March 16, 2015 600 13 TH STREET, N.W. SUITE 400 WASHINGTON, D.C. 20005 Tel. 202.289.4322 Fax 202.589.2526 Ms. Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street, N.W. Washington D.C. 20552 Re: Docket No. CFPB-2014-0033; RIN 3170-AA49; Amendments to the 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z). Dear Ms. Jackson: The Housing Policy Council 1 of the Financial Services Roundtable (HPC) welcomes the opportunity to comment on the Consumer Financial Protection Bureau s (Bureau) proposed amendments to the 2013 mortgage rules under the Real Estate Settlement Procedures Act s (RESPA) Regulation X and the Truth in Lending Act s (TILA) Regulation Z. I. General Comments We have reviewed the proposal amendments to the definition of delinquency (12 C.F.R. 1024.31); the requests for information (12 C.F.R. 1024(d) and (i)); force placed insurance (12 C.F.R. 1024.37(c), (d), and (e) and prompt payment processing (12 C.F.R. 1026.36). While there are a few provisions within those amendments that we believe could be improved, we have no major objections or suggestions with respect to these proposals. We would like to focus instead on the four provisions with which we have substantial objections namely: (a) the changes in the successor in interest provisions (12 C.F.R. 1024.30(d) and 38(b); (b) the early intervention provisions (12. C.F.R. 1024.39); (c) the loss mitigation provisions (12 C.F.R. 1024.41) and (d) the provisions relating to periodic statements (12 C.F.R. 1026.41). II. Proposals that Need Substantial Changes 1 The Housing Policy Council of The Financial Services Roundtable consists of thirty-two of the leading national mortgage finance companies. HPC members originate, service, and insure mortgages. We estimate that HPC member companies originate approximately 75% and service twothirds of mortgages in the United States. HPC's mission is to promote the mortgage and housing marketplace interests of member companies in legislative, regulatory, and judicial forums. 1
a. Successors in Interest We believe there are major problems with this proposal including deciding who is a successor in interest, applying mortgage servicing rules to these successors in interest and offering loss mitigation to this defined group of successors in interest. We have an overriding concern that the factual possibilities under these rules will not just be complicated (for example children, adult or minor, of multi-spouse couples one of whom is the obligor on the loan), but in many cases will be intrusive into other disputes between the parties unrelated to disclosures and could create possible conflicts with other laws. Under the proposed amendments the successor in interest may not necessarily have assumed the mortgage loan obligation under state law, and the servicer may not necessarily have agreed to add the successor in interest as obligor on the mortgage loan. This places servicers in the very difficult position of affording non-borrowers (and often completely unrelated individuals) statutory and regulatory protections and rights intended only for signatories on the note. We respectfully suggest that this broadening of applicability be reconsidered in light of all of the other federal, state and municipal requirements applicable to mortgage servicers. 1. Deciding who is a successor in interest It appears that the proposal would permit an individual who believes he has succeeded to an interest in real property to write an unsolicited letter to the servicer asking for information that normally is only available to a borrower on that loan, and that a servicer would have to treat that as an indication that the author of the letter may in fact be a successor in interest. That is extraordinarily unusual. Having received that inquiry, the burden is then on the servicer to ask of the writer the appropriate questions which, when answered, will permit the servicer to determine, under specific laws and regulations and case precedent in each state, whether that individual really has succeeded to the interests of the individual who had been identified by the servicer as the person with ownership interests in the property. That is a difficult and complicated task, since the entities or persons that can now be successors in interest under the proposal have expanded extensively. Practically speaking, this means that for purposes of determining to whom the rules apply a successor in interest may now include any one of several different categories of individuals, or an entity such as a trust who obtains title to real property no longer just through the death of the borrower. This includes, for example, certain ownership exchanges between parents and children, legally separated and divorced spouses and transfers to family trusts. We believe this proposed expansion of those individuals who must be considered successors in interest places additional and unnecessary burdens on servicers (1) to engage in 2
