Friday, March 19, 2010
HOUSING PRESERVATION AND TENANT PROTECTION ACT OF 2010 (H.R. 4868)
Provide Resources and Incentives to Prevent the Further Loss of Affordable Housing Units
· Provides grants and loans to for-profit and non-profit housing sponsors to help recapitalize and/or transfer the property to a preservation purchaser.
· Establishes a voluntary Preservation Exchange Program to encourage owners to sell properties to purchasers who will keep the housing affordable.
· Establishes a federal first right of refusal that provides HUD with an opportunity to purchase a property from an owner who wishes to sell their property. Significantly, the bill does not require an owner to sell their property or prevent them from obtaining fair market value.
· Allows owners to request project-based assistance in lieu of enhanced vouchers, which serves to help preserve the long-term affordability of the project, assist with capital for rehabilitation, and ensure that tenants are not displaced.
· Allows owners to receive budget based rent increases, thus ensuring that the properties are adequately maintained and encouraging owners to renew Section 8 contracts.
Prevent the Displacement of Disabled, Elderly and Other Low-Income Tenants
· Closes gaps in existing law to ensure that all low and moderate-income tenants are eligible for enhanced vouchers in the event that the assisted housing is converted to market rate housing.
· Gives HUD and affordable housing groups the tools needed to recapitalize the aging Section 202 elderly housing portfolio.
· Enables tenants to be partners with HUD, RHS and owners to ensure that federally-assisted housing is properly maintained.
· Includes notification requirements to ensure that tenants are given sufficient notice prior to the conversion of the property to market rate housing.
Rural Housing
· Makes permanent a rural housing revitalization demonstration program launched in Fiscal Year 2006 that is designed to preserve and recapitalize Section 515 properties.
· Authorizes vouchers for tenants in properties that are converted to market rate housing or foreclosed.
· Extends the same protections that tenants in HUD-assisted housing currently have to tenants in RHS-assisted multifamily properties.
Establish a National Database to Further Preservation
· Directs HUD to establish a nationwide public database of HUD and RHS assisted properties to enable policymakers and the public to more effectively monitor and preserve the existing portfolio of affordable housing and contains adequate safeguards to ensure the protection of owners' privacy rights and proprietary information.
· Provides grants and loans to for-profit and non-profit housing sponsors to help recapitalize and/or transfer the property to a preservation purchaser.
· Establishes a voluntary Preservation Exchange Program to encourage owners to sell properties to purchasers who will keep the housing affordable.
· Establishes a federal first right of refusal that provides HUD with an opportunity to purchase a property from an owner who wishes to sell their property. Significantly, the bill does not require an owner to sell their property or prevent them from obtaining fair market value.
· Allows owners to request project-based assistance in lieu of enhanced vouchers, which serves to help preserve the long-term affordability of the project, assist with capital for rehabilitation, and ensure that tenants are not displaced.
· Allows owners to receive budget based rent increases, thus ensuring that the properties are adequately maintained and encouraging owners to renew Section 8 contracts.
Prevent the Displacement of Disabled, Elderly and Other Low-Income Tenants
· Closes gaps in existing law to ensure that all low and moderate-income tenants are eligible for enhanced vouchers in the event that the assisted housing is converted to market rate housing.
· Gives HUD and affordable housing groups the tools needed to recapitalize the aging Section 202 elderly housing portfolio.
· Enables tenants to be partners with HUD, RHS and owners to ensure that federally-assisted housing is properly maintained.
· Includes notification requirements to ensure that tenants are given sufficient notice prior to the conversion of the property to market rate housing.
Rural Housing
· Makes permanent a rural housing revitalization demonstration program launched in Fiscal Year 2006 that is designed to preserve and recapitalize Section 515 properties.
· Authorizes vouchers for tenants in properties that are converted to market rate housing or foreclosed.
· Extends the same protections that tenants in HUD-assisted housing currently have to tenants in RHS-assisted multifamily properties.
Establish a National Database to Further Preservation
· Directs HUD to establish a nationwide public database of HUD and RHS assisted properties to enable policymakers and the public to more effectively monitor and preserve the existing portfolio of affordable housing and contains adequate safeguards to ensure the protection of owners' privacy rights and proprietary information.
