Thursday, December 30, 2010
Treating Straddle Tax Claims in Chapter 13
http://www.abiworld.org/committees/newsletters/consumer/vol8num10/treat.html
by: Thomas D. DeCarlo
Chapter 13 Trustee Office; Southfield, Mich.
Each year, thousands of debtors file for relief under chapter 13 between Jan. 1 and April 15. A certain number will then timely file tax returns for the prior year, and find that they have a tax liability. These “straddle” liabilities—liabilities for tax years preceding the year in which the chapter 13 is commenced but before the deadline for filing the tax return—pose serious problems for debtors who need and deserve the fresh start promised in chapter 13. How can a debtor deal with these tax liabilities in the chapter 13, if at all? Four recent decisions from Michigan illustrate the difficulties in analyzing and treating these straddle liabilities.
In In re Turner, [1] the debtor filed for chapter 13 relief on Jan. 13, 2009, and timely filed his State of Michigan tax return that indicated a liability of $2,396 for the tax year ending Dec. 31, 2008. The debtor filed a proof of claim on behalf of the state, which objected to the claim. The court focused on § 1305, which provides that only the taxing authority can file a claim for “taxes that become payable...while a case is pending.” The court stated that while the debtor could pay the taxes at any time after Jan. 1, the taxes are not payable until the final day on which a tax return can legally be filed. The taxes are not due to or legally enforceable by the taxing authority until that date, and until the return is filed, the taxing authority cannot know whether there is a liability. The court also noted that if the tax liability is found to be a pre-petition obligation, then the taxing authority may be denied the time required by Bankruptcy Rule 3002 for filing a proof of claim, and the taxing authority has 180 days from the petition date to file the claim. The debtor filed for relief on Jan. 13, and the bar date for a governmental proof of claim would run on July 28. If the tax liability is not fixed until April 15, then the governmental unit would have only 88 days between April 15 and July 28 to actually file the proof of claim. The fact that the taxes are not payable and the apparent adverse impact on the state’s ability to file a proof of claim compelled the conclusion that the straddle tax liability was a post-petition liability that could not be treated in the chapter 13 plan unless the state chose to file a proof of claim and receive payment through the Plan.
In In re Senczyszyn, [2]the court determined that § 1305 does not define “pre-petition” vs. “post-petition” claims, but applies only after a court makes the threshold determination that the claim is a post-petition claim. The court stated that whether an obligation is a claim is based on § 101(5)(A), which defines any right to payment—whether liquidated, unliquidated, contingent or otherwise—and is to be construed in the broadest terms possible. Under Sixth Circuit precedent, the obligation will be a claim if the obligation has its basis in a pre-petition relationship between the debtor and creditor. That relationship, standing alone, gives the creditor the required notice of an obligation to file a proof of claim. Applied to tax obligations, the liability by definition arises out of a pre-petition relationship between the debtor and taxing authority. Every fact that is necessary for the existence and extent of the claim occurred as of Dec. 31 of the prior year. The straddle tax liability is a claim as of Dec. 31 that, as a pre-petition priority claim, must be treated in debtor’s chapter 13 plan pursuant to § 1322, free from the restrictions of § 1305.
Two other cases [3] used a third approach to straddle tax claims and were the first to disagree with the Senczyszyn court regarding the status of the claim as a pre-petition claim. These courts agreed with the Turner court’s holding that the state’s “right to payment” did not arise until April 15 and, therefore, the claim did not arise until April 15, well after the commencement of the cases.
The courts then focused on §§ 1322 and 507(a)(8)(A)(i). Section 507(a)(8) gives priority status to any claim that is measured by income for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due after three years before the date of the filling of the petition. Straddle tax liabilities are “measured by income” for a tax year ending prior to the commencement of the case—the debtor's income in 2009 certainly predates the filing of the case in 2010. The last date on which the debtor could timely file a return would have been April 15, 2010, a date is that is after a date that was three years prior to the commencement of the case. Thus, the debtor’s tax obligation for the year 2009 constituted a “priority” tax claim under § 507.
Section 502 provides that any claim that arises after commencement of the case for tax that is otherwise entitled to priority is determined and allowed as if the claim had arisen before the date of the Petition. Section 1322 requires that the debtor's plan provide for full payment of all allowed priority claims over the life of the plan. "[Sections] 502(i), 507(a)(8) and 1322(a)(2)…establish a Congressional intent to treat taxes on income for the taxable year preceding the bankruptcy cases as prepetition claims and to bring those claims into the bankruptcy plan." [4]
Regardless of the analysis used—whether the “straddle” tax claim is a pre-petition claim or is a post-petition claim that nonetheless can be treated in the Plan—allowing a debtor to treat these claims is more consistent with the “fresh start” policy of the Bankruptcy Code. Presumably, debtors are all committing all of their disposable income to the funding of the plan, raising the question of how the debtor would be able to pay this additional claim. Payment of the claim assures that the claim will be paid, as full payment of the priority claim is a condition to the debtor receiving a discharge. Payment through the chapter 13 plan also simplifies the collection by the taxing authority, which must do nothing more than file a proof of claim. The taxing authority may be denied the ability to charge interest and penalties. However, a taxing authority’s goal should be to collect taxes owed, not to seek unnecessarily punitive additional charges or fees. Payment of straddle tax claims through the chapter 13 plan furthers the goals of both the Code in providing the debtor with a fresh start and those of the taxing authority for collection of outstanding tax obligations.
1. 420 B.R. 711 (Bankr. E.D. Mich. 2009).
2. 426 B.R. 250 (Bankr. E.D. Mich. 2010).
3. In re Wilson, Case No. 10-45791 (Bankr. E.D. Mich. 2010), and In re Hight, 426 B.R. 258 (Bankr. W.D. Mich.), aff'd, 434 B.R. 505 (W.D. Mich. 2010).
4. In re Hight, 434 B.R. at 510.
by: Thomas D. DeCarlo
Chapter 13 Trustee Office; Southfield, Mich.
Each year, thousands of debtors file for relief under chapter 13 between Jan. 1 and April 15. A certain number will then timely file tax returns for the prior year, and find that they have a tax liability. These “straddle” liabilities—liabilities for tax years preceding the year in which the chapter 13 is commenced but before the deadline for filing the tax return—pose serious problems for debtors who need and deserve the fresh start promised in chapter 13. How can a debtor deal with these tax liabilities in the chapter 13, if at all? Four recent decisions from Michigan illustrate the difficulties in analyzing and treating these straddle liabilities.
In In re Turner, [1] the debtor filed for chapter 13 relief on Jan. 13, 2009, and timely filed his State of Michigan tax return that indicated a liability of $2,396 for the tax year ending Dec. 31, 2008. The debtor filed a proof of claim on behalf of the state, which objected to the claim. The court focused on § 1305, which provides that only the taxing authority can file a claim for “taxes that become payable...while a case is pending.” The court stated that while the debtor could pay the taxes at any time after Jan. 1, the taxes are not payable until the final day on which a tax return can legally be filed. The taxes are not due to or legally enforceable by the taxing authority until that date, and until the return is filed, the taxing authority cannot know whether there is a liability. The court also noted that if the tax liability is found to be a pre-petition obligation, then the taxing authority may be denied the time required by Bankruptcy Rule 3002 for filing a proof of claim, and the taxing authority has 180 days from the petition date to file the claim. The debtor filed for relief on Jan. 13, and the bar date for a governmental proof of claim would run on July 28. If the tax liability is not fixed until April 15, then the governmental unit would have only 88 days between April 15 and July 28 to actually file the proof of claim. The fact that the taxes are not payable and the apparent adverse impact on the state’s ability to file a proof of claim compelled the conclusion that the straddle tax liability was a post-petition liability that could not be treated in the chapter 13 plan unless the state chose to file a proof of claim and receive payment through the Plan.
In In re Senczyszyn, [2]the court determined that § 1305 does not define “pre-petition” vs. “post-petition” claims, but applies only after a court makes the threshold determination that the claim is a post-petition claim. The court stated that whether an obligation is a claim is based on § 101(5)(A), which defines any right to payment—whether liquidated, unliquidated, contingent or otherwise—and is to be construed in the broadest terms possible. Under Sixth Circuit precedent, the obligation will be a claim if the obligation has its basis in a pre-petition relationship between the debtor and creditor. That relationship, standing alone, gives the creditor the required notice of an obligation to file a proof of claim. Applied to tax obligations, the liability by definition arises out of a pre-petition relationship between the debtor and taxing authority. Every fact that is necessary for the existence and extent of the claim occurred as of Dec. 31 of the prior year. The straddle tax liability is a claim as of Dec. 31 that, as a pre-petition priority claim, must be treated in debtor’s chapter 13 plan pursuant to § 1322, free from the restrictions of § 1305.
Two other cases [3] used a third approach to straddle tax claims and were the first to disagree with the Senczyszyn court regarding the status of the claim as a pre-petition claim. These courts agreed with the Turner court’s holding that the state’s “right to payment” did not arise until April 15 and, therefore, the claim did not arise until April 15, well after the commencement of the cases.
The courts then focused on §§ 1322 and 507(a)(8)(A)(i). Section 507(a)(8) gives priority status to any claim that is measured by income for a taxable year ending on or before the date of the filing of the petition for which a return, if required, is last due after three years before the date of the filling of the petition. Straddle tax liabilities are “measured by income” for a tax year ending prior to the commencement of the case—the debtor's income in 2009 certainly predates the filing of the case in 2010. The last date on which the debtor could timely file a return would have been April 15, 2010, a date is that is after a date that was three years prior to the commencement of the case. Thus, the debtor’s tax obligation for the year 2009 constituted a “priority” tax claim under § 507.
Section 502 provides that any claim that arises after commencement of the case for tax that is otherwise entitled to priority is determined and allowed as if the claim had arisen before the date of the Petition. Section 1322 requires that the debtor's plan provide for full payment of all allowed priority claims over the life of the plan. "[Sections] 502(i), 507(a)(8) and 1322(a)(2)…establish a Congressional intent to treat taxes on income for the taxable year preceding the bankruptcy cases as prepetition claims and to bring those claims into the bankruptcy plan." [4]
Regardless of the analysis used—whether the “straddle” tax claim is a pre-petition claim or is a post-petition claim that nonetheless can be treated in the Plan—allowing a debtor to treat these claims is more consistent with the “fresh start” policy of the Bankruptcy Code. Presumably, debtors are all committing all of their disposable income to the funding of the plan, raising the question of how the debtor would be able to pay this additional claim. Payment of the claim assures that the claim will be paid, as full payment of the priority claim is a condition to the debtor receiving a discharge. Payment through the chapter 13 plan also simplifies the collection by the taxing authority, which must do nothing more than file a proof of claim. The taxing authority may be denied the ability to charge interest and penalties. However, a taxing authority’s goal should be to collect taxes owed, not to seek unnecessarily punitive additional charges or fees. Payment of straddle tax claims through the chapter 13 plan furthers the goals of both the Code in providing the debtor with a fresh start and those of the taxing authority for collection of outstanding tax obligations.
1. 420 B.R. 711 (Bankr. E.D. Mich. 2009).
2. 426 B.R. 250 (Bankr. E.D. Mich. 2010).
3. In re Wilson, Case No. 10-45791 (Bankr. E.D. Mich. 2010), and In re Hight, 426 B.R. 258 (Bankr. W.D. Mich.), aff'd, 434 B.R. 505 (W.D. Mich. 2010).
4. In re Hight, 434 B.R. at 510.
AZ and NV AGs Sue Bank of America for Alleged Deceptive Loan Mod Activities
Arizona Attorney General Terry Goddard, and Attorney General Catherine Cortez Masto, both announced lawsuits against Bank of America Corporation and its affiliates for allegedly engaging in deceptive trade practices and violations of state consumer fraud statutes relating to loan modification activities.
A copy of the Arizona AG’s complaint is available at:
http://www.azag.gov/press_releases/dec/2010/BofAComplaint.pdf
A copy of the Nevada AG’s complaint is available at:
http://ag.state.nv.us/newsroom/press/2010/Bank%20of%20America%20Filed%20Complaint.pdf
The AGs’ complaints allege that Bank of America is supposedly:
1) “Misleading consumers by promising to act upon requests for mortgage modifications within a specific period of time;”
2) “Misleading consumers with false assurances that their homes would not be foreclosed while their requests for modifications were pending, but sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions;”
3) “Misrepresenting to consumers that they must be in default on their mortgages to be eligible for modifications when, in fact, current borrowers are eligible for assistance;
4) “Making false promises to consumers that their modifications would be made permanent if they successfully completed trial modification periods, but then failing to convert these modifications;”
5) “Misleading consumers with inaccurate and deceptive reasons for denying their requests for modifications;”
6) “Falsely notifying consumers or credit reporting agencies that consumers are in default when they are not;”
7) “Misleading consumers with offers of modifications on one set of terms, but then providing them with agreements on different sets of terms, or misrepresenting that consumers have been approved for modifications.”
The Arizona AG’s complaint also asserts that Bank of America is violating the March 13, 2009 consent judgment with Countrywide. In the consent judgment, Countrywide agreed to develop and implement a loan modification program for certain former Countrywide borrowers in Arizona. Bank of America assumed responsibility for Countrywide’s compliance with the consent judgment.
The Arizona complaint alleges that, instead of providing the relief to which eligible homeowners were entitled, Bank of America supposedly failed to make timely decisions on modification requests and proceeded with foreclosures while modification requests were pending in violation of the agreement.
A copy of the Arizona AG’s complaint is available at:
http://www.azag.gov/press_releases/dec/2010/BofAComplaint.pdf
A copy of the Nevada AG’s complaint is available at:
http://ag.state.nv.us/newsroom/press/2010/Bank%20of%20America%20Filed%20Complaint.pdf
The AGs’ complaints allege that Bank of America is supposedly:
1) “Misleading consumers by promising to act upon requests for mortgage modifications within a specific period of time;”
2) “Misleading consumers with false assurances that their homes would not be foreclosed while their requests for modifications were pending, but sending foreclosure notices, scheduling auction dates, and even selling consumers’ homes while they waited for decisions;”
3) “Misrepresenting to consumers that they must be in default on their mortgages to be eligible for modifications when, in fact, current borrowers are eligible for assistance;
4) “Making false promises to consumers that their modifications would be made permanent if they successfully completed trial modification periods, but then failing to convert these modifications;”
5) “Misleading consumers with inaccurate and deceptive reasons for denying their requests for modifications;”
6) “Falsely notifying consumers or credit reporting agencies that consumers are in default when they are not;”
7) “Misleading consumers with offers of modifications on one set of terms, but then providing them with agreements on different sets of terms, or misrepresenting that consumers have been approved for modifications.”
The Arizona AG’s complaint also asserts that Bank of America is violating the March 13, 2009 consent judgment with Countrywide. In the consent judgment, Countrywide agreed to develop and implement a loan modification program for certain former Countrywide borrowers in Arizona. Bank of America assumed responsibility for Countrywide’s compliance with the consent judgment.
The Arizona complaint alleges that, instead of providing the relief to which eligible homeowners were entitled, Bank of America supposedly failed to make timely decisions on modification requests and proceeded with foreclosures while modification requests were pending in violation of the agreement.
Monday, December 27, 2010
United States: Red Flags Rule Now Excludes Lawyers, Doctors, and Other Professionals
http://thomas.loc.gov/cgi-bin/bdquery/z?d111:S.3987:
On December 18, 2010, President Obama signed the Red Flag Program Clarification Act of 2010. Effective immediately, the act changes the definition of the word "creditor" in the FTC Red Flags Rule to exclude most professionals that take payment after rendering services. LexisNexis has a great website on Red Flags Rule, if you would like more information
The Red Flags Rule requires "creditors" and "financial institutions" to address the risk of identity theft by developing and implementing a written prevention program. As originally written, the Rule defined "creditors" using a very broad definition covering all businesses or organizations that regularly defer payment for goods or services or provide goods or services and bill customers later. As the FTC noted in its own guidance on the Rule, this definition included most lawyers, medical providers, accountants, and other professionals. Professional organizations such as the American Bar Association objected in the courts and to Congress that the definition of creditor was broader than necessary to reasonably address identity theft, and pointed out that most legal, medical, and financial professionals are already subject to requirements to protect personal information.
