June 16, 2014 The Honorable Richard Cordray Director Consumer Financial Protection Bureau 1700 G Street, N.W. Washington, D.C. 20552 Re: Periodic Mortgage Statements for Bankruptcy-Protected Debtors Dear Director Cordray: The Consumer Mortgage Coalition ( CMC ), a trade association of national mortgage lenders, servicers, and service providers, appreciates the opportunity to share our views with the Consumer Financial Protection Bureau ( CFPB ) regarding periodic statements to consumers in bankruptcy. Bankruptcy presents complex issues relating to periodic statements. This letter suggests how these issues might best be resolved from the consumer s perspective, ensuring an appropriate level of transparency without interfering with the bankruptcy protections against debt collection, and without including unhelpful information. Chapter 13 Background Shortly after a Chapter 13 bankruptcy filing, a consumer debtor must file a proposed plan of reorganization. A Chapter 13 trustee or a creditor may object to the plan, and the plan is subject to prior Bankruptcy Court approval. Chapter 13 in effect bifurcates the mortgage debt that is past due at the time of the bankruptcy filing (pre-petition arrearage), and the amount that becomes contractually due thereafter (post-petition payments). Creditors file a proof of claim, which details the arrearage amount as well as future payments due on the debt. The pre-petition arrearages are payable over the term of the Chapter 13 plan, while payments that become due post-petition continue to be due according to the contract. Only in certain instances is the debtor allowed to modify the underlying mortgage contract. At the end of a successful plan, which generally lasts three to five years, the mortgage loan is current. Pursuant to the Bankruptcy Code, no portion of the post-petition mortgage debt is discharged, and long-term mortgage debt survives the Chapter 13 plan. Prior to plan approval, the debtor makes mortgage payments that become due postpetition to the mortgage loan servicer, either directly or through an appointed Chapter 13 trustee. The manner of payment is determined by local bankruptcy rule and practice. Debtors commence making payments for pre-petition arrears to the trustee within 30 days
of filing, however the trustee does not forward these payments to the mortgage servicer until after the case is confirmed (approved) by the court, which is generally 90 to 120 days after filing. After the Bankruptcy Court approves a Chapter 13 plan, the trustee may not forward the appropriate pre-petition payment amount to the servicer immediately because the trustee must pay claims according to their court-approved bankruptcy order of priority, which varies district to district. The mortgage creditor is generally the second or third priority creditor, depending on the nature of the consumer debtor s other obligations. It may be six months to a year after a bankruptcy filing before the servicer receives a pre-petition payment. After plan confirmation, Chapter 13 debtors continue to make payments for pre-petition arrearages to trustees, who remits payments to servicers. Debtors commonly, although not always, make post-petition payments to the trustee as well. Again, this is determined by local practice and is not consistent around the country. After a plan is approved, the Chapter 13 debtor may default on a post-petition mortgage amount due. Each time this occurs, a servicer may file a motion for relief from the stay, which may be resolved in a manner that results in yet another claim, in addition to the other claims. This multitude of claims, each of which requires separate tracking, is what leads to the complexity of Chapter 13 cases. Chapter 13 Timing Chapter 13 involves inherent timing differences between the trustee s and the servicer s receipt of payments. There is no requirement mandating that trustees send monthly payments to servicers by the contractual due dates under the applicable loan agreement. Instead, trustees disburse on a monthly schedule according to their unique practices, and pay creditors according to the court-approved order of priority. The fact that Chapter 13 trustees do not send servicers monthly payments that trustees receive based on the due dates set forth in the applicable loan agreements makes it virtually impossible for servicer-prepared monthly statements to accurately reflect the status of either arrearage payments or post-petition monthly payments that are first made to trustees. Under Regulation Z, servicers must transmit periodic statements within a reasonably prompt time after the due date or after a courtesy period, 1 which generally means within four days of the close of the courtesy period of the previous billing cycle[.] 2 Because there is no similar and uniform requirement for when trustees send payments to servicers, often payments that consumers have made to trustees cannot be timely reflected in servicer-prepared monthly statements, because the servicer either has not received the payment at all or has not received it in time to reflect the payment in the periodic statement. A mortgage servicer must separately track all payments it receives during a Chapter 13 plan if the loan is delinquent at filing because the bankruptcy plan dictates payment application per the confirmed plan. The underlying mortgage loan contract is generally 1 12 C.F.R. 1026.41(b). 2 12 C.F.R. Supplement I comment 41(b)-1. 2