determining what information and legal documents it needs in each fact-specific situation, (2) to request and receive such information and documentation and (3) to make potentially life changing decisions for individuals in an incredibly short period of time. The variety of inquiries that must be made to seek answers that are dispositive of the question of whether that individual is a valid successor, particularly when there is no indication in writing from the individual on what basis he or she claims succession, is mind boggling. Even when the basis of succession is stated there remain difficult questions of state law as to property ownership including a variety of differences between jurisdictions and often a bewildering set of factual questions in the context of modern spousal arrangements of varying kinds and numbers. For example, partners now may move among many partners with a variety of formal or informal arrangements, some recognized in certain states and not recognized in others, and compound these arrangements with different numbers of children of the different arrangements and the complexity of that one scenario becomes apparent. We would urge the Bureau to limit those written communications to those that specifically identify the writer as one claiming to be a successor in interest to property rights of the mortgaged property, and the manner in which and under what authority that claim is made. This is not a casual claim about incidental property, but a formal statement that the writer believes that he has rights in real property, an expensive and valuable right. Real property laws in the United States and other common law jurisdictions are among the most circumscribed and legalistic laws of any that exist. It is only fitting that such a claim should place primary responsibility on the claimant to make the claim and the authority for its validity as clear as possible. The servicer should not have to act as the private investigator, accountant and lawyer for the claimant and be expected to guide a claimant through a process in which the servicer has very little direct knowledge. The rule also would require the servicer to maintain policies and procedures that allow for application of the relevant law governing each situation. For servicers that operate nationally or regionally, that would require the maintenance of policies and procedures appropriate for each jurisdiction for each of the bewildering variety of situations that might arise. That is a monumental task, not only in assembling them in the first instance but of maintaining them as laws change from time to time, both legislatively and judicially and from jurisdiction to jurisdiction. The proposed amendments require that servicers maintain policies and procedures that allow for application of the relevant law governing each successor in interest situation. Four specifically identified situations include: (1) tenancy by the entirety or joint tenancy; (2) affidavits of heirship; (3) divorce or legal separation; and (4) living spouses or parents. 2 This 2 The Bureau does note, however, that other unspecified successor in interest transfers may occur, and the servicer is required to be able to handle these also as such arise. 3
assessment must occur promptly so as to not compromise consideration for loss mitigation alternatives and at least 30 days prior to upcoming milestones. Thus, mortgage servicers must be able to assess based on documentation requested and received by the servicer whether an individual is or is not a successor in interest, make changes to its systems of record, and communicate the results of this assessment to requesting individuals in a very short time frame. Under the proposed amendments, servicers must respond to a written request that indicates that the person making the request may be a successor in interest by providing that person with information regarding the documents the servicer requires confirming the person s identity and ownership interest in the property. The written request requirement appears in the request for information (RFI) section of the servicing regulations, which means the mandatory RFI response timelines are applicable, except when a servicer receives a loss mitigation inquiry from a purported successor in interest outside of the RFI protocol. Industry experience confirms that disputes often arise before, during, and after the servicer s initial contact with other potential successors in interest over who the successor in interest is or should be. Servicers are not the appropriate parties to adjudicate such disputes. We are very concerned, that as proposed by the Bureau, the amendments to the servicing regulation would require that servicers determine who the correct successor or successors in interest are, based on the servicer s interpretation of the applicable law, based on facts the servicer may not be able to adequately verify, and with only the limited written documentation the servicer can obtain from the purported successor or successors in a very short time frame. We believe it should be clear that servicers cannot be required to meet such demands when the contingencies that lead to resolution are outside servicers control. The Bureau should provide a safe harbor to servicers who in good faith and consistent with the rules of the Bureau make a determination as to the rightful successor in interest and are subsequently brought into litigation between other potential successors in interest who may be challenging the question of who is the rightful successor in interest. The Bureau should provide servicers with additional time to consider and verify information and documents submitted by the purported successors in interest in order to reduce the likelihood of an unintended rush to judgment that could be detrimental to all parties concerned, including additional successors in interest who may not have had an opportunity to submit their claim. We believe a reasonable time under the circumstances to be up to ninety (90) calendar days unless the dispute is being litigated. 2. Applying mortgage servicing rules to successors in interest 4