The new definition eliminates from the scope of the definition businesses that merely bill consumers for services previously provided, which was the reason many professional organizations were covered. Instead, the Act specifies that the term "creditor" applies only to a business or organization "that regularly and in the ordinary course of business— (i) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction; (ii) furnishes information to consumer reporting agencies, as described in section 623, in connection with a credit transaction; or (iii) advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person." The third item does not include funds advanced on behalf of a person "for expenses incidental to a service provided by the creditor to that person."
The Red Flags Rule was originally scheduled to take effect on March 1, 2008, but enforcement has been postponed several times. Most recently, enforcement was delayed from June 1, 2010 to January 1, 2011 at Congress's request. Those entities that still qualify as creditors under the revised definition should be prepared to comply by the new year, as Congress's stated reason for the extension was to pass this legislation.
For a full summary of the Red Flags Rule, see the previous summary from Digestible Law @ http://www.digestiblelaw.com/?entry=856.
Thanks Mondaq.
On December 18, 2010, President Obama signed the Red Flag Program Clarification Act of 2010. Effective immediately, the act changes the definition of the word "creditor" in the FTC Red Flags Rule to exclude most professionals that take payment after rendering services. LexisNexis has a great website on Red Flags Rule, if you would like more information
The Red Flags Rule requires "creditors" and "financial institutions" to address the risk of identity theft by developing and implementing a written prevention program. As originally written, the Rule defined "creditors" using a very broad definition covering all businesses or organizations that regularly defer payment for goods or services or provide goods or services and bill customers later. As the FTC noted in its own guidance on the Rule, this definition included most lawyers, medical providers, accountants, and other professionals. Professional organizations such as the American Bar Association objected in the courts and to Congress that the definition of creditor was broader than necessary to reasonably address identity theft, and pointed out that most legal, medical, and financial professionals are already subject to requirements to protect personal information.
The new definition eliminates from the scope of the definition businesses that merely bill consumers for services previously provided, which was the reason many professional organizations were covered. Instead, the Act specifies that the term "creditor" applies only to a business or organization "that regularly and in the ordinary course of business— (i) obtains or uses consumer reports, directly or indirectly, in connection with a credit transaction; (ii) furnishes information to consumer reporting agencies, as described in section 623, in connection with a credit transaction; or (iii) advances funds to or on behalf of a person, based on an obligation of the person to repay the funds or repayable from specific property pledged by or on behalf of the person." The third item does not include funds advanced on behalf of a person "for expenses incidental to a service provided by the creditor to that person."
The Red Flags Rule was originally scheduled to take effect on March 1, 2008, but enforcement has been postponed several times. Most recently, enforcement was delayed from June 1, 2010 to January 1, 2011 at Congress's request. Those entities that still qualify as creditors under the revised definition should be prepared to comply by the new year, as Congress's stated reason for the extension was to pass this legislation.
For a full summary of the Red Flags Rule, see the previous summary from Digestible Law @ http://www.digestiblelaw.com/?entry=856.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Thanks Mondaq.
Paying the Handyman- The IRS wants to Know
If you're the owner of even just a single unit of rental property, starting in 2011 you must begin tracking any vendor doing at least $600 worth of work for you, because you now have to send them an IRS 1099 Form for the 2011 tax year – or face stiff penalties.
The requirement to track vendors and issue the 1099 forms isn't new. It's something larger rental property owners already do. But last year, when the federal government enacted the Small Business Jobs and Credit Act of 2010 (H.R. 5297), it expanded the requirement to all property owners, no matter how small. In effect, even property owners just doing rental as a sideline – maybe as part of a family investment fund or as part of a retirement savings plan – are "conducting a trade or business," so the 1099 reporting requirement now applies to them.
That means you have a legal obligation to obtain certain information from your vendors (generally, their name, address and Social Security number or other Tax ID, plus the amount you pay them over the year), and then issue them the 1099 forms to reflect the income you paid them for the year. (Don't forget to keep a copy for yourself.) Since the requirement takes effect for the 2011 tax year, you should start tracking the payments you make to your vendors beginning in January 2011. After you've tracked your payments for the year, you'll send them the total in the 1099 form in early 2012.
There are some exceptions to the requirement:
Burden: if gathering the information and issuing the forms would create a hardship
Duration: if the property is only a temporary rental of your own residence
Income: if your income from the rental doesn't meet minimal threshold requirements
Additional Guidance to Come
More guidance is forthcoming. The IRS will fill in the details on what constitutes a hardship or is considered "minimal" income, so you'll need to watch for that when it comes out.
On the vendor side, the requirement applies to all independent contractors or freelance workers that typically provide services in a rental real estate context. These include plumbers, electricians, painters, cleaning services, gardeners, landscapers, accountants and handymen – in short, virtually all service providers to the property that don't receive a W-2 form from you and who provide at least $600 in services for the year. It's a cumulative amount, so even if that painting job only costs you $400, you need to track it and add any other charges from that vendor to see if the total comes to more than $600, which triggers the requirement for sending that vendor the 1099 form.
How to Comply
To satisfy the requirement, you'll want to review your bookkeeping procedures (with your accountant if you work with one) to be confident you have a system in place to track your payments to your vendors. You'll want to set up your tracking procedure so that you can keep separate how you paid them: by credit card, debit card, check or cash.
The IRS will set forth the important dates for the 2011 tax year. You'll want to note those and be sure to comply, because late filing will be penalized. Indeed, penalties have been doubled under the new law.
The initial first-tier penalty has been increased from $15 to $30 (filing 1099 up to 30 days late), the second-tier penalty increased from $30 to $60 (more than 30 days late), and the third-tier penalty increased from $50 to $100 (filing after August 1). There's also a $250 penalty for the intentional failure to file.
As a general matter, you'll be able to request a 30-day extension for getting your forms to the IRS, but that won't apply to your deadline for getting the form to your vendors. Remember, they need to use those in preparing their tax returns.
For many owners, the new reporting requirement will come as a surprise. If you manage property for a small owner, make sure you let them know about it. If you're the owner, be sure to prepare to comply, which means tracking your payments starting this year.
Thanks to Holland & Knight for the info.
The requirement to track vendors and issue the 1099 forms isn't new. It's something larger rental property owners already do. But last year, when the federal government enacted the Small Business Jobs and Credit Act of 2010 (H.R. 5297), it expanded the requirement to all property owners, no matter how small. In effect, even property owners just doing rental as a sideline – maybe as part of a family investment fund or as part of a retirement savings plan – are "conducting a trade or business," so the 1099 reporting requirement now applies to them.
That means you have a legal obligation to obtain certain information from your vendors (generally, their name, address and Social Security number or other Tax ID, plus the amount you pay them over the year), and then issue them the 1099 forms to reflect the income you paid them for the year. (Don't forget to keep a copy for yourself.) Since the requirement takes effect for the 2011 tax year, you should start tracking the payments you make to your vendors beginning in January 2011. After you've tracked your payments for the year, you'll send them the total in the 1099 form in early 2012.
There are some exceptions to the requirement:
Burden: if gathering the information and issuing the forms would create a hardship
Duration: if the property is only a temporary rental of your own residence
Income: if your income from the rental doesn't meet minimal threshold requirements
Additional Guidance to Come
More guidance is forthcoming. The IRS will fill in the details on what constitutes a hardship or is considered "minimal" income, so you'll need to watch for that when it comes out.
On the vendor side, the requirement applies to all independent contractors or freelance workers that typically provide services in a rental real estate context. These include plumbers, electricians, painters, cleaning services, gardeners, landscapers, accountants and handymen – in short, virtually all service providers to the property that don't receive a W-2 form from you and who provide at least $600 in services for the year. It's a cumulative amount, so even if that painting job only costs you $400, you need to track it and add any other charges from that vendor to see if the total comes to more than $600, which triggers the requirement for sending that vendor the 1099 form.
How to Comply
To satisfy the requirement, you'll want to review your bookkeeping procedures (with your accountant if you work with one) to be confident you have a system in place to track your payments to your vendors. You'll want to set up your tracking procedure so that you can keep separate how you paid them: by credit card, debit card, check or cash.
The IRS will set forth the important dates for the 2011 tax year. You'll want to note those and be sure to comply, because late filing will be penalized. Indeed, penalties have been doubled under the new law.
The initial first-tier penalty has been increased from $15 to $30 (filing 1099 up to 30 days late), the second-tier penalty increased from $30 to $60 (more than 30 days late), and the third-tier penalty increased from $50 to $100 (filing after August 1). There's also a $250 penalty for the intentional failure to file.
As a general matter, you'll be able to request a 30-day extension for getting your forms to the IRS, but that won't apply to your deadline for getting the form to your vendors. Remember, they need to use those in preparing their tax returns.
For many owners, the new reporting requirement will come as a surprise. If you manage property for a small owner, make sure you let them know about it. If you're the owner, be sure to prepare to comply, which means tracking your payments starting this year.
Thanks to Holland & Knight for the info.
3rd Cir Says Escrow Cushion Pre-Petition Arrears To Be Included in BK Proof of Claim
The United States Court of Appeals for the Third Circuit recently held that the bankruptcy automatic stay prohibits a mortgage loan servicer from accounting for a pre-petition escrow shortage cushion in its post-petition calculation of future monthly escrow payments.
A copy of the opinion is available at: http://www.ca3.uscourts.gov/opinarch/092724p.pdf
Under the terms of bankruptcy petitioners' ("Borrowers") purchase-money mortgage, part of the monthly payment was to be paid into an escrow account to be used by the mortgage servicer to pay for taxes, insurance, and other charges as they became due. As permitted by the federal Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq., the mortgage servicer required the Borrowers to pay an amount into the escrow account that was higher than required to cover the actual cost of taxes, insurance, and other charges.
The Borrowers subsequently filed for Chapter 13 Bankruptcy. At that time, the Borrowers had an escrow shortage exceeding $5,000, which included $1,787.69 which the servicer had included as part of its escrow cushion pursuant to RESPA but had not yet distributed for taxes, insurance, and other charges.
After the bankruptcy filing, the servicer issued a revised escrow analysis and a demand for payment which indicated that the servicer had increased the monthly escrow payment. Specifically, the servicer calculated the revised escrow payments presuming the escrow balance at the time of the Borrowers' bankruptcy filing was $0, and included specific line items of $210.65 for a '[s]hortage payment' as well as $87.02 for a "r]eserve requirement."
The servicer's proof of claim did not include the $1,787.69 escrow cushion that had not yet been disbursed or paid out on the Borrowers' behalf through the escrow account. The Third Circuit noted that the servicer 'did not seek to recoup the $1,787.69 cushion via the bankruptcy process, but rather by assessing the [Borrowers] higher post-petition monthly escrow payments to make up for the shortfall.'
The Borrowers filed a motion in the Bankruptcy Court to enforce the automatic stay pursuant to 11 U.S.C. § 362(a), compel the servicer to "cease post-petition collection of pre-petition escrow claims," and award the Borrowers attorneys fees and costs. The Bankruptcy Court denied the motion, and the District Court affirmed.
As you may recall, an automatic stay pursuant to 11 U.S.C. § 362(a)(6) "is applicable only to claims that arise pre-petition, and not to claims that arise post-petition." The Bankruptcy Code defines "claim" to mean the: "(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5).
Addressing Section 101(5), the Third Circuit first noted the United States Supreme Court's observation that the "language "right to payment" in the definition of "claim" meant "nothing more nor less than an enforceable obligation." " In addition, "Congress intended by this language to adopt the broadest available definition of claim." The Third Circuit noted that it had "endorsed this broad interpretation of the term "claim," overruling the narrow "accrual test"" previously established.
Relying on Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008), the Third Circuit held that the Borrowers' unpaid escrow shortage constituted a 'claim' under the Bankruptcy Code. The Court reasoned that "the terms of the Borrowers" mortgage establish that the obligation to pay into the escrow account was enforceable." Thus, the servicer 'had a claim for the unpaid escrow.' The Court further clarified that "the contingent nature of the right to payment does not change the fact that the right to payment exists, even if it is remote, and thereby constitutes a "claim" for purposes of § 101(5)."
The Third Circuit rejected the servicer's argument that 'forcing the Servicer to recoup the missed escrow cushion payments through the Chapter 13 plan improperly modifies the Servicer's rights under RESPA and 'Regulation X,' 24 C.F.R 3500.17.' The Court reasoned that "the principle of protecting the debtor from all efforts to collect pre-petition claims outside of the Chapter 13 structure takes precedence over the Servicer's other rights under RESPA to recalculate the escrow payments."
Having determined that the unpaid $1,787.69 escrow cushion should have been part of the servicer's proof of claim in the bankruptcy action, the Third Circuit remanded the matter for the lower court to determine whether the servicer had "willfully violated the automatic stay," and whether the Borrowers were entitled to damages per 11 U.S.C. § 362(k).
The dissenting opinion argued that the servicer's "pre-petition claim should be limited to the amounts actually disbursed." Quoting the Bankruptcy Court's opinion, the dissent reasoned that "a "right to payment," as incorporated in the statutory definition of 'claim' under 11 U.S.C. §101(5) implicitly encompasses a right of retention, which is not subsumed in the servicer's "right to collect" escrow items." Thus, the dissent noted that, "[a]bsent sums actually expended, as permitted under the loan documents to protect its own collateral interest, the Servicer need not include pre-petition escrow arrears in its proof of claim inasmuch as the mortgage instrument only permits the Servicer to retain such funds as reimbursement to the extent of actual advances. Otherwise, the Servicer merely collects and holds such funds for payment to third parties." This conclusion "is consistent with the Second Circuit's interpretation of "claim" in In re Villarie, 648 F.2d 810, 812 (2d Cir. 1981)."
The dissent also argued that "the majority fails to acknowledge that the Servicer acted in accordance with RESPA" and "never even tries to explain why RESPA is inapplicable." Rather, "under the majority's approach, it is difficult to foresee that any mortgage lender that seeks to recalculate escrow due in accordance with RESPA and Regulation X would not be in violation of the automatic stay." This approach, in effect, "abrogates RESPA."
A copy of the opinion is available at: http://www.ca3.uscourts.gov/opinarch/092724p.pdf
Under the terms of bankruptcy petitioners' ("Borrowers") purchase-money mortgage, part of the monthly payment was to be paid into an escrow account to be used by the mortgage servicer to pay for taxes, insurance, and other charges as they became due. As permitted by the federal Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq., the mortgage servicer required the Borrowers to pay an amount into the escrow account that was higher than required to cover the actual cost of taxes, insurance, and other charges.
The Borrowers subsequently filed for Chapter 13 Bankruptcy. At that time, the Borrowers had an escrow shortage exceeding $5,000, which included $1,787.69 which the servicer had included as part of its escrow cushion pursuant to RESPA but had not yet distributed for taxes, insurance, and other charges.
After the bankruptcy filing, the servicer issued a revised escrow analysis and a demand for payment which indicated that the servicer had increased the monthly escrow payment. Specifically, the servicer calculated the revised escrow payments presuming the escrow balance at the time of the Borrowers' bankruptcy filing was $0, and included specific line items of $210.65 for a '[s]hortage payment' as well as $87.02 for a "r]eserve requirement."
The servicer's proof of claim did not include the $1,787.69 escrow cushion that had not yet been disbursed or paid out on the Borrowers' behalf through the escrow account. The Third Circuit noted that the servicer 'did not seek to recoup the $1,787.69 cushion via the bankruptcy process, but rather by assessing the [Borrowers] higher post-petition monthly escrow payments to make up for the shortfall.'
The Borrowers filed a motion in the Bankruptcy Court to enforce the automatic stay pursuant to 11 U.S.C. § 362(a), compel the servicer to "cease post-petition collection of pre-petition escrow claims," and award the Borrowers attorneys fees and costs. The Bankruptcy Court denied the motion, and the District Court affirmed.
As you may recall, an automatic stay pursuant to 11 U.S.C. § 362(a)(6) "is applicable only to claims that arise pre-petition, and not to claims that arise post-petition." The Bankruptcy Code defines "claim" to mean the: "(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or (B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured." 11 U.S.C. § 101(5).
Addressing Section 101(5), the Third Circuit first noted the United States Supreme Court's observation that the "language "right to payment" in the definition of "claim" meant "nothing more nor less than an enforceable obligation." " In addition, "Congress intended by this language to adopt the broadest available definition of claim." The Third Circuit noted that it had "endorsed this broad interpretation of the term "claim," overruling the narrow "accrual test"" previously established.
