Pstt! Homeowners. Bankruptcy Lawyers.
We’ve been handed a new tool for dealing with problems with mortgage lenders.
Or maybe the courts are just showing us how to use some tools we’ve accumulated. Tools to make sure that homeowners who emerge from Chapter 13 are right and square with their mortgage lender.
Scott v. Caliber (Bankr. N. D. Okla 2015) holds the lender who snoozed through the bankruptcy case guilty of violating the discharge by claiming there was a mortgage delinquency.
Here’s how it developed.
Mortgage woes in Chapter 13
Getting current on a delinquent home loan is often the central goal of a Chapter 13.
The problem is that too often the debtor completes the bankruptcy case, only to get a notice from the lender that he’s not current, but facing foreclosure again.
This happened often enough that the Bankruptcy Rules Committee gave us a new rule to flush out these problems before a Chapter 13 case closes.
This is huge (to use a currently popular term) because while the bankruptcy case is open, you have a judge available to hear and resolve disputes about whether the mortgage is current or not.
Or, put another way, you find out, while you have options, whether the lender agrees you’re good to go.
Bankruptcy Rule 3002.1
The basic new tool is the rule that requires a Chapter 13 trustee to send out a notice at the end of the case declaring the mortgage fully current. The lender or the servicer must then file a written response, agreeing that the loan is current, or asserting that deficiencies remain.
The rule mandates a loan history be attached if the servicer asserts that the loan isn’t current.
Right there, we’re ahead of the usual game, where the lender used to just say “you’re behind” but provides no evidence.
What happened to the Scotts
At the end of Ms. Scott’s Chapter 13, the trustee gave notice to the servicer that the mortgage was current. Caliber didn’t respond.
But just weeks later, Caliber sent a statement to Ms. Scott claiming that payments were overdue and imposing late charges of more than $1000. Then they sent back the regular monthly payment the Scotts made.
The bankruptcy judge was having none of it.
Citing 11 USC 524(i), Judge Michael held that the attempt to collect late fees violated the discharge.
(i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.
When Caliber failed to dispute the trustee’s notice that the mortgage was current, that became an established fact.
If the mortgage is current, there can’t be any late fees owed, the judge reasoned, and the claim that there are unpaid fees proves that Caliber didn’t properly credit the payments made during the Chapter 13.
And failure to properly credit the payments is a discharge violation.
In my view, mortgage servicing is a pus pocket in the financial services industry.
Servicers make money when they can find borrowers in default. They have been virtually unaccountable in the real world.
Up until recently, it’s been difficult to get timely, meaningful information from servicers. When you find a problem in how your loan is handled, it’s difficult to get it fixed.
And most state courts still think that banks must be capable and trustworthy.
Things are changing with the CFPB regulations making it easier to get information and the comparable changes in bankruptcy rules.
I continue to recommend that every homeowner with a loan make an annual request for information to check on what the servicer is doing with your payments.