CONSUMER MORTGAGE COALITION MORTGAGE BANKERS ASSOCIATION

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1 CONSUMER MORTGAGE COALITION MORTGAGE BANKERS ASSOCIATION July 3, 2014 Honorable Richard Cordray Director Consumer Financial Protection Bureau 1700 G Street, NW Washington, DC Re: Periodic Consumer Mortgage Statements and Bankruptcy Dear Director Cordray: The Consumer Mortgage Coalition and Mortgage Bankers Association write to discuss two issues that arise in the Consumer Financial Protection Bureau s ( CFPB ) pending mortgage servicing rulemaking. We believe it is important that the CFPB be aware of the consequences of a potential requirement that mortgage servicers reflect payment breakdowns in periodic statements for consumers protected by Chapter 13 of the Bankruptcy Code. We also suggest how Regulation Z could permit periodic statements to cease and resume consistent with bankruptcy law. Chapter 13 Bankruptcy Treatment Cannot Upend Loan Contracts or Investor Contracts We understand some have advocated that the CFPB require servicer statements for Chapter 13 debtors to show how payments are allocated to principal, interest, and escrow, as is currently required outside of bankruptcy. 1 Such a requirement would be problematic because Chapter 13 creates a dichotomy between the treatment of payments for bankruptcy purposes and the contractual application of payments, which Chapter 13 does not amend. Before the CFPB decides this matter, it is important that the agency understand that the result of such a requirement would be consumer confusion. In designing its Home Affordable Modification Program ( HAMP ), Treasury was explicit 1 Regulation Z requires periodic statements outside of bankruptcy to include all of the following: The monthly payment amount, including a breakdown showing how much, if any, will be applied to principal, interest, and escrow[;] and (i) The total of all payments received since the last statement, including a breakdown showing the amount, if any, that was applied to principal, interest, escrow, fees and charges, and the amount, if any, sent to any suspense or unapplied funds account; and (ii) The total of all payments received since the beginning of the current calendar year, including a breakdown of that total showing the amount, if any, that was applied to principal, interest, escrow, fees and charges, and the amount, if any, currently held in any suspense or unapplied funds account. 12 C.F.R (d)(2)(i) and (d)(3) (emphasis added).

2 Page 2 of 6 that, when loans are not permanently modified, servicers must continue to apply payments according to the original mortgage agreement. The same is necessary in Chapter 13 cases for the reasons we describe below. Chapter 13 Allows for Temporary Restructuring of the Mortgage Payment Amounts but Does not Amend the Underlying Contracts. Chapter 13 creates a dichotomy because it requires mortgage servicers to credit payments according to the bankruptcy plan, but amends neither the underlying loan contract nor the contract between the servicer and the mortgage investor. The Chapter 13 treatment and the contractual treatment of payments during the bankruptcy plan are different. This difference is subtle, and therefore has the potential to cause confusion if it were reflected in periodic statements. From a bankruptcy perspective, Chapter 13 temporarily sets aside some of the consumer s contractual obligations, conditional on a plan proceeding successfully. At the same time, a Chapter 13 filing does not amend a mortgage loan contract, and that contract dictates that payments are applied to the oldest outstanding payment. A Chapter 13 filing also does not relieve servicers of their contractual obligation to investors to remit principal and interest to investors according to the original loan contract. Investors may have differing rights to principal and interest payments, and a Chapter 13 filing does not realign those investor rights. A Chapter 13 filing may arise after a loan has been delinquent for some months. If a Chapter 13 consumer makes a timely and full post-petition payment, the servicer must apply that payment and remit it to the investor according to the contract, that is, the servicer must apply the payment to the oldest outstanding payment. If the loan has a prepetition arrearage of some months, the servicer must apply a full post-petition payment to a payment due date that, under the contract, was pre-petition. This is true even if the consumer is in compliance with the Chapter 13 plan, and even though the servicer treats the payment as timely for bankruptcy purposes. As a mortgage loan amortizes, the amount of each monthly payment that goes toward principal and interest changes monthly, even if the amount of the payments remains the same. Given this dynamic nature of mortgage loan amortizations, applying a payment made post-petition to an earlier payment due date will affect the amount of that payment that is applied to principal and interest. All else equal, a payment applied today on a loan that has always been current will have more of the payment applied to principal and less to interest than a payment applied today on a loan that has been delinquent for even one month. Were the CFPB to require servicers to disclose how much of a pre- or post-petition payment is applied to principal and interest, consumers would not understand how servicers calculated the allocations. Regulation Z would require servicers to reflect the