Relying on Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008), the Third Circuit held that the Borrowers' unpaid escrow shortage constituted a 'claim' under the Bankruptcy Code. The Court reasoned that "the terms of the Borrowers" mortgage establish that the obligation to pay into the escrow account was enforceable." Thus, the servicer 'had a claim for the unpaid escrow.' The Court further clarified that "the contingent nature of the right to payment does not change the fact that the right to payment exists, even if it is remote, and thereby constitutes a "claim" for purposes of § 101(5)."
The Third Circuit rejected the servicer's argument that 'forcing the Servicer to recoup the missed escrow cushion payments through the Chapter 13 plan improperly modifies the Servicer's rights under RESPA and 'Regulation X,' 24 C.F.R 3500.17.' The Court reasoned that "the principle of protecting the debtor from all efforts to collect pre-petition claims outside of the Chapter 13 structure takes precedence over the Servicer's other rights under RESPA to recalculate the escrow payments."
Having determined that the unpaid $1,787.69 escrow cushion should have been part of the servicer's proof of claim in the bankruptcy action, the Third Circuit remanded the matter for the lower court to determine whether the servicer had "willfully violated the automatic stay," and whether the Borrowers were entitled to damages per 11 U.S.C. § 362(k).
The dissenting opinion argued that the servicer's "pre-petition claim should be limited to the amounts actually disbursed." Quoting the Bankruptcy Court's opinion, the dissent reasoned that "a "right to payment," as incorporated in the statutory definition of 'claim' under 11 U.S.C. §101(5) implicitly encompasses a right of retention, which is not subsumed in the servicer's "right to collect" escrow items." Thus, the dissent noted that, "[a]bsent sums actually expended, as permitted under the loan documents to protect its own collateral interest, the Servicer need not include pre-petition escrow arrears in its proof of claim inasmuch as the mortgage instrument only permits the Servicer to retain such funds as reimbursement to the extent of actual advances. Otherwise, the Servicer merely collects and holds such funds for payment to third parties." This conclusion "is consistent with the Second Circuit's interpretation of "claim" in In re Villarie, 648 F.2d 810, 812 (2d Cir. 1981)."
The dissent also argued that "the majority fails to acknowledge that the Servicer acted in accordance with RESPA" and "never even tries to explain why RESPA is inapplicable." Rather, "under the majority's approach, it is difficult to foresee that any mortgage lender that seeks to recalculate escrow due in accordance with RESPA and Regulation X would not be in violation of the automatic stay." This approach, in effect, "abrogates RESPA."
SCAM Alert
Never agree to deposit a check from someone you don’t know and then wire money back. The check will bounce, and you’ll owe your bank the money you withdrew. By law, banks must make the funds from deposited checks available within a day or two, but it can take weeks to uncover a fake check. It may seem that the check has cleared and that the money is in your account. But you’re responsible for the checks you deposit, so if a check turns out to be a fake, you owe the bank the money you withdrew.
New York Bill to Shield More Debtors in Bankruptcy Is Signed by Paterson
New York debtors in bankruptcy and other court cases will be able to shield more assets from lenders under a law signed by Governor David Paterson, Bloomberg News reported on Thursday. The law increases the dollar value of some exemptions for the first time since the 19th century, and raises others to levels that would help debtors live without government assistance, said Charles Juntikka, a New York City lawyer who represents debtors. Under the new law, debtors can retain vehicles valued as much as $4,000 above an associated loan, up from $2,400. They also may keep a home with equity of $75,000 to $150,000, depending on location, up from $50,000. Home equity is the value of a home, less mortgages. The measure may make it harder for New York City to enforce parking rules and collect unpaid tickets, according to a July letter from Mayor Michael Bloomberg. The city will seek to amend it to solve that problem, said a spokesman for the mayor.
http://www.bloomberg.com/news/print/2010-12-23/new-york-bill-to-shield-more-debtors-in-bankruptcy-is-favored-by-paterson.html
http://www.bloomberg.com/news/print/2010-12-23/new-york-bill-to-shield-more-debtors-in-bankruptcy-is-favored-by-paterson.html
Wednesday, December 22, 2010
My Favorite Holiday Book
The Zombie Night Before Christmas
by Clement C. Moore, H. Parker Kelley, Dominic Mylroie (Illustrator)
Why worry about the Grinch when you’ve got ZOMBIES on the attack! Their prey? America’s best-loved Christmas poem. Get ready to have a holly jolly zombie holiday with this monstrously funny mash-up that subverts all that tiresomely good Christmas cheer. Clement C. Moore’s verses are tweaked and twisted, turning a once-cozy fireside read-aloud on its (now brainless) head. To complete the sacrilege: hilarious renderings of zombie stockings (undead legs!) hung by the chimney with care, and St. Nick attempting to repel a full-out, flesh-devouring zombie attack. One thing’s for sure—Santa and his eight tiny reindeer will never be the same!
CALIFORNIA HOMEOWNERS FINDING IT TOUGHER TO OBTAIN ATTORNEY FORECLOSURE ASSISTANCE
In California, where foreclosures are more abundant than in any other state, homeowners trying to win a loan modification have always had a tough time. Now they face yet another obstacle: hiring a lawyer, according to a New York Times report yesterday. Lawyers throughout California say they have no choice but to reject clients because of a new state law that sharply restricts how they can be paid. Under the measure, passed overwhelmingly by the state legislature and backed by the state bar association, lawyers who work on loan modifications cannot receive any money until the work is complete. The bar association says that under the law, clients cannot put retainers in trust accounts. The law, which has few parallels in other states, was devised to eliminate swindles in which modification firms made promises about what their lawyers could do, charged hefty fees and then disappeared. But foreclosure specialists say there has been an unintended consequence: Honest lawyers can no longer afford to assist homeowners who feel helpless before lenders that they see as elusive, unyielding and skilled at losing paperwork. Homeowners whose cases were handled improperly have little way of knowing it, and even if they found out, they would be hard-pressed to challenge a lender without a lawyer. The problem for lawyers is that even a simple modification, in which the loan is restructured so the borrower can afford the monthly payments, is a marathon, putting off their payday for months if not years. If the bank refuses to come to terms, the client may file for bankruptcy, in which case the lawyer will never be paid.
http://www.nytimes.com/2010/12/21/business/21foreclosure.html?_r=1&emc=eta1
http://www.nytimes.com/2010/12/21/business/21foreclosure.html?_r=1&emc=eta1
Is Bankruptcy Right For You ?
Bankruptcy is a process designed to provide a financial “fresh start” to those with burdensome debts. Bankruptcy protects debtors against collections, garnishments, lawsuits, creditor harassment, and in certain cases avoids repossession of vehicles and foreclosure of homes. At the end of the process, bankruptcy results in a discharge, releasing the debtor from personal liability from specific debts, prohibiting creditors from collecting on those debts in the future, and ultimately gives the debtor peace of mind and a clean slate from which to start anew.
While nobody wants to file bankruptcy, it is important to understand that it is not the goal of the bankruptcy code to take away all of your assets, leaving you living in a cardboard box under a bridge. The code has certain exemptions, allowing you to keep assets such as home equity, vehicles, tools of the trade and the like - as well financial assets such as retirement funds.
There are two primary forms of consumer bankruptcy: Chapter 7 (liquidation) and Chapter 13 (reorganization). The decision of whether to file under Chapter 7 or Chapter 13 requires thorough analysis and may vary from case to case.
Bankruptcy is a process designed to provide a financial “fresh start” to those with burdensome debts. Bankruptcy protects debtors against collections, garnishments, lawsuits, creditor harassment, and in certain cases avoids repossession of vehicles and foreclosure of homes. At the end of the process, bankruptcy results in a discharge, releasing the debtor from personal liability from specific debts, prohibiting creditors from collecting on those debts in the future, and ultimately gives the debtor peace of mind and a clean slate from which to start anew.
While nobody wants to file bankruptcy, it is important to understand that it is not the goal of the bankruptcy code to take away all of your assets, leaving you living in a cardboard box under a bridge. The code has certain exemptions, allowing you to keep assets such as home equity, vehicles, tools of the trade and the like - as well financial assets such as retirement funds.
There are two primary forms of consumer bankruptcy: Chapter 7 (liquidation) and Chapter 13 (reorganization). The decision of whether to file under Chapter 7 or Chapter 13 requires thorough analysis and may vary from case to case.
Call (727) 410-2705 for an appointment today!
GSEs' Foreclosures Outnumber Modifications More than 2 to 1 in Q3
For every home loan held by Fannie Mae and Freddie Mac that was modified during the third quarter, 2.3 loans were foreclosed on during the same period. The GSEs initiated foreclosure on 339,000 home mortgages during the July to September timeframe. Loan modifications completed in the quarter totaled 146,500, with the majority of those completed through non-HAMP programs. The two companies approved 29,500 short sales during the third quarter.
http://www.fhfa.gov/
http://www.fhfa.gov/
In a Sign of Foreclosure Flaws, Suits Claim Break-Ins by Banks
In an era when millions of homes have received foreclosure notices nationwide, lawsuits detailing bank break-ins keep surfacing, and in the wake of the scandal involving shoddy, sometimes illegal paperwork that has buffeted the nation's biggest banks in recent months, critics say that these situations reinforce their claims that the foreclosure process is fundamentally flawed, the New York Times reported today. Identifying the number of homeowners who were locked out illegally is difficult, but banks and their representatives insist that these situations represent just a tiny percentage of foreclosures. Many of the incidents that have become public appear to have been caused by confusion over whether a house is abandoned, in which case a bank may have the right to break in and make sure the property is secure. Some of the cases appear to be mistakes involving homeowners who were up to date on their mortgages—or had paid off their homes—but who still became bank targets. More common are cases in which a homeowner was behind on payments, perhaps trying to work out a modification, when bank crews changed the locks. Banks and their contractors insist that the number of mistakes is minuscule given the hundreds of thousands of new foreclosure cases filed each month.
http://www.nytimes.com/2010/12/22/business/22lockout.html?_r=2&hp
http://www.nytimes.com/2010/12/22/business/22lockout.html?_r=2&hp
Tuesday, December 21, 2010
Strategic Renting
The Sum Of All Eviction Fears
in From The Orb > Blog View
by John Clapp on Thursday 16 December 2010
BLOG VIEW: While scanning mortgage headlines the other morning, I was stopped in my tracks by one particularly eye-grabbing claim: "Families Exchange Homes to Stop Foreclosure."
Immediately, I recalled a story that made the rounds last summer. You might remember the one: While cleaning out their home, a family facing foreclosure found a highly valuable Superman comic book - Action Comics No. 1. That comic - apparently a collector's dream item - was later auctioned for $436,000, leading to a bevy of "Man Of Steel Saves The Day" headlines (but, sadly, no "Faster than an affidavit notarization, more powerful than a foreclosure locomotive on a dual track" ledes).
"But what's all this about swapping homes?" I asked myself as I dug into the press release.
As it turns out, the release was touting a new (and free) service being offered by an entity known as Home Lease Exchange LLC. In addition to boasting offices in Phoenix and San Jose, Calif., Home Lease Exchange appears to be the creative force behind the ForceYourLenderToModify.com - a domain name that doesn't exactly conjure up thoughts of compromise, good-faith negotiating, etc.
Here's how Home Lease Exchange's new service works: A borrower whose foreclosure is drawing near leases - under very generous terms - his or her home to another borrower who (a) lives nearby and (b) is also facing foreclosure. The long-term lease will deter buyers at trustee sales, leaving the servicer and/or bank to deal with the REO and its tenants, Home Lease Exchange explains.
According to the release, this plan "creates amazing leverage for homeowners with their lenders, because under President Obama's Helping Families Save Their Homes Act, tenants have the right to stay in their homes through the term of their lease, as long as the lease is entered into before complete title to the property is transferred."
The Helping Families Save Their Homes Act, which passed in May 2009, included the Protecting Tenants at Foreclosure Act (PTFA). Created in response to the rare but nonetheless unfair situation where a tenant is kicked out of his home on little notice because his landlord stopped paying the mortgage, the PTFA was designed to give tenants some breathing room between learning of his landlord's foreclosure and securing new living accommodations. Under the PTFA, servicers must abide by the terms of bona-fide leases or, where no such lease exists, provide a 90-day grace period for tenants.
The PTFA was immediately met by trepidation on the part of servicers and eviction specialists. Giving servicers cause for concern were the legislation's vague language, questionable cutoff points and definition of bona-fide leases.
For months following the PTFA's passage, eviction-themed webinars and industry panel sessions dealt with worst-case scenarios, such as the dreaded 10-year verbal lease entered into between a borrower and his brother. The PTFA, well-intentioned though it was, clearly put servicers in a precarious spot.
Making things more difficult was a PTFA amendment included in this year's financial reform legislation that essentially allows borrowers and tenants to enter into leases up until the point at which complete title to a property is transferred to a successor entity.
"Therefore, the Dodd-Frank Act opens the door wider than before to potential fraudulent leases or tenancies, under which straw-man tenants or others are used as a strategy to significantly delay the REO owner from recovering possession of the property," Larry R, Rothenberg, a partner at Weltman, Weinberg & Reis Co. LPA, wrote at the time. "'Strategic renting may now join 'strategic default' as a term in our lexicon."
Perhaps to the surprise of much of the industry, abuse of the PTFA has been limited to one-off events, eviction attorneys told me as recently as last week. Yes, suspicious leases come up now and then, they say, but by and large, the issue of fraudulent leases hasn't been nearly as bad as was originally feared.
Will Home Lease Exchange be the galvanizing force that turns eviction departments on their heads?
- John Clapp, editor, Servicing Management
in From The Orb > Blog View
by John Clapp on Thursday 16 December 2010
BLOG VIEW: While scanning mortgage headlines the other morning, I was stopped in my tracks by one particularly eye-grabbing claim: "Families Exchange Homes to Stop Foreclosure."
Immediately, I recalled a story that made the rounds last summer. You might remember the one: While cleaning out their home, a family facing foreclosure found a highly valuable Superman comic book - Action Comics No. 1. That comic - apparently a collector's dream item - was later auctioned for $436,000, leading to a bevy of "Man Of Steel Saves The Day" headlines (but, sadly, no "Faster than an affidavit notarization, more powerful than a foreclosure locomotive on a dual track" ledes).
"But what's all this about swapping homes?" I asked myself as I dug into the press release.
As it turns out, the release was touting a new (and free) service being offered by an entity known as Home Lease Exchange LLC. In addition to boasting offices in Phoenix and San Jose, Calif., Home Lease Exchange appears to be the creative force behind the ForceYourLenderToModify.com - a domain name that doesn't exactly conjure up thoughts of compromise, good-faith negotiating, etc.
Here's how Home Lease Exchange's new service works: A borrower whose foreclosure is drawing near leases - under very generous terms - his or her home to another borrower who (a) lives nearby and (b) is also facing foreclosure. The long-term lease will deter buyers at trustee sales, leaving the servicer and/or bank to deal with the REO and its tenants, Home Lease Exchange explains.
According to the release, this plan "creates amazing leverage for homeowners with their lenders, because under President Obama's Helping Families Save Their Homes Act, tenants have the right to stay in their homes through the term of their lease, as long as the lease is entered into before complete title to the property is transferred."
The Helping Families Save Their Homes Act, which passed in May 2009, included the Protecting Tenants at Foreclosure Act (PTFA). Created in response to the rare but nonetheless unfair situation where a tenant is kicked out of his home on little notice because his landlord stopped paying the mortgage, the PTFA was designed to give tenants some breathing room between learning of his landlord's foreclosure and securing new living accommodations. Under the PTFA, servicers must abide by the terms of bona-fide leases or, where no such lease exists, provide a 90-day grace period for tenants.
The PTFA was immediately met by trepidation on the part of servicers and eviction specialists. Giving servicers cause for concern were the legislation's vague language, questionable cutoff points and definition of bona-fide leases.
For months following the PTFA's passage, eviction-themed webinars and industry panel sessions dealt with worst-case scenarios, such as the dreaded 10-year verbal lease entered into between a borrower and his brother. The PTFA, well-intentioned though it was, clearly put servicers in a precarious spot.
Making things more difficult was a PTFA amendment included in this year's financial reform legislation that essentially allows borrowers and tenants to enter into leases up until the point at which complete title to a property is transferred to a successor entity.