non-modifiable, so payments must still be tracked contractually as well. This contractual tracking is also important because many cases are, unfortunately, dismissed before plan completion, 3 and at dismissal, the account reverts to its contractual status. It is important to note that servicers treat the loan as current while the debtor performs according to the bankruptcy plan, even if, according to the loan contract, the loan is not current. For example, a pre-petition arrearage may not be fully paid for five years, but the servicer does not treat the loan as delinquent during that repayment period. From the consumer s perspective, the loan in this circumstance is current, and servicers treat it so. Chapter 13 Statements Should Be Relevant to Consumers We believe it is important that periodic statements that servicers send to consumers should be meaningful to consumers. We believe including more than the information necessary to understand the amount and status of the monthly post-petition payments in a Chapter 13 case would be overwhelming and confusing. During a Chapter 13 plan, the loan is likely contractually delinquent for three to five years, even if it is current for bankruptcy purposes. As the plan progresses, the prepetition arrearage decreases, so that when the plan successfully terminates, the loan is contractually current. Sending a statement that calls out a contractual delinquency or prepetition delinquency while a plan is pending is likely to be confusing to the average consumer, who may actually be current in plan payments. From the consumer s perspective, it may be preferable for a periodic statement to include transaction activity for the most recent billing cycle, reflecting payments the servicer has received during the cycle. While this will often differ from payments the consumer has made to the trustee due to disbursement timing differences, periodic statements could explain that this difference may exist. If statements will be required to contain a history of payments received, it is important to note that servicers do not have the capacity to include in statements whether a payment came from a trustee or from a debtor. Servicers do not systematically track the ultimate source of loan payments, for accounts in bankruptcy or otherwise. Even within one bankruptcy case, whether the consumer or trustee remits a payment to the servicer can change over time. Additionally, defining who makes a payment would present a number of complexities. Payments, to either the trustee or servicer, may come from loss mitigation programs such as the Hardest Hit Fund, or a consumer s family member or church. Payments may be in the form of cashier s checks or through an automated clearinghouse, such that the servicer cannot readily determine their sources. 3 According to annual reports available from the Executive Office for the United States Trustees, 3.4 million new Chapter 13 cases were reported during the ten years from fiscal 2004 through fiscal 2013. During this time, 11.5 percent of the cases were converted to Chapter 7, 51.7 percent were dismissed, and 34.3 percent were closed with a completed plan. These data do not reflect cases from the six judicial districts that are served by Bankruptcy Administrators. 3
When servicers receive payments from trustees, they often do not receive sufficient information about the amount that the trustees allocate to the various claims without a manual research process. For this reason, we believe servicer statements should not attempt to reflect the trustees allocations. Consumers can obtain this information from their attorneys and from trustees. Servicers need to track how payments they receive are allocated according to the loan contract. Servicers must also maintain the Chapter 13 bifurcation between pre- and postpetition payments. When a servicer receives less than a full contractual payment, the servicer puts the payment into a partial payment bucket until a full contractual payment is received. In doing so, the servicer cannot intermingle pre- and post-petition partial payment buckets. If a payment for a pre-petition arrearage is insufficient for a contractual payment, the servicer places the payment in a pre-petition partial payment bucket until there is enough in that pre-petition bucket for a contractual payment. Likewise, if a post-petition payment is insufficient for a contractual payment, the servicer places it in a post-petition partial payment bucket until there is enough in the post-petition bucket for a contractual payment. Chapter 13 accounting procedures are complicated, and we do not believe consumers would readily understand them. Nor do we believe consumers would be well-served by seeing this level of complexity on a monthly basis throughout a Chapter 13 plan. The amount of pre-petition arrearages may be disputed, and there are timing differences between when a consumer pays these arrearages and when servicers receive the payments. If servicers include in periodic statements information about the transaction history of a loan before a bankruptcy petition is filed, such information could be construed as attempted debt collection in violation of the automatic stay. Chapter 13 debtors need to know how much to pay and when, not how much they have not paid. For these reasons, we believe that it is advisable not to include information about the amount or nature of pre-petition arrearages in servicer statements. Consumers can always request account information from servicers should they choose, and servicers are required to provide the information, usually in 30 to 45 days. 4 Servicers Should Send Periodic Statements Only to Consumers Whatever periodic statements the CFPB will require on accounts subject to bankruptcy, servicers should be required to send the statements only to the consumer debtor. Chapter 13 trustees do not represent the debtor and do not have a fiduciary duty to the debtor. Further, trustees already have the information they need. Trustees know the loan terms, the contractual payment amount, and the amount of pre-petition arrearages. 5 Servicers must provide trustees with notice before a change in the loan payment for any reason, 4 12 C.F.R. 1024.36(d). 5 Bankruptcy Rule 3001. 4
