Troutman Sanders LLP: New Requirements for Mortgage Creditors Among Changes to Federal Rules of Bankruptcy Procedure

Troutman Sanders LLP: New Requirements for Mortgage Creditors Among Changes to Federal Rules of Bankruptcy Procedure

By David N. Anthony and Bill B. Ruhling, II

In the aftermath of the economic downturn, the federal government has adopted a number of new programs designed to protect homeowners. Those protections have now been incorporated into the bankruptcy process through new rules of bankruptcy procedure that became effective December 1, 2011. These changes are of particular importance to mortgage lenders, and are summarized in this advisory.

Federal Rule of Bankruptcy Procedure 3001

Proofs of claim (POC), when necessary, must be submitted in writing. This requirement is not new, but has been moved into a new subdivision, FRBP 3001(c)(1). Accompanying this change is a revision to Official Form B10, Proof of Claim. The revised form now includes a series of check boxes with the signature block, which require the person submitting the POC to identify the source of her authority to make the submission. Moreover, to the extent the POC is submitted by an authorized agent, the POC must now be accompanied by proof of such authority (e.g., power of attorney). Employees of mortgage companies or mortgage servicers, however, are exempt from the requirement to provide such proof.

The real changes to FRBP 3001 come in the addition of section (c)(2), which is applicable to cases in which the debtor is an individual. In an individual debtor's bankruptcy, a creditor whose claim includes interest, fees, expenses or other charges incurred before the petition was filed must also append an itemized statement of such portions of the claim to the POC. FRBP 3001(c)(2)(A). Further, if a creditor claims a security interest in property of the debtor, the POC must include a statement of the amount necessary to cure a default. FRBP 3001(c)(2)(B). 

Finally, if the creditor claims a security interest in an individual debtor's principal residence, then the POC must include proof of attachment. FRBP 3001(c)(2)(C). In addition, if an escrow account has been established, an escrow account statement as of the petition date must be included. FRBP 3001(c)(2)(C). This information must be presented utilizing Attachment A to the Official Form B10.

Understanding these new requirements is critical because Rule 3001 provides for sanctions if a creditor fails to provide any of the information required under Rule 3001(c). Specifically, the court, after providing notice and a hearing, may prohibit the creditor from presenting the omitted information as evidence in any contested matter or adversary proceeding, including a relief from stay, unless the creditor establishes that the failure was substantially justified or harmless. FRBP 3001(c)(2)(D)(i). The court also has been vested with the power to impose monetary sanctions against a creditor for failing to supply the information detailed above. FRBP 3001(c)(2)(D)(ii).

Federal Rule of Bankruptcy Procedure 3002.1

A new rule was included with the December 2011 changes. FRBP 3002.1 is aimed at Chapter 13 creditors claiming a security interest in the debtor's principal residence whose claims are for arrearages being cured through the Chapter 13 Plan. This rule was added in response to the adoption of 11 U.S.C. § 1322(b)(5), which permits a Chapter 13 debtor to cure a default and maintain payments on a home mortgage over the duration of the plan.

Rule 3002.1 requires mortgage creditors to file with the bankruptcy court a notice of any payment changes (e.g., interest rate changes or escrow adjustments) at least 21 days before the new amount is due. FRBP 3002.1(b). This notice, which must be provided utilizing Supplement 1 to Official Form B10, shall be served on the debtor, debtor's counsel and the Chapter 13 trustee. A failure to provide this notice carries the same potential sanctions described in connection with FRBP 3001, supra.

In addition, Chapter 13 mortgage creditors are required to supplement their POC with a disclosure of post-petition fees, expenses and charges incurred during the pendency of the case. FRBP 3002.1(c). The expenses that must be disclosed include late fees, inspection fees, appraisal fees, taxes advanced, preservation fees, force placed insurance and attorney's fees. This notice, which must be submitted utilizing Supplement 2 to Official Form B10, must be provided within 180 days of the charges being incurred. The notice must be served on the same parties as with Supplement 1. While the language of the rule does not address pending Chapter 13 cases, mortgage creditors are well advised to file a Supplement 2 in all cases disclosing fees, costs and expenses incurred within the past 180 days.

Debtors and trustees have 12 months after the filing of a Rule 3002.1(c) notice to object to any fees or charges sought by the creditor. As with the previously discussed sections, a failure to comply with the notice requirement carries the potential for both evidentiary and financial sanctions against the creditor.

Rule 3002.1 also requires trustees to serve a notice upon mortgage creditors within 30 days of the debtor's completion of all plan payments. This required Notice of Final Cure Payment must inform the claimant of its obligation to file a response to the Notice. Service of this Notice triggers a requirement for the mortgage creditor to serve the debtor, debtor's counsel and the Chapter 13 trustee, within 21 days, with a statement specifying (1) whether it agrees that the debtor has paid all amounts necessary to cure the default; (2) whether the debtor is otherwise current on all payments outside the plan; and (3) if the creditor contends the debtor has failed to cure the default or pay post-petition amounts due, it must provide an itemized statement of the cure amount or other amounts the creditor believes are owed as of the notice date. Failure by a mortgage creditor to provide this statement within 21 days may result in a waiver of all outstanding amounts due. Mortgage creditors would be well served, as a result, to implement procedures to ensure these statements are time provided.

A debtor or trustee who receives the required statement from the mortgage creditor then has 21 days to seek a hearing to determine whether the debtor has cured her default and/or paid all post-petition amounts.

Conclusion

These changes impose a number of requirements on secured creditors, particularly those whose security interest attaches to a debtor's principal residence. Luckily, the requirements can be managed. By ensuring proper procedures in place, all of the required submissions, notices and statements can easily be provided so that the creditor's security interest is protected and the creditor avoids any risk of sanctions.

About Troutman Sanders' Financial Services Litigation Practice

Troutman Sanders is an accomplished and experienced leader in providing litigation and regulatory advice to a broad spectrum of financial services institutions. The firm currently represents mortgage lenders, assignees, and loan servicers and can provide valuable advice and analysis to make sure that your foreclosure procedures confirm with the terms of the loan documents and the controlling law. Troutman Sanders also can provide experienced and efficient legal representation in the event the validity of a foreclosure sale is challenged in a lawsuit, including bankruptcies. 

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