3 Page 3 of 6 contractual application because this is the application servicers will make or the amount that servicers applied to principal and interest within the meaning of Regulation Z. However, we do not believe this information would be helpful to disclose monthly to consumers. The CFPB must grapple with a dichotomy between the Chapter 13 requirements and the contractual requirements in designing periodic statements for Chapter 13 mortgage loans. As Fannie Mae describes this dichotomy: This requires the servicer to maintain several sets of records during the term of the reorganization plan one that reflects application of the payments under the terms of the reorganization plan, one that reflects application of the payments under the original terms of the mortgage loan, and one that reflects application of any scheduled interest that must be remitted to Fannie Mae (if the mortgage loan has a scheduled/actual remittance type). 2 Fannie Mae describes the fact that servicers must maintain only one active amortization schedule per loan. If a loan is permanently modified, servicers reamortize it and use the new amortization schedule. However, a Chapter 13 filing does not modify a loan, so servicers cannot reamortize the loan upon a Chapter 13 filing. Servicers use their amortization schedules for multiple purposes, including applying loan payments and remitting them to investors, but also for internal and external financial reporting, producing IRS Forms 1098, safety and soundness purposes, as well as for internal controls and auditing. Servicers cannot keep conflicting amortization schedules for the same loan at the same time. Servicers track and credit payments under the Chapter 13 plan, but they cannot reamortize a loan absent a contract amendment. The dichotomy between servicers contractual obligations, and the consumer s viewpoint that Chapter 13 sets aside some of the contract temporarily, is illustrated by the example of an adjustable-rate mortgage ( ARM ) loan on which the rate has decreased. If a loan, contractually, has the oldest outstanding payment due some months ago, after which the rate adjusted downward, the consumer will make payments now at the lower adjusted interest rate. At the same time, the servicer must apply payments in contractual order. If the older payment was $1000 and the current payment is $900, and the consumer makes a $900 payment that is timely for Chapter 13 purposes, the servicer will apply the $900 payment according to the contract even while treating it as current under the bankruptcy plan. The fact that contract terms that are binding on the servicer are simultaneously set aside for the consumer would be confusing if reflected every month in periodic statements. 2 Fannie Mae Single Family 2012 Servicing Guide, 506, Managing Chapter 13 Bankruptcies, p

4 Page 4 of 6 HAMP and the GSEs are Similarly Situated: They too Require Servicers to Continue to Account for Loans on a Contractual Basis, Unless and Until a Loan is Permanently Restructured The Treasury Department s HAMP treatment of unemployment ( UP ) forbearance plans and trial modifications is analogous to and illustrative of this Chapter 13 dichotomy. When a servicer grants forbearance for loan payments or sets up a trial modification, as with a Chapter 13 case, some loan terms are set aside temporarily for consumer purposes. In these cases, as in a Chapter 13 case, the servicer is not released from its contractual obligations to apply payments or to remit payments to investors according to the loan agreement. Also in these cases, the servicer cannot revise the amortization schedule it uses for the loan. Treasury requires the following: 4.7 Application of UP Payments Payments made during an UP forbearance plan must be applied in accordance with the terms of the existing loan documents. A servicer should not change a borrower s scheduled loan terms in its servicing system and/or mortgage file during an UP forbearance plan Application of Trial Period Payments Trial period payments must be applied in accordance with the terms of the existing loan documents. A servicer should not change a borrower s scheduled loan terms in its servicing system and/or mortgage file during the trial period. 4 As Fannie Mae explains, investors require servicers to track payments according to the original loan agreement and remit them according to investor requirements. 5 Servicers do not have the option to reamortize loans that are not contractually modified. If servicers were faced with a requirement to include contractual payment application information on monthly statements for Chapter 13 loans, servicers could include extensive disclaimers, but that would make the disclosures even less meaningful to consumers. For all of these reasons, we recommend that periodic statements in a Chapter 13 case not be required to indicate the principal and interest breakdown of either pre- or post-petition payments. 3 Making Home Affordable Program Handbook for Servicers of Non-GSE Mortgages, Chapter III, Home Affordable Unemployment Program, 4.7, p. 159, version 4.4 (March 3, 2014). 4 Id. at Chapter II, HAMP Eligibility, 8.4, p If the mortgage loan is one that Fannie Mae holds in its portfolio, the servicer must satisfy Fannie Mae s standard remittance requirements (based on the applicable remittance type for the mortgage loan) throughout the term of the reorganization plan. Fannie Mae Single Family 2012 Servicing Guide, 506, Managing Chapter 13 Bankruptcies, p