Thursday, March 18, 2010
Supreme Cour Moved it's Site
Today the Court will commence in-house hosting of its Web site, assuming site
management responsibilities from the Government Printing Office (GPO), which had provided
hosting services since the site's inception ten years ago. The Court received funding in its FY
20 10 appropriation to make the transition from GPO to in-house management. That transition
will enable the Court to integrate the Web site with the Court's other operations, improve the
quality of the site, and expand services for the public's benefit. The Web address for the site will
change from www.supremecourtus.gov to www.supremecourt.gov, t either address will
provide access through July l ,2010.
management responsibilities from the Government Printing Office (GPO), which had provided
hosting services since the site's inception ten years ago. The Court received funding in its FY
20 10 appropriation to make the transition from GPO to in-house management. That transition
will enable the Court to integrate the Web site with the Court's other operations, improve the
quality of the site, and expand services for the public's benefit. The Web address for the site will
change from www.supremecourtus.gov to www.supremecourt.gov, t either address will
provide access through July l ,2010.
FFIEC Issues FAQs on SAFE Act Registration for Depository Institution
The Federal Financial Institutions Examination Council published a question and answer document regarding licensing obligations of depository institutions under the Secure and Fair Enforcement for Mortgage Licensing Act. See: http://www.ffiec.gov/safeact.htm
As you may recall, the SAFE Act requires individual mortgage loan originators to register with the Nationwide Mortgage Licensing System and Registry, a database established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states.
The FDIC recently approved a draft final rule (attached) to put the federal registration requirement into effect, which will require registration by individual residential mortgage loan originators employed by agency-related institutions. These originators will obtain a unique identifier that will stay with them regardless of employment. The draft rule would provide financial institutions with 180 days to complete initial registrations once the system is operational.
The FDIC's draft final rule is currently under review by the Office of Management and Budget pursuant to Executive Order 12866.
As you may recall, the SAFE Act requires individual mortgage loan originators to register with the Nationwide Mortgage Licensing System and Registry, a database established by the Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators to support the licensing of mortgage loan originators by the states.
The FDIC recently approved a draft final rule (attached) to put the federal registration requirement into effect, which will require registration by individual residential mortgage loan originators employed by agency-related institutions. These originators will obtain a unique identifier that will stay with them regardless of employment. The draft rule would provide financial institutions with 180 days to complete initial registrations once the system is operational.
The FDIC's draft final rule is currently under review by the Office of Management and Budget pursuant to Executive Order 12866.
Wednesday, March 17, 2010
Get Free Credit Report
Consumers can request one free credit report each year from each of the three nationwide credit-reporting companies—Equifax, Experian and TransUnion—through AnnualCreditReport.com. You are also entitled to a free report in certain situations, including if you are unemployed and plan to look for a job within 60 days, or if a company says it didn't hire you because of your credit history.
BAD CREDIT DERAILS JOB SEEKERS
Concerned about rising rates of employee theft and fiduciary issues, more employers are conducting credit background checks on applicants for some positions, the Wall Street Journal reported today. Companies say that the financial information can offer insight into a candidate's level of responsibility. However, people whose previously solid credit has been damaged by the economic downturn say they are victims of circumstances beyond their control. The federal Fair Credit Reporting Act gives employers the right to conduct background checks on current and potential employees through third-party companies, with the individual's approval. Some 47 percent of employers say they check the credit history of applicants for certain positions, according to a survey by the Society for Human Resource Management of more than 430 organizations in late 2009, up from 42 percent of employers in 2006. Lawsuits or other judgments outstanding, or multiple accounts in debt collection, were the types of credit information most likely to keep an organization from extending a job offer, according to the survey.
