Escrow Accounts and Chapter 13 Bankruptcy: Inherent Problems with Form B410A

Escrow Accounts and Chapter 13 Bankruptcy: Inherent Problems with Form B410AThe intersection of Chapter 13 bankruptcy and escrow accounts is complicated and confusing.  Since 2011, various bankruptcy rule and form changes have occurred in an effort to eliminate perceived problems with Chapter 13 escrow issues. This article explains how one of these changes – a revised version of a proof of claim attachment form – actually added to the confusion instead of alleviating it, and how that confusion can be costly to servicers.

Official Form B410A

One of the changes was a new form attachment for mortgage proofs of claim effective December 1, 2011 – Official Form B10A (entitled “Mortgage Proof of Claim Attachment”). An accompanying revision to Bankruptcy Rule 3001 mandated use of Form B10A if a security interest is claimed on the debtor’s principal residence. Four years later, effective December 1, 2015, Form B10A was superseded by a new Official Form B410A (also entitled “Mortgage Proof of Claim Attachment”). Unfortunately, Form B410A often causes issues at the end of a successful Chapter 13 case.

Part 3 of Form 410A contains numerous line items to calculate the prepetition arrearage. They include amounts for “Escrow deficiency for funds advanced” and “Projected escrow shortage,” which the Official Instructionsmake relatively clear are the same amounts as “escrow deficiency” and “escrow shortage as defined by RESPA in Regulation X, 12 C.F.R § 1024.17. The line item for “Principal and interest” must include only the principal and interest component of the missed prepetition payment and cannot include any escrow portion.

The Disconnect Caused by B410A

Unlike former Form B10A, current Form B410A does not allow a servicer to include the escrow component of the missed prepetition payments in the prepetition arrearage. Instead, escrow is severed from those missed prepetition payments and accounted for in the arrearage by including any escrow shortage/deficiency (or surplus) identified by a petition-date escrow analysis as a separate line item(s).  Few, if any, servicing systems of record, however, allow a servicer to simply change the escrow amount of missed prepetition payments. Instead, those payments remain fixed after the bankruptcy case is filed and must be satisfied to advance the contractual due date of the loan. Simply put, the end result is that the servicer’s system of record requires one escrow amount to satisfy missed prepetition escrow payments, and Form B410A requires an escrow shortage/deficiency amount that is virtually never the same. This means that at the end of a successful Chapter 13 case, the mismatch of these two amounts presents a situation in which the debtor can never be precisely “current.”

As a hypothetical, suppose the borrower misses six $1,000 monthly payments each containing a required principal and interest component of $800 and a required escrow component of $200. This means he has missed $4,800 of prepetition principal and interest payments and a $1,200 of prepetition escrow payments. Further suppose that the petition-date escrow analysis recognizes an escrow shortage of $1,040. Part 3 of Form 410A will therefore include $4,800 for principal and interest and $1,040 for escrow in the prepetition arrearage, or a total amount of $5,840. The system of record, though, needs $6,000 to fully pay the six missed prepetition payments of $1,000 each. Holding numerous other variables constant for illustration purposes, this means that at the end of the Chapter 13 case the borrower will be $160 short of being current on his payments.

The Potential Financial Impact

At the end of a Chapter 13 case, upon completion of the Chapter 13 trustee’s repayment of the prepetition arrearage, she is required to file a “notice of final cure payment” pursuant to Bankruptcy Rule 3002.1(f).  The servicer is then required to file a response pursuant to subsection (g) stating whether or not the debtor is current on his postpetition payments.  In situations like the above hypothetical (which may involve “mismatch” amounts much greater than $160), the servicer will often simply bring the debtor current and waive the difference when performing reconciliation in preparation for a response. Less frequently, the servicer will respond that the debtor is not current but end up writing the difference off because of further debtor objection. Either way, bringing the debtor’s loan current when it is not in fact current often causes an actual monetary loss to the servicer.  Over time, these losses of course add up.


This issue will become more and more common in the near future, as three-year Chapter 13 plans based on servicer proof of claims filed after December 1, 2015, approach their end date, and continue to be common so long as Form B410A remains in its present form. Servicing bankruptcy departments, specifically staff and management charged with responding to Chapter 13 trustee notices of final cure, must be aware of this issue. It is not difficult to compare the escrow amounts in the Form B410A with the sum of the missed prepetition escrow payments to determine if there is a substantial difference and whether or not the difference is contributing to a debtor’s delinquency at the end of a Chapter 13 case.  Proper education of staff and management on this issue can directly assist servicers in avoiding substantial write-offs.

CFPB Quietly and Proactively Acts on Its Revised CID Policy

CFPB Quietly and Proactively Acts on Its Revised CID PolicyThe Consumer Financial Protection Bureau (CFPB) recently announced that it is adopting a new policy regarding Civil Investigative Demands (CIDs). Going forward, Director Kathleen Kraninger has committed to providing more information to the entity or individual that is the recipient of the CID. This will be accomplished through more specific notifications of purpose, which will explain the potential provisions of law that the CFPB believes may have been violated. While the CFPB did not include in its announcement how or when this new policy would become effective, the CFPB’s recent orders in response to numerous petitions to modify or set aside CIDs provide tangible insight into what the new approach will look like going forward.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires that when the CFPB issues a CID it must “state the nature of the conduct constituting the alleged violation which is under investigation and the provision of law applicable to such violation.” This is accomplished through the notification of purpose section of the CID. However, the CFPB has historically provided generic, broad and vague notifications of purpose, and that practice has come under scrutiny. In response to one of the 12 requests for information (RFIs) that were issued by then-Acting Director Mick Mulvaney, the CFPB received numerous comments suggesting that it should provide more detail and direction regarding what it is investigating when a CID is issued. Director Kraninger’s new policy, which was announced on April 23, 2019, is at least partially driven by the comments it received in response to the Mulvaney RFIs.

