's reaffirmation, the credit union must provide a periodic statement or coupon book but without the bankruptcy-specific modifications described in section 1026.41(f).
Bankruptcy Successors in Interest
The 2016 Mortgage Servicing Rule added definitions of "successor in interest" to Regulation X and Regulation Z. In addition, it included provisions related to how a credit union confirms a successor in interest's identity and ownership interest in a property. It also generally provides that the mortgage servicing rules apply to successors in interest once a credit union confirms the successor in interest's status.
Question: Do credit unions have a responsibility to know if a confirmed successor in interest is in bankruptcy for purposes of complying with the early intervention and periodic statement requirements?
Answer: Yes. Pursuant to Regulation X and Regulation Z, confirmed successors in interest are considered "borrowers" for purposes of the early intervention requirements and "consumers" for purposes of the periodic statement provisions. Because confirmed successors in interest are considered to be "borrowers" and "consumers" for the relevant parts of Regulation X and Regulation Z, credit unions need to know whether confirmed successors in interest are in bankruptcy and may want to include them in any normal checks they utilize to identify borrowers in bankruptcy.
Bankruptcy Provisions Effective Date
Credit unions may want to consult with legal counsel and their compliance officers to fully appreciate its obligations under the Mortgage Servicing Rules. The credit union is also responsible for devising policies and procedures to comply with the rules' requirements.
Question: How does a credit union comply with the new bankruptcy periodic statement rules under Regulation Z, sections 1026.41(e)(5) and (f) if a borrower became a debtor in bankruptcy prior to April 19, 2018, and a statement is required starting on or after April 19, 2018?
Answer: The credit union must send modified periodic statements as required under Regulation , on or after April 19, 2018, unless, as of April 19, 2018, any exemption applies. Section 1026.41(e)(5) includes new provisions that exempt a credit union from providing a statement to a borrower in bankruptcy. These new requirements and exemption provisions apply to a mortgage loan as of April 19, 2018, irrespective of whether the borrower became a debtor in bankruptcy before or after April 19, 2018, but as of that date, the credit union must comply with all of the new requirements under the rule.
A credit union's business model will influence how it complies with the Mortgage Servicing Rules. When mapping out your compliance plan, the credit union may want to consider practical implementation issues in addition to understanding its obligations under the rule.
About the Author
André B. Cotten, NCCO, was named regulatory compliance counsel in November 2016. In this role, Cotten helps credit unions with a variety of compliance issues.