"Therefore, the Dodd-Frank Act opens the door wider than before to potential fraudulent leases or tenancies, under which straw-man tenants or others are used as a strategy to significantly delay the REO owner from recovering possession of the property," Larry R, Rothenberg, a partner at Weltman, Weinberg & Reis Co. LPA, wrote at the time. "'Strategic renting may now join 'strategic default' as a term in our lexicon."
Perhaps to the surprise of much of the industry, abuse of the PTFA has been limited to one-off events, eviction attorneys told me as recently as last week. Yes, suspicious leases come up now and then, they say, but by and large, the issue of fraudulent leases hasn't been nearly as bad as was originally feared.
Will Home Lease Exchange be the galvanizing force that turns eviction departments on their heads?
- John Clapp, editor, Servicing Management
Counseling Improves Mod Success, Nearly Doubles Payment Reductions
NeighborWorks America is the administrator of the National Foreclosure Mitigation Counseling (NFMC) Program, which was implemented by Congress in January 2008. Based on a new report that analyzed the NFMC program in its first two years, through December 2009, the nonprofit group found that the odds of curing a foreclosure is 1.7 times greater for a homeowner who works with an NFMC counselor than for a homeowner who doesn’t receive counseling.
The analysis also revealed that homeowners who obtain a mortgage modification through the NFMC program lower their mortgage payments by an average of $555 per
month, compared to savings of just $288 per month for homeowners who don’t work with an NFMC program counselor. NeighborWorks says the national counseling program has helped individual homeowners save more than $6,000 annually.
In addition, the re-default rate for homeowners counseled through the NFMC program was better than that for homeowners who didn’t receive counseling. The NFMC report estimates that 36 percent of counseled homeowners who received a default-curing mortgage modification became serious delinquent again after eight months, compared to 49 percent of homeowners who received no program counseling.
http://www.dsnews.com/articles/counseling-improves-mod-success-nearly-doubles-payment-reductions-2010-12-20
The analysis also revealed that homeowners who obtain a mortgage modification through the NFMC program lower their mortgage payments by an average of $555 per
month, compared to savings of just $288 per month for homeowners who don’t work with an NFMC program counselor. NeighborWorks says the national counseling program has helped individual homeowners save more than $6,000 annually.
In addition, the re-default rate for homeowners counseled through the NFMC program was better than that for homeowners who didn’t receive counseling. The NFMC report estimates that 36 percent of counseled homeowners who received a default-curing mortgage modification became serious delinquent again after eight months, compared to 49 percent of homeowners who received no program counseling.
http://www.dsnews.com/articles/counseling-improves-mod-success-nearly-doubles-payment-reductions-2010-12-20
NJ Judge Stops Foreclosures
http://www.bloomberg.com/news/print/2010-12-20/bank-of-america-lenders-subject-to-new-jersey-court-order.html
Bank of America Corp., JPMorgan Chase & Co. and four other mortgage lenders and service providers face a possible suspension of foreclosures in New Jersey by Jan. 19 under a judge's order
Bank of America Corp., JPMorgan Chase & Co. and four other mortgage lenders and service providers face a possible suspension of foreclosures in New Jersey by Jan. 19 under a judge's order
Monday, December 20, 2010
Bankruptcy: Doomsday- NO - Salvation
The advantage of bankruptcy is that foreclosures, evictions, repossession, garnishment of wages or Social Security payments, utility shut-offs and collections calls stop. If a person waits too long to file, a legal judgment might eliminate options for saving an asset.
Do not wait until the car is on the verge of repossession or two days before the home is foreclosed.
Do not wait until the car is on the verge of repossession or two days before the home is foreclosed.
Bankruptcy Court More Effective Than Loan Modification Efforts
Homeowners are finding that obtaining a loan modification even with an attorney’s assistance is costly, lengthy and only 50% successful. Filing for bankruptcy has become a viable option for consumers earning an income but facing foreclosure.
Helping a client file for Chapter 13 bankruptcy and putting together a plan allowing the homeowner to catch up on mortgage arrears beats the loan modification process which “has no teeth.”
http://www.post-gazette.com/pg/10354/1111554-499.stm
http://www.maxbankruptcybootcamp.com/why-hamp-should-be-of-interest-to-boot-campers
Helping a client file for Chapter 13 bankruptcy and putting together a plan allowing the homeowner to catch up on mortgage arrears beats the loan modification process which “has no teeth.”
http://www.post-gazette.com/pg/10354/1111554-499.stm
http://www.maxbankruptcybootcamp.com/why-hamp-should-be-of-interest-to-boot-campers
Freddie Mac Extends Foreclosure Protection for Service Members Through 2011
For Immediate Release
December 17, 2010
Contact: corprel@freddiemac.com
or (703) 903-3933 (703) 903-3933
McLean, VA – Freddie Mac (OTC: FMCC) today instructed its servicers to delay initiating foreclosure for at least nine months for financially troubled service members who are released from active duty through the end of 2011 and have Freddie Mac-owned mortgages. Freddie Mac is one of the nation’s largest investors in conforming, conventional mortgages.
News Facts
Freddie Mac’s decision to extend the nine-month foreclosure stay will give lenders more time to work with service members that are having difficulty paying their mortgage.
Freddie Mac is making this protection a requirement for servicing our mortgages although its original authorization in the Housing and Economic Recovery Act of 2008 (HERA) expires on December 31, 2010.
The nine-month stay was originally authorized for service members under amendments to the Service members Civil Relief Act (SCRA) included in HERA.
News Quotes
“Our military make sacrifices every day to protect our homes and families,” said Anthony Renzi, Executive Vice President of Single Family Portfolio Management at Freddie Mac. “This small act will protect financially troubled service members when they return from active duty by giving them more time to work with their lender to stay in their home.”
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.
http://www.bizjournals.com/washington/news/2010/12/17/freddie-mac-extends-foreclosure.html#ixzz18epkcylp
December 17, 2010
Contact: corprel@freddiemac.com
or (703) 903-3933 (703) 903-3933
McLean, VA – Freddie Mac (OTC: FMCC) today instructed its servicers to delay initiating foreclosure for at least nine months for financially troubled service members who are released from active duty through the end of 2011 and have Freddie Mac-owned mortgages. Freddie Mac is one of the nation’s largest investors in conforming, conventional mortgages.
News Facts
Freddie Mac’s decision to extend the nine-month foreclosure stay will give lenders more time to work with service members that are having difficulty paying their mortgage.
Freddie Mac is making this protection a requirement for servicing our mortgages although its original authorization in the Housing and Economic Recovery Act of 2008 (HERA) expires on December 31, 2010.
The nine-month stay was originally authorized for service members under amendments to the Service members Civil Relief Act (SCRA) included in HERA.
News Quotes
“Our military make sacrifices every day to protect our homes and families,” said Anthony Renzi, Executive Vice President of Single Family Portfolio Management at Freddie Mac. “This small act will protect financially troubled service members when they return from active duty by giving them more time to work with their lender to stay in their home.”
Freddie Mac was established by Congress in 1970 to provide liquidity, stability and affordability to the nation’s residential mortgage markets. Freddie Mac supports communities across the nation by providing mortgage capital to lenders. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.
http://www.bizjournals.com/washington/news/2010/12/17/freddie-mac-extends-foreclosure.html#ixzz18epkcylp
In Re Kemp
In re: Kemp
A claim filed by a mortgage servicer would be disallowed when that creditor did not have possession of the note and the note was not endorsed to the creditor at the time the claim was filed.
****************************
In the Matter of John T. Kemp, Debtor.
John T. Kemp, Plaintiff,
v.
Countrywide Home Loans, Inc., Defendant.
Case No. 08-18700-JHW, Adversary No. 08-2448.
United States Bankruptcy Court, D. New Jersey.
November 16, 2010.
Bruce H. Levitt, Esq. Levitt & Slafkes, PC, South Orange, New Jersey, Counsel for the Debtor.
Harold Kaplan, Esq. Dori L. Scovish, Esq. Frenkel, Lambert, Weiss, Weisman & Gordon, LLP, West Orange, New Jersey, Counsel for the Defendant.
391 B.R. 262 (2008)
In the matter of John T. KEMP, Debtor.
No. 08-18700/JHW.
United States Bankruptcy Court, D. New Jersey.
July 17, 2008.
263*263 Steven N. Taieb, Esq., Mt. Laurel, NJ, for the Debtor.
A claim filed by a mortgage servicer would be disallowed when that creditor did not have possession of the note and the note was not endorsed to the creditor at the time the claim was filed.
****************************
In the Matter of John T. Kemp, Debtor.
John T. Kemp, Plaintiff,
v.
Countrywide Home Loans, Inc., Defendant.
Case No. 08-18700-JHW, Adversary No. 08-2448.
United States Bankruptcy Court, D. New Jersey.
November 16, 2010.
Bruce H. Levitt, Esq. Levitt & Slafkes, PC, South Orange, New Jersey, Counsel for the Debtor.
Harold Kaplan, Esq. Dori L. Scovish, Esq. Frenkel, Lambert, Weiss, Weisman & Gordon, LLP, West Orange, New Jersey, Counsel for the Defendant.
391 B.R. 262 (2008)
In the matter of John T. KEMP, Debtor.
No. 08-18700/JHW.
United States Bankruptcy Court, D. New Jersey.
July 17, 2008.
263*263 Steven N. Taieb, Esq., Mt. Laurel, NJ, for the Debtor.
Bad Credit Car Loans
The following advice to consumers seeking a bad credit car loans before the end of the year:
• Know the information contained in each of your credit reports as well as the individual credit score for each one
• Plan on coming into a bad credit car loan with at least 10 percent down in cash or actual trade equity
• Keep the term of the loan as short as possible
• Buy a compact or midsize car and put off purchase what you really want until after you’ve reestablished your car credit.
• Know the information contained in each of your credit reports as well as the individual credit score for each one
• Plan on coming into a bad credit car loan with at least 10 percent down in cash or actual trade equity
• Keep the term of the loan as short as possible
• Buy a compact or midsize car and put off purchase what you really want until after you’ve reestablished your car credit.
Cal App Confirms UCC Overrides Common Law, Holds Bank Not Required to Prove It Was Free from Negligence
The California Appellate Court, Fourth District, recently ruled in favor of a bank in a lawsuit arising from a check cashing scheme, confirming that the Uniform Commercial Code (“UCC”) overrides inconsistent principles of state common law, and did not require the bank to prove it was free from negligence.
A copy of the opinion is available at: http://www.courtinfo.ca.gov/opinions/documents/E049170A.pdf
Chino Commercial Bank, N.A. (“Chino”) brought an action against Brian Peters and Marylin Charlnoes for breach of contract and fraud. Peters and Charlnoes maintained a checking account with Chino through their small construction business, Faux Themes Inc. (“Faux”). In March of last year, Peters entered into a business arrangement with a man he met on the internet, whereby the man would send Peters checks to deposit into Faux’s account with Chino and Peters would then wire the funds to a bank account in Hong Kong. Peters would retain a fifteen percent fee for this service.
Overall, Peters wired just under half a million dollars to Hong Kong, but the checks he deposited with Chino were ultimately dishonored as forgeries. Chino then brought an action against Peters and Charlnoes to recover the funds overdrafted from Faux’s account, seeking to attach property of Peters and Charlnoes under a common law contract theory. The trial court found in Chino’s favor, placing the burden of proving any negligence by Chino in accepting the altered checks or wiring the funds on Peters and Charlnoes.
Peters and Charlnoes appealed the trial court’s ruling, arguing that Chino should have been required to prove it was free from negligence under the traditional principles of California common law that govern contracts. The Appellate Court rejected the appeal, explaining that California’s enactment of the UCC preempted any inconsistent common law principles. It then discussed Chino’s potential liability under the relevant UCC provisions for (1) accepting the altered checks; and (2) wiring the funds as directed by Peters.
Concerning Chino’s acceptance of the altered checks, the Appellate Court looked to the UCC’s chargeback provisions to determine that Chino could, in fact, be liable for charging the amounts of the dishonored checks back to Faux’s account if it failed to exercise ordinary care in accepting the altered checks. However, the Appellate Court found that Chino presented uncontradicted evidence that it used ordinary care, and that Chino was therefore entitled to charge the funds back to Faux’s account. Specifically, the Appellate Court relied on evidence that Chino’s employees (1) looked for irregularities on the face of the altered checks without finding any; and (2) considered whether the amounts of the checks were consistent with deposits to other companies owned and operated by Peters at the same address as Faux.
Concerning Chino’s wiring of the funds as directed by Peters, the Appellate Court looked to Article 4A governing funds transfers. Noting that Article 4A specifically limits the liability of banks in connection with the transfer of funds to that created under its express provisions, the Appellate Court held that negligence is not an element of the article’s general obligation of good faith, and nothing in the current version of Article 4A would otherwise create liability for a bank negligently accepting a duly authorized wire transfer.
A copy of the opinion is available at: http://www.courtinfo.ca.gov/opinions/documents/E049170A.pdf
Chino Commercial Bank, N.A. (“Chino”) brought an action against Brian Peters and Marylin Charlnoes for breach of contract and fraud. Peters and Charlnoes maintained a checking account with Chino through their small construction business, Faux Themes Inc. (“Faux”). In March of last year, Peters entered into a business arrangement with a man he met on the internet, whereby the man would send Peters checks to deposit into Faux’s account with Chino and Peters would then wire the funds to a bank account in Hong Kong. Peters would retain a fifteen percent fee for this service.
Overall, Peters wired just under half a million dollars to Hong Kong, but the checks he deposited with Chino were ultimately dishonored as forgeries. Chino then brought an action against Peters and Charlnoes to recover the funds overdrafted from Faux’s account, seeking to attach property of Peters and Charlnoes under a common law contract theory. The trial court found in Chino’s favor, placing the burden of proving any negligence by Chino in accepting the altered checks or wiring the funds on Peters and Charlnoes.
Peters and Charlnoes appealed the trial court’s ruling, arguing that Chino should have been required to prove it was free from negligence under the traditional principles of California common law that govern contracts. The Appellate Court rejected the appeal, explaining that California’s enactment of the UCC preempted any inconsistent common law principles. It then discussed Chino’s potential liability under the relevant UCC provisions for (1) accepting the altered checks; and (2) wiring the funds as directed by Peters.
Concerning Chino’s acceptance of the altered checks, the Appellate Court looked to the UCC’s chargeback provisions to determine that Chino could, in fact, be liable for charging the amounts of the dishonored checks back to Faux’s account if it failed to exercise ordinary care in accepting the altered checks. However, the Appellate Court found that Chino presented uncontradicted evidence that it used ordinary care, and that Chino was therefore entitled to charge the funds back to Faux’s account. Specifically, the Appellate Court relied on evidence that Chino’s employees (1) looked for irregularities on the face of the altered checks without finding any; and (2) considered whether the amounts of the checks were consistent with deposits to other companies owned and operated by Peters at the same address as Faux.
Concerning Chino’s wiring of the funds as directed by Peters, the Appellate Court looked to Article 4A governing funds transfers. Noting that Article 4A specifically limits the liability of banks in connection with the transfer of funds to that created under its express provisions, the Appellate Court held that negligence is not an element of the article’s general obligation of good faith, and nothing in the current version of Article 4A would otherwise create liability for a bank negligently accepting a duly authorized wire transfer.
New Rules for Gift Cards
New Federal Reserve rules provide important protections when you purchase or use gift cards. Here are some key changes that apply to gift cards sold on or after August 22, 2010:
Covered by the new rules
Store gift cards, which can be used only at a particular store or group of stores, such as a book store or clothing retailer.
Gift cards with a MasterCard, Visa, American Express, or Discover brand logo. These cards generally can be used wherever the brand is accepted. (Not all cards with a brand logo are covered; see "Other prepaid cards" below for exceptions.)
New protections
Limits on expiration dates. The money on your gift card will be good for at least five years from the date the card is purchased. Any money that might be added to the card at a later date must also be good for at least five years.
Replacement cards. If your gift card has an expiration date you still may be able to use unspent money that is left on the card after the card expires. For example, the card may expire in five years but the money may not expire for seven. If your card expires and there is unspent money, you can request a replacement card at no charge. Check your card to see if expiration dates apply.
Fees disclosed. All fees must be clearly disclosed on the gift card or its packaging.
Limits on fees. Gift card fees typically are subtracted from the money on the card. Under the new rules, many gift card fees are limited. Generally, fees can be charged if
you haven't used your card for at least one year, and
you are only charged one fee per month.
