On December 1, 2015, consumer bankruptcy practitioners received an early Christmas gift from the Judicial Conference overhaul of the majority of the most frequently used forms. For mortgage creditors and their counsel, while Notices of Payment Change, Notices of Post-Petition Fees and Costs, and Reaffirmation Agreement forms have undergone changes in appearance, the most noteworthy changes were made to the Proof of Claim form. Since the implementation of the new forms, some changes have been adopted gracefully, while others still seem to be stumbling blocks.
The previous B10 and B10A forms were renumbered to 410 and 410A respectively, and while the content of the new 410 form is scarcely different from the old B10 form, the 410A form is quite another story. The form itself instructs that the 410A form is only needed when the debt at hand secures the debtor's primary residence. As a result, completion of the new form will not be required for all mortgage claims. This means that very early in the bankruptcy case, mortgage creditors and their counsel have been tasked with determining whether their collateral is, in fact, the Debtor's primary residence. This is a topic which, in and of itself, is subject to interpretation and has introduced a split of authority amongst the courts. As a result, claimants have generally decided to err on the side of caution and prepare the 410A form despite the time and expense required to do so. As more creditors begin to automate the production of these documents, it requires little if any additional effort to produce the more complicated document.
The committee notes for the new 410A form advise that "the form now requires the claimant to provide a loan history that reveals when payments were received, how they were applied, when fees and charges were incurred, and when escrow charges were satisfied . . . Attachment of a loan history with a home mortgage proof of claim will also provide transparency about the basis for the claimant’s calculation of the claim and arrearage amount." If there are any delinquencies in either payments or fees and costs, the creditor must include a full payment history, including escrow transactions, dating back to the earliest date for which the creditor seeks to collect.
To that end, the committee notes instruct that "[t]he loan history should begin with the first date on which the borrower failed to make a payment in accordance with the terms of the note and mortgage, unless the note was subsequently brought current with no principal, interest, fees, escrow payments, or other charges immediately payable." Practically speaking, that means in the all too common scenario where a borrower misses a payment and never makes that payment up, the borrower could potentially remain 30 days delinquent for years before the borrower files for bankruptcy. The old B10A form would have required that the claimant report that the loan is one month delinquent. The new 410A form requires that the claimant include a complete loan history for all the years that the account maintained that delinquency. Also, consider the scenario where a loan falls delinquent and fees are posted to the account for inspections or late charges. While the loan is subsequently brought current, the inspections or late charges may remain unpaid for years. Although the account is contractually current, years’ worth of loan history will have to be reported due to late charges incurred for past years.
The new 410A form also introduces a new formula for calculating arrearages. The old B10A form simply included the missed payments, added any fees or costs and subtracted any funds held in suspense. The new 410A form requires that delinquent principal and interest payments are extracted from any escrowed accounts, the fees and costs, the negative escrow balance, and the projected escrow shortage added in, and then the funds in suspense subtracted. This formulaic difference necessarily nets a different arrearage amount, and this new amount won’t likely reflect the same default shown in the servicer’s accounting.
The Committee Notes also anticipate that claimants should automate the process of creating the payment history required by the 410A form to aid with efficiency and accuracy, and while that sounds enticing and attractive, that solution appears to be presently out of reach for all but the largest servicers. This is due mainly to the sheer cost and time involved in developing the technology.
What about a service transfer? If a loan was delinquent at the time that a service transfer occurred, then the current servicer is required to provide the full payment history for the loan while it was serviced by a prior entity. Complications have arisen when the prior servicer is uncooperative, or unable to provide the requested payment history. This bears the question, of whether delinquencies are then unrecoverable if the current servicer files a Proof of Claim without the required payment history. This is a question that remains to be answered in most jurisdictions.
At this time, the majority of objections to claims filed on the new forms appear to have arisen due to a lack of understanding of the forms' requirements and thus it remains to be seen what sort of reception these new forms are truly receiving. Other objections seem to be caused by the increase in complexity of the document being required, but there has been no extension of time to prepare or file the document.
What does all of this mean for mortgage lenders? While these new forms were intended to create national uniformity for Proofs of Claim, there will necessarily be variations between jurisdictions as well as between servicing entities. This places a heavier burden on lenders and their counsel to be familiar with the requirements of their jurisdictions, and clients. As is so often the case, local counsel has now becomes one of the few sources with the knowledge of their particular jurisdiction’s requirements.