such as a rate reset on an adjustable-rate loan, or a change in an escrow payment. 6 Trustees know of any post-petition fees for which the consumer may be liable and that the servicer has a right to collect, because servicers must disclose these amounts. 7 Trustees know the payments they receive and the payments they remit to servicers. In addition, when a debtor completes the payments under a Chapter 13 plan, the trustee must file a notice of final cure. 8 Servicers are required to respond, stating whether the servicer agrees that the default is cured and whether the consumer is current on post-petition payments, and itemizing any required cure or post-petition amounts. 9 If there are any differences that the trustee and servicer cannot reconcile, the Bankruptcy Court may make a determination. 10 While some may believe that requiring servicers to routinely send periodic statements to trustees would reduce the amount of reconciliation necessary when a successful Chapter 13 plan terminates, it would not. The need for reconciliation is due to the inherent differences between when trustees receive payments and when servicers receive them. Servicers are not in a position to address the timing differences because servicers are the last to learn of consumers payments to trustees and of payments trustees remit to servicers, and servicers cannot compel trustees to provide information. The bankruptcy procedure recognizes this, and requires reconciliation to begin with trustees information, to which servicers must respond. To the extent there is a need to address the Chapter 13 reconciliation procedure, it would be best handled through bankruptcy procedures rather than through periodic statements. Chapter 13 reconciliations are beyond the scope of the Truth in Lending Act ( TILA ). In addition to the fact that trustees have the information they need, mortgage account statements contain sensitive personal information. Financial institutions are required to have information security standards to protect against unauthorized access to or use of such [protected] records or information which could result in substantial harm or inconvenience to any customer. 11 A fundamental information security safeguard is to limit access to sensitive information to only those who are entitled to access or who have some other need for the information. Some trustees may find servicer statements convenient in some cases. However, routinely sending mortgage account statements about every closed-end consumer mortgage loan in every Chapter 13 case would create a significant information security risk that is not counterbalanced by a need for the sensitive information. Moreover, it is common for consumers to have multiple accounts at the same mortgage lender or servicer. A consumer in a Chapter 13 bankruptcy case may be the sole borrower on a mortgage loan and may also have a joint checking account with the same creditor. In this event, the creditor may send the mortgage borrower a statement showing 6 Bankruptcy Rule 3002.1(b). 7 Bankruptcy Rule 3002.1(c). 8 Bankruptcy Rule 3002.1(f). 9 Bankruptcy Rule 3002.1(f). 10 Bankruptcy Rule 3002.1(h). 11 Gramm Leach Bliley Act 501(b) and (b)(3), codified at 15 U.S.C. 6801(b) and (b)(3). 5
both accounts, or may make such statements available electronically with the consumer s consent. If one of the joint checking account holders is not in bankruptcy and is not a mortgage borrower, that consumer would not expect third parties to have routine, monthly access to information about the joint checking account. The creditor does not disclose, and Regulation P prohibits disclosing, 12 information about the joint checking account to people other than the account holders, absent an exception. There is an exception to the privacy restrictions for account statements, but it is narrow. The privacy restrictions: do not apply if you disclose nonpublic personal information as necessary to effect, administer, or enforce a transaction that a consumer requests or authorizes, or in connection with: (1) Servicing or processing a financial product or service that a consumer requests or authorizes; * * * (b) Necessary to effect, administer, or enforce a transaction means that the disclosure is... (iii) To provide a confirmation, statement, or other record of the transaction, or information on the status or value of the financial service or financial product to the consumer or the consumer's agent or broker[.] 13 Absent a subpoena or other legal requirement, or consumer consent, financial institutions may divulge account statements to third parties when necessary, not when merely convenient to the third parties. Moreover, even when necessary, servicers may divulge statements only to the consumer, the consumer s agent, or the consumer s broker. Chapter 13 trustees are not the consumer s agent and are not brokers. If a trustee were to desire a periodic statement, the trustee could and should request it from the consumer or the consumer s attorney. This would help reduce unnecessary information security risks by limiting disclosures to cases of need for the information. Moreover, it would be an enormous burden for servicers to retool their servicing systems to send one statement to multiple addresses. If trustees had the option to select whether to receive statements, whether on a wholesale basis, loan-by-loan, or by event, the tracking would impose the cost of additional, very significant, systems changes. The party who filed the voluntary bankruptcy, rather than the servicer, is the proper party to bear the costs and information security risks of disclosing statements to bankruptcy trustees. General Bankruptcy Statement Requirements In all cases, periodic statements that servicers send to bankruptcy-protected borrowers should be permitted to be free of language that could be construed as attempted debt 12 12 C.F.R. 1016.10(a). 13 12 C.F.R. 1016.14(a)(1) and (b)(2)(iii). 6
