Home mortgage lenders should be aware that the federal rule governing notices to borrowers in Chapter 13 bankruptcy cases was recently amended. The amendment provides clarifications regarding both the breadth and duration of the lender's duty to give notices.
Federal Bankruptcy Rule 3002.1 (the "Rule") was amended effective December 1, 2016. Generally speaking, the Rule requires a home-mortgage lender to serve and file with the bankruptcy court notices of the following while the borrower is in Chapter 13 bankruptcy: (1) changes in payment amounts, (2) "fees, expenses, or charges" that were incurred after the bankruptcy filing and will be added to the loan, and (3) at the end of the bankruptcy case, whether the loan is then current. Notices of changes in payment amounts are to be given "no later than 21 days before a payment in the new amount is due," and notices of fees, expenses, or charges are to be given "within 180 days after the date on which the fees, expenses, or charges are incurred." Finally, notice at the end of the case regarding whether the loan is then current is to be given within 21 days after the bankruptcy trustee (or the borrower) serves notice on the lender that he believes the loan has been brought current.
The new amendment clarifies that (1) the Rule applies regardless of whether there is an arrearage being cured through the borrower's Chapter 13 plan, (2) the Rule applies regardless of whether it is the borrower or the Chapter 13 trustee who makes the regular mortgage payments during the Chapter 13 case, and (3) unless the bankruptcy court orders otherwise, the lender's duty ceases once an order terminating the automatic stay as to the borrower's home becomes effective.
The Rule was created in 2011 to keep the lender, the borrower, and the Chapter 13 trustee on the same page regarding the status of the mortgage loan during the bankruptcy case. Experience had shown that many debtors had entered Chapter 13 with the goal of curing a mortgage arrearage only to learn years later, when they left Chapter 13, that they were still in arrears due to, for example, payment-amount changes during the bankruptcy case caused by fluctuations in the interest rate or escrow obligation. Complying with the Rule is important, as failure to comply can result, for example, in the bankruptcy court (a) precluding the lender from using the information it failed to provide to support a pleading, such as a motion to lift stay, and (b) awarding the borrower attorney fees against the lender.
Nonetheless, the Rule's language was not completely clear, and it therefore generated litigation and differing opinions from the bankruptcy courts. For example, a bankruptcy court in the Eastern District of Virginia ruled in 2012 that the Rule applied only if there was an arrearage to be cured through the borrower's Chapter 13 plan, and that ruling was criticized by several other courts. Similarly, another bankruptcy court ruled in 2012 that the Rule applied only if the Chapter 13 trustee was making the payments to the lender - i.e., the Rule didn't apply if the borrower was making the payments "outside the plan" - and that ruling also was met with disagreement by other courts. The new amendment to the Rule is designed to get past these disagreements, making clear that "[s]o long as a creditor has a claim that is secured by a security interest in the debtor's principal residence and the plan provides that contractual payments on the claim will be maintained, the rule applies" (in the language of the Committee that drafted the amendment).
Likewise, there was disagreement in the court decisions about whether the Rule continued to apply once the lender obtained relief from the automatic stay as to the borrower's home. The new amendment clarifies that the Rule no longer applies once the lender obtains stay relief "unless the court orders otherwise."
There are official forms that the lender needs to use in complying with the Rule - which are to be filed as supplements to the lender's proof of claim - and we discussed those forms and provided links to them in a previous article (available here). One of those forms, Official Form 410S2 (which is used to provide notice of postpetition mortgage fees, expenses, and charges) was updated as of December 1, 2016, and the updated form is available here. The update adds an instruction that if the bankruptcy court has previously approved a fee, expense, or charge, then such approval is to be indicated on the form.
HELOC Amendment Under Consideration
In an earlier article discussing some issues presented by the Rule (linked here), we pointed out that the Rule requires a lender to give notice of a payment change no later than 21 days before the new payment is due and therefore may be difficult to comply with if the loan is a home equity line of credit (HELOC), because the payments due on a HELOC can vary from month to month. Since at least 2012, the Advisory Committee that proposes amendments to the federal bankruptcy rules has been discussing how to remedy the problem the Rule presents with respect to HELOCs. After much deliberation, that committee has proposed to supplement the Rule to provide that a bankruptcy court can modify a HELOC lender's duty to notify its borrower of payment changes. Specifically, the proposed amendment supplements the Rule with the following sentence: "For a claim arising from a home-equity line of credit, this requirement may be modified by court order."
While the proposed amendment may at first appear unsatisfactory - i.e., the committee is essentially punting the problem to the bankruptcy courts, and the amendment may present a lender with the unenviable choice of either sending notices of payment change every month or incurring the expense of asking for a court order for relief - it has the virtue of allowing creative solutions at the local level. Over time, trial and error in the many bankruptcy courts may produce an efficient solution to the HELOC issue that can be made national by a future amendment to the Rule.
In August 2016, the proposed amendment to the Rule was submitted to the public for comment, and the comment period runs through February 15, 2017. Any comments must be submitted electronically at http://www.uscourts.gov/rules-policies/proposed-amendments-published-public-comment, and all comments will become part of the official public record and will be available to the public.
Neil McCullagh is an attorney at Spotts Fain PC who works with banks on a wide variety of issues, including lending, insolvency, workouts, creditors' rights, bankruptcy, and collections.