5 Page 5 of 6 If the CFPB s goal is to educate consumers about loan amortizations or about Chapter 13, we fully support those goals. The CFPB is well situated to provide just that type of education, and we believe it would be enormously helpful to consumers. If the CFPB s goal is to make consumers know that timely payments reduce the principal outstanding, periodic statements can say that. Periodic statements would not be a useful vehicle for explaining the mechanics of loan amortization, especially for loans on which some terms are temporarily set aside for consumer purposes but not investor purposes. Periodic Statements Make Sense for Certain Bankruptcy-Protected Borrowers Services need a clear compliance standard about when to terminate and when to resume statements. We recommend as follows. In Chapter 13 cases, statements should continue unless any one or more of the following happens: The consumer opts out of statements, such as by sending an opt-out request to a servicer s designated address for such requests; 6 The consumer files a notice of intent to surrender the property and the bankruptcy plan is confirmed; The lien is stripped; The bankruptcy court grants the servicer s motion for relief from the stay; or The bankruptcy court orders or directs statements to cease. In Chapter 7 cases, statements should cease unless any one or more of the following happens: The consumer opts in to receiving statements by filing a bankruptcy Statement of Intention indicating that the property will be retained; The consumer agrees to reaffirm the mortgage debt and the reaffirmation agreement becomes effective; The servicer elects to send statements, such as in the case of a consumer who continues to make payments. In any bankruptcy case, a consumer may continue to make mortgage payments to retain the property. In this event, servicers may want to continue to send statements in an effort to encourage payments. However, continuing to send statements if the consumer pays late, makes only partial payments, or both, could increase the servicer s risk of facing allegations that the statements are inconsistent with bankruptcy law. Bankruptcy law is not necessarily clear about when statements are permissible. While sending statements in these circumstances is a risk for servicers, the risk cannot be eliminated through Regulation Z because it is a bankruptcy law risk, for which compliance with Regulation 6 Designating an address for a specific type of notice alerts servicers to receipt of the notice so they may comply with response requirements. The CFPB permits use of designated addresses for consumers error assertion notices, 12 C.F.R (c), and for information requests, 12 C.F.R (b).

6 Page 6 of 6 Z is not a clear defense. Servicers need to be able to comply with both bodies of law. To avoid conflicting laws, Regulation Z should not require statements when bankruptcy law may prohibit them. Even when Regulation Z does not require statements, it should not prohibit them because consumers may benefit from being able to receive them. First Statement After a Hiatus Should Reflect One Statement Cycle When a consumer begins receiving statements after having received none for some time, a question arises about what the first statement after resumption should reflect. Regulation Z currently requires statements to include the following: The total of all payments received since the last statement[;] 7 and All transaction activity since the last statement. 8 When statements resume after some months, we recommend that since the last statement be revised to require disclosure of such amounts during the current billing cycle, meaning during the most recent statement cycle. Otherwise, the statement could be so voluminous as to be overwhelming. Conclusion We appreciate your consideration of our comments in what is an extraordinarily complex rulemaking. We would be delighted to meet with you to discuss these matters. Sincerely, Consumer Mortgage Coalition Mortgage Bankers Association cc: D. Ayoubi D. Hixson L. Maggiano P. Mondor 7 12 C.F.R (d)(3)(i) C.F.R (d)(4).