Mortgage lenders and servicers face several regulations in servicing residential mortgages. There are requirements under the Truth in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), the Equal Credit Opportunity Act (“ECOA”), the Fair Debt Collection Practices Act (“FDCPA”), state law, and new regulations implemented by the Consumer Financial Protection Bureau (“CFPB”). Failure to comply with these regulations and laws may give rise to litigation, as well as statutory penalties. In many cases, the mortgage borrower files for bankruptcy. When the mortgage borrower states an intention to surrender the mortgaged property in bankruptcy, non-bankruptcy statutes and regulations often conflict with or at minimum create great uncertainty about the mortgage servicer’s obligations to communicate with these borrowers after discharge. Neither the Supreme Court nor many of the Circuits have provided clarity for mortgage servicers on whether, how, and to what extent they may communicate with a discharged debtor who still owns the mortgaged property. Accordingly, for the time being, mortgage servicers must attempt to comply with every applicable statute and regulation while not running afoul of any applicable bankruptcy discharge rules. The following is a compilation of cases dealing with this dichotomy.
- “[N]ot every communication from a creditor following the conclusion of a Chapter 7 case violates the discharge injunction.” In re Henriquez, 536 B.R. 341, 345 (Bankr. N.D. Ga. 2015).
- Correspondence does not violate Section 524 unless it includes a clear demand for payment, accompanied by coercion in the form of a threatened action or some other consequence for nonpayment to induce the debtor to pay. In re Gill, 529 B.R. 31, 40 (Bankr. W.D.N.Y. 2015).
A. Cases Discussing Foreclosure Notices Required by State Law.
- Foreclosure notices have been held not to violate the discharge injunction because they are required under both the mortgage and state law. Gill, 529 B.R. at 41; In re Ladebush, No. AP 13-1154-JMD, 2016 WL 675580, at *7 (Bankr. D.N.H. Feb. 18, 2016).
- The Eighth Circuit has held that foreclosure notices from a secured creditor to a debtor that contain a declaration that they were provided “for information purposes” about the status of the property are not an attempt to collect against the debtor personally, as a matter of law. In re Pennington-Thurman, 499 B.R. 329, 332 (B.A.P. 8th Cir. 2013), aff’d, 559 F. App’x 600 (8th Cir. 2014).
- Several courts have held that a secured creditor’s communication that acknowledges a bankruptcy discharge has been entered and states the notice is not an attempt to collect personally against the debtor does not violate Section 524. Id.; Pearson v. Bank of Am., No. 3:12-CV-00013, 2012 WL 2804826, at *5-6 (W.D. Va. July 10, 2012); Anderson v. Bank of Am., No. 6:12-CV-00017, 2012 WL 4458474, at *3-4 (W.D. Va. July 11, 2012); In re Mele, 486 B.R. 546 (Bankr. N.D.Ga. 2013); Jones, No. 08–05439, 2009 WL 5842122, at *3 (Bankr. S.D.Ind. Nov. 25, 2009); In re Schatz, 452 B.R. 544, 550 (Bankr. M.D. Pa. 2011).
B. Cases Discussing Escrow Account Review Statements Required by RESPA and State Law.
RESPA and some state law require mortgage servicers to provide escrow account review statements at least annually. 24 C.F.R. 3500.17; see e.g., Fla. Stat § 501.137(2)).
- Escrow account review statements have been held not to violate the discharge order. Pearson, 2012 WL 2804826, at *5-6; In re Whitmarsh, 383 B.R. 735, 736-37 (Bankr. D. Neb. 2008).
- One court noted that although the Bankruptcy Code prohibits a mortgagee from exerting pressure on the mortgagor to repay an advance or escrow deficiency, it does not prohibit a mortgagee from providing information or notice to a mortgagor of escrow deficiencies. Chase Manhattan Mortg. Corp. v. Padgett, 268 B.R. 309, 314 (S.D. Fla. 2001).
C. Cases Discussing Foreclosure Alternative Letters Required by RESPA and Allowed by the Bankruptcy Code.
Federal regulations require loan servicers to provide post-discharge communications about loss mitigation options and periodic mortgage statements. Regulation X, which implements RESPA, requires loan servicers to fulfill the “early intervention” obligations of 12 C.F.R. 1024.39 – but to suspend compliance during a borrower’s bankruptcy. Effective January 10, 2014, the CFPB amended Regulation X to require loan servicers to resume compliance upon the first delinquency after a bankruptcy discharge. Comment, 12 C.F.R. 1024.39(d)(1)-2 Cmt.; 12 C.F.R. 1026.41(e)(5)-2 Cmt. In implementing this regulation, the CFPB acknowledged the Bankruptcy Code may prevent attempts to collect a debt personally, but concluded the Bankruptcy Code did not prevent servicers from sending consumers information about the mortgage.
- Several courts have found that letters offering alternatives to foreclosure have been held not to violate the discharge injunction. Whitmarsh, 383 B.R. at 736-37; Henriquez, 536 B.R. at 344-45.
- Letters responding to borrowers’ requests for loss mitigation information have also been held not to violate the discharge injunction. Mele, 486 B.R. at 557.
- In the situation where the debtor indicates an intention to surrender the property but continues to live in the property, courts have found that information provided to debtors about making voluntary payments post-discharge to avoid foreclosure is allowed under 11 U.S.C. § 524(j). Jones, 2009 WL 5842122, at *3.
- Regulation X’s “early intervention” requirements also include providing the borrower, at least once every 180 days, with contact information for personnel assigned to assist them and examples of potential loss mitigation options. Similarly, an ECOA statement of the estimated property value must be provided to the property owner without regard to bankruptcy. 12 C.F.R. 1002.14(a)(1); see ECOA Valuation Rule: Compliance Guide, Oct. 3, 2013, at 10 (“The rule covers applications for … loss-mitigation transactions, … covered by Regulation B”).
- These courts have held that customer relationship letters and property value estimates do not violate Section 524. Henriquez, 536 B.R. at 344-45; Best v. Nationstar Mortgage, LLC, 540 B.R. 1, 10 (B.A.P. 1st Cir. 2015); Leahy-Fernandez v. Bayview Loan Servicing, LLC, — F.Supp.3d –, 2016 WL 409633, at * 8 (M.D. Fla. Feb. 3, 2016)(Covington, J.).
D. Property Insurance Lapse Notices Required by RESPA.
RESPA requires servicers to issue at least two notices to property owners before obtaining lender-placed insurance. 12 U.S.C. § 2605(l). RESPA then requires a notice to be sent upon each renewal of a lender-placed policy. 12 CFR 1024.37(e). The CFPB has concluded that a bankruptcy discharge does not relieve mortgagees from this requirement, and its final lender-placed insurance rule provides no notice exceptions for bankruptcy, default, or foreclosure. See Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10696-01, at 10,767 (Feb. 14, 2013).
- These cases held insurance notice communications did not violate the discharge injunction. Leahy-Fernandez, 2016 WL 409633, at * 8; Myers v. Bank of Am., No. 8:14-MP-00007-MGW, ECF 24-1 at 28:18-31:4 (Bankr. M.D. Fla. Nov. 18, 2014).
Since the mortgage crisis began in 2008, Congress has passed additional regulations to help property owners retain their homes. More clarity for mortgage servicers is needed on how these regulations are enforced after the debtor receives a bankruptcy discharge. In the meantime, we hope this compilation of situations and applicable caselaw is of use to you.