Will CFPB Make handling delinquent loans even more difficult?
They may-at least in relation to mortgage loans involving bankrupt borrowers.
Let’s recall that in passing Dodd Frank and promulgating its regulations Congress and the CFPB wanted to minimize potential dual track foreclosures whereby a bank agrees to modify a mortgage loan on a Friday only to foreclose on the same house the following Monday. As a result, the 2013 Mortgage servicing rules mandated that mortgage servicers make a “good faith efforts to establish live contact with a delinquent borrower not later than the 36th day of the borrower’s delinquency and, promptly after establishing live contact, inform such borrower about the availability of loss mitigation options if appropriate.” In addition servicers are required to provide to a delinquent borrower a written notice alerting a delinquent borrower to loss mitigation opportunities not later than 45 days of a borrowers delinquency (12 CFR 1024.39)
But what happens if the delinquent borrower has declared bankruptcy? What happens if the mortgage is owed by co-borrowers only one of whom has declared bankruptcy? These are the type of arcane riddles that keep compliance folks tossing and turning at night. They are very legitimate questions because trying to collect a debt subject to an automatic stay is illegal.
Fortunately, the Bureau That Never Sleeps shared these concerns, or so I thought. When it finalized the mortgage servicing rules in 2013 it clarified that the “Live Contact “ provisions don’t apply if the borrower has declared bankruptcy. It went onto explain that the “live contact” provisions also don’t apply if either co-borrower on a delinquent loan is delinquent. As the Bureau explains in a commentary to this provision “The exemption in § 1024.39(d)(1) applies if any of the borrowers is in bankruptcy. For example, if a husband and wife jointly own a home, and the husband files for bankruptcy, the servicer is exempt from complying with § 1024.39 as to both the husband and the wife.”
This makes perfect sense. After all can you imagine trying to make live contact with a non-bankrupt spouse while trying to avoid running afoul of the bankruptcy code with the other? Would you train your servicers to hang up if it sounds like anyone but the spouse who has not declared bankruptcy answers the phone?
Unfortunately our good friends at the Bureau can’t keep well enough alone. In December they issued a series of proposed amendments to the servicing rules. Some of these changes make sense but the Bureau is considering narrowing the live contact exemption. Specifically it is proposing that the exemption from the live contact requirements applies to only those non-bankrupt borrowers who are jointly liable on a mortgage loan with a debtor in a Chapter 12 or Chapter 13 bankruptcy case. In other words, if the Bureau goes forward with this proposal you would have to make a good faith effort to make live contact with a non- bankrupt co-borrower whose co-borrower declared chapter 7 bankruptcy.
The Bureau is responding to consumer groups who point out that there is currently no prohibition in the bankruptcy code against contacting a non-delinquent co-borrower. Fair enough. But this means that under existing law servicers get to use their own judgment in deciding when the benefits of such contact are worth the risks. How serious a problem is the CFPB trying to address anyway? Is there an epidemic of houses being lost because a co-borrower filed for Chapter 7 bankruptcy and the other co-borrower didn’t know? This is a great example of crafting a regulation that is great in the abstract just so long as no one has to try to implement it.
As for the early intervention notices the Bureau is proposing to mandate that servicers, with certain exceptions, be required to provide the written early intervention notice required by § 1024.39(b) to a delinquent borrower who is in bankruptcy or has discharged personal liability for the mortgage loan. The comment period ends Monday and I will keep you posted on what the CFPB decides to do.
Have a good weekend.