collection. For example, there should be no required reference to amounts past due and there should be no required delinquency box information as is required outside of bankruptcy. 14 Bankruptcy-protected consumers in all cases should be permitted to opt out of periodic statements at any time, and servicers should be permitted to honor such opt-outs. This approach would benefit consumers who want to enjoy the bankruptcy protections against debt collection. Additionally, it might arguably be deemed a violation of the automatic stay or discharge injunction under the Bankruptcy Code for a creditor to continue to send statements after a bankruptcy debtor has elected to opt out of receiving such statements. For Chapter 7 debtors who continue making payments, statements should continue, without language that could amount to debt collection, such as the delinquency box. If the debtor has moved out of the property, the property is vacant, the consumer has indicated an intent to surrender the property, or if the Bankruptcy Court grants a servicer s motion for relief from the stay, monthly statements no longer serve a purpose and should terminate. Sending statements to an address after the consumer has moved increases the chance that a non-addressee will open the envelope and see what should be private information. We recommend that the CFPB provide a model form as required, 15 but that its use be optional. Any rule or regulation should specifically acknowledge that servicers have flexibility to address the Bankruptcy Code, local procedural rules, case law, and court orders in individual cases. Additionally, servicers need formatting flexibility to accommodate the varying bankruptcy factual circumstances, the differences in servicer s systems, and the fact that some statements will be electronic. Implementation Process Complexities and Costs Bankruptcy creates myriad complex issues relating to periodic statement requirements. There are areas in which the purposes of TILA, which requires detailed account information for each billing cycle 16 are inconsistent with the protections of the Bankruptcy Code, which generally prohibits debt collection activities aimed at bankruptcy-protected consumers. Reconciling the two is inherently complex. At the same time, servicers realize they face the formidable task of making extensive systems changes to implement the final rule that will follow the present interim final regulation. Servicers are still finalizing the many systems and other changes needed to implement the comprehensive regulations that became effective in January 2014. Adopting changes of this complexity and extent is a labor-intensive and very costly process. 14 See 12 C.F.R. 1026.41(d)(8). 15 TILA 128(f)(2). 16 TILA 128(f)(1). 7
It would be very unfortunate if the CFPB were to finalize changes to its interim final rule on periodic statements only to have to make further amendments. When the CFPB released its January 2013 final servicing rules, servicers immediately began the impossible task of implementing periodic statements to comply with that rule within the required 12 months. While the industry appreciates the October clarifications and adjustments to the servicing rules, the changes required servicers to revise work already done. To avoid multiple revisions to business processes and technology going forward, we strongly urge the CFPB to provide sufficient vetting of the complex issues surrounding bankruptcy and periodic statements. We, therefore, strongly recommend that the CFPB take advantage of an advance notice, then a notice of proposed rulemaking so that the agency will have the benefit of multiple iterations of input before it finalizes this rule. This would permit the CFPB time to conduct consumer testing of periodic statements. Input coupled with consumer testing would reduce the chances of having to amend a final rule after it is released, a process that benefits no one. When the rule is final, servicers will need time to implement it. How much time servicers will need will depend on what the rule will require, so it is difficult to estimate precisely. Given the complexity of the bankruptcy rules juxtaposed to non-bankruptcy objectives of periodic statements, substantially more time than 12 months is needed to implement periodic statements for borrowers in bankruptcy. Conclusion We appreciate the CFPB s efforts to design periodic statements that provide consumers with important information that is not confusing, while permitting the protections of the Bankruptcy Code to remain intact. We urge the CFPB not to require servicers to provide trustees with consumer account statements for the reasons discussed. Finally, we urge the CFPB provide servicers appropriate time to implement periodic statements that are far more complex than statements to borrower outside of bankruptcy. Sincerely, Anne C. Canfield Executive Director 8