Under the proposed rules, a successor in interest would be deemed to be a borrower for purposes of RESPA servicing rules, even though the individual may not be liable for the debt or have made any promises to make payment on the debt. As borrowers, they will be entitled to all the communications that any borrower may receive even though the servicer may be required to continue to provide various communications to the prior borrower. This will be true even if the successors in interest are a series of individuals. We urge the Bureau to limit the required communications to the successors in interest and to eliminate the prior borrower from any communications once a successor in interest is confirmed. We also urge the Bureau to provide a safe harbor to the servicers who, in good faith and consistent with the rules of the Bureau, make a determination of successor in interest and are subsequently brought into litigation among the potential successors in interest who may be litigating the question of who is the rightful successor in interest. 3. Offering loss mitigation to successors in interest The proposed rules would require a servicer that receives from an individual a claim of successor in interest and asks for loss mitigation options need not immediately receive a response to the inquiry about loss mitigation, but must retain the request on file until the determination is made that the individual has a rightful claim as a successor in interest. At that time, the inquiry about options for loss mitigation must receive a response from the servicer, as though the inquiry was made by a recognized borrower at that time. It is unlikely that putting such requests for loss mitigation aside or noting them for possible further action and then successfully reviving them after a determination is made in what possibly is a very complex successor question will actually succeed. It would be better to begin the loss mitigation process only after the question of succession is answered in favor of the individual having made his case to be a valid successor in interest. At that point a request for loss mitigation would be relevant and timely. b. Early Intervention The proposed rules will be very complicated, and it is very possible that despite their good faith efforts, servicers will make errors in trying to implement them. The requirement that live contacts be continued throughout the delinquency seems unnecessary and redundant, since the borrower knows that he or she is delinquent, and constant attempts to establish live contact may simply be seen as harassment. If the borrower has availed him or herself of no contact protection under the FDCPA (Federal Debt Collection Practices Act), crafting a written notice in a way that will satisfy the Bureau s proposed rule but not cause a bankruptcy court to find a violation of that order may turn out to be difficult and treated differently in different courts. For live contact requirements, the Bureau proposes to exempt borrowers who are in bankruptcy, have 5
discharged personal liability for the mortgage loan, or shares liability on a mortgage loan with a person who is a debtor in a Chapter 12 or Chapter 13 bankruptcy case. Those exemptions would not be available to a borrower who is jointly liable on the mortgage loan with someone who is a debtor in a Chapter 7 or Chapter 11 bankruptcy case. When multiple successors in interest are involved, the information searches to review all of these variables can become extensive, difficult, and produce unpredictable results. The proposed rules revise already established mortgage servicing rules to require that servicers establish or make good faith efforts to establish live contact with a delinquent borrower no later than the 36th day after each payment due date for the duration of the borrower s delinquency. As a general matter, it is questionable whether borrowers will gain any benefit from being repeatedly informed by a live person of something about which they are acutely aware; namely, that they are delinquent. We believe that at some point such communications become unnecessary badgering that will only bring more discomfort to borrowers who are already suffering under financial stress. The Bureau proposes to adopt two especially technical exemptions to the early intervention requirements: (1) borrowers in bankruptcy and (2) cease and desist requests under the FDCPA. 1. Borrowers in bankruptcy The Bureau proposes to narrow the scope of the bankruptcy exemption from the early intervention requirements. Currently, servicers are wholly exempted from the early intervention requirements with respect to a mortgage loan if at least one of the borrowers is a debtor in bankruptcy. This includes both the live contact and the written notice requirements. However, the Bureau believes that servicers should apply the early Intervention contact requirements in limited bankruptcy-related circumstances. For the live contact element of the early intervention requirement, the Bureau proposes to maintain the exemption with respect to a borrower who is in bankruptcy, has discharged personal liability for the mortgage loan or shares liability on a mortgage loan with a person who is a debtor in a Chapter 12 or Chapter 13 bankruptcy case. However, the proposed revisions provide that the exemption would no longer apply to a borrower who is jointly liable on the mortgage loan with someone who is a debtor in a Chapter 7 or Chapter 11 bankruptcy case. In other words, a borrower jointly liable on a debt where another borrower files for Chapter 7 or 11 bankruptcies can receive calls to establish live contact. When multiple successors in interest are involved, the information searches to review all of these variables can become extensive, difficult and produce unpredictable and sometimes questionable results. 6
