Are You Ready to Deliver Statements to Mortgage Borrowers in Bankruptcy?
On August 4th, 2016, the CFPB finalized the long-awaited amendments to the Truth in Lending Act’s current exemption from providing a periodic statement for a mortgage loan while the consumer is in bankruptcy. The amendment was later published in the Federal Register on October 19, 2016, establishing an implementation date of April 19, 2018, for financial services firms and mortgage services to come into compliance (for the statement requirement).
Given the amendment has been on the industry’s radar screen for several years now, some organizations have proactively taken steps to come into compliance – for those who have not, it is a project many default management organizations should have on the roadmap to begin soon. What makes this very narrowly focused requirement so important? Let’s explore.
First, it is relevant to note that the requirement to provide periodic statements for mortgage loans while consumers are in bankruptcy is just one of several new requirements included in the CFPB’s Truth in Lending Act Amendment. However, we feel this could be one of the most challenging to comply with because of several factors:
- To comply with the requirement, financial services firms should have means to systematically track payments on accounts with Chapter 13 Bankruptcy plans.
- Historically, tracking payments on accounts with Chapter 13 Bankruptcy plans (and the bankruptcy process, generally) has been highly manual considering the complexity/challenges associated with building business rules – and is often something that is easily de-scoped for higher priority matters.
- The new rule is not limited to “new” bankruptcy filings. So, is someone who filed in 2014 and is still in the midst of a repayment plan when the rule goes into effect, will be required to receive a statement.
- Therefore, if Chapter 13 Bankruptcy plans have been historically tracked in a more manual process, or, if errors in tracking are on existing portfolios, they will need to be converted/remediated prior to launching the new process.
These complexities will need to be conquered to come into compliance – but proactive and organized default management organizations shouldn’t have an issue meeting the implementation date.
Coming into Compliance – The Action Plan
To prepare for the implementation of the new rule, a multi-phased project plan is required. We recommend variation of the following work streams, with each working closely together throughout the project:
- Go-forward compliance and readiness
- Existing portfolio conversion and remediation
- Operational readiness
For some organizations, other work stream groupings may be more effective, however, our recommended structure provides an initial framework/set of tasks to consider during planning.
Work Stream 1: Go-Forward Compliance and Readiness
This team is heads-down focused on the future. The key question to address is what are the most efficient and effective ways to track Chapter 13 payments (and more generally, all bankruptcy information required for statements) in a way that can drive production of Periodic Statements by April 18, 2018. This team is responsible for everything from implementation of a dual-ledger accounting system (if one does not already exist – to track Pre-Petition Arrearage Payments and Post-Petition Payments) to design/branding, testing and generation of the actual statement itself.
Work Stream 2: Existing Portfolio Conversion and Remediation
While the first team is focused on the future, this team is focused on the past. This work stream starts by determining whether accurate accounting has been retained for all accounts that will be active as of the implementation date. For instance, for bankruptcy plans that have been active for up to three or more years, where is payment information retained? Is it all accurate? Can it be used to produce statements without significant manipulation? If any required data has been purged, is inaccurate, or needs to be altered, this team determines how to address it prior to the implementation date.
For some organizations, this work stream will be minimal effort and may not even be required, however, for others, these tasks may be more challenging than complying on a go-forward basis. In determining the required data, this work stream may need to kick off in full gear just after Work Stream 1 begins.
Work Stream 3: Operational Readiness
Lastly, a team should be focused on operational readiness. For larger services who are not sending statements today, this implementation may drive additional volume of highly complex questions into call centers. Providing agent education, routing plans, and scripting to customer service or collections agents who may be the recipient of these calls will be important to ensure all bankruptcy laws are complied with and mis-information is not provided. This work stream is less time sensitive than 1 and 2, but nonetheless, should not be overlooked.
Conclusion – Start Early, Be Proactive
The requirement to send statements on mortgage loans when the borrower is in bankruptcy is relatively narrow, and perhaps easy to overlook. However, coming into compliance for some financial services firms may be complex. For those organizations that use third-party servicers to handle their bankrupt accounts, this does not mean you should not focus on this new requirement – we recommend working with the servicer to ensure go-forward compliance just as you would if you owned the operation.
As a financial services consulting firm that has led hundreds of technology-driven implementations since inception, we have always felt when it comes to compliance-driven implementations, starting early and being proactive is the key to success. Whether you’re just beginning your journey towards implementing periodic statements or you’re well underway, we would be happy to discuss how you are approaching this initiative. Get in touch with us here – we look forward to hearing from you!
For more details see our white paper: Implementing Periodic Statements for Mortgage Loans in Bankruptcy