New Proposed Bankruptcy Rules: Focus on Periodic Statements

By George FitzGerald

The CFPB’s Judicial Conference Advisory Committee on Bankruptcy Rules has proposed a variety of changes and updates that apply to periodic statements - many of which could have important and potentially difficult implications for servicers.  The periodic statement is one of the areas that - depending on the conditions required by the final rules - could become substantially more costly to manage and to deliver. By comparison, today servicers operate based on a simple exemption from the need to deliver periodic statements to any of the obligors in bankruptcy.

Under the CFPB’s proposed rules, most borrowers in bankruptcy would receive periodic statements/coupons, unless the borrower requests that the servicer stop sending them; surrenders the property; the court avoids the lien; or the lien is relieved from stay. Other nuances also apply, such as the proposed provision that non-filing co-borrowers must also receive periodic statements or coupons.

Finally, the proposed rules would also require statements to be tailored specifically for the particular bankruptcy chapter that has been filed. If the case is ultimately dismissed, discharged, closed, or the borrower reaffirms the debt or requests statements, servicers must resume sending periodic statements.

The Industry Weighs In

The CFPB received feedback on the proposed bankruptcy rules through March of this year, and many concerns were brought forward.  As it relates to periodic statements, the American Financial Services Association (AFSA), along with many other industry participants, provided well-reasoned input to the CFPB Committee for consideration. The AFSA comments are further detailed in the AFSA – CMC Comments on Proposed Servicing Regulations, dated March 16, 2015

The AFSA outlined five primary positions related to when periodic statements should be required – and for whom.  The key points made by the AFSA are briefly summarized as follows:

1. Statements should be based on the content of the debtor’s file pending confirmation
2. Opting out of periodic statements by the borrower should not be required twice (in the case that borrowers may have already opted out of receiving statements – but might have to do so again once the final rules go into effect)
3. Statements should remain permissible in Chapter 7 ride-throughs, even when they are not required and the consumer does not specifically opt in to receive them. The AFSA wants assurance that doing so would not incur a Regulation Z violation around impermissible collection activities
4. Cram-downs, which occur when obtaining confirmation of a plan that modifies one or more terms, including those that might render some or all of the mortgage debt as unsecured – should not require statements
5. Servicers should not be required to provide bankruptcy trustees with copies of periodic statements, given that they already have access to all the information they need to perform their statutory duties.

The proposed rules represent a significant departure from the periodic statement requirements that today’s default servicing operations are built around.  To help bring that point into greater focus, here is a simple comparison:

Today:  Servicers are exempt from providing periodic statements if any obligor is in bankruptcy.

Proposed: Servicers are only exempt from providing periodic statements if the borrower is a debtor in bankruptcy; is in either Chapter 12 or 13 bankruptcy; or is discharged from personal liability.  In addition, at least one of the following conditions must be present:

• The servicer must have received a written request from the borrower or borrowers to cease sending statements or coupon book
• The borrower or borrowers must have filed a statement in court of his or her intention to surrender the dwelling
• The Court has entered an order to avoid the borrower’s lien, lift automatic stay, or cease periodic statements or coupons
• The borrower’s confirmed plan provides for surrender of the property, lien avoidance, and/or no pre- or post-petition payments are due

To accommodate the many different possibilities, and depending on the provisions contained in the final rules, servicers must be prepared to manage through the increased level of complexity that may be associated with periodic statements for borrowers in bankruptcy.

Other Provisions Under Consideration

In addition to the potential changes to the conditions under which servicers are required to provide periodic statements to those in bankruptcy, there are a number of other provisions under consideration that would impact the content of periodic statements. Depending on the debtor’s circumstances, specific content must be included on the statement – while other content may not be required at all. The proposed rules even address terminology options: for example, “amount due” can be adjusted to read “payment amount”.

While this article is intended to be a high level overview of the proposed rules for Bankruptcy Periodic Statements, there is certainly is a great deal of important detail that is not addressed here. Industry professionals should continue to carefully consider the proposed changes to the Federal Rules of Bankruptcy Procedure and Official Forms. While servicers will have one year from the date the final rules are published to comply with the requirements, it’s a good idea to begin thinking about how they will approach the changes to periodic statements that may eventually come.