In July 2010, amid the worst mortgage meltdown since the Great Depression,[1] the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted to promulgate pervasive new regulations on mortgage servicers.[2] In reviewing the causes of the mortgage crisis, the U.S. House of Representatives found a need to increase transparency and accountability in the mortgage-servicing field.[3] Accordingly, the Dodd-Frank Act incorporates new servicing regulations requiring mortgage servicers to disclose certain information to delinquent borrowers. For example, under the Early Intervention Requirements, mortgage servicers will be required to make good-faith efforts to establish live contact with delinquent borrowers, not later than 36 days after delinquency,[4] to provide the borrower with loss-mitigation options.[5]
Mortgage servicers have expressed concern over whether this required communication conflicts with the Bankruptcy Code’s automatic stay, which prohibits actions to collect, assess or recover a claim against a debtor that arose before the debtor filed for bankruptcy.[6] The new rules enacting the mortgage-servicing provisions of the Dodd-Frank Act took effect on Jan. 10, 2014,[7] leaving many industry stakeholders concerned about possible liability loopholes and conflicts with the Bankruptcy Code.
Early Intervention Requirements and Compulsory Loss-Mitigation Contact
The Consumer Financial Protection Bureau (CFPB) was established by the Dodd-Frank Act to consolidate rulemaking authority over federal mortgage servicing statutes, including the Mortgage Servicing Rules under the Real Estate Settlement Procedures Act (RESPA).[8] In August 2012, under notice and comment rulemaking, the CFPB proposed several amendments to the rule that implements RESPA (Regulation X).[9] One such amendment creates the Early Intervention Requirements, which require a mortgage servicer to make live contact with a delinquent borrower in order to offer the borrower information on loss-mitigation options.[10] The rule was finalized on Jan. 17, 2013, with an effective date of January 10, 2014.[11] Then, on Oct. 15, 2013, the CFPB issued its interim final rule[12] and bulletin[13] in response to concerns raised by industry leaders, including, but not limited to, concerns regarding possible conflicts between the Early Intervention Requirements and the Bankruptcy Code’s automatic stay.
Permissible Contacts with Delinquent Borrowers
According to the CFPB bulletin, servicers must make good-faith attempts to establish live contact, informing the borrower about loss-mitigation options by the 36th day for each billing cycle for which a borrower is delinquent by at least 36 days.[14] In the bulletin, “[t]he CFPB emphasizes that the rule is specifically designed to give servicers significant flexibility in tailoring their contact methods to particular circumstances.”[15] The CFPB bulletin also provides samples of what it considers to be reasonable steps to establish live contact:[16]
- When a borrower is delinquent in consecutive billing cycles, the live-contact requirement is satisfied if the servicer has established and is maintaining ongoing contact with the borrower concerning completion of and evaluation of a loss-mitigation application.
- If the borrower stops paying under a loss-mitigation plan or becomes delinquent after curing a default, the servicer has an obligation to make good-faith efforts to contact the borrower within 36 days of the subsequent delinquency.
- Servicers may combine contacts with borrowers made pursuant to the Early Intervention Requirement with contacts made for other reasons.
- A borrower’s failure to respond to a servicer’s repeated attempts at communication is appropriate to consider when determining whether the servicer has made a good-faith effort.
Mortgage Servicers Do Not Have to Contact Delinquent Borrowers Under the Early Intervention Requirements While a Borrower Is in Bankruptcy
Under the Bankruptcy Code, the filing of a bankruptcy petition “operates as a stay, applicable to all entities, of ... any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the [bankruptcy] case.”[17] It is not unusual for a bankruptcy court to find a mortgage servicer in contempt of the automatic stay for mailing a monthly billing statement, or other information, to a borrower who is a debtor in bankruptcy.[18] Thus, when the CFPB issued its Early Intervention Requirements, several members of the mortgage industry expressed unease about compliance with the CFPB’s new RESPA rule.
In response, the CFPB added a conflict-of-law provision to the rule that implements RESPA (Regulation X), specifying that servicers are not required to make contact with borrowers in a manner prohibited by the Bankruptcy Code.[19] Still, members of the mortgage industry feared that simply offering this flexibility to servicers on communications with borrowers was not sufficient protection from liability under RESPA given that the lenders did not know, as a preliminary matter, when and how bankruptcy law applied to the Early Intervention Requirements. The industry therefore sought further clarification on whether the CFPB could require any attempt at compliance with the Early Intervention Requirements in situations where the automatic stay is in place.
Based on these queries, the CFPB has concluded that the interplay between the Early Intervention Requirements and bankruptcy law “can be highly varied and complex.”[20] According to the CFPB, “whether certain communications with the borrower may violate an automatic stay or discharge injunction are fact-specific inquiries and can vary depending on the Chapter of the Bankruptcy Code at issue, the intention of the debtor to retain the property, and the frequency and detailed contents of the communications.”[21]
However, few bankruptcy courts have issued guidance on the issue. The U.S. Bankruptcy Court for the District of New Jersey has entered an administrative order holding that “communications and/or negotiations between debtors and []mortgage servicers about loan modification shall not be deemed as a violation of the automatic stay…. [A]ny such communication or negotiation shall not be used by either party against the other in any subsequent litigation....’’[22] The U.S. Bankruptcy Court for the Northern District of Washington has similarly issued a local rule providing that “[a] mortgage creditor’s contact with the debtor and/or the debtor’s counsel for the purposes of negotiating a loan modification shall not be considered a violation of the automatic stay imposed by 11 U.S.C. 362.”[23] These two local rules permit some communication regarding loan modifications while a borrower is in bankruptcy, although this authority is limited and not universally recognized.