Just a few weeks after the new policy was announced, Director Kraninger quietly gave five examples of how the CFPB will provide more detailed notifications of purpose under the new policy. This was done without any fanfare, press releases or announcements. The CFPB, as it has always done, publishes the decisions that are made in response to a CID recipient’s petition to modify or set aside the CID on its public website. On May 9, 2019, five new decisions were published, and all five contain substantial modifications to the notifications of purpose that were contained in the petitioners’ CIDs.

Consistent with the new policy announcement, each modified notification of purpose contains much more detail than the original version. For example, one of the original notifications of purpose implicated potential violations of the Fair Credit Reporting Act (FCRA) by saying:

The purpose of this investigation is to determine whether student loan debt-relief providers, mortgage lenders, or other persons . . . have violated the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq.

The original notification of purpose does not specify any actual conduct that may violate the FCRA, and it also cites to the entirety of the FCRA as potentially being violated. In contrast, under the CFPB’s new CID policy, the portion of the modified version of the notification of purpose related to potential FCRA violations now says:

The purpose of this investigation is to determine whether student loan debt-relief providers, mortgage originators, or associated persons . . . have obtained or used consumer reports without a permissible purpose in a manner that violates the Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq., principally § 1681b.

This provides much more detail into both the conduct at issue, and the specific provisions of the FCRA that are being looked at. Similar enhancements were made to the CIDs of the other four petitioners as well. This shift in policy will greatly benefit recipients of a CFPB CID in the future.

Another interesting observation regarding the CFPB’s recent orders is that the CFPB proactively modified the notification of purpose section of CIDs for two petitioners who didn’t object to the broad nature of the original version. Director Kraninger simply cited the CFPB’s recent policy announcement and then provided a new notification of purpose that is consistent with that policy. Although none of the five petitions to modify or set aside a CID were fully granted, having more detail in the CFPB’s notification of purpose and having a better understanding of where the investigation may be headed is a major win for industry.

The Conundrum of Credit Reporting In and After Bankruptcy: Help May Be on the Way

The Conundrum of Credit Reporting In and After Bankruptcy: Help May Be on the Way

Creditors and credit furnishers often find properly reporting a payment status to Credit Reporting Agencies (CRAs) during, and after, bankruptcy a challenge. The recent Report of the American Bankruptcy Institute on Consumer Bankruptcy recognizes those challenges, and looks to convene a forum to provide better guidance and clarity as to proper credit reporting once a borrower goes into bankruptcy.


What constitutes proper credit reporting with an account that is in, or after, bankruptcy is not always clear. The ABI Report highlighted an assortment of comments related to credit reporting in bankruptcy, including discharged debts being listed as “charged off” rather than reporting a zero balance; incorrect reporting after final cure in bankruptcy; the lack of a standard method for reporting debts after a Chapter 13 case is dismissed; lenders reporting a charge-off for a non-filer, co-obligor in a Chapter 13 after completion of the Chapter 13 plan rather than at the time of filing; and reporting of a third party who is not an obligor on the loan but has statutory or equitable rights in the collateral securing the loan. Although organizations such as the Consumer Data Industry Association (CDIA) provide resources like its resource guide for reporting in bankruptcy, which includes a helpful Q&A section, there remain nuanced situations that are far from clear for creditors in various reporting circumstances. Other resources providing industry guidance include CDIA’s “FAQ” publications and certain FTC opinions regarding credit reporting in and after bankruptcy.

Additionally, as creditors have certainly come to know, claims of improper investigation are being brought under the Fair Credit Reporting Act (FCRA), which allows for recovery of actual or statutory damages plus attorneys’ fees. Creditors are put in the position of either defending their credit reporting actions through litigation with the exposure of significant attorneys’ fees or settling early even if they may believe they have reported correctly.

The ABI convened and issued its report to recommend improvements to the consumer bankruptcy system. The thorough report covered a range of bankruptcy subject matters and “emphasized a pragmatic, problem-solving approach.” Bradley has detailed the ABI Commission’s Final Report in other two posts published on May 6 and May 17. Credit reporting was not the focus of the ABI Commission, but the uncertainty and controversy led the commission to at least craft a proposal for future substantive determinations, highlighting that one of the goals of bankruptcy is a fresh start for debtors, which includes the tools to rebuild their credit in their post-bankruptcy financial life.

ABI Proposal

The commission proposed that the ABI host a forum on credit reporting with bankruptcy experts, major industry players, advocacy groups, and policymakers to address problems and promote standardization in credit reporting on bankruptcy cases including best practices. The report did not describe any dates or deadlines, but it seems that credit reporting in bankruptcy is “on the radar” for industry experts and advocates from both sides to tackle.