We note that this requirement like others noted below will require that servicers apply different operational rules to new variables. That is, distinguishing live contact requirements based on bankruptcy chapter filings (which can and often do change) and by different borrowers on the debt will require both costly system and operational changes that still will not guarantee foolproof execution. For the written notice element of the early intervention requirement, the Bureau proposes a very different rule because of the nature of the notice. Specifically, the proposed regulations require that a servicer provide the written notice to a delinquent borrower who is in bankruptcy or has discharged personal liability for the mortgage loan. There are exceptions to this requirement. The Bureau intends to exempt servicers from sending a written notice in the following circumstances: No loss mitigation options are available; The borrower is a debtor in bankruptcy, and the borrower s confirmed plan of reorganization provides that the borrower will surrender the property securing the mortgage loan, provides for the avoidance of the lien securing the mortgage loan, or otherwise does not provide for, as applicable, the payment of pre-bankruptcy arrearage or the maintenance of payments due under the mortgage loan; The borrower is a debtor in bankruptcy, and the borrower files with the court a Statement of Intention to surrender the property securing the mortgage loan; or The borrower is a debtor in bankruptcy, and a court enters an order in the bankruptcy case providing for the avoidance of the lien securing the mortgage loan or lifting the automatic stay with respect to the property securing the mortgage loan. The complexity of these requirements is evident on their face. The requirements are especially onerous when servicers will also have to layer on the live contact variances. We request the Bureau simplify the live contact and written notice requirements so that the population of consumers requiring both types of contact is identical and less contingent on bankruptcy status or process, which are always subject to change and rarely reported in real time. 2. Cease and Desist requests under the FDCPA The FDCPA provides, If a consumer notifies a debt collector in writing that the consumer refuses to pay a debt or that the consumer wishes the debt collector to cease further communication with the consumer, the debt collector shall not communicate further with the consumer with respect to such debt. If a servicer receives such a written communication currently, it creates a conflict with the mandatory early intervention contact requirements, and 7
the Bureau rules do not require the servicer to comply with the contact requirements. That is eminently reasonable. The Bureau proposes to alter this guidance in the proposed amendments. For the live contact element of the early Intervention requirement, the Bureau proposes that the current exemption remain. However, for the written notice element of the early intervention requirement, servicers must begin sending a special version of the written notice that (1) excludes any request for payment; (2) includes other information already contained in the mortgage servicing rules and (3) includes a statement that the servicer may or intends to invoke its specified remedy of foreclosure. We urge the Bureau not to change its prior guidance on this subject. If a borrower avails him or herself of the no contact protection under the FDCPA, crafting a special version of the written notice that will satisfy the Bureau s proposed rule, while possible, seems counter to the consumer protection at the heart of the FDCPA. Most debtors will feel such a statement is a continuing demand for payment. We ask the Bureau to carefully consider whether these technical and complex changes to the early intervention requirements are really helpful to borrowers. We believe they are not. Devising a fact pattern that might find utility in narrowing the exemptions in bankruptcy cases should not by itself lead to a narrowing of those exemptions. We urge the Bureau to reconsider its cost benefit analysis of the early intervention provisions of the proposed rule given the substantial complexity of the changes. It should be cognizant of the fact that adding layers of cost to mortgage servicing can lead to a reduction in originations and tighter access to credit. In short, adding additional complexity to the regulations increases costs for the lender-servicer and can have a negative impact on consumers. c. Loss mitigation 1. Evaluations If borrowers receive a modification in their loan and make payments under the modification for a substantial period of time such as five years, and then, because of a life event or some similar situation, find themselves in default, it is not unreasonable or bad business to offer them a second modification. That is standard practice among most mortgage servicers and support for that is found in most investor contracts. However, on the other hand, if a borrower is in default and has applied for a modification and perhaps has a short term modification, but shortly before the servicer is ready to make a decision on the application brings current the loan, and then repeats that process of default, 8
