April 28, 2017
New Ramifications for Secured Creditor’s Failure to Comply with Required Bankruptcy Notices Under Bankruptcy Rule 3002.1
On April 25, 2017, the Office of the Comptroller of the Currency (the “OCC”) published a decision that orders U.S. Bank National Association to pay a civil penalty of $15 million for bankruptcy filing violations. According to the OCC, the Bank committed various errors related to the requirements under Bankruptcy Rule 3002.1 including: untimely, not filed, or inaccurately filed Proofs of Claim; (b) payment application inaccuracies resulting in overpayments by debtors or trustees; (c) untimely and/or inaccurate Payment Change Notices; (d) untimely, and/or inaccurate Post-Petition Mortgage Fees, Expenses, and Charges; (e) inaccurate Notices of Final Cure; (f) exposure of confidential customer information in court-filed documents; and (g) inconsistent application of the Bank’s fee waiver practices.
Rule 3002.1 requires secured lenders in Chapter 13 bankruptcy proceedings to comply with several time sensitive notices reporting changes in payments, post-petition fees and responses to the Chapter 13 Trustee’s notice of final cure. Failure to comply with Rule 3002.1 may result in severe penalty, damages, and fines.
This decision represents a trend in decisions revolving around Rule 3002.1 violations. In November 2015, a settlement agreement was entered into in the District of Maryland between the United States Trustee Program and Wells Fargo after the United States Trustee identified over 84,000 accounts for which a notice of mortgage was either missed or untimely.
More recently, in September 2016, a decision was released out of the Bankruptcy District Court of Vermont which opened the door to Rule 3002.1 sanctions. In this case, the Rule 3002.1 violations resulted in a $375,000 sanction. More importantly, this case represents the first instance of punitive sanctions under Rule 3002.1.
We recommend that secured lenders reach out to legal counsel to evaluate current processes and determine best practices to avoid or mitigate liability. If you have questions regarding the impact of these decisions or complying with the requirement under Bankruptcy Rule 3002.1, please contact Zieve, Brodnax & Steele, LLP.
Erin M. McCartney, Managing Bankruptcy Attorney
In re Gravel, 556 B.R. 561 (Bankr. D. Vt. 2016).
From: Nathaniel Brodnax, Esq.
To: Clients of Zieve, Brodnax & Steele, LLP.
Re: SB 1150 Homeowner Survivor Bill of Rights
California Senate Bill 1150, known as the Homeowner Survivor Bill of Rights or “SBOR” for short, was recently approved by the California Assembly. The purpose of this bill is to provide certain foreclosure protections to surviving spouses and other surviving persons such as domestic partners, heirs, joint tenants and the like who are otherwise not parties to the decedent’s residential home mortgage.
Once signed into law by Governor Brown, this bill will require loan servicers to take certain steps before they are able to proceed with their foreclosure once they are notified of the death of the mortgagor. Specifically, the Bill states that upon notification that the borrower has died by someone claiming to be a successor in interest, where that claimant is not a party to the loan; a mortgage servicer shall not record a notice of default until the servicer does the following:
• Requests reasonable documentation of the death of the borrower and a reasonable period of time lapses, but no less than 30 days.
• Requests reasonable documentation demonstrating claimant’s ownership interest in the property and a reasonable period of time lapses, but no less than 90 days.
• Upon receipt of the required documentation, claimant shall be deemed a successor in interest and entitled to additional protections. Namely, within 10 days of being deemed a successor in interest they are to be provided information in writing about the loan and they shall be allowed to either apply to assume the deceased borrower’s loan, or seek a foreclosure prevention alternative offered by the servicer. It is important to note here that servicers are not required by this legislation to offer foreclosure prevention alternatives to unqualified applicants. The servicer’s standard criteria for approving such alternatives can still be followed.
• Once deemed a successor in interest, this person shall have the same rights and remedies afforded to the original borrower under the provisions of the California Homeowners Bill of Rights.
Failure to abide by the requirements of this bill exposes servicers to liability for actual economic damages and if the violation is found to be an intentional or reckless material violation resulting from willful misconduct, the court may award the successor in interest the greater of treble
damages or statutory damages of $50,000. There is a safe harbor provision however that allows servicers to avoid potential liability if they remedy any violation prior to the recording of a trustee’s deed upon sale resulting from an improper foreclosure.
Anticipating potential confusion from some of the language in the bill, some definitions are given in the bill to provide clarity. “Notification of death” is defined as provision of a death certificate or other written evidence of death deemed sufficient by the servicer. “Reasonable documentation” is further delineated by a specific list of documents deemed sufficient to demonstrate a person’s status as successor in interest. “Successor in interest” is defined as a natural person who demonstrates that they are the spouse, domestic partner, joint tenant, parent, grandparent, adult child, adult grandchild or adult sibling of the deceased borrower, who has occupied the property as his or her principal residence continuously for the last six months prior to the death of the borrower, and who currently resides in the property. Lastly, similar to the California Homeowners Bill of Rights, SBOR is limited to only first lien mortgages secured by owner occupied residential real property, containing no more than four dwelling units. “Owner occupied” is further defined to mean that the property was the principal residence of the deceased borrower. This disqualifies vacation properties or investment properties from SBOR protection.
Two further exceptions to the protections of SBOR are provided by the bill. First, SBOR shall not apply to a successor in interest who is engaged in a legal dispute over the property where a legal proceeding has been filed regarding that dispute. Second, as with the Homeowners Bill of Rights, the requirements of this bill shall not apply to depository institutions that foreclosed on 175 or fewer residential real properties in California within the preceding annual reporting period.
The full impact of this legislation is hard to know at present. Undoubtedly it will further slowdown the foreclosure process in instances where there is a deceased borrower and a purported successor in interest. Additionally, as with any new foreclosure protection law, abuse of its protections is to be expected. The section most ripe for abuse is section 2920.7(a)(2) which states that there may be more than one successor in interest, and that the mortgage servicer shall apply all the protections of this section to those multiple successors. One could easily foresee a scenario where a mortgage servicer is inundated with successor in interest claims from the family of a deceased borrower in the hopes of forestalling an impending foreclosure. Even if such claims ultimately prove to be meritless, the provision still requires the servicer provide each with the appropriate waiting period before proceeding with the foreclosure.
It is likely that some of these lingering issues will need to be worked out by way of judicial ruling. In the interim, Zieve, Brodnax and Steele will continue to monitor the progress of this bill and any resulting court decisions to keep you abreast of the most current status of the law.