The commission stated candidly that it did not have the resources to address the large scope of bankruptcy and post-bankruptcy credit reporting, but it wanted to raise the significance of the issue for future evaluation. The commission had discussed possible amendments to the FCRA, but believed it should first gather facts so it could implement changes without legislative or regulatory intervention.

Guidance on the Horizon?

Clarifying direction and guidance on how bankruptcy and post-bankruptcy accounts should be reported to CRAs will be welcomed by the industry. These recommendations will not be legally binding, but will carry considerable weight in the industry and may lead to amendments or regulatory changes. Although it will take time and does not provide any immediate direction, the hope is that clarity will result where there has been controversy and confusion.

Stay tuned for future announcements and recommendations from the industry on credit reporting.

The ABI Commission’s Final Report on Consumer Bankruptcy Issues: What Mortgage Creditors Need to Know

We previously provided you with some of the American Bankruptcy Institute’s Commission on Consumer Bankruptcy’s recommendations to improve the consumer bankruptcy system. As the commission noted, changes in bankruptcy law occur slowly. The last major amendments to the Bankruptcy Code were in 2005, and the last major amendments to the Bankruptcy Rules were in 2011. Despite the post-recession changes in the rules and local practice regarding mortgage servicing for borrowers in bankruptcy, gaps still exist, and the existing law often fails to effectively balance the interests of borrowers, mortgage servicers, the judicial system and other interested parties. Here are some suggested changes to address treatment of mortgages in bankruptcy:

Loan Modifications in Chapter 13

  • Uniformity and transparency should be encouraged.
  • Successful modifications should be approved through the plan modification process.
    • Motions to modify a plan should be filed no more than 45 days after agreement to the terms of modification.
    • Attachments to the motion should contain particular information about the terms of modification.
    • Amended budget information should be required if the modification changes the original monthly mortgage payment by a substantial amount (>10%).
  • Payment change notices (PCNs) should not be required for a payment change resulting from successful modification.
  • Reasonable fees should be permitted for borrower’s attorneys relating to work on modifications.
  • The commission did not address the necessity of Amended Proofs of Claim to reduce capitalized arrearages; nor did it address the nuances of Trial Period Payments.

Improvements to Rule 3002.1 – Payment Change Notices (PCNs) and Notices of Final Cure

  • Untimely Filed PCNs:
    • The commission recommends amending Rule 3002.1 to clarify the payment effective date for untimely filed PCNs to give the borrower the benefit of a lower payment early, and bar creditors from collecting a higher payment before they fully comply with the 21-day deadline.
  • Home Equity Line of Credit
    • The commission recommends that only an annual notice be filed, provided that (i) the monthly changes are less than $10, (ii) the notice explains the monthly changes, and (iii) a reconciliation amount for any overpayment or underpayment received during the prior year is included.
    • The monthly payment specified in the annual notice would be adjusted upward or downward to account for the reconciliation amount.
  • Reverse Mortgages
    • The commission recommends amending Rule 3002.1 to clarify that reverse mortgages are subject to the rules’ requirements, except for PCN requirements.
  • Notice of Final Cure
    • The commission recommends amending Rule 3002.1 to:
      • Convert the current notice process to motion practice, allowing for more certainty upon discharge.
      • Add a mid-case status review.
      • Emphasize and clarify that the creditor’s response is required and must include certain data points, including principal balance owed; date when next installment payment is due; amount of the next installment payment, separately identifying amounts due for principal, interest, mortgage insurance and escrow, as applicable; and amount, if any, held in a suspense account, unapplied funds account, or any similar account.
      • Allow the debtor or trustee to file a motion to compel creditor’s statement and for appropriate sanctions if the creditor does not comply with Rule 3002.1.

Conflicts between Proof of Claim and Chapter 13 Plans

  • The commission recommends an amendment to the rules to clarify the effect of proofs of claim and Chapter 13 plans with respect to the amount of claims and installment payments.
  • The rules should provide that the amount in a timely proof of claim should take precedence over a contrary amount in a Chapter 13 plan regarding:
    • If the debtor proposes to cure defaults and maintain payments, the amount necessary to cure any default and amount of the current installment payment;
    • The total amount of the creditor’s claim (including amount of a claim subject to lien avoidance under § 522(f)); and
    • The amount of a secured claim excluded from § 506.

Upcoming Webinar

The ABI Commission’s Final Report on Consumer Bankruptcy Issues: What Mortgage Creditors Need to KnowIf these are areas you would like to learn more about, we encourage you to join us for “The ABI Commission’s Final Report on Consumer Bankruptcy Issues, Part II: What Mortgage Creditors Need to Know” webinar, which is scheduled for Thursday, May 23, from 11:30 a.m. to 12:30 p.m. CT. This webinar will focus on topics in the Final Report and Recommendations from the Commission of particular interest to mortgage creditors, as well as forecasting next steps and reactions from the industry.


