Here’s how to navigate the turbulent waters between CFPB regulation and bankruptcy code


As each year goes by, lenders and servicers spend more of their budgets on compliance to avoid regulatory potential pitfalls. However, there is one area where a modest investment can help increase a firm’s bottom line. Most large residential mortgage lenders and loan servicers are not set up to handle the myriad complexities that arise when consumer borrowers file for bankruptcy.

There is a perception by those servicing mortgage portfolios that the cost of proper training and revising current procedures outweighs the cost of litigation related to default bankruptcy servicing. Given the current regulatory and legal climate, this is a mistake.

A relatively small investment in properly training staff to familiarize them with the Bankruptcy Code and enhancing systems to deal with the numerous possibilities once a customer files a case can eliminate issues that currently cost servicers money. Not only would such an investment save on litigation cost, it will help improve the public’s opinion of the firm and ultimately help bring in new customers.

One issue on which servicers can focus is their communication with Debtor borrowers. Servicers can eliminate litigation cost simply by re-evaluating what they send to debtors. However, doing so requires some expertise in navigating an inherent conflict between the Bankruptcy Code and CFPB regulation. Current and proposed banking regulations require that servicers have frequent, written communication with all borrowers, irrespective of whether they are debtors in a bankruptcy case.

These communications include myriad notices and monthly statements. However the Bankruptcy Code prohibits sending collection notices or taking any action seeking to collect or control any of a debtor’s property (the “Automatic Stay”). Thus, any communication with a debtor which might be interpreted as attempting to coerce payment on a debt, even if the communication says otherwise, is a potential Automatic Stay violation. Clearly, the means with which these two consumer protection systems seek to achieve their ends are at somewhat crossed purposes and lenders and servicers are frequently caught in the middle.

Determining whether a communication violates the Automatic Stay is a fact intensive inquiry without a bright line test for courts to follow. Courts are therefore free to decide whether a reasonable debtor would view a notice or statement as attempted coercion, leaving lenders and servicers at the mercy of an increasingly pro-debtor judiciary.

Generally, a communication with a debtor violates the Automatic Stay if it seeks to coerce a payment from the debtor and combines that purpose with some threatened action or consequence or harassment. Most debtor communications indicate somewhere that the communication is for informational purposes only, but courts frequently look behind that disclaimer especially when actual coercion is present or the information provided serves no legitimate purpose. 

Moreover, communications found to violate the Automatic Stay are commonly found to be willful, subjecting the sender to increased damages and, more importantly, attorney’s fees.6 A finding that a RESPA or TILA required notice or statement amounts to a willful stay violation can have far reaching impact and the debtors’ bar is all too aware that they need only to allege a stay violation to obtain a settlement from a bank.

Given this landscape, it is important to craft proper content for communications and ensure that proper flags and systems are in place to route any debtor accounts properly so they either receive (or don’t receive) the correct version of a notice. This sounds easier in theory than it is in practice.

First, determining proper content will likely be trial and error. It is impossible to determine whether a customer can reasonably view a notice as a collection attempt before they get it.

The CFPB has proposed new statement forms they believe to be bankruptcy compliant, but their field tests produced somewhat mixed reactions from consumers. Courts have not yet ruled on whether using the CFPB’s proposed forms insulates servicers from liability and, in tests, some consumers still believed the statements were trying to get them to pay. Change is also inherently difficult in large institutions. Customer communications impact many internal departments and raise many internal issues. Many lenders rightly view these communications as institutionally significant and they are accordingly reluctant to modify their message to the public.

Finally, systems are only as good as the people using them. The bankruptcy code is a mystery to most people, even attorneys. It is hard to find employees who have sufficient bankruptcy experience and knowledge to recognize all the potential impacts of a filing.

One potential solution to a lack of sufficient institutional knowledge is to hire experienced consumer bankruptcy litigators as consultants to train incoming staff members and to help advise on potential content and system changes. Most business units have bright, competent and dedicated bankruptcy professionals, but those professionals already wear many hats.

There are many talented and qualified attorneys who would jump at the chance to train in-house staff or advise on a potential system change at a large institution, if only to get on the radar for potential business. The outlay for such help may prove to be quite reasonable, especially when measured against a concomitant reduction in litigation fees and settlement cost.

Ultimately, lenders and servicers will be forced to assign additional resources to deal with the conflict between regulations and current law. Those resources can be dedicated to settlements and legal fees or invested in additional training for staff and enhanced systems. Lenders and servicers can easily measure the decrease in litigation cost over time to judge a return on such an investment. Better yet, there a few better ways to engender goodwill from the public, and from the bench, than “getting it right.” That goodwill can easily increase a firm’s bottom line especially in a world where the public only reads the headlines and their perception is that firm’s reality.

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