In comparison, the U.S. Department of Housing and Urban Development (HUD) has taken the position that once a borrower becomes a debtor in bankruptcy, a loss-mitigation letter must be sent to debtor’s counsel, not the debtor, and the lender is not required to make direct contact with the borrower.[24] Thus, in addition to the statement by CFPB — that applying the Early Intervention Requirements and bankruptcy law can be highly varied and complex — the existing authority on the matter is mixed and not binding on the vast majority of mortgage services.
Conclusion
The CFPB has decided that additional study of the overlap between the Early Intervention Requirements and the automatic stay is needed but could not be completed before Jan. 10, 2014. As such, the interim rule published on Oct.15, 2013, exempts servicers from the Early Intervention Requirements when a borrower is a debtor in bankruptcy.[25] Additionally, the new comments to the Early Intervention Requirements provide that when any portion of the mortgage debt is not discharged, a servicer must resume compliance with the Early Intervention Requirements after the first delinquency that follows the earliest of any of three potential outcomes in the borrower’s bankruptcy case: the case is dismissed, the case is closed or the borrower receives a discharge.
[1] For a historical analysis of mortgage market failures in the U.S. and federal government responses thereto, see Michael Simkovic, Competition and Crisis in Mortgage Securitization, 88 Ind. L.J. 213 (2013).
[2] Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No.111-203, 124 Stat. 1376 (2010).
[3] H. Rep. No. 111-94, at 54-56 (2009), available at http://www.gpo.gov/fdsys/pkg/CRPT-111hrpt94/pdf/CRPT-111hrpt94.pdf.
[4] 12 C.F.R. § 1024.39 (effective Jan. 10, 2014).
[5] Consumer Financial Protection Bureau, Interim Final Rule, Amendments to the 2013 Mortgage Rules Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) [hereinafter Interim Final Rule], 78 Fed. Reg. 62993-01, 62996, 63004-05 (Oct. 23, 2013) (to be codified at 12 C.F.R. § 1024.39), available at http://www.gpo.gov/fdsys/pkg/FR-2013-10-23/pdf/2013-24521.pdf.
[6] 11 U.S.C. § 362.
[7] Interim Final Rule, supra n.5, at 62993.
[8] 12 U.S.C. §§ 5491, 5511, 5512(b)(4)(a) and 5581(b)(7) (2010).
[9] Consumer Financial Protection Bureau, 2012 Real Estate Settlement Procedures Act (Regulation X) Mortgage Servicing Proposal, 77 Fed. Reg. 57,200, 57,200-02 (proposed Sept. 17, 2012) (to be codified at 12 C.F.R. § 1024), available at http://www.gpo.gov/fdsys/pkg/FR-2012-09-17/pdf/2012-19974.pdf.
[10] 12 C.F.R. § 1024.39 (effective Jan. 10, 2014).
[11] Consumer Financial Protection Bureau, Final Rule, Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X) (Feb. 14, 2013), 78 Fed. Reg. 10696-01, 10,696, 10,708 (to be codified at 12 C.F.R. § 1024.39), available at http://www.gpo.gov/fdsys/pkg/FR-2013-02-14/pdf/2013-01248.pdf.
[12] Interim Final Rule, supra n.5.
[13] CFPB Bulletin 2013-12, Implementation Guidance for Certain Mortgage Servicing Rules (Oct. 15, 2013), available at http://files.consumerfinance.gov/f/201310_cfpb_mortgage-servicing_bulletin.pdf.
[14] Id. at 4.
[15] Id. at 4.
[16] Id. at 5.
[17] 11 U.S.C. § 362(a)(6).
[18] See, e.g., In re Brown, 481 B.R. 351, 360 (Bankr. W.D. Pa. 2012); In re Bruce, No. 00–50556 C–7, 2000 WL 33673773, at *4 (Bankr. M.D.N.C. Nov. 7, 2000).
[19] Interim Final Rule, supra n.5, at 62996.
[20] Id. at 62997.
[21] Id.
[22] Id. at n.20 (citing Amended General Order Regarding Negotiations Between Debtor(s) and Mortgage Servicer(s) to Consider Loan Modifications of the United States Bankruptcy Court for the District of New Jersey (July 24, 2009)).
[23] Id. at n.20 (citing Bankr. W.D. Wash. R. 4001-2(b)).
[24] Id. at 19 (citing HUD, Mortgagee Letter 2008-32 (Oct. 17, 2008)), available at http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2008ml.cfm.
[25] Interim Final Rule, supra n.5, at 63004-05 (to be codified at 12 C.F.R. § 1024.39(d)(1)).