United States Senate to Consider Legislation Expanding Fair Housing Protection to LGBTQ Community

United States Senate to Consider Legislation Expanding Fair Housing Protection to LGBTQ CommunityA bipartisan measure was introduced in the United States Senate in late April to expand fair housing protections to LGBTQ persons. The Fair and Equal Housing Act of 2019, introduced by Senators Susan Collins (R-ME), Angus King (I-ME), and Tim Kaine (D-VA), would expressly include “sexual orientation and gender identity” as characteristics protected by the Fair Housing Act. If this bill becomes law, it will prohibit housing providers from denying individuals housing based on sexual orientation or gender identity. Co-sponsor Tim Kaine, in a press release announcing the introduction of the bill, says that this bill “is about ensuring all Americans have access to equal housing.” Sen. Collins echoed that sentiment, stating that “[t]hroughout my Senate service, I have worked to end discrimination against LGBTQ Americans, and it is time we ensure that all people have full access to housing regardless of their sexual orientation or gender identity. I urge our colleagues to join us in supporting this important legislation.”

Although the Fair Housing Act, in its current form, does not expressly extend its protections to LGBTQ individuals, some federal courts already have determined that such persons are entitled to protection under the statute. These federal decisions mainly stem from the United States Supreme Court’s decision in Price Waterhouse v. Hopkins. In Price Waterhouse, the Supreme Court considered whether the protections of Title VII extended to individuals based on stereotyping based on sex. The Supreme Court concluded that sex discrimination includes discrimination based on “gender stereotypes.” Plaintiffs alleging housing discrimination have successfully argued in a number of cases that the Price Waterhouse prohibition on gender discrimination applies to their LGBTQ status.

The federal appellate courts are divided on whether sexual orientation or gender identity is protected under analogous civil rights statutes. Moreover, the Supreme Court recently accepted three cases in which it will determine the scope of protections based on “sex” within Title VII of the Civil Rights Act, which prevents employers from discriminating on the basis of race, sex, color, national origin and religion.

Although the Fair Housing Act provides a potent remedy against housing discrimination in the form of damages claims, there are other avenues for protection. The United States Department of Housing and Urban Development (HUD), for instance, interprets the Fair Housing Act to protect individuals from discrimination on the basis of sexual orientation and gender identity based on the Price Waterhouse decision. HUD also adopted a rule prohibiting lenders that utilize the FHA mortgage insurance program, HUD-assisted or HUD-insured housing providers, and all other recipients of HUD funds from discriminating on the basis of “sexual orientation or gender identity.” HUD has also issued a rule protecting transgender individuals while enrolled in certain housing programs receiving HUD funds. Finally, in addition to HUD protections, 21 states and several hundred municipalities have enacted laws protecting individuals against housing discrimination based on sexual orientation and gender identity. All that being said, there have been multiple reports that HUD has considered rolling back these protections, and HUD has elected not to release previously drafted rules designed to enhance protections based on gender identity.

It is uncertain–at best–whether the Fair and Equal Housing Act of 2019 will clear both the Senate and the House and be signed into law. Even if this particular proposal is unsuccessful, however, there is at least some measure of bipartisan appetite for legislation regarding federal housing protection afforded to LGBTQ individuals. Moreover, the presence of state and local anti-discrimination laws, as well as HUD regulations prohibiting discrimination against LGBTQ individuals, means that lenders, property managers, and other housing providers subject to the Fair Housing Act must take great care to avoid discriminatory practices.

Disclosure and Cooperation Allow for Reduced False Claims Act Settlements According to New DOJ Guidance

Disclosure and Cooperation Allow for Reduced False Claims Act Settlements According to New DOJ GuidanceThis week, the Department of Justice (DOJ) formalized and expanded its guidance for how defendants can earn cooperation credit in False Claims Act (FCA) cases and thereby reduce settlement amounts. New section 4-4.112 of the Justice Manual outlines three ways entities and individuals facing FCA claims can potentially earn credit—through voluntary disclosures, cooperation, and remedial measures. The credit allotted can take the form of a reduced damage multiplier, reduced penalties, or DOJ assistance in dealing with agencies and relators.

Voluntary Disclosures

The policy values voluntary self-disclosure of false claims, both in the first instance as well as when additional misconduct is discovered during the course of the internal investigation. In announcing the new policy, Assistant Attorney General Jody Hunt stated, “The Department of Justice has taken important steps to incentivize companies to voluntarily disclose misconduct and cooperate with our investigations; enforcement of the False Claims Act is no exception. False Claims Act defendants may merit a more favorable resolution by providing meaningful assistance to the Department of Justice.” Hunt referred to voluntary disclosure as “the most valuable form of cooperation.”


The policy provides an illustrative list of measures FCA defendants can take in an effort to receive more favorable treatment. While noting that a “comprehensive list of activities that constitute . . . cooperation is not feasible because of the diverse factual and legal circumstances involved in FCA cases,” the list provides examples of 10 cooperative actions FCA defendants can take in an effort to obtain credit. The list includes:

  • Identifying individuals substantially involved in or responsible for the misconduct;
  • Disclosing relevant facts and identifying opportunities for the government to obtain evidence relevant to the government’s investigation that is not in the possession of the entity or individual or not otherwise known to the government;
  • Preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements;
  • Identifying individuals who are aware of relevant information or conduct, including an entity’s operations, policies, and procedures;
  • Making available for meetings, interviews, examinations, or depositions an entity’s officers and employees who possess relevant information;
  • Disclosing facts relevant to the government’s investigation gathered during the entity’s independent investigation (not to include information subject to attorney-client privilege or work product protection), including attribution of facts to specific sources rather than a general narrative of facts, and providing timely updates on the organization’s internal investigation into the government’s concerns, including rolling disclosures of relevant information;
  • Providing facts relevant to potential misconduct by third-party entities and third-party individuals;
  • Providing information in native format, and facilitating review and evaluation of that information if it requires special or proprietary technologies so that the information can be evaluated;
  • Admitting liability or accepting responsibility for the wrongdoing or relevant conduct; and
  • Assisting in the determination or recovery of the losses caused by the organization’s misconduct.