application, bringing the loan current again, perhaps multiple times, it is not unreasonable to prohibit such a borrower from applying for additional modifications. We urge the Bureau to consider placing limitations on the number of times a servicer in situations comparable to the example above must evaluate an applicant for loss mitigation. 2. Notification that application is complete Five days to respond and notify the borrower that the loss mitigation application is complete is too short a time frame. In particular, that is true when one considers the letter that must accompany the information that the application is complete. 3 If the Bureau is willing to permit a generic response such as This is to notify you that the application is complete, then that could be done in 5 days. But if there must be seven specific items covered in the letter and many of them require loan specific information (for example, was a foreclosure sale scheduled when the borrower completed the application and, if so, for when), preparing such a letter will require more than 5 days in many cases. We urge that the Bureau provide 10 days to give notification if the letter requires loan specific information, but if it can be generic and not provide loan specific information, 5 days will be sufficient. 3. Lack of information beyond control of servicer There are times when the borrower has provided all the documents and information that he can and has answered all the questions that the servicer has relative to his loss mitigation application. The borrower, of course, would like to know that is the case as soon as possible to partially relieve his anxiety. The borrower would also like to know when a decision will be made on the application. Unfortunately, sometimes the servicer has not yet received information from one or more third parties that is necessary to be considered when evaluating the application. For example, a home owners association may not have notified the servicer that there are no outstanding accounts owed by the borrower and no obligations unmet, notwithstanding repeated inquiries to the association for that information. If there is a delay, the servicer is expected to seek to obtain the information as quickly as possible, a very loose standard, and one somewhat made ambiguous by the comments in the explanation that accompanies the proposed rule, that efforts should be with more immediate urgency than previously. That is a standard that does not provide guidance. 3 The notice of complete application must state or contain: (A) That the loss mitigation application is complete; (B) The date the servicer received the complete application; (C) Whether a foreclosure sale was scheduled as of the date the servicer received the complete application and, if so, the date of that scheduled sale; (D) The date the borrower s loss mitigation protections began, as applicable, and a concise description of those protections; (E) That the servicer expects to complete its evaluation within 30 days of the date it received the complete application; (F) A statement that, although the application is complete, the borrower may need to submit additional information at a later date if the servicer determines that it is necessary; and (G) If applicable, that the borrower will have the opportunity to appeal the servicer s determination to deny the borrower for any trial or permanent loan modification. 9
The proposed rule would require considerable detail in the letter explaining that situation, such as when the request went to the third party, who the third party is, etc. 4 It is unlikely that this detailed information will be of much interest to the borrower, yet requiring it in the letter exposes the servicer to one more opportunity to make an unintentional mistake. In addition, certain mistakes may create greater anxiety from the borrower than is necessary, even though they are completely accurate ( the IRS has not yet responded to our inquiry, for example). Absent a strong case that the detailed information will be of real significance to the borrower, it would be preferable for the servicer to send a more general letter which stated that the borrower had now provided all of the information that the servicer asked him to provide, that the servicer was prepared to evaluate the application once additional information necessary for that evaluation was received by the servicer, that such additional information had been requested of the party who had the information, and that if the borrower wants information about the matter, the servicer will provide it if the borrower telephoned the servicer at an appropriate tollfree number provided in the letter. 4. Short term forbearance or repayment plans We have one overriding concern with the provisions in sec. 1024.41(c)(2)(iii). In that section, the plan must be in writing, and in practice, almost all short term payment or forbearance plans are oral. The plans are later confirmed through the statements that follow the commencement of the plan in which the payments due and other details are listed. Our members can cite very few experiences in which a short term payment or forbearance plan has been challenged as having been unfair to the borrower. At a minimum, there has been a reduction in payment due and a relaxation of the time frame in which delinquencies must be corrected. Those criteria are the essence of such plans and they are always beneficial to the consumer. That being the case, we do not believe there is a benefit to the consumer in requiring those plans to be in writing. There is a detriment, however, in that once a plan must be reduced to writing, it must meet certain internal reviews and controls that add to the time required to initiate such plans. In emergencies such as natural disasters, oral short-term plans have proven especially advantageous. 4 In addition, if, 30 days after a complete loss mitigation application is received, a servicer is unable to determine which loss mitigation options, if any, it will offer the borrower because it lacks documents or information from a party other than the borrower or the servicer, the servicer must promptly provide the borrower a written notice stating the following: (a) that the servicer has not received documents or information not in the borrower s control that the servicer requires to determine which loss mitigation options, if any, the servicer will offer on behalf of the owner or assignee of the mortgage; (b) the specific documents or information that the servicer lacks; (c) the date on which the servicer first requested that documentation or information during the current loss mitigation application process; and (d) that the servicer will complete its evaluation of the borrower for all available loss mitigation options promptly upon receiving the documentation or information. 10
