Topic: Bankruptcy
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How should we handle employees who file for bankruptcy? Should we require the employee to notify us, and should we take any precautions after we learn of an employee’s bankruptcy?
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We are not aware of any law or regulation requiring a bank to take action if it becomes aware that an employee has filed for bankruptcy or to monitor employees’ bankruptcy filings. Moreover, federal law strictly prohibits you from terminating or discriminating against an employee who is filing or has filed for bankruptcy. The Bankruptcy…
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Is there a maximum late fee or default rate that we can charge non-consumer loan customers? Also, are we required to send non-consumer loan customers notice when there is a change in the interest rate due to a default?
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There are very few limitations on loan late fees and default interest rates under Illinois law, whether for consumer or commercial loans, provided that your customers have agreed to such fees and rates in your loan agreements. However, default rates may be subject to court scrutiny if they are not considered “reasonable.” Further, we are…
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Our bank received a Chapter 7 bankruptcy notice for a customer who has a home equity line of credit (HELOC) with our bank. We are in a second lien position and want to know what our current position is with respect to the first lien. We also are considering freezing the line due to the borrower’s bankruptcy. Do we have a permissible purpose to pull the customer’s credit report?
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Yes, we believe that your bank has a permissible purpose under the Fair Credit Reporting Act (FCRA) to pull the borrower’s credit report in this situation. The FCRA permits a bank to obtain an individual’s credit report in limited circumstances, including for purposes of a “review” of a consumer’s loan account. The Federal Trade Commission…
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Our bank received a Chapter 7 bankruptcy notice for a customer who has a home equity line of credit (HELOC) with our bank. Can we decrease the available amount on the line, without terminating it, so that the customer may no longer access the funds? If so, what notification, if any, do we need to provide to the customer? Also, would we need to send an adverse action notice to the borrower, or does the bankruptcy prevent us from doing so?
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Yes, we believe that your bank may reduce a HELOC’s line of credit after receiving a Chapter 7 bankruptcy notice, subject to the notice requirements discussed below. Regulation Z generally prohibits creditors from reducing or freezing a HELOC’s credit limit unless an exception applies. One exception permits the reduction or freezing of a line of…
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We have a borrower who filed a Chapter 13 bankruptcy petition. The borrower is current on their mortgage loan, and the notice we received indicates that they will maintain the current contractual installment payments due under the loan. As a large servicer, are we still required to send the modified periodic statement for borrowers in bankruptcy, even though our debt is unaffected by the filing? There is no delinquency information to be reported, but the modified statement would contain the important bankruptcy message.
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Yes, we believe your bank must send the modified periodic statements for residential mortgage loans required under Regulation Z for borrowers in bankruptcy, unless certain exemptions apply. Generally, mortgage loan servicers (including creditors and assignees) subject to the large servicer rules are required to send modified periodic statements to debtors in bankruptcy for closed-end consumer…
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Our bank has a customer making payments on a Chapter 13 bankruptcy plan. The bank’s claim is related to an auto loan, and the Chapter 13 trustee has indicated that the secured portion of the claim has been paid in full. The trustee is distributing the customer’s plan payments among the unsecured creditors, and the amount the bank is receiving is insufficient to cover the customer’s monthly loan payment. Can we assess late charges on the loan?
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No, we do not believe your bank can assess late fees, even though such fees may be allowed by the terms of the loan agreement, because your bank’s claim is “undersecured,” meaning the value of the collateral (the vehicle securing the loan) is less than the value of your bank’s claim (the unpaid loan amount).…
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One of our customers is making payments under a confirmed Chapter 13 bankruptcy plan. The plan requires the customer to make certain payments to the Chapter 13 trustee to be distributed to the bank. If we have not received the payments, or receive late or incomplete payments, can we report the customer’s loan account as delinquent to a credit bureau? The customer has advised that they are current on all plan payments due to the trustee.
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Yes, if a delinquency exists on an account under the terms of the original loan agreement, a bank may report the account as delinquent. Although a bankruptcy filing triggers an automatic stay that prohibits a creditor from engaging in any activity that might be construed as an attempt to collect on a debt, the stay…
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One of our tellers has a deposit account at our bank that was frozen due to past due debts. Do we need to do anything, such as restricting the employee’s access to cash? Also, if a front line staffer filed for bankruptcy, would we have to take any action to address that?
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We are not aware of any laws or regulations that would require a bank to take action if it becomes aware of a frontline employee’s loan default or bankruptcy (or other adverse information about an employee’s credit). If an employee is a mortgage loan originator (MLO) subject to Regulation Z’s screening requirements, your bank must…
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We would like to raise the post-maturity rate that we charge on consumer loans. This rate is charged after the consumer defaults on a loan. Is there a maximum post-maturity rate we can charge in Illinois?
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No, we are not aware of a maximum post-maturity rate set by Illinois law. There are very few limitations on interest rates and fees charged by banks under Illinois law, whether for consumer or commercial loans. Post-maturity rates (also known as default rates) must be agreed to by your customers in your loan agreements, and…
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We received a call from a potential customer who said that we are on the list of authorized institutions for holding debtor-in-possession (DIP) accounts. Where can we find the list to confirm? If we are indeed on the list, are we obligated to open this account? We would prefer not to.
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The list of authorized depositories for southern and central Illinois is available only on request. We obtained the list by calling the local U.S. Bankruptcy Trustee’s office number, which is (317) 226-6101. The list of authorized depositories for northern Illinois is available online at this URL: https://www.justice.gov/ust-regions-r11/file/chicago_authorized_depositories.pdf/download. We do not believe that a bank would…