Not surprisingly, the government will also consider the additional factors of (1) the timeliness and voluntariness of the assistance; (2) the truthfulness, completeness and reliability of any information or testimony provided; (3) the nature and extent of the assistance; and (4) the significance and usefulness of the cooperation to the government in evaluating both voluntary disclosures and other methods of cooperation. The government does not require the waiver of attorney-client privilege or work product protection in order to receive cooperation credit.

Remedial Measures

In addition to cooperative acts, the policy mandates that the government consider remedial measures when determining whether and how much credit is warranted. Examples include:

  • Demonstrating a thorough analysis of the cause of the underlying conduct and, where appropriate, remediation to address the root cause;
  • Implementing or improving an effective compliance program designed to ensure the misconduct or similar problem does not occur again;
  • Appropriately disciplining or replacing those identified by the entity as responsible for the misconduct either through direct participation or failure in oversight, as well as those with supervisory authority over the area where the misconduct occurred; and
  • Any additional steps demonstrating recognition of the seriousness of the entity’s misconduct, acceptance of responsibility for it, and the implementation of measures to reduce the risk of repetition of such misconduct, including measures to identify future risks.

The inclusion of an existing compliance program is worth noting, especially in light of the revised corporate compliance guidance issued by DOJ on April 30, 2019. Having a robust and evolving compliance program remains vitally important to defending an FCA claim.

Credit Available

The policy explains that cooperation and/or remediation by FCA defendants will most commonly be rewarded with reduced penalties or damages multiple. Partial credit is explicitly authorized, and, regardless of the extent of the cooperation, the policy caps the credit available at a level not to “exceed an amount that would result in the government receiving less than full compensation for the losses caused by the defendant’s misconduct,” including damages, lost interest, costs of investigation and relator share. Therefore, even fully cooperating defendants should still expect to pay more than single damages. The government also outlines other avenues of relief potentially available to cooperating defendants, including proactive assistance from the government in parallel agency matters, public acknowledgement of disclosures, cooperation or remediation, and assistance with resolving qui tam litigation with a relator or relators.

The new policy provides a wide-ranging checklist for entities and individuals hoping for favorable treatment in FCA cases. Because government attorneys are purposefully left with broad discretion and flexibility in complying with DOJ policy, the door is open for cooperating defendants to use these factors to propose innovative settlements.

CFPB Requests Information on Remittance Rule

CFPB Requests Information on Remittance RuleLast week, the Bureau of Consumer Financial Protection (Bureau) issued a request for information on its remittance rules, which are located in the Electronic Fund Transfers Act (EFTA). The request primarily seeks information and evidence related to two categories: (1) the temporary exception under the EFTA and (2) the scope of coverage of the remittance rules. Comments to this request must be received by the Bureau on or before June 28, 2019.

In sum, the remittance rules implement protections for consumers sending international money transfers (commonly referred to as “remittance transfers”). These protections include the general requirements for a remittance transfer provider to disclose the actual exchange rate and the amount to be received by the recipient, amongst others. However, EFTA currently provides a temporary exception to certain institutions that allows the institution to disclose estimates of the exchange rate, certain third-party fees, the total amount that will be transferred to the recipient inclusive of certain third-party fees, and the amount the recipient will receive after deducting third-party fees.

This exception is “temporary” in that it was originally enacted with an expiration date of July 21, 2015. The Bureau extended the temporary exception by five years to July 21, 2020; however, EFTA does not authorize the Bureau to extend the temporary exception any further.

With the expiration of the temporary exception just over a year away, the Bureau is seeking information to determine the impact of the expiration, which, based on the Bureau’s analysis, could affect hundreds of thousands of remittance transfers. The request for information also seeks evidence regarding whether the remittance rules’ current definition of “normal course of business” is appropriate. Under the current version of the remittance rules, an institution is exempt from the requirements of the rule if it provides 100 or fewer remittance transfers per year. However, the Bureau has found that more than half of the banks and around two-thirds of the credit unions covered by the rule sent fewer than 500 remittance transfers per year.

The assessment conducted by the Bureau also unveiled the following relationship: The smaller the asset size of a financial institution, the fewer total number of remittance transfers it offers on average. Ultimately, the Bureau is seeking information to determine whether the current definition of “normal course of business” should be adjusted and whether the creation of a “small financial institution” exception may be appropriate.

At the end of the day, the Bureau has no power to extend the temporary exception to the remittance rules. However, it is clear that the Bureau is interested in gathering as much information as possible to determine what effect the expiration of this exception will have on particular institutions and whether the Bureau should take any additional steps to counteract the potential negative consequences from the expiration of the exception.

The City Has My Vehicle. What Now?

