Stay No More: the Cfpb's Proposed Amendments to Servicing Rules Undermine the Clarity of the Automatic Stay

• Publication year: 2015
• Citation: Vol. 2015 No. 3
• Author: Brian Burke Farrell

Stay No More: The CFPB's Proposed Amendments To Servicing Rules Undermine The Clarity Of The Automatic Stay

Brian Burke Farrell

Brian Farrell is an associate at Sheppard, Mullin, Richter & Hampton, LLP. He is a business litigation attorney specializing in consumer finance, creditors' rights, business torts, and appellate practice. He can be reached at bfarrell@smrh.com.

The Consumer Financial Protection Bureau (CFPB) has proposed certain amendments to the mortgage servicing regulations issued in 2013. Two of these amendments will eliminate blanket exemptions currently applicable to certain servicer-initiated communications while the borrower is a debtor in bankruptcy. The proposed amendments will narrow the scope of the current exemptions and will require servicers to, in certain circumstances, continue to communicate with borrowers who have filed for bankruptcy protection. These amendments, which are expected to result in final rules issued in March 2016, undermine the certainty of the automatic stay and will require servicers to more carefully analyze and monitor bankruptcy proceedings, determine if debtors are eligible for loss mitigation options, and send periodic statements to debtors who intend to retain the property securing the mortgage loan.

The Current Rules

The proposed amendments discussed herein relate to two CFPB servicing regulations. The first regulation, 12 C.F.R. § 1024.39, requires servicers to conduct "early intervention" communications with delinquent borrowers regarding available loss mitigation options. Section 1024.39 contains both a "live contact" requirement (imposing an ongoing obligation to try to reach the borrower by telephone) and a "written notice" requirement (imposing an obligation to send a written communication to the borrower, with such written notice not required to be sent more than once every six months). The second regulation, 12 C.F.R. § 1026.41, requires servicers to send consumers "periodic statements" containing information about the status of the consumer's mortgage loan account.

The current language of both section 1024.39 and section 1026.41 contains a broad exemption applicable when the borrower is a debtor in bankruptcy: "A servicer is exempt from the requirements of this section for a mortgage loan while the borrower is a debtor in bankruptcy under Title 11 of the United States Code." 12 C.F.R. § 1024.39(d)(1). See also 12 C.F.R. § 1024.39(e) (5) (replacing "borrower" with "consumer"). These broad exemptions allowed servicers to respect the Bankruptcy Code's automatic stay provisions,¹ which could arguably be violated by...