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Counsel’s Corner: Lack of Uniformity in Bankruptcy Laws, CFPB Rules Challenging Servicers

Marcy Ford w captionMarcy Ford is a managing partner and EVP of Bankruptcy and Firm Operations with Detroit-based Trott Law P.C. She is a member of the State Bar of Michigan, the Federal Bar Association, the Oakland County Bar Association, the American Bankruptcy Institute, and the National Association of Chapter 13 Trustees. She is a frequent speaker and published author, and she has been honored on the Crain Detroit Business "Women to Watch" list and by DBusiness Magazine as a "Top Lawyer" since the award's inception. Trott Law is a member of the Legal League 100, a nationwide consortium comprised of 100 default servicing and financial services law firms providing a results-driven, go-to resource for the industry's decision makersMarcy recently spoke with DS News about the issues that bankruptcy laws are creating for servicers.

What are some of the current land mines in the bankruptcy space as it relates to mortgage servicing?

At the present time, what bankruptcy default servicers and their counsel are dealing with is the overarching issue that there is no margin for error. The servicers feel that they must be perfect in everything they do every single time. Keep in mind that there are 94 bankruptcy districts, approximately 350 bankruptcy judges that have different opinions, different rulings, different perspectives, local rules, and the U.S. Trustee all looking at mortgage default servicing and bankruptcy very closely. Rules are sometimes hard to follow and apply uniformly. You might say there is no uniformity despite bankruptcy being a federal law. This makes it very difficult not to have human errors or unintended consequences of processes or procedures and attempts to automate and operationalize in the current environment. There are so many different rule books that the servicers have to follow.

Specifically, if you wanted to look at one section of the bankruptcy law that servicers still struggle with, it certainly would be the rule 3002.1 requirements, which are payment change notices, 180-day notices, and notices of final cure payment. Across the board, servicers are still struggling with those rules and how to operationalize the requirements in a uniform way across the country when there is no uniformity.

What is an example of an unintended consequence that you have experienced related to the lack of uniformity?

I think you have to look no further than the 3002.1 requirements.  Compliance may be pretty easy on a traditional mortgage where the payment only changes once a year when the escrow changes   But not so easy on DSI loans or adjustable rate mortgages that change more frequently and in some instances strict compliance is impossible.   Some districts have now created local rules or forms to accommodate the non-traditional situation, but others have not. All of this requires near constant monitoring and system/procedure updates.

The lack of uniformity or a single "source of truth" makes it difficult if not impossible to effectively use automation to be able to meet all the different bankruptcy needs.

How can this lack of uniformity be improved?

That is the second prong of looking at what's going on in bankruptcy right now that servicers have to be aware of in regard to future changes. There are three things that are on the horizon. One of them is, we just completed the comment period – it just closed February 17 –for the proposed bankruptcy federal rule changes and implementation of a national model plan. To some extent, the Federal Rules Committee has heard and is attempting to correct the lack of uniformity with the implementation of a national model plan and a set of rule changes that will support and require use of that national model plan. It certainly wouldn’t fix everything, but it would be a move in the right direction. It's not law yet, and as a matter of fact, I'm not sure that anyone would give passage, as it currently stands, at greater than a 50 percent shot. Out of approximately 350 bankruptcy judges that sit in the United States, 144 of them signed onto a letter opposing the implementation of the national model plan.

The mortgage industry supports the implementation of a national model plan, by and large. It may not be perfect, but it's better than having 300-plus plans around the country. We don't know if it will pass, and if it does, it would not be effective until at least December 1, 2016.

Are the judges opposed because they like having their own way of doing things?

The joke is that nobody is necessarily opposed to a nation model plan –everyone just wants their plan to be selected as the national model plan! Before the closing of the comment period, another smaller group of judges, trustees, and one servicer offered up a compromise solution. So while this one national model plan maybe doesn't have a great chance of passing, the parties that are involved have not given up and are still proposing a compromise. Under the compromise, we would not end up with one model plan. It would allow the districts more flexibility. Every district would have to choose a plan, so there would be no more than 94 in the country. We would be moving from over 300 down to 94, so there is some value in that.

The national model plan would be a plus for the mortgage industry, but it comes with a negative. The rules committee has also proposed to move the proof of claims deadline down by 50 percent, down from approximately 120 days to 60 days. A 50 percent drop in the amount of time to file a proof of claim is very substantial for servicers and will be a challenge.

What other significant bankruptcy-related issues are currently facing mortgage servicers?

Potentially, a bigger concern for servicers is the proposed CFPB rules as they apply to bankruptcy. Right now there is a waiver in the requirement for servicers to send a monthly periodic statement to borrowers who are in bankruptcy. It is optional, but servicers are not required to send out periodic statements. The CFPB has proposed a rule that is in the comment period now that would eliminate that exception for borrowers in bankruptcy. There is, written into the proposal, the possibility of an exemption where certain conditions are met. However, those exemptions are very complicated to follow, and I think that it would be easy on a one-off basis, but we know, and the CFPB does know, that decisions on exemptions cannot be made on a one-off basis. They need to be put into rules and we need to be able to use automation. From my discussions with servicers and the technology companies, that challenge will be difficult to work through if the proposed rule is indeed the final rule. There is a 12-month implementation period after the final rule is published, and servicers will need every bit of that time to work with their departments, their business units, and their legal units as well as their technology providers to "get it right." That's a really big issue that servicers need to be paying attention to right now. They need to join with advocacy groups like the MBA or other groups and file comments on the proposed rule. In my opinion, the greatest challenge is automating a modified/bankruptcy statement for chapter 13 debtors, who are generally curing a mortgage default over a 3- to 5-year period.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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