The City Has My Vehicle. What Now? Chicagoans have found a new avenue through which to regain possession of their vehicle after it has been impounded by the City:  file a chapter 13 bankruptcy case. In 2018, 17,603 new chapter 13 bankruptcy cases were filed in the Northern District of Illinois. By comparison, in 2018, the Middle District of Florida, one of the busiest bankruptcy courts, saw 6,650 new chapter 13 cases filed, and the Southern District of California, another large bankruptcy district, saw 1,426 new filings.  The driving force behind the Northern District of Illinois’s skewed statistics appears to be Chicago residents utilizing bankruptcy filing to obtain an impounded vehicle from the City.

In Chicago, fines for traffic violations can result in mounting debt for residents. For example, Chicago’s red light camera tickets can cost over $100 per violation, and those charges are often exacerbated due to late fees.  If Chicago residents fail to pay, the city, or one of its contractors, can “boot” the residents’ vehicles. If residents do not pay the balance owed to the city within a certain amount of time of booting (sometimes as short as 24 or 48 hours), city contractors tow and impound the vehicles. Once a vehicle is impounded, residents again have a limited amount of time to pay fees and retrieve their vehicles before they are sold. Even if a resident’s vehicle is sold, the sale proceeds do not offset the resident’s fees owed to Chicago.

When residents lack the necessary funds to remedy this situation, some will file chapter 13 bankruptcy as an avenue to have the vehicle returned. That practice is so common that some local attorneys leave advertisements on booted vehicles and represent on their websites that they can help residents get their vehicles back for less money than they owe the city.

How Filing Chapter 13 May Help Get A Seized Vehicle Returned

Upon filing, a bankruptcy estate is created, which consists of the debtor’s “legal and equitable” interests in property. This includes the debtor’s right to redeem property. Under the Bankruptcy Code, chapter 13 debtors have the right to use estate property, and, therefore, have standing to pursue violations of the automatic stay against creditors and seek to have certain property returned. There is a circuit split as to how the automatic stay applies to personal property, particularly vehicles, when it was repossessed prior to the bankruptcy filing. That bankruptcy bench in the Northern District of Illinois is split, too.

Following seizure of their vehicles, many Chicagoans file for chapter 13 bankruptcy, relying upon the Seventh Circuit’s Thompson v. GMAC, to demand that the city, as a creditor, return the vehicle to them, the debtor. In Thompson, the court found that a secured creditor violated the automatic stay by failing to return the vehicle after the bankruptcy filing. In other words, the creditor “exercised control” over property of the bankruptcy estate in violation of the automatic stay, and was required to return it to the debtor. Once the vehicle is returned, many Chicago residents will abandon their bankruptcy cases to be dismissed by other parties or the court. If the case is dismissed immediately after the debtor retrieves the vehicle, the city may obtain a writ of replevin to retake the vehicle from the debtor.

But, in 2017, one Northern District of Illinois bankruptcy judge changed course, and did not require the city to return the vehicle. The court held that the city had a possessory lien on the vehicle. By keeping the vehicle, the city was maintaining perfection of its possessory lien and did not violate the automatic stay. Shortly thereafter, four other Northern District of Illinois judges ruled oppositely, each holding that the vehicles should be returned to the debtors. Chicago has  appealed those four decisions to the Seventh Circuit in a consolidated appeal, captioned City of Chicago v. Robbin L. Fulton, No. 18-2527.

Is This an Abuse of the Bankruptcy Process?

Filing for bankruptcy initiates a formal legal proceeding, which should not be taken lightly. The filing establishes certain rights and obligations for parties other than the debtor. In particular, creditors must adjust their treatment of the debtor’s account immediately to avoid violating the automatic stay. Other interested parties, including trustees, the U.S. Trustee, judges, and court personnel, must spend time and resources analyzing schedules and statements and attending initial hearings and 341 meetings, even if the case is quickly dismissed. The strain on the bankruptcy system caused by these bankruptcy filings is evidenced by the number of chapter 13 cases filed in the Northern District of Illinois as compared to other jurisdictions.

The ABI Suggests a Solution

The American Bankruptcy Institute’s Commission on Consumer Bankruptcy recently released a report of recommendations to improve the consumer bankruptcy system. The report recommends a statutory amendment to balance the debtors’ and creditors’ conflicting interests regarding collateral repossessed prepetition. Specifically, the Commission recommends a Bankruptcy Code amendment to expressly provide that retaining possession of estate property violates the automatic stay. To ensure adequate protection for creditors, property subject to potential loss in value due to accident, casualty or theft (i.e. vehicles) may be retained by the creditor unless the debtor fails to provide proof of insurance or other security for the value of the property.

The Commission further recommends amending the Bankruptcy Code to protect the “status quo” for creditors with statutory liens dependent upon possession. For example, if the resident provided proof of insurance, presumably the city would be required to release the vehicle. Any statutory lien dependent upon possession that the city had would continue in the same amount and priority as if the creditor had retained possession of the vehicle. If the debtor dismissed the case immediately after retrieving the vehicle, the city would have the right to obtain a writ of replevin.

Finally, the report recommends amending the Federal Rules of Bankruptcy Procedure to provide that the debtor could enforce the turnover right by motion instead of adversary proceeding. This allows the debtor a more expedient and cost-effective resolution.

What’s Next?

