Years of uncertainty and indifference, rooted in the automatic stay and a homeowner’s ongoing obligation on their mortgage after bankruptcy, has ended with a new rule.

Mortgage servicers must now send monthly statements to borrowers in bankruptcy under a new CFPB rule effective April, 2018.   

The earlier version of the rule, adopted in 2014, allowed servicers to send no statements to consumers who had discharged their personal liability in bankruptcy or who had a pending bankruptcy case.

Now the rule creates a duty to render a monthly statement unless

• the consumer requests the servicer stop sending statements
• the consumer’s Chapter 13 plan provides for surrender, avoidance of the lien, or doesn’t provide for ongoing payments
• a court order avoids the mortgage lien
• a Chapter 7 statement of intentions indicates surrender AND no payment has been made since bankruptcy was filed

Even if an exemption to the duty applies, the consumer can opt in to receiving monthly statements by making a written request.  The request can be made by any borrower on the loan or by their agent, such as their bankruptcy attorney.

And just like RESPA Requests for Information, the servicer can designate an exclusive address to which the request must be made.

Statements tailored for Chapter 13

When a borrower is in Chapter 13, the servicer must modify the monthly statement to show the amount due as only the post petition amount.

The monthly statement must also account for the pre bankruptcy arrearages in a new category on the statement.  Required information on the arrears includes

• amount received on the prepetition arrearage since the last statement
• the total of all payments received since the bankruptcy was filed
• the current balance of the prepetition arrearage

Boon to borrowers

This rule is a huge step forward for borrowers in bankruptcy.  Until this rule, there was a terrible disconnect between the borrower’s intention to continue paying on the mortgage and the servicer’s ability to avoid providing information about what is due.

FRBP 3002.1 spoke to part of the problem when it required servicers to file and serve notices of changes.  But that still left the homeowner without the monthly cue on where and how much to pay on the home loan. 

The new rule goes a step further in that it requires the monthly statement to show both the state of the loan payments since bankruptcy, but also the progress toward curing any pre bankruptcy default.

Challenge to servicers

For the last 25 years of my bankruptcy practice, servicers have routinely botched the problem of accounting for payments made on mortgage loans in Chapter 13.  They have struggled to impliment a system that properly credits and accounts for payments received after filing on the continuing mortgage along side payments received on the pre bankruptcy arrears.

Even before this rule, servicers can seldom file papers with the bankruptcy court with numbers that are consistent as to the amount the debtor owes.  I’ve seen cases where a proof of claim, an objection to confirmation, and a motion for relief from stay from a lender each states a different number.

The chances for the servicer to screw up have just increased with the implementation of this rule.

I recognize that Chapter 13 presents a challenge, but servicers are in the business of accounting for money.  They need to get it right.  And if compliance makes their job more expensive, they can negotiate an increase in price for their services.

It can no longer be OK to keep borrowers who want to pay in the dark.

Thank you, CFPB.

More for borrowers

The new, improved Request for Information

Decoding your mortgage statement

Half a loaf is what you too often got when you weren’t the original borrower on a home loan.

Whether you inherited the property or it was awarded to you in a divorce, you get shortchanged by the mortgage lender.

Even with  a court order from a divorce or a deed from the probate court making you the owner of the property, too often the bank holding the mortgage loan didn’t accord you the full set of rights they had to give the original borrower.

While the law says you own the property, the mortgage lender says “so what?”

But that just changed.

Starting in April, 2018, CFPB amendments to RESPA and TILA  rules extend mortgage servicing protections to successors in interest in real estate.  Those who inherit property, or are awarded a home in divorce, now have the same federal rights with respect to the home loan as the original borrower.

‘Bout time.

Now, if you are a successor in interest on a home, you are now entitled to make a Request for Information about the loan; dispute the lender’s accounting; and participate in loan modifications, just as if you’d been the original borrower.

Who are successors?

In a stroke of efficiency, the new CFPB rules adopted the list of protected successors from 20 year old federal law.

The Garn-St.Germain Act created a list of transfers of real property that are excepted from enforcement of a contractual “due on sale” clause.  Transfers that don’t fall in the list of exceptions can trigger a foreclosure since the note is now due in full.

The protected transfers include

Getting confirmed as a successor

Under the new rule, the definition of a “borrower” is expanded to include a confirmed successor in interest.

When a successor makes a written request of a mortgage servicer that indicates that the person making the request may be a successor, and provides enough information to allow the servicer to identify the original borrower and the loan in question,  the servicer has duties to the requestor.

Within specified time frames, the servicer must indicate what documents are needed to confirm that the person making the request is a protected successor.  The document request must reasonable under the laws of the jurisdiction, the situation of the successor, and the documents already in the servicer’s possession.

Borrowers have rights

As a confirmed successor in interest, all of the RESPA and TILA protections are available to you.

It does not matter for these purposes that you aren’t liable on the underlying loan.  Your property is liable, and thus you can invoke your rights to get information, challenge errors, have payments properly credited, and be considered for loss mitigation.

More

New rules/better information for borrowers in bankruptcy

More about the new Request for Information

California’s better way to pass real estate at death

Sound the alarm.

What began as a trickle of Chapter 13 cases ending badly has become a torrent.

