Alston & Bird Consumer Finance Blog

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Consolidated Appropriations Act Includes Temporary Provisions That May Affect Servicers

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Among the myriad provisions of H.R. 133, the Consolidated Appropriations Act, 2021, is Division FF, Title X, Section 1001, of which mortgage holders and servicers should take note because it may affect activities with respect to borrowers in bankruptcy.  These temporary provisions expire December 27, 2021.

First, Section 1001 provides that a debtor under a Chapter 13 plan may seek (and a court may grant) a discharge if (1) the debtor has missed three or fewer mortgage payments on or after March 13, 2020 because of a “material financial hardship due, directly or indirectly, by the coronavirus disease 2019 COVID-19) pandemic”; or (2) the debtor’s plan provides for the curing of a default and maintenance of payments, and the debtor has entered into a loan forbearance or modification agreement, and. Importantly, unpaid mortgage payments are not discharged if the debtor is granted a discharge, and thus remain owed to the mortgage holder or servicer.

Second, Section 1001 provides that a consumer cannot be denied a CARES Act forbearance or other applicable CARES Act relief if they are a debtor in a pending bankruptcy case.

Third, Section 1001 permits servicers of federally backed mortgage loans to file supplemental proofs of claim for the amounts forborne under a CARES Act forbearance, provided that they are filed no later than 120 days after the expiration of the forbearance. Mortgage holders or servicers may also move to modify the debtor’s bankruptcy plan to provide for the supplemental CARES forbearance claim within thirty days after filing the supplemental claim.

Takeaway

Servicers may wish to consult counsel to determine whether these provisions will affect 2021 operations.

DOJ Trustee Program Settles with Servicers

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A&B ABstract:

On December 7, the Department of Justice U.S. Trustee Program (“USTP”) announced that it has entered into agreements with three servicers to address mortgage servicing deficiencies impacting borrowers in bankruptcy.

Issues

Addressing allegations that the entities failed to comply with the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure, the agreements reflect issues with the servicing of mortgages for more than 60,000 borrowers in bankruptcy dating back to 2011.

According to the USTP, the issues included application of payments, inaccurate, missing, and untimely bankruptcy filings; and delayed escrow statements.  Specifically, the USTP alleges that:

  • Two of the servicers failed to run annual escrow analyses for borrowers in bankruptcy;
  • Two of the entities failed to accurately apply payments in bankruptcy cases;
  • One servicer failed to file timely and accurate proofs of claim in bankruptcy cases; and
  • All three entities failed to: (1) file timely and accurate notices of changes to mortgage payments for borrowers in bankruptcy; (2) file timely and accurate notices of fees assessed during bankruptcy cases; and (3) provide an accurate final accounting of payments made by borrowers during bankruptcy cases.

Settlement Terms

To resolve these issues, the USTP entered into memoranda of understanding with two of the servicers, and a letter of acknowledgment with the third.  Altogether, the servicers will pay more than $74 million in credits and refunds; additionally, one entity will waive approximately $43 million in fees and charges.

Takeaway

While the issue of servicing mortgages for borrowers in bankruptcy received significant attention with the CFPB’s most recent revisions of the Mortgage Servicing Rules, the USTP’s settlements serve as a reminder that additional obligations arise under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedures.  Servicers should review their practices against the USTP’s allegations to ensure that they are compliant with all applicable provisions.