Using oral short-term plans has worked well for a very long time, and we urge the Bureau to refrain from unnecessarily complicating it by requiring them to be in writing. d. Periodic Statements There are a variety of issues raised in that part of the proposed amendments covering periodic statements. Many of them arise from the introduction of bankruptcy matters into the TILA environment; a change that we think is not warranted. We have comments on that and on other parts of the proposed changes in the periodic statement requirements. Proposed comment 1026.41(d)(1)-1 states If the balance of a mortgage loan has been accelerated but the servicer will accept a lesser amount to reinstate the loan, the amount due under 1026.41(d)(1) should identify only the lesser amount that will be accepted to reinstate the loan. The reinstatement amount is not typically a static value and includes the expenses incurred by third parties on the servicer s behalf to date, including outside counsel, court costs and appraisal costs. When a consumer requests reinstatement, servicers must undertake a process to request the then-current billings from local counsel in addition to other incurred fees. This is a highly manual process, which itself results in time and cost from outside counsel to merely compile their billings. No servicer, to our knowledge, has integrated automatic, real time, outside law firm billing into its mortgage servicing records systems (which may literally be impossible to do), yet we believe this is exactly what comment 41(d)(1)-1 seems to contemplate in practice when it calls for monthly updates to the reinstatement amount on the periodic statements for all accelerated borrowers. We appreciate the discussion in the preamble of the Bureau s intent behind this provision; however, the costs of this proposal must be weighed against its benefits. Whether servicers implement a vast new automated solution (again this may not be possible) or simply use a very time-intensive manual solution, we believe that this requirement would impose very large cost increases for the servicing of accelerated loans. These costs would far outweigh the benefits to consumers whom the Bureau must recognize are already well behind in their obligations and whom have already been given the benefit of the Bureau s own extensive new mortgage servicing protections including early intervention, single point of contact, and loss mitigation evaluation. Our concerns with this provision stem from the particular nature of the reinstatement amount which is highly variable and not known to the servicer in real-time. Periodic statements are primarily designed to disclose expected future amounts due. However, as soon as a reinstatement amount is disclosed, it can increase as a result of continued action by outside professionals including court fees, appraisals and similar expenses. It is unclear from the proposal whether the Bureau expects servicers to accept as the amount due for reinstatement a 11
disclosed reinstatement amount that lacks additional costs not available at the time the reinstatement fee was disclosed. We believe that most borrowers will not understand the difference between an amount required to reinstate the loan and the accelerated amount. There will be further confusion when borrowers request state-mandated payoff statements or receive other required notifications that only include one value. Some jurisdictions do not even require a reinstatement option and the methodology for computing the reinstatement amount varies within each jurisdiction. We suggest instead that borrowers with accelerated loans would see even more benefit from a statement on the periodic statement which indicates that while their loan amount has been accelerated, the servicer may be able to reinstate the regular payment schedule of the loan. If the borrowers are interested in reinstating the loan, they should call the servicer to inquire about the terms and conditions of reinstatement. At that time, the servicer could calculate the reinstatement amount known at that time and notify the borrower that there may already be incurred costs that have not yet been billed to the servicer which also must be paid by the borrower. This would effectively allow servicers to retain their current practices for calculating reinstatement amounts, while providing accelerated borrowers a new awareness of the possibility of loan reinstatement in furtherance of the Bureau s stated intent behind this provision. The Bureau also introduces a bankruptcy-specific periodic billing statement, which will for purposes of mortgage servicers be a wholly new document that will have very limited applicability. It seems paradoxical that the bankruptcy automatic stay deems non-communication with bankrupt filers as being best for them to reassess their financial situation without having to worry about creditor