More and more, bankruptcy judges are strictly enforcing the direct pay term of Chapter 13 plans:

If your plan says you will pay your on-going mortgage payments directly, and you don’t pay as promised, the judge may dismiss your case without a discharge.

After three to five years in bankruptcy, you end up with neither house nor a discharge of your debts.

Bummer!

Chapter 13 plans have teeth

Here’s why failing to follow through on your plan can be fatal.

The Chapter 13 plan becomes a court order when it’s confirmed by the court.  It requires the creditors to wait for their money, sets out the payments to be made, and binds all parties to its terms.

In many districts, the trustee pays any arrearages on home mortgages, but the debtor pays the mortgage payments directly that come due during the plan.

But all too often, the debtor stops making the on-going payments to the mortgage lender, without telling any of the other interested parties, like their attorney, the trustee, and the court.

The lack of payments goes unremarked.

But with the advent of Rule 3002.1, there’s a reckoning at the end of the plan.  The trustee files with the court a notice of final cure payment, alleging that all is well with the mortgage.

When the lender responds that the debtor isn’t current on the post filing payments, all hell breaks loose.

Too often, the court finds that the debtor’s failure to pay the ongoing mortgage payments is a material breach of the plan.  Because the plan hasn’t been fully performed, the case gets closed without a discharge.

Presumably, foreclosure follows, or another Chapter 13 filing.

Why Chapter 13’s are dismissed

In the debtor’s mind, it’s easy to see the on going payments as something just between the borrower and the lender.  If the lender isn’t happy, it can ask for relief from stay.

But the bankruptcy system sees it differently.

Since the debtor proposed the terms of the Chapter 13 plan, there’s a logic in sanctioning the debtor if he doesn’t do as he proposed to do.

The court would certainly sanction creditors if they didn’t honor the plan.

Consequences of dismissal

Dismissal without a discharge means that none of your debts is wiped out at the end of the plan.

Sometimes, that’s OK, if you’ve managed through the plan to pay taxes or your car loan.

But more often, it means that your personal obligation on the home loan lives on, along with any of the unsecured debt like credit cards, pay day loans, and medical bills survive as legally enforceable debts.

If you stripped off an underwater mortgage or avoided a judgment lien in the Chapter 13, you lose those benefits.

Preserving your bankruptcy discharge

The trick to getting your discharge is simple:  speak up.

Talk to your attorney when you begin having trouble making the on-going mortgage payment.

Talk through whether the problem is temporary or the inevitable consequence of too little income or intervening circumstances.

There are fixes.

• You can modify your plan to terms you can live with as long as you are within the five year duration of a plan.
• Maybe you surrender the house.
• Maybe you reduce the plan payment til you catch up on the mortgage.
• Maybe you dismiss this case and refile again to include the new arrears in a new plan.
• Maybe converting to Chapter 7 works for you now.

But know that failing to address the issue puts the discharge at risk.  Chances are, you have too much at stake to keep quiet.

More

When a Chapter 13 falters

Why Chapter 13 plans fail

Can you change lawyers mid case?

Bankruptcy terms simplified

Just when I thought that most of the pain from the mortgage lending bubble of a decade ago was behind us, we arrive at a painful milestone.

Those 10 years-interest only loans from 2006 and 2007 are resetting.

Instead of being interest only, they now move to principal and interest.  And the balance originally borrowed for 30 years, has to be repaid in the remaining 20 years of the loan.

Ouch.

Yet, many homeowners I’ve talked to are only vaguely aware that the earth under them is about to shift.  Or have only a vague plan about what to do now that it has shifted.

How amortization works

Amortization is the mathematical formula that tells you how much you have to pay each month, at a given interest rate, in order to pay off a loan over a given number of years.

The standard home loan in the US is a 30 year loan.  The fixed monthly payment is calculated so that by the end of thirty years, you have repaid the amount borrowed and the interest that the loan accrued over those three decades.  In the early years, most of the payment goes to interest.  As the principal is reduced, interest is a smaller share of each payment.

Suppose you borrow $300,000 at 5% , amortized over 30 years.  The monthly payment is $1610. In the first month, $350 goes to pay off principal, and $1250 goes to interest.

By the last payment, the principal is fully repaid.

But let’s look at the same 30 year loan, assuming it was interest only for 10 years, and the entire loan is repaid in the remaining 20 years of the loan term.

In year 11, the payment moves to $1980 per month.  The first payment in the amortization period is $780 is principal and $1250 is interest.

Coping with mortgage reset

In the best of all possible worlds, you saw the reset coming and have the increased cash flow available to make the larger payments of principal and interest payment.  Good work.

But if the increased payment finds you still budget challenged, you’ve got a problem.

Your choices include refinancing the loan, replacing the existing loan with a new loan, with a life longer than the 20 years remaining on your current loan.

Modification of the loan with the current lender may be an option, though you usually have to show some evidence of hardship to qualify for modification.  The government-regulated loan modification programs have expired.

You can use this juncture to consider selling the home, if it’s time to relocate, downsize, or escape the work involved with home ownership.

Lastly, you can look at your options to eliminate other expenses from your budget to free up cash, or other ways to increase your income with a second job or getting a housemate.

Don’t forget that  Housing and Urban Development offers expert housing counselors, free of charge.