What Should a Mortgage Company Do During and Following a Bankruptcy?

In a perfect world, a mortgage creditor should:

• Timely file accurate proofs of claim for prepetition arrearage;
• Properly calculate postpetition PITI payment;
• Apply payments in accordance with confirmed plan;
• Conduct annual escrow account analysis that reflects payments made under confirmed plan;
• Send accurate payment change notices, with attachments for RESPA escrow account statement or TILA rate change notice;
• Timely file accurate response to notice of final cure;
• Conduct a case closing audit.

However, many debtors report that mortgage servicing companies do not properly apply payments during a bankruptcy.  According to the Fannie Mae Servicing Guide, a servicer must:

• Monitor and separately account for all prepetition and post petition payments;
• Maintain several sets of records during the term of the reorganization plan:
  • one that reflects application of the payments under the terms of the reorganization plan;
  • one that reflects application of the payments under the original terms of the mortgage loan; and
  • one that reflects application of any scheduled interest that must be remitted to Fannie Mae if the mortgage loan has a scheduled/actual remittance type.

So is there a remedy for debtors when a mortgage company fails to do all of this?  Well yes, fortunately there are several.

A mortgage company is required to file an initial Proof of Claim under Rule 3001(c)(2) for the security interest.  For claims filed on or after December 1 ,2015, a mortgage company must provide itemization of prepetition arrearage as part of its loan payment history.  Form 410A must show any escrow deficiencies as well as any projected escrow shortage.  Form 410A requires that the loan history start with the first day of default, something we often see lacking.

When the payment changes, notice of the payment change must be filed and served 21 days prior to the change per Rule 3002.1(b).  If the change is based upon an escrow account or an adjustable rate mortgage, the mortgage creditor must attach to Supplement 1 an escrow account statement or rate change notice prepared in a form consistent with RESPA and TILA.  If the mortgage creditor accrues fees, expenses or other charges, notice must be sent no later than 180 days after the fees are incurred.  The date that fees are deemed “incurred” is when the services were performed, not when the servicer was invoiced for the fees by a third party.

Due to some confusion over the last couple of years, an Amendment to Bankruptcy Rule 3002.1, went into effect December 1, 2016, and clarified when a mortgage company must ensure compliance:

• the rule applies whenever the plan provides for payment of ongoing mortgage payments, regardless of whether a prepetition default is being cured;
• the rule applies regardless of whether it is the debtor or the trustee who makes the mortgage payments; and
• unless a court orders otherwise, the rule ceases to apply when an order granting relief from the stay becomes effective with respect to debtor’s residence.

There are remedies available when a mortgage creditor fails to do any of the above.  Under no circumstances after a discharge should a debtor be surprised by a bill for an amount that became due during the bankruptcy.  Both the trustee and the debtor can file a notice of final cure.  There is a dispute mechanism in place for the bankruptcy court to determine if the debtor has cured the default and is now back on track.

In the event that a mortgage company does not comply with the foregoing, an aggressive debtor’s counsel can move for Rule 3002.1(i) sanctions; Section 105 sanctions under the Court’s inherent powers; contempt of confirmation order; Section 524(i) violation; FDCPA or FCCPA violation of consumer statutes; FCRA violation for erroneous credit reporting; TILA prompt crediting rule violation; RESPA notice of error violation; Florida’s Deceptive and Unfair Trade Practices Act violation; or simply a breach of implied covenant of good faith and fair dealing.  Many of the these avenues also provide for the payment of debtor’s counsel’s attorney’s fees.

When hiring a bankruptcy attorney, it’s important to select counsel who is knowledgeable, experienced and who has the time to pursue things like this for the best overall result. For additional information, please see our website at Arkovich Law. and/or contact us to set a free consultation.