communications, while the Bureau deems periodic debt-specific communications to those same individuals as in their best interest. We respectfully suggest that the U.S. Bankruptcy Code, Federal Rules of Bankruptcy Procedure, court orders and local rules guidelines and standing orders are exceedingly complex and represent a delicate balance between the rights of creditors and debtors under federal law. We think the Bureau should not attempt to integrate these provisions with already complex provisions in the TILA disclosure regime, particularly with the additional new complications associated with the successor in interest proposals. Instead, they should retain the present rules and guidance. TILA and RESPA have historically been silent on the treatment of these borrowers and have instead deferred to the bankruptcy rules regarding how mortgage creditors and servicers should proceed. There is no new additional law that has been adopted which calls for the integration with bankruptcy law as is done in the regulations. Dodd-Frank is silent as to periodic statements to borrowers in bankruptcy. As a matter of public policy, mortgage creditors are similarly situated to other consumer creditors and should be treated equally with other types of 12
consumer creditors in bankruptcy. In fact, the attempt to segregate those from other creditors in bankruptcy may well lead to anger and confusion when consumers receive periodic statements. Such statements will be seen as an attempt to collect a debt, notwithstanding what the consumers believe are the protections afforded by bankruptcy courts. We believe many bankruptcy judges will feel the same way. As the Bureau acknowledges, some jurisdictions have borrowers make all payments directly to the bankruptcy trustee. Those payments would, of course, not be known to the servicer and would not, therefore, be reflected on the periodic statements. It is not clear what benefit consumers would receive from receiving periodic statements in those jurisdictions, since they would not only be seen as a debt collection effort (notwithstanding the most carefully worded disclaimer why else would you send a statement?) but as the Bureau acknowledges, would be inaccurate. In short, borrowers in a bankruptcy proceeding are a protected class which already has an established body of federal law and procedure for communications between creditors and borrowers in bankruptcy. We believe borrowers receive extensive protections by the bankruptcy regime. If the current elaborate architecture of federal bankruptcy protections is insufficient for consumers, we believe that amendments to the rules of bankruptcy should be made. We do not think that the appropriate place to strengthen bankruptcy protections is in the regulations which implement TILA, nor do we believe disclosure is appropriate in those cases other than as mandated by the bankruptcy rules and its courts. The issue is complicated further by recognition that the Bureau may lack authority under TILA to mandate that statements be sent to at least one group covered in the proposal. The requirement to send periodic statements is found in 12 CFR 1026.41, Reg. Z, TILA. However, 1026.41(a)(1) states This section applies to a closed-end consumer credit transaction secured by a dwelling 5 TILA does not apply if it is not a closed-end consumer credit transaction. When a debt is discharged from a sole-obligor consumer in bankruptcy, it is no longer a consumer credit transaction. The creditor may have a lien against a property, but any claim must be exercised in rem against the property itself, as the creditor no longer has a claim against the consumer anymore. TILA does not apply to in rem actions or to all creditors with residential real estate liens. TILA does not even apply to corporate loans secured by a lien on residential real estate, because it s not a consumer credit transaction. TILA also does not apply to consumer business purpose loans. Therefore, not only do we think that the Bureau should leave the bankruptcy protections to the bankruptcy rules and system, but we respectfully suggest that there is no legal authority under TILA to require the provision of periodic statements to borrowers who have discharged their loan in bankruptcy. 5 The five exceptions to this rule include reverse mortgages, time shares, coupon books, small servicers, and debtors in bankruptcy. 13
This is not words over substance, since it is possible that servicers that continue to provide periodic statements could incur TILA liability for errors, even when the underlying credit has been discharged, and they have no recourse to the consumer for the loan amount. 6 We appreciate the Bureau s consideration of these comments and we hope they will help produce a final regulation that protects consumers and enables lender-servicers to comply with the additional standards in a cost-effective manner. Thank you. Sincerely, John H. Dalton President Housing Policy Council of the Financial Services Roundtable 6 See also the general coverage of TILA in section 1026.1(c) Coverage. In general, this part applies to each individual or business that offers or extends credit, other than a person excluded from coverage of this part by section 1029 of the Consumer Financial Protection Act of 2010, Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376, when four conditions are met: The credit is offered or extended to consumers; The offering or extension of credit is done regularly; The credit is subject to a finance charge or is payable by a written agreement in more than four installments; and The credit is primarily for personal, family, or household purposes. 14