These restrictions apply to fees such as:
-dormancy or inactivity fees for not using your card,
-fees for using your card (sometimes called usage fees),
-fees for adding money to your card, and maintenance fees.
You can still be charged a fee to purchase the card and certain other fees, such as a fee to replace a lost or stolen card. Make sure you read the card disclosure carefully to know what fees your card may have.
Other prepaid cards
These new rules apply only to gift cards, which are just one type of prepaid card. The new rules do not cover other types of prepaid cards, such as:
Reloadable prepaid cards that are not intended for gift-giving purposes. For example, a reloadable prepaid card with a MasterCard, Visa, American Express, or Discover brand logo that is intended to be used like a checking account substitute is not covered.
Cards that are given as a reward or as part of a promotion. For example, a free $15 gift card given to you by a store if you purchase merchandise or services of $100 or more may have fees or an expiration date of one year rather than five years. Regardless, you must be clearly informed of any expiration dates or fees for these cards.
http://www.federalreserve.gov/consumerinfo/wyntk_giftcards.htm
Covered by the new rules
Store gift cards, which can be used only at a particular store or group of stores, such as a book store or clothing retailer.
Gift cards with a MasterCard, Visa, American Express, or Discover brand logo. These cards generally can be used wherever the brand is accepted. (Not all cards with a brand logo are covered; see "Other prepaid cards" below for exceptions.)
New protections
Limits on expiration dates. The money on your gift card will be good for at least five years from the date the card is purchased. Any money that might be added to the card at a later date must also be good for at least five years.
Replacement cards. If your gift card has an expiration date you still may be able to use unspent money that is left on the card after the card expires. For example, the card may expire in five years but the money may not expire for seven. If your card expires and there is unspent money, you can request a replacement card at no charge. Check your card to see if expiration dates apply.
Fees disclosed. All fees must be clearly disclosed on the gift card or its packaging.
Limits on fees. Gift card fees typically are subtracted from the money on the card. Under the new rules, many gift card fees are limited. Generally, fees can be charged if
you haven't used your card for at least one year, and
you are only charged one fee per month.
These restrictions apply to fees such as:
-dormancy or inactivity fees for not using your card,
-fees for using your card (sometimes called usage fees),
-fees for adding money to your card, and maintenance fees.
You can still be charged a fee to purchase the card and certain other fees, such as a fee to replace a lost or stolen card. Make sure you read the card disclosure carefully to know what fees your card may have.
Other prepaid cards
These new rules apply only to gift cards, which are just one type of prepaid card. The new rules do not cover other types of prepaid cards, such as:
Reloadable prepaid cards that are not intended for gift-giving purposes. For example, a reloadable prepaid card with a MasterCard, Visa, American Express, or Discover brand logo that is intended to be used like a checking account substitute is not covered.
Cards that are given as a reward or as part of a promotion. For example, a free $15 gift card given to you by a store if you purchase merchandise or services of $100 or more may have fees or an expiration date of one year rather than five years. Regardless, you must be clearly informed of any expiration dates or fees for these cards.
http://www.federalreserve.gov/consumerinfo/wyntk_giftcards.htm
SEC Subpoenas Big Banks' Mortgage Securitization Documents
http://www.dsnews.com/articles/sec-subpoenas-big-banks-mortgage-securitization-documents-2010-12-17
The Securities and Exchange Commission (SEC) is reportedly investigating lenders' procedures for packaging home mortgages into securities bonds for sale to investors. Reuters, citing two sources familiar with the probe, says the SEC sent subpoenas last week to Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo. The subpoenas focus on the earliest stage of the mortgage securitization process, in particular, the role of master servicers.
The Securities and Exchange Commission (SEC) is reportedly investigating lenders' procedures for packaging home mortgages into securities bonds for sale to investors. Reuters, citing two sources familiar with the probe, says the SEC sent subpoenas last week to Bank of America, Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo. The subpoenas focus on the earliest stage of the mortgage securitization process, in particular, the role of master servicers.
Wednesday, December 15, 2010
Credit Counseling or Bankruptcy?
When you have more debt than income and you're drowning in late payments, filing for bankruptcy can seem like a tempting way out.
But it may not be the fresh start you think it is. A new report shows nearly one in three people who filed for bankruptcy last month, still had to pay off their debt.
According to the American Bankruptcy Institute, more than 114,000 people filed for bankruptcy in November.
That's a 13-percent drop from the month before, but it's a more than 2 percent increase over consumer bankruptcies filed a year ago.
While bankruptcy can bring relief from creditors, credit counselors caution: consider every other option first.
The truth of the matter is, when you file bankruptcy, some of the effects linger for years and years and years.
Chapter 7 bankruptcy, which wipes out most of your debt, stays on your credit report for 10 years. Chapter 13 stays on your credit report for up to seven years, and you still must repay many of your creditors on a payment plan.
The average debt management program through a credit counseling agency lasts, roughly about five years and affects your credit rating the same as a chapter 13 bankruptcy. They may also pay your payments late causing additional marks on your credit report. Payments through a Ch 13 plan can not be marked late.
But it may not be the fresh start you think it is. A new report shows nearly one in three people who filed for bankruptcy last month, still had to pay off their debt.
According to the American Bankruptcy Institute, more than 114,000 people filed for bankruptcy in November.
That's a 13-percent drop from the month before, but it's a more than 2 percent increase over consumer bankruptcies filed a year ago.
While bankruptcy can bring relief from creditors, credit counselors caution: consider every other option first.
The truth of the matter is, when you file bankruptcy, some of the effects linger for years and years and years.
Chapter 7 bankruptcy, which wipes out most of your debt, stays on your credit report for 10 years. Chapter 13 stays on your credit report for up to seven years, and you still must repay many of your creditors on a payment plan.
The average debt management program through a credit counseling agency lasts, roughly about five years and affects your credit rating the same as a chapter 13 bankruptcy. They may also pay your payments late causing additional marks on your credit report. Payments through a Ch 13 plan can not be marked late.
By law, you must qualify for bankruptcy. Depending on your circumstances, you may be limited to chapter 13- the kind of bankruptcy that goes on your record, but still results in a court-ordered payment plan for your creditors. That's what happened to nearly a third of the consumers who filed for bankruptcy last in November.
FEDERAL RESERVE PROPOSES TO INCREASE CONSUMER CREDIT, LEASE-PROTECTION LIMITS TO $50,000
The U.S. Federal Reserve proposed two rules that would raise consumer protection coverage limits for credit transactions and leases, Bloomberg News reported yesterday. The rules would increase the limits to $50,000, according to the Federal Reserve, and amounts will be adjusted annually to reflect any increase in the consumer price index. Consumer loans of more than $25,000 are generally exempt from the protections of the Truth in Lending Act, and leases where the consumer’s total obligation exceeds $25,000 are also exempt from safeguards of the Consumer Leasing Act. The $50,000 limit for leases would apply to everything consumers are required to pay under the lease excluding taxes, the Fed said. The financial overhaul bill enacted July 21 included a provision to extend coverage to $50,000 effective July 21, 2011.
http://www.bloomberg.com/news/print/2010-12-13/fed-to-increase-consumer-lease-protection-limits-to-50-000.html
http://www.bloomberg.com/news/print/2010-12-13/fed-to-increase-consumer-lease-protection-limits-to-50-000.html
FDIC PROPOSES MINIMUM CAPITAL STANDARDS FOR BANKS
U.S. regulators today proposed new capital standards for all financial institutions, implementing a requirement of the Dodd-Frank financial overhaul, the Wall Street Journal reported today. The standards mandate that the nation's largest banks be subject to the same minimum standards for their capital cushions as smaller institutions, FDIC Chairman Sheila Bair said. The FDIC also voted to gradually boost the amount of reserves that insured banks must hold. The so-called designated reserve ratio would be targeted to rise to 2 percent over the next 17 years, FDIC officials said. The Dodd-Frank law sets a minimum of 1.35 percent by fall 2020. The Federal Reserve and Office of the Comptroller of the Currency are joining the FDIC's proposal
HAMP is A Failure
http://cop.senate.gov/documents/cop-121410-report.pdf
Today's monthly Congressional Oversight report concluded that for all intents and purposes, HAMP is a failure. Link to the report is here: http://cop.senate.gov/documents/cop-121410-report.pdf So, perhaps characterizing the program in last week's webinar as not longer having credibility in many policy circles was not too risky after all. It not only means the continued experimentation of alternative approaches - mediation etc - but a plaintiff's bar even more aggressive in its litigation strategies in the wake of the foreclosure document problem. Despite criticism of program implementation by Treasury, COP basically lays the failure of loan modification efforts at the feet of the mortgage servicers. Not at all surprising in today's environment:
A major reason [for HAMP's failure] is that mortgages are, in practice, far more complicated than a one-to-one relationship between borrower and lender. In particular, banks typically hire loan servicers to handle the day-to-day management of a mortgage loan, and the servicer's interests may at times sharply conflict with those of lenders and borrowers. For example, although lenders suffer significant losses in foreclosures, servicers can turn a substantial profit from foreclosure related fees. As such, it may be in the servicer's interest to move a delinquent loan to foreclosure as soon as possible. HAMP attempted to correct this market distortion by offering incentive payments to loan servicers, but the effort appears to have fallen short, in part because servicers were not required to participate. Another major obstacle is that many borrowers have second mortgages from lenders who may stand to profit by blocking the modification of a first mortgage. For these reasons, among many others, HAMP's straightforward plan to encourage modifications has proven ineffective in practice.
Today's monthly Congressional Oversight report concluded that for all intents and purposes, HAMP is a failure. Link to the report is here: http://cop.senate.gov/documents/cop-121410-report.pdf So, perhaps characterizing the program in last week's webinar as not longer having credibility in many policy circles was not too risky after all. It not only means the continued experimentation of alternative approaches - mediation etc - but a plaintiff's bar even more aggressive in its litigation strategies in the wake of the foreclosure document problem. Despite criticism of program implementation by Treasury, COP basically lays the failure of loan modification efforts at the feet of the mortgage servicers. Not at all surprising in today's environment:
A major reason [for HAMP's failure] is that mortgages are, in practice, far more complicated than a one-to-one relationship between borrower and lender. In particular, banks typically hire loan servicers to handle the day-to-day management of a mortgage loan, and the servicer's interests may at times sharply conflict with those of lenders and borrowers. For example, although lenders suffer significant losses in foreclosures, servicers can turn a substantial profit from foreclosure related fees. As such, it may be in the servicer's interest to move a delinquent loan to foreclosure as soon as possible. HAMP attempted to correct this market distortion by offering incentive payments to loan servicers, but the effort appears to have fallen short, in part because servicers were not required to participate. Another major obstacle is that many borrowers have second mortgages from lenders who may stand to profit by blocking the modification of a first mortgage. For these reasons, among many others, HAMP's straightforward plan to encourage modifications has proven ineffective in practice.
Fewer Homes "Underwater" as Foreclosures Increase
Trade-industry data released on Monday showed that the number of U.S. homeowners who owe more on their mortgages than their homes are worth fell in the third quarter, but the decline stemmed from banks getting more aggressive on foreclosures, not from home values going up, the Wall Street Journal reported today. The total of underwater mortgages fell to 10.8 million at the end of September, down from a peak of 11.3 million at the beginning of the year, according to CoreLogic, a real-estate data firm. The latest total accounts for nearly 22.5 percent of U.S. homeowners with a mortgage. Home prices, meanwhile, appear to be declining again after tax credits that spurred sales produced modest price gains during the first half of the year. Home values could drop by an estimated $1.7 trillion this year, a 40 percent increase from a year ago, according to Zillow.com, a real-estate website. Most of the decline is expected in the second half of the year.
Tuesday, December 14, 2010
Dress Code
It's winter -people wear clothes- so this should not even be an issue. But no we have leggings! If you are built like a Kardasian or fat NO LEGGINGS with out a dress or sweater to mid thigh or below please! It is just gross! While we are at it if your are over 25 you should follow the above even if you have the body for it- MLF is just gross. If you are in an office you should also follow number one. Looking like a high price call girl instead of a legal assistant will not gain you respect- maybe a date with the young male attorney or start of your sexual harrasment case.
Weidner and Forrest attacked in Court by Robo- Signers
http://www.ritholtz.com/blog/2010/12/when-robosigners-attack/
Got copies of the videos removed from You Tube? Send them to me- I'll post them here too!
Oh and by the way the Robo-Signers can each be prosecuted individual per signing under FS 117.105 of a third degree felony and under FS 117.107 they can be fined $5,000 per signature.
Got copies of the videos removed from You Tube? Send them to me- I'll post them here too!
Oh and by the way the Robo-Signers can each be prosecuted individual per signing under FS 117.105 of a third degree felony and under FS 117.107 they can be fined $5,000 per signature.
LPS
The reports and investigations will continue to roll in…but will there be any relief for the homeowner who was victimized by such practices? How many more families will be thrown into the streets while these investigations play out?
The first sign of legal problems for LPS emerged earlier this year, when the company disclosed that federal prosecutors in Florida had opened a criminal investigation into apparently forged signatures on foreclosure documents prepared by DocX, the shuttered subsidiary located in a small office park in Alpharetta, Georgia.
Fidelity National Financial, LPS’s former parent, had bought DocX in 2005. The unit soon became a high-speed mill, churning out mortgage assignments — many of which are now known to be of doubtful validity — on behalf of banks and investor trusts, helping them to foreclose on homeowners.
Few firms benefited more from the collapse of the U.S. housing boom than LPS. Spun off as an independent company in 2008, the company has seen its profits, with big help from its mortgage default services business, reach $232 million for the first nine months of 2010. That is a nearly 15 percent increase from the same period in 2009. Its revenue last year was $2.4 billion, up from $1.8 billion in 2008.
http://www.msnbc.msn.com/id/40533358/ns/business-us_business/
The first sign of legal problems for LPS emerged earlier this year, when the company disclosed that federal prosecutors in Florida had opened a criminal investigation into apparently forged signatures on foreclosure documents prepared by DocX, the shuttered subsidiary located in a small office park in Alpharetta, Georgia.
Fidelity National Financial, LPS’s former parent, had bought DocX in 2005. The unit soon became a high-speed mill, churning out mortgage assignments — many of which are now known to be of doubtful validity — on behalf of banks and investor trusts, helping them to foreclose on homeowners.
Few firms benefited more from the collapse of the U.S. housing boom than LPS. Spun off as an independent company in 2008, the company has seen its profits, with big help from its mortgage default services business, reach $232 million for the first nine months of 2010. That is a nearly 15 percent increase from the same period in 2009. Its revenue last year was $2.4 billion, up from $1.8 billion in 2008.
http://www.msnbc.msn.com/id/40533358/ns/business-us_business/
Funds for Uncleared Pre-Petition Checks Are Property of the Estate
Recently, in In re Brubaker, 426 B.R. 902 (Bankr. M.D. Fla. 2010), a Florida bankruptcy court held that funds related to checks that had not cleared were property of the estate under section 541(a)(1) of the Bankruptcy Code. In Brubaker, the debtors wrote several checks before filing for chapter 7 relief. As of the filing date, these checks had not cleared, and therefore the funds remained in the debtors’ bank account. The bankruptcy court rejected the debtors’ argument that these funds transferred on the dates that the checks were presented to the recipient, and thus were not property of the estate. Instead, the court noted that funds do not transfer until the checks are honored. Thus, the court held that funds remaining in the account were property of the estate since the debtors’ bank had not honored the checks.
Under section 542(a) all property in “possession, custody, or control” of the debtor at the start of the case must be delivered to the trustee. The court looked at the UCC for guidance in determining “control” under section 542(a). Under the UCC, a check is simply an order for the bank to pay the recipient a stated sum of money on demand. U.C.C. § 3-104(a)(2). Until the bank issues payment, the debtor has the ability to close the account or stop payment of the check. Since the checks in Brubaker had not been cashed at the time of filing, the funds were in debtors’ control and remained part of the estate. In Barnhill v. Johnson (In re Barnhill), 503 U.S. 393, 401 (1992), the Supreme Court held that transfer of funds occurred when the drawee bank honored the check. The court followed this decision and also considered the bankruptcy policy that the trustee must distribute funds among creditors fairly and equitably. The court decided that the best way to accomplish this goal was to determine that the transfer of funds did not occur until the bank honored the check. Holding otherwise would make it too easy for debtors and aggressive creditors to outsmart the system by selecting to pay certain creditors instead of others, knowing that those payments would be honored, thus defeating the goal of equitable distribution. As a result, courts have consistently held that outstanding funds remain property of the estate.