For now, all eyes remain on City of Chicago v. Robbin L. Fulton, the consolidated appeal of the four Northern District of Illinois cases that held against Chicago. The issues are briefed and the matter will be set for oral argument. In the meantime, the circuit split on the issue remains, with the minority of decisions finding that vehicles do not need to be released upon bankruptcy filing unless the court orders otherwise.

ABI Commission’s Final Report on Consumer Bankruptcy Issues, What Creditors Need to Know

The American Bankruptcy Institute’s Commission on Consumer Bankruptcy  released its Final Report and recommendations on April 12, 2019. The commission was created in 2016 to research ABI Commission’s Final Report on Consumer Bankruptcy Issues, What Creditors Need to Knowand develop recommendations to improve the consumer bankruptcy system. During its review, the commission focused on new trends regarding how Americans are incurring debt. At the conclusion of its review, the commission created a Final Report which includes recommendations for amendments to the Bankruptcy Code and Rules to make the bankruptcy system more approachable and efficient.

Some of the issues addressed in the Final Report include:

  • Remedies for discharge violation: Most courts only allow motions to enforce a discharge through a contempt proceeding. Therefore, in an effort to make it easier to seek relief, the commission recommends that a statutory private right of action be created for violations of the discharge. For example, a private right of action would be created for violations of the automatic stay, which would include sanctions consisting of costs, attorneys’ fees, and punitive damages. The commission further recommends amendments to the Bankruptcy Code that would allow motions to determine which creditor violated the discharge.
  • Protection of Interests in Collateral Repossessed Prepetition: Circuit courts are currently divided as to whether collateral seized prepetition must be returned to the party entitled to possession afterward. To balance the competing interests of the debtor and creditor, the commission recommends that § 362(a)(3) be amended to provide that a creditor’s retention of estate property violates the automatic stay, but only if proof of insurance or other security is provided for the property subject to loss of value.
  • Credit Counseling and Financial Management Course: The commission recommends amending the Fair Credit Reporting Act to mandate that consumer reporting agencies report the debtor’s successful completion of a financial management course, so that the impact of the course may be measured by changes in the debtor’s credit score.

Upcoming Webinar

If these are areas you would like to learn more about, we encourage you to join us for the “ABI Commission’s Final Report on Consumer Bankruptcy Issues, Part I: What Creditors Need to Know” webinar, which is scheduled for Thursday, May 9, from 11:30 a.m. to 12:30 p.m. CT.  Given the depth of topics covered in the Final Report, we will be doing a two-part series. Our first webinar will provide an overview of the Final Report and recommendations from the commission, with a targeted focus on areas of interest to creditors. We will also forecast next steps and reactions from the industry. The second webinar is scheduled for Thursday, May 23, from 11:30 a.m. to 12:30 p.m. CT and will target areas of interest for residential mortgage creditors.

Fourth Circuit Strikes Down TCPA Exemption for Collection of Government Debt, Putting Loan Servicers and Debt Collectors at Risk

Fourth Circuit Strikes Down TCPA Exemption for Collection of Government Debt, Putting Loan Servicers and Debt Collectors at RiskA recent decision by a panel of the United States Court of Appeals for the Fourth Circuit interpreting the Telephone Consumer Protection Act (TCPA) has significant – and possibly costly – implications for loan servicers and debt collectors seeking to collect on loans owed to or guaranteed by the United States. On April 24, the Fourth Circuit issued its published decision in American Association of Political Consultants, Inc. v. Federal Communications Commission, holding that the TCPA’s exemption for automated phone calls to cell phones related to the collection of debts owed to or guaranteed by the United States violated the First Amendment because it caused the statute to unconstitutionally discriminate against other forms of speech, which did not enjoy the same exemption. Servicers and debt collectors relying on the TCPA’s government debt collection exemption for their calls to borrowers living in the states of Virginia, West Virginia, Maryland, North Carolina, and South Carolina now need to make sure that their practices comply with the statute.

If the panel’s decision stands, the order striking down the exemption will require any loan servicers or debt collectors for debts owed to or guaranteed by the United States to reevaluate their practices for contacting borrowers by telephone in order to avoid potential liability for significant statutory damages. Most notably, the decision affects collection of pre-2010 federally guaranteed student loans and post-2010 federal student loans under the William D. Ford Federal Direct Loan Program, as well as federally guaranteed mortgage loans.

The TCPA, as enacted in 1991, contained only two statutory exemptions for automated phone calls made to cell phones using an Automatic Telephone Dialing System (commonly called an “autodialer”): calls made for “emergency purposes” and calls made with “the prior express consent of the called party.” In 2015, Congress created a third statutory exemption for calls made “solely to collect a debt owed to or guaranteed by the United States.”

In American Association of Political Consultants, four entities that engaged in political activities and contacted individuals by telephone for the purposes of furthering political causes sued the Federal Communications Commission (FCC) and the attorney general, arguing that that the TCPA’s ban on the use of autodialers to make phone calls to cell phones without prior consent was an unlawful content-based restriction on speech, in light of the regulatory and statutory exemptions permitting such calls in certain circumstances (including the statutory exemption for the collection of debts owed to or guaranteed by the United States). The plaintiffs claimed that the ban on the use of autodialers was “underinclusive” and thus not narrowly tailored in light of the regulatory and statutory exemptions. Notably, the plaintiffs requested that the proper remedy was for the court to strike down the entire autodialer ban.

