By Chris Mertens, Mertens Law, LLC
April 19, 2018, was the effective date of significant amendments to the regulations promulgated by the Consumer Financial Protection Bureau under the Truth In Lending Act related to mortgage servicing rules. The rules as amended provide a right to receive periodic billing statements on mortgage loans for homeowners who are in or have completed bankruptcy. This long-awaited final rule will give mortgage borrowers greater clarity over what is happening with their mortgage loans and the opportunity to review the loans to ensure proper application of payments and loan servicing by mortgage servicers.
The previous versions of the rule contained an exception to providing periodic billing statements during bankruptcy or after bankruptcy where the personal liability for the mortgage debt was discharged. This often left homeowners in the dark about their mortgage balance, payments, and fees and frustrated with attempts to get information from mortgage servicers.
TILA, Regulation Z, and the Bankruptcy Exception for Mortgage Periodic Billing Statements
The Truth In Lending Act (TILA) is codified at 15 U.S.C. § 1601, et seq. TILA was enacted on May 29, 1968, as Title I of the Consumer Credit Protection Act. Pub.L. 90–321, 82 Stat. 146. Some of the expressed purposes of the Truth In Lending Act are to assure meaningful disclosure of credit terms and to protect consumers from inaccurate and unfair billing practices. 15 U.S.C. § 1601(a).
The Regulations implementing TILA were originally published at 12 C.F.R. 226 as “Regulation Z” (Reg Z). References to the requirements imposed under TILA also include reference to the applicable regulation in Reg Z. 15 U.S.C. § 1602(z).
TILA and Reg Z have been amended and updated several times throughout the years. On July 21, 2010, TILA’s rule making authority was transferred from the Federal Reserve Board to the Consumer Financial Protection Bureau (CFPB) pursuant to provisions enacted by the Dodd–Frank Wall Street Reform and Consumer Protection Act in July 2010. Pub.L. 111–203, H.R. 4173.
TILA was amended by the Dodd-Frank Act, as relevant here, adding requirements that applied to creditors, assignees, and servicers regarding the sending and content of periodic billing statements for mortgage borrowers. Pub.L. 111–203, § 1420, enacted as 15 U.S.C. § 1638(f).
The CFPB issued several new regulations as an updated Reg Z, implementing several provisions of TILA as amended by Dodd-Frank and published as 12 C.F.R. 1026, et seq.
Effective January 10, 2014, the CFPB published several regulations governing the servicing of mortgage loans, and specifically the requirements of servicers to send periodic billing statements, and the required form and content of the statements. The CFPB issued the periodic billing statement regulations under the authority of TILA section 128(f), codified in 15 U.S.C. § 1638(f). See also 38 Fed. Reg. 10958-59 (discussing statutory authority under TILA section 128(f) for periodic billing statement regulations and other loan information requirements).
These regulations contained a broad exception for borrowers in bankruptcy, or whose personal liability on a mortgage debt was discharged in bankruptcy, where servicers were not required to send periodic billing statements. See Former 12 C.F.R 1026.41(e)(5), comment 1-3.
It was common for consumer debtors who filed Chapter 7 and received a discharge to stop receiving mortgage statements as soon as the petition for relief was filed, and never to receive the statements again unless they had reaffirmed the mortgage debt–a rare practice in Oregon. Consumers in Chapter 13 sometimes did not receive statements during the plan period, and had to rely on required notices filed with the court, which sometimes were not timely filed, or not filed at all, to know if their mortgage payment was changing due to escrow or had incurred fees.
Changes to the Mortgage Statement Requirements for Borrowers During and Following Bankruptcy
Effective April 19, 2018, the CFPB’s final amended rules governing the mortgage borrower’s rights to periodic billing statements for their residential mortgage loans provided consumer borrowers rights to statements during and following bankruptcy cases.
Below is a brief summary of the changes to 12 C.F.R. 1026.41(e) as a result of the amendment. The new text of the regulation is more detailed than its predecessor and can be viewed here.
Requirement to Send Statements and Updated Exemption Rules – The Borrower Is in Control
Prior to the amendment there was a blanket exception for sending periodic statements to borrowers in bankruptcy. The new regulation as amended added a two-part test for when a servicer is initially not required to send statements, and both parts must be met. 12 C.F.R. 1026.41(e)(5)(i). The first prong requires the borrower to be a debtor in an active bankruptcy case or have discharged personal liability for the mortgage loan in question. 12 C.F.R. 1026.41(e)(5)(i)(A). These requirements mirror the only ones under the previous version of the rule. Now, in order to be initially exempt from sending statements, one of the following must also be true: The consumer requests in writing that the servicer stop sending statements; The most recent chapter 13 plan provides for surrender of the residential property, avoidance of the mortgage lien, or does not provide for ongoing payments or cure of any default; an order avoiding the mortgage lien, granting the mortgage creditor relief from stay, or otherwise requiring statements to be stopped is entered by the court; or in chapter 7 the debtor’s statement of intention for the property states surrender AND no partial or full payment has been made since the case is filed. 12 C.F.R. 1026.41(e)(5)(i)(B).
The big takeaway for consumer borrowers and their bankruptcy counsel is that even if the lender may initially qualify for an exemption, the borrower has the power to elect to receive statements and disqualify the servicer from the exemption. 12 C.F.R. 1026.41(e)(5)(ii). Any borrower on the loan may request the statements be sent, including by an agent of the borrower, such as a borrower’s attorney. 81 Fed. Reg. 72323.
Modified Statements in Bankruptcy and Post-Discharge.
The recent regulation added a section to 12 C.F.R. 1026.41 modifying the requirements of what information is in a periodic billing statement for a mortgage loan during or following a borrower’s bankruptcy. Generally there are limitations on personal liability, the way some fees are reported is limited, and the amount due is not required to be displayed prominently. 12 C.F.R. 1026.41(f)(1)&(2). The text of new paragraph f and related comments can be found here.
There are specific modifications required for periodic billing statements sent to mortgage borrowers who are in chapter 13 (and chapter 12). 12 C.F.R. 1026.41(f)(3). The modifications essentially implement a common-sense approach of differentiating between pre-petition arrears and payments thereon through the chapter 13 plan and post-petition ongoing payments and fees due. The “amount due” may be limited to the post-petition amounts due. 12 C.F.R. 1026.41(f)(3)(ii)&(iii). The statement must also include the pre-petition arrearage balance, total payments received since the last statement, and total pre-petition payments received since the inception of the bankruptcy case. 12 C.F.R. 1026.41(f)(3)(v). This will allow chapter 13 debtors and their counsel to track the proper application of payments on the arrearages, which before was potentially done behind a curtain – with borrowers not knowing the impact of the payment on pre-petition arrears being received and applied or if the mortgage servicer was delaying proper application.
Timing for Compliance – Single-Statement Exemption
Once the triggering event occurs—including the borrower filing for bankruptcy, a servicer becoming disqualified for an applicable exemption, or non-modified statements being required following reaffirmation or non-discharge of mortgage liability following bankruptcy completion—the servicer is excused from complying for the first statement that is due to have been sent had the triggering event not occurred. Thus, the servicer must comply not with the first immediately forthcoming statement, but the second, following the triggering event. 12 C.F.R. 1026.41(e)(5)(iv). This exemption was a late amendment to the final rule, published by the CFPB on March 22, 2018. 83 Fed. Reg.10553-59.