How should a debtor deal with these checks becoming property of the estate? Some options exist for the debtor. First, the debtor could notify his bank that he has filed for bankruptcy protection, his account is part of the estate, and any checks presented for payment should no longer be honored. Debtors should be careful writing checks on the eve of filing. It may be fraudulent if the debtor knows he intends to file for bankruptcy at the time the checks are written and therefore payment will be stopped. See Shake v. County of Buffalo, Neb., 154 B.R. 270, 276 (Bankr. D. Neb. 1993) (allowing criminal complaint against drawer of bad check to proceed as exception to automatic stay of section 362); Johnson v. Lindsey, 16 B.R. 211, 213 (Bankr. D. Fla. 1981) (permitting criminal prosecution for issuing worthless check, but not permitting repayment if found guilty). Second, the debtor can wait until all drawn checks have cleared from the account before filing a petition of relief. It should be noted that this option only relates to “when” a debtor should file bankruptcy. Although a debtor may want his checks to clear, there may be more imminent concerns. For example, the value of outstanding checks is probably not the biggest concern if a debtor’s home is being foreclosed.
Under section 542(a) all property in “possession, custody, or control” of the debtor at the start of the case must be delivered to the trustee. The court looked at the UCC for guidance in determining “control” under section 542(a). Under the UCC, a check is simply an order for the bank to pay the recipient a stated sum of money on demand. U.C.C. § 3-104(a)(2). Until the bank issues payment, the debtor has the ability to close the account or stop payment of the check. Since the checks in Brubaker had not been cashed at the time of filing, the funds were in debtors’ control and remained part of the estate. In Barnhill v. Johnson (In re Barnhill), 503 U.S. 393, 401 (1992), the Supreme Court held that transfer of funds occurred when the drawee bank honored the check. The court followed this decision and also considered the bankruptcy policy that the trustee must distribute funds among creditors fairly and equitably. The court decided that the best way to accomplish this goal was to determine that the transfer of funds did not occur until the bank honored the check. Holding otherwise would make it too easy for debtors and aggressive creditors to outsmart the system by selecting to pay certain creditors instead of others, knowing that those payments would be honored, thus defeating the goal of equitable distribution. As a result, courts have consistently held that outstanding funds remain property of the estate.
How should a debtor deal with these checks becoming property of the estate? Some options exist for the debtor. First, the debtor could notify his bank that he has filed for bankruptcy protection, his account is part of the estate, and any checks presented for payment should no longer be honored. Debtors should be careful writing checks on the eve of filing. It may be fraudulent if the debtor knows he intends to file for bankruptcy at the time the checks are written and therefore payment will be stopped. See Shake v. County of Buffalo, Neb., 154 B.R. 270, 276 (Bankr. D. Neb. 1993) (allowing criminal complaint against drawer of bad check to proceed as exception to automatic stay of section 362); Johnson v. Lindsey, 16 B.R. 211, 213 (Bankr. D. Fla. 1981) (permitting criminal prosecution for issuing worthless check, but not permitting repayment if found guilty). Second, the debtor can wait until all drawn checks have cleared from the account before filing a petition of relief. It should be noted that this option only relates to “when” a debtor should file bankruptcy. Although a debtor may want his checks to clear, there may be more imminent concerns. For example, the value of outstanding checks is probably not the biggest concern if a debtor’s home is being foreclosed.
Claims Of Discrimination Lead HUD To Investigate 22 Lenders
by MortgageOrb.com on Thursday 09 December 2010
Based on complaints filed by the National Community Reinvestment Coalition (NCRC), the U.S. Department of Housing and Urban Development (HUD) is launching multiple investigations to determine whether 22 banks and lenders discriminated against African American and Latino borrowers.
The NCRC alleges the mortgage originators denied Federal Housing Administration (FHA)-insured loans to African Americans and Latinos with credit scores as high as 640. FHA guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5% of the loan amount, or above 500, provided the borrowers have down payments equaling 10% of the loan amount.
"The decision by some banks to not follow the FHA's policy is cutting qualified borrowers off from accessing credit, and in doing so, causing harm to their ability to prosper, build wealth and for our economy to grow," says John Taylor, president and CEO of the NCRC. "And this decision is arbitrary, because the loans are 100 percent guaranteed, whether the borrower's credit score is 580 or 780. That means the loans with lower credit scores don't pose additional risk to the company, so there's no legitimate business defense for this across-the-board practice."
The NCRC says it conducted "mystery shopping" tests on the nation's top FHA-approved lenders. Of all the lenders tested, 32, or 65%, refused to consider consumers with credit scores below 620. An additional 11, or 22%, refused to extend credit to consumers with credit scores below 640. Only five lenders, or 10%, had policies in place that served consumers with credit scores of 580 and higher.
The NCRC believes the policies of the 22 lenders violate the Fair Housing Act, the Equal Credit Opportunity Act and the Community Reinvestment Act. A complete list of the lenders against which the NCRC filed complaints can be found here.
SOURCES: HUD, NCRC
Based on complaints filed by the National Community Reinvestment Coalition (NCRC), the U.S. Department of Housing and Urban Development (HUD) is launching multiple investigations to determine whether 22 banks and lenders discriminated against African American and Latino borrowers.
The NCRC alleges the mortgage originators denied Federal Housing Administration (FHA)-insured loans to African Americans and Latinos with credit scores as high as 640. FHA guidelines allow mortgages to borrowers with credit scores above 580, provided the borrowers have down payments equaling 3.5% of the loan amount, or above 500, provided the borrowers have down payments equaling 10% of the loan amount.
"The decision by some banks to not follow the FHA's policy is cutting qualified borrowers off from accessing credit, and in doing so, causing harm to their ability to prosper, build wealth and for our economy to grow," says John Taylor, president and CEO of the NCRC. "And this decision is arbitrary, because the loans are 100 percent guaranteed, whether the borrower's credit score is 580 or 780. That means the loans with lower credit scores don't pose additional risk to the company, so there's no legitimate business defense for this across-the-board practice."
The NCRC says it conducted "mystery shopping" tests on the nation's top FHA-approved lenders. Of all the lenders tested, 32, or 65%, refused to consider consumers with credit scores below 620. An additional 11, or 22%, refused to extend credit to consumers with credit scores below 640. Only five lenders, or 10%, had policies in place that served consumers with credit scores of 580 and higher.
The NCRC believes the policies of the 22 lenders violate the Fair Housing Act, the Equal Credit Opportunity Act and the Community Reinvestment Act. A complete list of the lenders against which the NCRC filed complaints can be found here.
SOURCES: HUD, NCRC
Fannie Mae Study- Americans more Likely to Rent
Overall, according to Fannie Mae, one-third of Americans (33 percent) would be more likely to rent their next home than buy, up from 30 percent in January 2010. Among renters, 59 percent said they would continue to rent compared to 54 percent in January 2010.
Shifting U.S. demographic and lifestyle trends, including shrinking numbers of married couples and fewer households with children, correlate to housing decisions that may have long-term implications for the housing market, according to Fannie Mae’s research analysis.
Shifting U.S. demographic and lifestyle trends, including shrinking numbers of married couples and fewer households with children, correlate to housing decisions that may have long-term implications for the housing market, according to Fannie Mae’s research analysis.
Negative Equity
CoreLogic’s market data shows that negative equity remains concentrated in five states. Nevada had the highest negative equity percentage with 67 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (46 percent), Michigan (38 percent), and California (32 percent).
Some of these same hard-hit states, however, also saw the largest declines in negative equity during the third quarter. Alaska experienced the biggest decrease, falling 1.8 percentage points, followed by Nevada (-1.6), Arizona (-1.4), California (-1.2), and Florida (-0.9).
Idaho and Alabama are the only states with noticeable increases in their negative equity ratios last quarter. CoreLogic says this comes as no surprise given they are currently the two top states for home price depreciation.
Some of these same hard-hit states, however, also saw the largest declines in negative equity during the third quarter. Alaska experienced the biggest decrease, falling 1.8 percentage points, followed by Nevada (-1.6), Arizona (-1.4), California (-1.2), and Florida (-0.9).
Idaho and Alabama are the only states with noticeable increases in their negative equity ratios last quarter. CoreLogic says this comes as no surprise given they are currently the two top states for home price depreciation.
Thursday, December 9, 2010
Walking Away Isn't Limited To Borrowers
Although much has been made of borrowers' decisions to walk away from their mortgage obligations, a different form of abandonment - bank walkaways - has caught the attention of at least one federal entity.
According to a study published last month by the Government Accountability Office (GAO), bank walkaways, which occur when servicers abandon foreclosures, are extremely rare but nonetheless have a devastating effect on the communities where they are located. In total, the GAO estimates that walkaways made up less than 1% of all homes that became vacant between January 2008 and March 2010. Although they happen infrequently, bank walkaways are highly concentrated in a small number of areas. The areas of greatest concentration tend to be economically distressed communities, including Rust Belt cities like Chicago, Detroit and Cleveland.
Walkaways - or charge-offs, as they are sometimes called - are typically associated with low-value assets. The economic reasoning for why a servicer might choose to abandon a foreclosure action, or to not even initiate one at all, is that the servicer does not expect that the proceeds from the sale of a real estate owned property (REO) will cover foreclosure and property-preservation costs.
In other examples, servicers, with investors' blessings, will forgo foreclosure if the principal balance of a loan in default is below a certain threshold and all relevant loss mitigation options have been exhausted. Freddie Mac, for instance, requires reviews for charge-offs on mortgages with balances less than $5,000. Freddie's cross-town sibling-in-conservatorship, Fannie Mae, formally stopped charging off loans in April.
As part of its study, the GAO interviewed six servicers - four large national platforms and two shops that specialize in nonprime mortgages. According to at least some of those servicers, properties valued between about $10,000 and $30,000 are considered charge-off eligible.
"Based on our reviews of bank regulatory guidance and discussions with federal and state officials, no laws or regulations exist that require servicers to complete foreclosure once the process has been initiated," the GAO report states. "Therefore, servicers can abandon the foreclosure process at any point."
Analyzing loan-file data from the six servicers, the GAO found that most walkaways - about 60% - happen before the foreclosure process is initiated. And in those instances, properties are more than twice as likely to be occupied at the time the decision not to pursue foreclosure has been made. But in the remaining 40% of charge-offs reviewed by the GAO, nearly half of the properties - 48% - were vacant at the point of charge-off.
In other words, the later the decision to charge off a loan is made, the more likely it is that the property will be vacant. This trend does not sit well with officials in the cities and counties where bank walkaways are most prevalent. Vacant properties, as has been well documented, promote crime and blight, as well as wreak havoc on cities' tax rolls.
"Charge-offs are going to be the reality" in some cases, said Steve Bancroft, executive director at the Detroit office of Foreclosure Prevention and Response, at the National P&P Conference in Washington, D.C., last month. "The issue is, how is the process done."
Bancroft wants to see servicers improve their communication of charge-off decisions to local officials, as doing so could promote the transfer of low-value properties into local hands. His office has piloted several programs in the past year that aim to curb vacancy levels in the city.
Another approach taken by an increasing number of communities is to institute land banks - quasi-public entities that rehabilitate, repurpose or demolish REOs that they inherit or buy from investors and servicers at deep discounts. In its report, the GAO suggests that land banks deter servicers from abandoning foreclosure actions because they provide servicers an additional option for REO disposition.
The land-bank movement is perhaps best exemplified by the city of Cleveland, which also happens to be a bank-walkaway hub. The Cleveland-Elyria-Mentor metropolitan statistical area (MSA) recorded the third-highest level of abandoned foreclosures in the nation during the time period studied by the GAO. Only the Chicago and Detroit MSAs had higher volumes.
"We're really trying to get to the point where the major banks and servicers understand and recognize the fact that the vast majority of the properties they hold in the city of Cleveland are going to have to be charged off," Jim Rokakis, the land bank's chairman and Cuyahoga County treasurer, said at the National P&P Conference.
The objective for Bancroft, Rokakis and other similarly situated city officials is not to necessarily end the practice of charge-offs, but to end the practice of reckless charge-offs - the kind that, more often than not, result in vacant properties.
As part of its report, the GAO recommended that servicers be required to notify borrowers when foreclosure actions are stopped, as well as notify borrowers of their right to stay in their homes until a foreclosure has been completed. In response to this suggestion, the Federal Reserve said such notifications represent a "responsible and prudent business decision."
The GAO also recommended instituting a requirement for servicers to obtain updated property valuations before they initiate foreclosures.
According to a study published last month by the Government Accountability Office (GAO), bank walkaways, which occur when servicers abandon foreclosures, are extremely rare but nonetheless have a devastating effect on the communities where they are located. In total, the GAO estimates that walkaways made up less than 1% of all homes that became vacant between January 2008 and March 2010. Although they happen infrequently, bank walkaways are highly concentrated in a small number of areas. The areas of greatest concentration tend to be economically distressed communities, including Rust Belt cities like Chicago, Detroit and Cleveland.
Walkaways - or charge-offs, as they are sometimes called - are typically associated with low-value assets. The economic reasoning for why a servicer might choose to abandon a foreclosure action, or to not even initiate one at all, is that the servicer does not expect that the proceeds from the sale of a real estate owned property (REO) will cover foreclosure and property-preservation costs.
In other examples, servicers, with investors' blessings, will forgo foreclosure if the principal balance of a loan in default is below a certain threshold and all relevant loss mitigation options have been exhausted. Freddie Mac, for instance, requires reviews for charge-offs on mortgages with balances less than $5,000. Freddie's cross-town sibling-in-conservatorship, Fannie Mae, formally stopped charging off loans in April.
As part of its study, the GAO interviewed six servicers - four large national platforms and two shops that specialize in nonprime mortgages. According to at least some of those servicers, properties valued between about $10,000 and $30,000 are considered charge-off eligible.
"Based on our reviews of bank regulatory guidance and discussions with federal and state officials, no laws or regulations exist that require servicers to complete foreclosure once the process has been initiated," the GAO report states. "Therefore, servicers can abandon the foreclosure process at any point."
Analyzing loan-file data from the six servicers, the GAO found that most walkaways - about 60% - happen before the foreclosure process is initiated. And in those instances, properties are more than twice as likely to be occupied at the time the decision not to pursue foreclosure has been made. But in the remaining 40% of charge-offs reviewed by the GAO, nearly half of the properties - 48% - were vacant at the point of charge-off.
In other words, the later the decision to charge off a loan is made, the more likely it is that the property will be vacant. This trend does not sit well with officials in the cities and counties where bank walkaways are most prevalent. Vacant properties, as has been well documented, promote crime and blight, as well as wreak havoc on cities' tax rolls.
"Charge-offs are going to be the reality" in some cases, said Steve Bancroft, executive director at the Detroit office of Foreclosure Prevention and Response, at the National P&P Conference in Washington, D.C., last month. "The issue is, how is the process done."
Bancroft wants to see servicers improve their communication of charge-off decisions to local officials, as doing so could promote the transfer of low-value properties into local hands. His office has piloted several programs in the past year that aim to curb vacancy levels in the city.
Another approach taken by an increasing number of communities is to institute land banks - quasi-public entities that rehabilitate, repurpose or demolish REOs that they inherit or buy from investors and servicers at deep discounts. In its report, the GAO suggests that land banks deter servicers from abandoning foreclosure actions because they provide servicers an additional option for REO disposition.
The land-bank movement is perhaps best exemplified by the city of Cleveland, which also happens to be a bank-walkaway hub. The Cleveland-Elyria-Mentor metropolitan statistical area (MSA) recorded the third-highest level of abandoned foreclosures in the nation during the time period studied by the GAO. Only the Chicago and Detroit MSAs had higher volumes.
"We're really trying to get to the point where the major banks and servicers understand and recognize the fact that the vast majority of the properties they hold in the city of Cleveland are going to have to be charged off," Jim Rokakis, the land bank's chairman and Cuyahoga County treasurer, said at the National P&P Conference.
The objective for Bancroft, Rokakis and other similarly situated city officials is not to necessarily end the practice of charge-offs, but to end the practice of reckless charge-offs - the kind that, more often than not, result in vacant properties.
