As the effective date for the CFPB’s successor in interest and bankruptcy billing statement requirements quickly approaches, one question we’ve heard multiple times is whether a mortgage servicer is required to know when a confirmed successor in interest is in bankruptcy. The question stems from upcoming provisions in Regulations X and Z that will collectively say, in essence, that a confirmed successor in interest must be treated as if he or she is a borrower for the purposes of the mortgage servicing rules. Combine that mandate with specific requirements in the periodic billing statement and early intervention contexts that apply when “any consumer [or borrower] on a mortgage loan is a debtor in bankruptcy” and it becomes clear why many servicers have wondered whether a confirmed successor in interest’s bankruptcy might trigger the various bankruptcy-specific requirements in the mortgage servicing rules.
On March 20, 2018, the CFPB arguably settled the debate when it published a set of Frequently Asked Questions that primarily addresses issues related to the upcoming periodic billing statement requirements for borrowers in bankruptcy. However, towards the end of the FAQ the CFPB includes the following question:
Do servicers 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?
The answer, which may be surprising to some, is “yes”:
Under Regulation X, § 1024.30(d) and Regulation Z, § 1026.2(a)(11), 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, servicers 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.
This means that yes, mortgage servicers do have to monitor whether a confirmed successor in interest is in bankruptcy and will, therefore, have to figure out how to include confirmed successors in interest in their standard bankruptcy checks. This may mean obtaining a confirmed successor in interest’s Social Security number or figuring out another way to determine whether a confirmed successor in interest is impacted by bankruptcy.
As the CFPB noted, if a borrower or consumer—and now a confirmed successor in interest—is a debtor in bankruptcy, a servicer’s obligations change in terms of early intervention contact and periodic billing statements. Although there are some nuances to the early intervention requirements when someone is in bankruptcy, servicers generally seem much more comfortable in that context as compared to the upcoming billing statement requirements when someone is impacted by bankruptcy. On April 19, 2018, new billing statement requirements will go into effect for when someone is in active bankruptcy or has received a discharge. There are certain scenarios where a servicer may be exempt altogether from sending periodic statements, but, when those exemptions do not apply, the upcoming law requires very detailed content and formatting modifications that take into account different chapters of bankruptcy.
In terms of required content on a periodic billing statement and whether a confirmed successor in interest’s status as a debtor in bankruptcy will trigger the modified billing statement obligations, the CFPB posed the following question in its FAQ:
Do the modifications to the periodic statement required for borrowers in bankruptcy apply if the borrower is a confirmed successor in interest in bankruptcy?
Given the CFPB’s response to the first question, you might not be surprised to learn that the answer is “yes”:
Under Regulation Z, § 1026.2(a)(11), confirmed successors in interest are borrowers for purposes of the periodic statement provisions, and so the periodic statement modification requirements for borrowers in bankruptcy in § 1026.41(f) would apply to the periodic statements supplied to that confirmed successor in interest in bankruptcy.
This means that not only will servicers have to figure out how to track whether a confirmed successor in interest is in bankruptcy, they will also have to figure out how to appropriately populate the periodic billing statement, in many cases with information that is specific to the successor’s bankruptcy case.
Together, these two questions and answers shed light on how the CFPB currently interprets the new law. They very clearly do believe that a confirmed successor in interest must be treated as a borrower or consumer for the purposes of all mortgage servicing rules, including those triggered by bankruptcy. Although it is helpful to have some clarity from the CFPB in advance of the rules’ effective date, the timing—approximately just one month before servicers are expected to be fully compliant—is likely to leave some servicers scrambling at the last minute.