Good Faith, Bad Faith, and No Faith:
The Interplay Of Loss Mitigation During Bankruptcy
Now Featuring: Webinar Question & Answers
An inter-jurisdictional look at Loss Mitigation and the Bankruptcy Process. The webinar will examine the pros and cons of Court-Appointed and Non-Court-Appointed Loss Mitigation Programs with a focus on how courts look at the actions of the Parties in determining whether each is acting in good faith or bad faith during the loss mitigation process. The program will examine case law, and what steps are needed by servicers to satisfy varying Court’s loss mitigation requirements. Topics will include disclosures by servicers/investors as to “down payments” and other investor guidelines, “dual-tracking,” and effects on confirmation. A Q&A with presenters will conclude the presentation.
Question: Should borrowers make post-petition payments until the review is completed?
Answer: The answer will very by Jurisdiction, as some loss mitigation rules and procedures will require payments, and some will not.
Question: How are Creditor’s handling District/Judges where payments are not required to be made during the LM.
Answer: In situations where the LM is taking a significant amount of time to complete and Creditor is not receiving payments, I typically suggest a request be made at the Loss Mitigation status conference for adequate protection payments pending the Loss Mitigation Period. It is also possible to file a limited objection at the outset to Debtor’s Request to Enter into Loss Mitigation seeking adequate protection payments pending the loss mitigation, provided there is adequate basis for the request. Some arguments that may have success are that the Debtor has had multiple reviews for loss mitigation in recent past; Debtor has filed previous bankruptcies which were dismissed recently; Debtor’s loan is significantly past due, etc.
Question: A loan modification escrow analysis may have an effective date of next month. Can the creditor file this payment change? Specifically, if the required 21 days prior notice deadline has passed, is there an exception?
Answer: If the 21 days deadline has not passed, then I would suggest filing the payment change. This provides notice of the new escrow amount, in the event that the borrower does not accept the modification or it is not approved by the Court. If the 21 days deadline has passed, Creditors/Debtors will request Court approval of the final loan modification and the Court/Trustee will be notified of the new escrow payment amount. Once the court approves the Mod, an Amended Proof of Claim will need to be filed by the Creditor and will include the new escrow payment amount similar to a NOPC. I would suggest discussing the new escrow amount with Debtor’s attorney as soon as possible in the process or with modification offer.
Question: Do we need Court approval before completing a modification in a Chapter 13.
Answer: In general, yes. Most jurisdictions will require Court authorization or approval of a final modification, or any stipulation, agreement, resolution agreed to during the Loss Mitigation Period. Most jurisdictions will in the least require Court approval of Modifications even if Debtor and Creditor are not within the Loss Mitigation Program.
Question: Do we need Court approval in an active Chapter 7.
Answer: This question is more challenging to answer without more facts of the case; however, my rule of thumb is if Debtor has not received discharge in the Chapter 7, then I would suggest filing a Motion to Approve. In jurisdictions that do not provide for a loss mitigation program in a chapter 7, I would be less inclined to advise for filing a motion to approve. Of course, the safest route is to still request the Court’s approval.
Question: In a conduit case, a chapter 13 Trustee is not making payments according to the Trial Plan Agreement and Investor Guidelines. Is the Creditor required to advise the Trustee to the frequency?
Answer: Usually in conduit jurisdictions, the Court requires a motion to approve trial modification, and this will provide notice to the Trustee for making the correct payment amounts. With regard to trial payment due date, unfortunately, a Creditor does not have the ability to compel a Trustee to disburse payments on a specific date during the month. Normally, a trustee will disburse payments in batch at the end of the month. In WDPA, the trustee’s office will disburse the monthly payments around the 23-25th of the month. It also may be possible for a trustee to disburse an amount that is less than the amount due under the trial. In districts with trustee conduit, I generally advise to keep the trial plan open until completion and then confirm that the total amount due at the end of the trial was received. If no payment is received from the trustee, and the trial modification was approved by the Court, I would advise to file a request for termination for breaking the trial agreement. If trustee does not disburse a payment at all, typically there will be other issues like the Debtor is not making payments to the trustee, and the Trustee will file a cert of default/motion to dismiss case.
Question: In the DMM portal for an MMM ordered mod - If the borrower was denied a few times for exceeding mods - do we have to accept and open the loan in the portal and then advise or reject it and let them know that they will be denied again because they exceeding the number of mods they're allowed to have?
Answer: Ideally, Creditor should object to the entry of the loss mitigation if it is aware of any reason that the borrower would be automatically denied for a loan modification. If the Court’s Loss Mit Order requiring DMM portal was already entered then yes, you have to accept the DMM Portal submission and advise through this channel of communication. However, after the Order is entered, if Creditor becomes aware of any reason that the borrower will be automatically denied for a loan modification, Creditor should relay this information to the Debtor’s Attorney and the Court, through a status report, or request for termination immediately upon that determination. If the Creditor knowingly allows the debtor to submit documentation and proceed in loss mitigation for several months only to be automatically denied, Creditor runs the risk of the Court finding them to be acting in bad faith.