As part of its report, the GAO recommended that servicers be required to notify borrowers when foreclosure actions are stopped, as well as notify borrowers of their right to stay in their homes until a foreclosure has been completed. In response to this suggestion, the Federal Reserve said such notifications represent a "responsible and prudent business decision."
The GAO also recommended instituting a requirement for servicers to obtain updated property valuations before they initiate foreclosures.
Indiana App Ct Holds Noncompliance with HUD/FHA Regs is a Valid Defense to FHA Foreclosure Action
"It’s not getting any easier for lenders seeking foreclosure on delinquent FHA home loans in Indiana. In a case of first impression, the Indiana Court of Appeals held that a servicer’s noncompliance with HUD servicing regulations is a valid affirmative defense to the foreclosure of an FHA-insured mortgage. Lacy-McKinney v. Taylor, Bean & Whitaker Mortg. Corp., 2010 Ind. App. LEXIS 2161 (Ind. Ct. App. Nov. 19, 2010).
"The Federal Housing Administration operates a mortgage insurance program for the purpose of encouraging lenders to issue loans at favorable interest rates to otherwise ineligible borrowers. Participating lenders must comply with rules imposed by the Department of Housing and Urban Development (HUD), including the servicing regulations contained at 24 CFR § 203.500 – § 203.681. These regulations include requirements that in certain default circumstances servicers may not immediately accelerate and foreclose, but must first meet face-to-face with borrowers prior to filing a foreclosure claim, accept partial payments, and engage in other timely loss mitigation efforts.
"The Indiana appellate court rejected the loan servicer’s argument that the HUD regulations apply only to the relationships between mortgagees and the government and that Congress did not intend for the regulations to be used by mortgagors as a private right of action or defense. Instead, the court found that public policy, the language of the regulations and precedents from other state courts supported its decision that a mortgagee’s satisfaction of HUD-imposed regulations is a binding condition precedent to its right to foreclose on an FHA-insured property. Finding that the servicer improperly refused the borrower’s partial payments and failed to conduct a face-to-face meeting prior to foreclosure, the appellate court reversed the trial court’s summary judgment in favor of the mortgagee and remanded the case for further proceedings. An appeal has not yet been filed.
"Although the Lacy-McKinney decision only allows the HUD regulations to be used by borrowers as a shield and not a sword, it is certain to attract attention from the growing number of attorneys specializing in the representation of borrowers facing foreclosure."
"The Federal Housing Administration operates a mortgage insurance program for the purpose of encouraging lenders to issue loans at favorable interest rates to otherwise ineligible borrowers. Participating lenders must comply with rules imposed by the Department of Housing and Urban Development (HUD), including the servicing regulations contained at 24 CFR § 203.500 – § 203.681. These regulations include requirements that in certain default circumstances servicers may not immediately accelerate and foreclose, but must first meet face-to-face with borrowers prior to filing a foreclosure claim, accept partial payments, and engage in other timely loss mitigation efforts.
"The Indiana appellate court rejected the loan servicer’s argument that the HUD regulations apply only to the relationships between mortgagees and the government and that Congress did not intend for the regulations to be used by mortgagors as a private right of action or defense. Instead, the court found that public policy, the language of the regulations and precedents from other state courts supported its decision that a mortgagee’s satisfaction of HUD-imposed regulations is a binding condition precedent to its right to foreclose on an FHA-insured property. Finding that the servicer improperly refused the borrower’s partial payments and failed to conduct a face-to-face meeting prior to foreclosure, the appellate court reversed the trial court’s summary judgment in favor of the mortgagee and remanded the case for further proceedings. An appeal has not yet been filed.
"Although the Lacy-McKinney decision only allows the HUD regulations to be used by borrowers as a shield and not a sword, it is certain to attract attention from the growing number of attorneys specializing in the representation of borrowers facing foreclosure."
Loan Modification Guidelines in the Northern District of California
Loan Modification Guidelines in the Northern District of California
December 7, 2010
NORTHERN DISTRICT OF CALIFORNIA INSTITUTES GUIDELINES REGARDING RESIDENTIAL LOAN MODIFICATIONS ON RELIEF FROM STAY MOTIONS AND IN CHAPTER 11 AND CHAPTER 13 PLANS
Dear Insolvency Law Committee constituency list members:
Please be advised that on December 1, 2010, Guidelines governing
(a) first lien mortgage holders who are seeking relief from stay in Chapter 7 cases in which the debtor has sought a loan modification, and (b) Chapter 11 and Chapter 13 debtors who seek consensual modification of the first mortgage loans on their principal residences went into effect in the San Francisco and San Jose divisions of the U.S. Bankruptcy Court for the Northern District of California. You can read the new Guidelines by clicking [HERE]
Disclosure Obligations Of Secured Creditors
Mortgage holders moving for relief must state on the cover sheet accompanying their motion (a) whether or not debtor has requested a loan modification prior to bankruptcy and/or the date any motion is filed, and (b) the status of the request.
Adequate Protection Options After Stay Relief Motion
As adequate protection, the court may set a deadline for the debtor to file a declaration describing (1) the date of such a modification request and to whom it was sent (attaching a copy of any transmittal letter, (2) the status of the request; and (3) the amount that is 31% of the debtor(s)' monthly gross income as shown on Schedule I.
The court may then set “an appropriate monthly payment amount, and in doing so may consider as adequate a monthly amount that is 31% of the debtor(s)' monthly gross income.” Such an adequate protection order will normally provide that, if the modification request is denied, the adequate protection payments will revert to the amount provided in the loan documents in the next calendar month and that the hearing may be restored to the calendar on ten days notice.
Modification In Connection With A Plan
A Chapter 11 or 13 plan premised upon a modification of a first mortgage loan secured by the debtor’s principal residence requires disclosure (by declaration in a Chapter 13 case or in the disclosure statement in a Chapter 11 case) of (1) the date of any modification request, (2) the status of such request, and (3) the present (unmodified) balances and total monthly payments on all claims secured by the debtor’s principal residence. Chapter 11 and 13 plans that propose to modify a first lien mortgage creditor's claim will not be confirmed until the modification has been approved by the first mortgage lender unless the plan provides that the secured creditor’s treatment reverts to the original contract terms if the modification request is denied. If a loan modification request remains pending when all other plan payments have been made, the case may be closed without a discharge.
Author’s Comment:
Guideline 10 makes it possible to confirm a plan while a modification request remains under consideration by a lender, but a potential trap for the unwary debtor exists in confirming a plan premised on approval of a modification. If the modification is denied, cash flow is not sufficient to make payments on the loan’s original terms, and the plan cannot be modified, then the debtor’s residence is likely to be lost after confirmation. Continuing to perform the plan may no longer make sense after such a loss. While a Chapter 13 debtor has an absolute right to dismiss under Bankruptcy Code section 1307(a), Chapter 11 debtors have no such right under Bankruptcy Code section 1112(b); a court must decide whether to convert even if dismissal is the debtor’s preference. In re Camden Ordnance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, 803 (E.D. Pa. 2000). “. . . [T]he standard for evaluating a debtor’s motion to dismiss its own voluntary Chapter 11 is the ‘best interest of creditors and the estate,’ rather than ‘plain legal prejudice’ to the creditors.” Id. at 804. Absent a demonstrated ability to pay or otherwise accommodate creditor claims as a condition of dismissal, practitioners should endeavor to complete any loan modification before confirmation and ensure that the debtor is fully-advised of the risks of not doing so.
These materials were prepared by Robert G. Harris of Binder & Malter, LLP in Santa Clara
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice.For more information about the Business Law Standing Committees, please see the standing committee's web page: http://businesslaw.calbar.ca.gov/StandingCommittees.aspx
December 7, 2010
NORTHERN DISTRICT OF CALIFORNIA INSTITUTES GUIDELINES REGARDING RESIDENTIAL LOAN MODIFICATIONS ON RELIEF FROM STAY MOTIONS AND IN CHAPTER 11 AND CHAPTER 13 PLANS
Dear Insolvency Law Committee constituency list members:
Please be advised that on December 1, 2010, Guidelines governing
(a) first lien mortgage holders who are seeking relief from stay in Chapter 7 cases in which the debtor has sought a loan modification, and (b) Chapter 11 and Chapter 13 debtors who seek consensual modification of the first mortgage loans on their principal residences went into effect in the San Francisco and San Jose divisions of the U.S. Bankruptcy Court for the Northern District of California. You can read the new Guidelines by clicking [HERE]
Disclosure Obligations Of Secured Creditors
Mortgage holders moving for relief must state on the cover sheet accompanying their motion (a) whether or not debtor has requested a loan modification prior to bankruptcy and/or the date any motion is filed, and (b) the status of the request.
Adequate Protection Options After Stay Relief Motion
As adequate protection, the court may set a deadline for the debtor to file a declaration describing (1) the date of such a modification request and to whom it was sent (attaching a copy of any transmittal letter, (2) the status of the request; and (3) the amount that is 31% of the debtor(s)' monthly gross income as shown on Schedule I.
The court may then set “an appropriate monthly payment amount, and in doing so may consider as adequate a monthly amount that is 31% of the debtor(s)' monthly gross income.” Such an adequate protection order will normally provide that, if the modification request is denied, the adequate protection payments will revert to the amount provided in the loan documents in the next calendar month and that the hearing may be restored to the calendar on ten days notice.
Modification In Connection With A Plan
A Chapter 11 or 13 plan premised upon a modification of a first mortgage loan secured by the debtor’s principal residence requires disclosure (by declaration in a Chapter 13 case or in the disclosure statement in a Chapter 11 case) of (1) the date of any modification request, (2) the status of such request, and (3) the present (unmodified) balances and total monthly payments on all claims secured by the debtor’s principal residence. Chapter 11 and 13 plans that propose to modify a first lien mortgage creditor's claim will not be confirmed until the modification has been approved by the first mortgage lender unless the plan provides that the secured creditor’s treatment reverts to the original contract terms if the modification request is denied. If a loan modification request remains pending when all other plan payments have been made, the case may be closed without a discharge.
Author’s Comment:
Guideline 10 makes it possible to confirm a plan while a modification request remains under consideration by a lender, but a potential trap for the unwary debtor exists in confirming a plan premised on approval of a modification. If the modification is denied, cash flow is not sufficient to make payments on the loan’s original terms, and the plan cannot be modified, then the debtor’s residence is likely to be lost after confirmation. Continuing to perform the plan may no longer make sense after such a loss. While a Chapter 13 debtor has an absolute right to dismiss under Bankruptcy Code section 1307(a), Chapter 11 debtors have no such right under Bankruptcy Code section 1112(b); a court must decide whether to convert even if dismissal is the debtor’s preference. In re Camden Ordnance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, 803 (E.D. Pa. 2000). “. . . [T]he standard for evaluating a debtor’s motion to dismiss its own voluntary Chapter 11 is the ‘best interest of creditors and the estate,’ rather than ‘plain legal prejudice’ to the creditors.” Id. at 804. Absent a demonstrated ability to pay or otherwise accommodate creditor claims as a condition of dismissal, practitioners should endeavor to complete any loan modification before confirmation and ensure that the debtor is fully-advised of the risks of not doing so.
These materials were prepared by Robert G. Harris of Binder & Malter, LLP in Santa Clara
Thank you for your continued support of the Committee.
Best regards,
Insolvency Law Committee
The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice.For more information about the Business Law Standing Committees, please see the standing committee's web page: http://businesslaw.calbar.ca.gov/StandingCommittees.aspx
Loan Modification Guidelines in the Northern District of California
NORTHERN DISTRICT OF CALIFORNIA INSTITUTES GUIDELINES REGARDING RESIDENTIAL LOAN MODIFICATIONS ON RELIEF FROM STAY MOTIONS AND IN CHAPTER 11 AND CHAPTER 13 PLANS
Dear Insolvency Law Committee constituency list members:
Please be advised that on December 1, 2010, Guidelines governing
(a) first lien mortgage holders who are seeking relief from stay in Chapter 7 cases in which the debtor has sought a loan modification, and (b) Chapter 11 and Chapter 13 debtors who seek consensual modification of the first mortgage loans on their principal residences went into effect in the San Francisco and San Jose divisions of the U.S. Bankruptcy Court for the Northern District of California.
Disclosure Obligations Of Secured Creditors
Mortgage holders moving for relief must state on the cover sheet accompanying their motion (a) whether or not debtor has requested a loan modification prior to bankruptcy and/or the date any motion is filed, and (b) the status of the request.
Adequate Protection Options After Stay Relief Motion
As adequate protection, the court may set a deadline for the debtor to file a declaration describing (1) the date of such a modification request and to whom it was sent (attaching a copy of any transmittal letter, (2) the status of the request; and (3) the amount that is 31% of the debtor(s)' monthly gross income as shown on Schedule I.
The court may then set “an appropriate monthly payment amount, and in doing so may consider as adequate a monthly amount that is 31% of the debtor(s)' monthly gross income.” Such an adequate protection order will normally provide that, if the modification request is denied, the adequate protection payments will revert to the amount provided in the loan documents in the next calendar month and that the hearing may be restored to the calendar on ten days notice.
Modification In Connection With A Plan
A Chapter 11 or 13 plan premised upon a modification of a first mortgage loan secured by the debtor’s principal residence requires disclosure (by declaration in a Chapter 13 case or in the disclosure statement in a Chapter 11 case) of (1) the date of any modification request, (2) the status of such request, and (3) the present (unmodified) balances and total monthly payments on all claims secured by the debtor’s principal residence. Chapter 11 and 13 plans that propose to modify a first lien mortgage creditor's claim will not be confirmed until the modification has been approved by the first mortgage lender unless the plan provides that the secured creditor’s treatment reverts to the original contract terms if the modification request is denied. If a loan modification request remains pending when all other plan payments have been made, the case may be closed without a discharge.
Author’s Comment:
Guideline 10 makes it possible to confirm a plan while a modification request remains under consideration by a lender, but a potential trap for the unwary debtor exists in confirming a plan premised on approval of a modification. If the modification is denied, cash flow is not sufficient to make payments on the loan’s original terms, and the plan cannot be modified, then the debtor’s residence is likely to be lost after confirmation. Continuing to perform the plan may no longer make sense after such a loss. While a Chapter 13 debtor has an absolute right to dismiss under Bankruptcy Code section 1307(a), Chapter 11 debtors have no such right under Bankruptcy Code section 1112(b); a court must decide whether to convert even if dismissal is the debtor’s preference. In re Camden Ordnance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, 803 (E.D. Pa. 2000). “. . . [T]he standard for evaluating a debtor’s motion to dismiss its own voluntary Chapter 11 is the ‘best interest of creditors and the estate,’ rather than ‘plain legal prejudice’ to the creditors.” Id. at 804. Absent a demonstrated ability to pay or otherwise accommodate creditor claims as a condition of dismissal, practitioners should endeavor to complete any loan modification before confirmation and ensure that the debtor is fully-advised of the risks of not doing so.
These materials were prepared by Robert G. Harris of Binder & Malter, LLP in Santa Clara
The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice.For more information about the Business Law Standing Committees, please see the standing committee's web page: http://businesslaw.calbar.ca.gov/StandingCommittees.aspx
Dear Insolvency Law Committee constituency list members:
Please be advised that on December 1, 2010, Guidelines governing
(a) first lien mortgage holders who are seeking relief from stay in Chapter 7 cases in which the debtor has sought a loan modification, and (b) Chapter 11 and Chapter 13 debtors who seek consensual modification of the first mortgage loans on their principal residences went into effect in the San Francisco and San Jose divisions of the U.S. Bankruptcy Court for the Northern District of California.
Disclosure Obligations Of Secured Creditors
Mortgage holders moving for relief must state on the cover sheet accompanying their motion (a) whether or not debtor has requested a loan modification prior to bankruptcy and/or the date any motion is filed, and (b) the status of the request.
Adequate Protection Options After Stay Relief Motion
As adequate protection, the court may set a deadline for the debtor to file a declaration describing (1) the date of such a modification request and to whom it was sent (attaching a copy of any transmittal letter, (2) the status of the request; and (3) the amount that is 31% of the debtor(s)' monthly gross income as shown on Schedule I.
The court may then set “an appropriate monthly payment amount, and in doing so may consider as adequate a monthly amount that is 31% of the debtor(s)' monthly gross income.” Such an adequate protection order will normally provide that, if the modification request is denied, the adequate protection payments will revert to the amount provided in the loan documents in the next calendar month and that the hearing may be restored to the calendar on ten days notice.