On cross motions for summary judgment, the district court ruled in favor of the government. The district court first accepted the plaintiffs’ position that the TCPA’s government debt exemption was a “content-based speech restriction,” which invoked the rigorous strict scrutiny standard (meaning that the government had to demonstrate that “the restriction furthers a compelling interest and is narrowly tailored to achieve that interest,” and that the government had to use the “least restrictive means” to achieve that interest). The district court divided its strict scrutiny analysis into two steps. First, the district court identified a compelling interest justifying the autodialer ban: the privacy rights of individuals who are protected by the statutory ban on the use of autodialers without prior consent. Second, the district court identified a governmental “compelling interest” in “collecting debts owed to it.” The district court concluded that the autodialer ban was narrowly tailored to achieve the compelling interest of protecting consumer privacy, and that the exemption for calls made for the purpose of collecting debts owed to or guaranteed by the United States was not impermissibly “underinclusive” in a way that constituted unconstitutional discrimination. The district court declined to address the regulatory exemptions to the autodialer ban, noting that it lacked jurisdiction to review the propriety of the FCC’s rules interpreting the TCPA, as the Administrative Procedures Act provided the exclusive procedure for review of those rules.

On appeal, the Fourth Circuit reversed. The Fourth Circuit agreed with the district court’s determination that the TCPA’s ban on the use of autodialers for calls made to cell phones for purposes other than the collection of debts owed to or guaranteed by the United States was content-based discrimination that triggered strict scrutiny. But the court rejected the district court’s conclusion that debt-collection exemption was narrowly tailored to serve a compelling interest. The Fourth Circuit specifically identified the volume of federal student loan debt (noting a report from the FCC that reported that there were over 41 million borrowers who owed over $1 trillion on federal student loans) as evidence that the government debt exemption was not “narrow.” The Fourth Circuit further concluded that the government debt exemption was different in both scope and effect from the other statutory exemptions allowing autodialer calls with prior consent and in the event of an emergency.

Having accepted the plaintiffs’ arguments that the TCPA autodialer ban was unconstitutional in light of the government debt exemption, the court then addressed the proper remedy. The Fourth Circuit first noted the Supreme Court’s “strong preference for a severance in these circumstances,” as opposed to an order striking down the entire provision. The court further noted the express severance provision in the original 1934 Communications Act, of which the TCPA became a part when it was enacted. In light of the “strong preference” for severability and the express severability provision, as well as the fact that the statute had operated for 24 years without an exemption for the collection of government debts, the court succinctly concluded that the proper remedy was striking only the government debt exemption and leaving the autodialer ban intact.

Although not wholly surprising, the outcome of the case could not have possibly been what the plaintiffs wanted. The plaintiffs may have been vindicated on their arguments that the government debt exemption caused the statute to discriminate based on the content of calls, but they are in the same position after the Fourth Circuit’s decision as they were before: subject to the autodialer ban. Thus, instead of the outcome they really wanted – an order striking down the autodialer ban in full, which would have been widely celebrated by the business community – the plaintiffs ended up with an order striking down a broad statutory exemption relied upon by numerous companies.

The Fourth Circuit issued its decision on April 24. Because a government agency is a party, the parties have until June 10 to seek rehearing or rehearing en banc.

As of now, the case does not appear to be a strong candidate for further review on a petition for a writ of certiorari to the Supreme Court. But the Ninth Circuit is currently considering the same issue in Gallion v. Charter Communications Inc., No. 18-55667 (as well as a few other cases that have been stayed pending the decision in Gallion). The Ninth Circuit heard oral arguments in Gallion on March 11; if it issues a decision creating a circuit split with American Association of Political Consultants, then either case becomes a much stronger candidate for review on a writ of certiorari.

The most significant question about the effect of the Fourth Circuit’s ruling was not addressed in the decision: whether the court’s holding would have a retroactive effect. In other words, if prior to the decision companies had been seeking to collect federally owned or guaranteed debts by using autodialers or prerecorded audio recordings can they now be held liable under the TCPA for that conduct (at least to the extent it falls within the statute of limitations)? Unfortunately, the opinion is silent on that question, and the guiding decisions from the Supreme Court regarding the retroactive effect of an order striking a statutory provision as unconstitutional are far from a model of clarity. But one possible articulation of the applicable rule was stated in Justice Thomas’ majority opinion in Harper v. Virginia Department of Taxation:

When this Court applies a rule of federal law to the parties before it, that rule is the controlling interpretation of federal law and must be given full retroactive effect in all cases still open on direct review and as to all events, regardless of whether such events predate or postdate our announcement of the rule.

Shortly after the Harper decision, the Fourth Circuit expressed some confusion as to whether the Harper Court had overruled the Supreme Court’s earlier decision in Chevron Oil Co. v. Huson, which laid out a more flexible balancing test for determining when a ruling would be given retroactive effect (see Fairfax Covenant Church v. Fairfax County School Board). Neither the Supreme Court nor the Fourth Circuit appears to have settled on a final explanation of the appropriate guiding principle. We anticipate that the TCPA plaintiffs bar will be ready to put that issue to the test very soon.