Question: In relation to the Single Point of Contact with delegated authority...is there any exceptions when you must obtain approval through the GSE website. For example, the case decision must be sent to WP2 for Freddie Mac and SMDU for Fannie Mae?
Answer: There is no case on point to this question and jurisdictions rules and procedures regarding SPOC’s are typically broad. For example, the Southern District of New York rules requires that “Creditor shall provide written notice to the Debtor, identifying the name, address and direct telephone number of the contact person who has full settlement authority.” What the Court essentially is looking for is having open, direct, transparent, and efficient communication. In situations where the court found bad faith for failing to designate a single point of contact there were additional facts that made the failure egregious, i.e., importantly, debtor was harmed by the failure, there was unreasonable delay in providing a determination, debtor received contradictory information or responses, etc. To completely avoid any issues, be sure to state in the affidavit designating your single point of contact, that final approval is received through the appropriate GSE website.
Question: Are you recommending to your clients to incorporate requirement into a Trial Plan or Mod that it is "contingent" on Debtor/Debtor's counsel filing a motion and getting court approval of the Mod.
Answer: I would recommend that our clients include in the trial terms all the requirements that must be met in order to be offered a Final Modification. This can include a multitude of requirements such as Borrower is responsible for obtaining final mod Court approval. This could also include subordination or assumption requirements. If you are unsure for any reason whether additional terms are unreasonable or the Court would look at it unfavorably, please be sure to consult with your counsel. I recommend that the investor’s Trial Mod template is as thorough on requirements and consistent as possible.
Question: If debtor is making payments to the "Trustee" during LM period and then is denied, how do you get the money out of the trustee coffers or get it "vested" so that it does not go back to the debtor when they let the bk die at the end of the road in LM.
Answer: Our office recently came across this issue, and we had success through reasonable negotiations with the Debtor’s Representative. In our case, Debtor was denied for a loan modification after being in the loss mitigation program for several months. Debtor was making payments to Trustee on prepetition arrears but not directly to the Creditor for post-petition payments. After discussing with the Debtor Attorney that we would be filing a motion for relief once the LM was terminated, Debtor threatened to dismiss the case and thereby regain the payments made to the trustee. Debtor’s representative eventually agreed to resolve the loss mitigation by filing a motion to disburse trustee funds to creditor to cure the post-petition delinquency and amend plan to cover all pre-petition arrears. This prevented the case from being dismissed. It also saved both parties fees and costs associated with the case being refiled and Creditor seeking a Motion for Relief (or in Rem relief) that would be litigated in the future case. This tactic may not work for all cases, but by working with your counsel you may be able to come up with outside of the box resolutions to make sure that you are getting paid.
Question: In a conduit plan case, should creditors object preemptively to debtor counsel attorney fees in excess of a particular amount when they respond requesting LM as a MFR defense. There is typically money in the trustee coffers and when the Loss Mit ends in impasse the money to cure the post-petition default then all drains out and goes to debtor's counsel.
Answer: If the request for LM is brought up at hearing, I would notice the court with an objection and request additional time to respond to the Debtor’s request for loss mitigation. If the request is filed as a response and defense to MFR, I would try to work with the Debtor’s attorney for an Agreed Order. You could request that Debtor place the fees associated with Creditor’s loss mitigation as priority in the plan to ensure Creditor also is paid for their loss mitigation efforts. Also, in most conduit jurisdictions the Trustee will disburse the adequate protection payments as proscribed in the LM Order, so it likely would be better to allow Debtor to resolve the MFR through agreed order whereby Debtor applies into the loss mitigation program, but under terms more favorable to Creditor. The agreed order would control the LM timeline and could be more strict than the standard loss mit order. It could also allow Creditor to require adequate protection payments in an amount up to the full monthly payment amount if desired. Typically, in these agreed orders, it is noted that there is still X.XX amount due post-petition and that it will become due within 14 days of termination of LM if Debtor does not successfully obtain a loan modification.
Question: Depending on the investor, modifications are sometimes removed from the waterfall. CFPB requires that we review all packages received. How does it work when we already know the file will be denied for a modification, but we are required to collect documents in order to review, just to deny it.
Answer: Courts expect that Creditor will either object or provide notice to Debtor at the outset if the Mod will automatically be denied for any reason. This in the least provides the opportunity to Debtor to decide whether to continue to pursue loss mitigation and/or other home retention options that Creditor may have available through the investor’s loss mitigation waterfall. If Debtor still wishes to apply for loss mitigation review Creditor should proceed as if it is a normal review and feel secure that it will not be held as participating in bad faith when the Debtor is ultimately denied for a loan modification. Onus is on the Debtor at that point. The important take away from the webinar is to make sure that whatever your investor guidelines are, that they are clear, procedurally explanative, consistent, and in writing. The judge may request the guidelines be available for inspection if it is contested, or the judge may require testimony from a person with settlement authority that a modification is not available.
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