Modification In Connection With A Plan
A Chapter 11 or 13 plan premised upon a modification of a first mortgage loan secured by the debtor’s principal residence requires disclosure (by declaration in a Chapter 13 case or in the disclosure statement in a Chapter 11 case) of (1) the date of any modification request, (2) the status of such request, and (3) the present (unmodified) balances and total monthly payments on all claims secured by the debtor’s principal residence. Chapter 11 and 13 plans that propose to modify a first lien mortgage creditor's claim will not be confirmed until the modification has been approved by the first mortgage lender unless the plan provides that the secured creditor’s treatment reverts to the original contract terms if the modification request is denied. If a loan modification request remains pending when all other plan payments have been made, the case may be closed without a discharge.
Author’s Comment:
Guideline 10 makes it possible to confirm a plan while a modification request remains under consideration by a lender, but a potential trap for the unwary debtor exists in confirming a plan premised on approval of a modification. If the modification is denied, cash flow is not sufficient to make payments on the loan’s original terms, and the plan cannot be modified, then the debtor’s residence is likely to be lost after confirmation. Continuing to perform the plan may no longer make sense after such a loss. While a Chapter 13 debtor has an absolute right to dismiss under Bankruptcy Code section 1307(a), Chapter 11 debtors have no such right under Bankruptcy Code section 1112(b); a court must decide whether to convert even if dismissal is the debtor’s preference. In re Camden Ordnance Mfg. Co. of Arkansas, Inc., 245 B.R. 794, 803 (E.D. Pa. 2000). “. . . [T]he standard for evaluating a debtor’s motion to dismiss its own voluntary Chapter 11 is the ‘best interest of creditors and the estate,’ rather than ‘plain legal prejudice’ to the creditors.” Id. at 804. Absent a demonstrated ability to pay or otherwise accommodate creditor claims as a condition of dismissal, practitioners should endeavor to complete any loan modification before confirmation and ensure that the debtor is fully-advised of the risks of not doing so.
These materials were prepared by Robert G. Harris of Binder & Malter, LLP in Santa Clara
The Insolvency Law Committee of the Business Law Section of the California State Bar provides a forum for interested bankruptcy practitioners to act for the benefit of all lawyers in the areas of legislation, education and promoting efficiency of practice.For more information about the Business Law Standing Committees, please see the standing committee's web page: http://businesslaw.calbar.ca.gov/StandingCommittees.aspx
Banks Suspend Foreclosure Evictions for Holidays
Leading the charge of big mortgage companies freezing foreclosures during the holiday season, Fannie Mae and Freddie Mac announced last week that they will not evict any homeowners for the rest of the year, MainStreet.com reported yesterday. The eviction freeze by both companies involves all single-family homes and two-to-four unit properties. "If the property is occupied, our foreclosure attorneys will suspend the eviction to provide a greater measure of certainty to families during the holidays," said Anthony Renzi, executive vice president of single family portfolio management at Freddie Mac. Suspending evictions in the holiday season is actually getting to be a regular occurrence for both Fannie and Freddie. Both companies did so in 2008 and 2009, despite a growing portfolio of delinquent mortgages. According to Fannie Mae's records, the government-sponsored enterprise now holds a 4.56 percent "serious delinquency rate" on its books, an amount totaling $798 billion as of Sept. 30, 2010.
http://www.mainstreet.com/article/real-estate/foreclosure/banks-suspend-foreclosure-evictions-holidays
http://www.mainstreet.com/article/real-estate/foreclosure/banks-suspend-foreclosure-evictions-holidays
Monday, December 6, 2010
The Bank of NY v Parnell -LA Sup Ct
The Supreme Court of Louisiana recently confirmed that a yield spread premium is not part of the “total points and fees payable by the consumer at or before closing” within the meaning of the Home Ownership and Equity Protection Act (HOEPA).
This case arises from an adjustable rate promissory note executed by Kathleen Johnson Parnell (Parnell), and secured by a mortgage on her home. The HUD-1 Settlement Statement prepared in connection with the loan closing noted that the lender paid the mortgage broker a YSP of $1,264. The HUD-1 stated that the YSP was “paid outside of closing.”
On June 19, 2003, Parnell demanded rescission under the federal Truth in Lending Act. Parnell claimed that her loan was subject to HOEPA, as the “points and fees charged in connection with her loan exceeded eight percent of the total loan amount.” She further claimed that she had not received certain disclosures required by HOEPA.
Following her demand, starting in September of 2003, Parnell stopped making the monthly payments due on her loan. The lender denied the demands made in Parnell’s June letter, as her points and fees totaled only 6.7 percent of the total loan amount by its calculation. The owner of the loan sought to seize and sell Parnell’s house in response to her failure to make payments on her promissory note. However, the note secured by the mortgage was later paid in full on June 26, 2006, from insurance proceeds following Hurricane Katrina.
In September of 2008, the loan owner filed a motion for summary judgment as to all claims asserted by Parnell in her June 2003 letter. The trial court held that the YSP paid by the lender to the mortgage broker “outside of closing” is “not included in HOEPA’s “point and fees” calculation” because “it was not paid or payable by Parnell at the time of closing.” Therefore, the trial court granted the Bank’s motion for summary judgment, and dismissed Parnell’s petition with prejudice. Parnell appealed this decision.
The court of appeals reversed the portion of the trial court’s decision granting summary judgment relating to Parnell’s HOEPA claim. The court of appeals “adopted a consumer-oriented view to HOEPA and a related regulation, Regulation Z.” Under this interpretation, the court found that “payable”, in relation to the YSP, meant “legally enforceable or obligated to pay rather than paid.” Therefore, “Parnell was legally obligated to pay the yield spread amount at or before closing” because of her obligation to pay a higher rate of interest during the life of the loan. This inclusion of the YSP in the points and fees calculation made the loan subject to HOEPA’s disclosure requirements.
The Louisiana Supreme Court reversed. The Court noted that “the phrase “points and fees” includes all compensation paid to mortgage brokers and excludes interest,” but “all “points and fees” must be “payable by the consumer at or before closing.”
Therefore, the Court held that while the statute itself and relevant case law sought to prevent “allowing lenders and financial institutions to manipulate the payment of points and fees . . . to avoid triggering the HOEPA protections”, the Board’s Official Staff Commentary clearly stated that “mortgage broker fees that are not paid by the consumer” are not included in calculating points and fees under HOEPA.
Thus, the Court held that, in cases where “the YSP is paid by the lender to the broker at the time of closing” and the borrower satisfies their obligation by paying a higher interest rate “over the course of the loan,” the YSP should not be included “in the calculation of the eight percent trigger.”
This case arises from an adjustable rate promissory note executed by Kathleen Johnson Parnell (Parnell), and secured by a mortgage on her home. The HUD-1 Settlement Statement prepared in connection with the loan closing noted that the lender paid the mortgage broker a YSP of $1,264. The HUD-1 stated that the YSP was “paid outside of closing.”
On June 19, 2003, Parnell demanded rescission under the federal Truth in Lending Act. Parnell claimed that her loan was subject to HOEPA, as the “points and fees charged in connection with her loan exceeded eight percent of the total loan amount.” She further claimed that she had not received certain disclosures required by HOEPA.
Following her demand, starting in September of 2003, Parnell stopped making the monthly payments due on her loan. The lender denied the demands made in Parnell’s June letter, as her points and fees totaled only 6.7 percent of the total loan amount by its calculation. The owner of the loan sought to seize and sell Parnell’s house in response to her failure to make payments on her promissory note. However, the note secured by the mortgage was later paid in full on June 26, 2006, from insurance proceeds following Hurricane Katrina.
In September of 2008, the loan owner filed a motion for summary judgment as to all claims asserted by Parnell in her June 2003 letter. The trial court held that the YSP paid by the lender to the mortgage broker “outside of closing” is “not included in HOEPA’s “point and fees” calculation” because “it was not paid or payable by Parnell at the time of closing.” Therefore, the trial court granted the Bank’s motion for summary judgment, and dismissed Parnell’s petition with prejudice. Parnell appealed this decision.
The court of appeals reversed the portion of the trial court’s decision granting summary judgment relating to Parnell’s HOEPA claim. The court of appeals “adopted a consumer-oriented view to HOEPA and a related regulation, Regulation Z.” Under this interpretation, the court found that “payable”, in relation to the YSP, meant “legally enforceable or obligated to pay rather than paid.” Therefore, “Parnell was legally obligated to pay the yield spread amount at or before closing” because of her obligation to pay a higher rate of interest during the life of the loan. This inclusion of the YSP in the points and fees calculation made the loan subject to HOEPA’s disclosure requirements.
The Louisiana Supreme Court reversed. The Court noted that “the phrase “points and fees” includes all compensation paid to mortgage brokers and excludes interest,” but “all “points and fees” must be “payable by the consumer at or before closing.”
Therefore, the Court held that while the statute itself and relevant case law sought to prevent “allowing lenders and financial institutions to manipulate the payment of points and fees . . . to avoid triggering the HOEPA protections”, the Board’s Official Staff Commentary clearly stated that “mortgage broker fees that are not paid by the consumer” are not included in calculating points and fees under HOEPA.
Thus, the Court held that, in cases where “the YSP is paid by the lender to the broker at the time of closing” and the borrower satisfies their obligation by paying a higher interest rate “over the course of the loan,” the YSP should not be included “in the calculation of the eight percent trigger.”
pp Ct Says Assignee for the Benefit of Creditors Entitled to Reasonable Compensation Ahead of Perfected Secured Party
The Illinois Appellate Court for the Second District recently held that an assignee for the benefit of creditors was entitled to receive reasonable compensation for services and expenses before the satisfaction of perfected secured interests, because Section 9-102(a) of the Uniform Commercial Code (“UCC”) does not transform an assignee for the benefit of creditors into a creditor with a competing security interest for the debtor's collateral.
A copy of the opinion can be found at: http://www.state.il.us/court/Opinions/AppellateCourt/2010/2ndDistrict/November/2091287.pdf
Plaintiff-Creditor obtained a perfected security interest in Defendant-Debtor's collateral on October 22, 2004. Defendant-Debtor entered into an assignment for the benefit of creditors with third-party intervenor Trustee on November 18, 2008, which provided the trustee "reasonable compensation" for his services and expenses "from the Assets."
Plaintiff-Creditor first learned of the trust agreement on November 21, 2008. Plaintiff-Creditor obtained a judgment against Debtor and moved to collect on that judgment. The trustee intervened, seeking fees and expenses for his duties as assignee. Plaintiff-Creditor moved for summary judgment against the trustee, asserting that, as a perfected secured creditor under the UCC, it had priority over the trustee, a lien creditor.
The trial court granted summary judgment in favor of Plaintiff-Creditor, and the trustee appealed. The Appellate Court reversed and remanded, holding that the UCC did not preclude the payment of reasonable compensation to the trustee for his services as assignee in an assignment for the benefit of creditors arrangement.
As you may recall, Section 9-102(a) of the UCC defines “lien creditor” in pertinent part as “an assignee for the benefit of creditors from the time of assignment.” The Plaintiff-Creditor argued that inclusion of an assignee for the benefit of creditors within the definition of “lien creditor” transforms, in the context of assessing an assignee for the benefit of creditor's right to his or her fees and expenses, the assignee into a mere lien creditor with a competing security interest for the debtor's collateral.
However, the Court disagreed, reasoning that the Plaintiff-Creditor’s interpretation of the UCC was illogical and inconsistent with the legislative intent in enacting the UCC, given the role of an assignee for the benefit of creditors.
The Court noted that, “[i]f assignees were required to forgo payment in favor of perfected security interests, no assignee would take on the task of liquidating assets, and assignments for the benefit of creditors would cease to be available as an efficient method of maximizing the liquidation value of troubled companies.” In addition, the Court noted that the Plaintiff-Creditor’s “interpretation would put an assignee in competition with the creditors he or she is bound to serve,” which “is an absurd scenario because it transforms a fiduciary into a competing creditor.” Moreover, “an assignment for the benefit of creditors is a common-law vehicle used to liquidate a company's assets, and, pursuant to the common law, the assignee has a right to his or her reasonable fees and expenses.” “If the General Assembly had intended to foreclose this common-law right, it would have clearly and explicitly set forth in the statute that a perfected secured creditor such as Creditor has priority over the assignee's right to fees and expenses.”
The Court also commented “on the scope of the trial court's calculation of reasonable compensation” on remand. The “trial court is to take into account that Trustee's compensation shall be based at least in part on the benefits that Creditor received between the date it had notice of Trustee's assignment and the date Creditor notified Trustee to cease his liquidation efforts.” The Court reasoned that the Plaintiff-Creditor received certain payments and, by not objecting to the assignment upon notice thereof, Plaintiff-Creditor at a minimum, implicitly accepted the services that Trustee rendered. “In other words, in spite of Creditor's status as a secured creditor, Trustee's notice to the Creditor and the Creditor's implicit acceptance of Trustee’s services enable Trustee to collect reasonable compensation for his services” based upon “the concept of quantum meruit.”
A copy of the opinion can be found at: http://www.state.il.us/court/Opinions/AppellateCourt/2010/2ndDistrict/November/2091287.pdf
Plaintiff-Creditor obtained a perfected security interest in Defendant-Debtor's collateral on October 22, 2004. Defendant-Debtor entered into an assignment for the benefit of creditors with third-party intervenor Trustee on November 18, 2008, which provided the trustee "reasonable compensation" for his services and expenses "from the Assets."
Plaintiff-Creditor first learned of the trust agreement on November 21, 2008. Plaintiff-Creditor obtained a judgment against Debtor and moved to collect on that judgment. The trustee intervened, seeking fees and expenses for his duties as assignee. Plaintiff-Creditor moved for summary judgment against the trustee, asserting that, as a perfected secured creditor under the UCC, it had priority over the trustee, a lien creditor.
The trial court granted summary judgment in favor of Plaintiff-Creditor, and the trustee appealed. The Appellate Court reversed and remanded, holding that the UCC did not preclude the payment of reasonable compensation to the trustee for his services as assignee in an assignment for the benefit of creditors arrangement.
As you may recall, Section 9-102(a) of the UCC defines “lien creditor” in pertinent part as “an assignee for the benefit of creditors from the time of assignment.” The Plaintiff-Creditor argued that inclusion of an assignee for the benefit of creditors within the definition of “lien creditor” transforms, in the context of assessing an assignee for the benefit of creditor's right to his or her fees and expenses, the assignee into a mere lien creditor with a competing security interest for the debtor's collateral.
However, the Court disagreed, reasoning that the Plaintiff-Creditor’s interpretation of the UCC was illogical and inconsistent with the legislative intent in enacting the UCC, given the role of an assignee for the benefit of creditors.
The Court noted that, “[i]f assignees were required to forgo payment in favor of perfected security interests, no assignee would take on the task of liquidating assets, and assignments for the benefit of creditors would cease to be available as an efficient method of maximizing the liquidation value of troubled companies.” In addition, the Court noted that the Plaintiff-Creditor’s “interpretation would put an assignee in competition with the creditors he or she is bound to serve,” which “is an absurd scenario because it transforms a fiduciary into a competing creditor.” Moreover, “an assignment for the benefit of creditors is a common-law vehicle used to liquidate a company's assets, and, pursuant to the common law, the assignee has a right to his or her reasonable fees and expenses.” “If the General Assembly had intended to foreclose this common-law right, it would have clearly and explicitly set forth in the statute that a perfected secured creditor such as Creditor has priority over the assignee's right to fees and expenses.”
The Court also commented “on the scope of the trial court's calculation of reasonable compensation” on remand. The “trial court is to take into account that Trustee's compensation shall be based at least in part on the benefits that Creditor received between the date it had notice of Trustee's assignment and the date Creditor notified Trustee to cease his liquidation efforts.” The Court reasoned that the Plaintiff-Creditor received certain payments and, by not objecting to the assignment upon notice thereof, Plaintiff-Creditor at a minimum, implicitly accepted the services that Trustee rendered. “In other words, in spite of Creditor's status as a secured creditor, Trustee's notice to the Creditor and the Creditor's implicit acceptance of Trustee’s services enable Trustee to collect reasonable compensation for his services” based upon “the concept of quantum meruit.”
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