HAMP MORTGAGE MODIFICATIONS JUMP 45 PERCENT IN FEBRUARY
The U.S. Treasury Department reported on Friday that mortgage modifications jumped 45 percent in February. In total, more than 170,000 individuals in the Home Affordable Modification Program (HAMP) have been successfully steered into more manageable loans, with another 1.3 million receiving offers for trial modifications. However, the program is still short of the minimum 3 million at-risk homeowners President Obama targeted when the measure was unveiled nearly one year ago. The timeline for that goal extends through 2012. Borrowers in permanent modification plans are saving a median of 36 percent of their before-modification payment with a median savings of more than $500 each month, according to the Treasury Dept. These homeowners' lower monthly payments represent a combined savings of more than $2.7 billion.
BANKRUPTCY JUDGESHIP BILL ADVANCES TO THE SENATE
The House of Representatives on Friday passed H.R. 4506, the “Bankruptcy Judgeship Act of 2010,” authorizing the creation of 13 new permanent bankruptcy judgeships and the conversion of 22 temporary judgeships to permanent judgeships, as well as the extension of two temporary judgeships for another five years. To finance the positions, the bill also raises the filing fees for debtors filing chapter 7 or chapter 13 cases by $1 and for those filing chapter 11 cases by $42 to satisfy the “pay-go” budgetary offset requirement. The bill is sponsored by Rep. Steve Cohen (D-Tenn.) and was submitted at the request of the Judicial Conference of the United States. The last judgeship bill was introduced in 2005. H.R. 4506 was received in the Senate yesterday and referred to the Senate Judiciary Committee.
Tuesday, March 16, 2010
Monday, March 15, 2010
"Cash for keys"
"Cash for keys"
Jon Daurio, chief executive officer of mortgage investor Kondaur Capital Corp., recently offered a $4,000 check to Barry Culver for the deed to his Bryan, Ohio house.
With the exchange, and a pay-off to a second-lien holder, Culver was freed of $120,000 in crushing mortgage debt on the house, said Daurio, who had bought the right to cut the deal when he purchased the mortgage months earlier. The house, after repairs, is now on the market for $47,500.
Owners of bad loans are increasingly making deals with borrowers to avoid a foreclosure, which tends to reduce returns for investors and place a black mark on the homeowner's credit. Lawmakers and regulators are becoming more accepting of these solutions even though they mean the borrower loses the home.
The trend comes after more than two years of loan modification programs and foreclosure moratoriums that have produced mixed results, with many homeowners ineligible or defaulting again.
Where a modification isn't feasible, the U.S. Treasury in April will begin paying borrowers who agree to a deed-in-lieu of foreclosure or short sale, where a home is sold for less than outstanding debt.
Unlike most modifications, those actions erase excess debt and reset home values, solving the problem of underwater loans that are a top cause of defaults.
U.S. modification efforts to date have been "tragic" in delaying housing and economic recovery, Daurio said.
More than 11 million properties with mortgages are "underwater," according to First American CoreLogic. Efforts to expand use of principal forgiveness haven't caught on.
Foreclosures have been stalled on more than 1 million bad loans since the U.S. Home Affordable Modification Program was announced a year ago, resulting in higher costs and losses to investors, according Moody's Investors Service.
This is delaying an inevitable clearing of the housing market that is needed for a lasting rebound, analysts said. A pent-up "shadow inventory" from failed modification efforts could destabilize the market in 2010, they worry.
The ability to customize loan workouts and earn potentially huge profits are enticing investors to the market, where loans are commonly sold at 40 cents to 60 cents per dollar of principal. Discounts give investors more room to work with borrowers than banks working to mitigate their loss.
Many loans are tied up in securities, and banks now with adequate reserves are arranging deed-in-lieu and short sale agreements themselves.
Minn Fed Ct Rules Against Borrowers in HAMP Challenge
The U.S. District Court for the District of Minnesota recently held that the HAMP program did not create a protected property interest for borrowers, because borrowers are not entitled to loan modifications.
As you may recall, the U.S. Treasury's Home Affordable Modification Program provides a series of guidelines for servicers to modify loans in default or likely to default in order to forestall foreclosures. Treasury guidelines outline eligible borrowers and provide incentives to mortgage servicers to reduce monthly payments to sustainable levels.
The Plaintiffs in this case purport to represent two classes of people. The first class consists of borrowers who were delinquent on their mortgage payments, applied for and were denied loan modification, but foreclosure proceedings had not yet been initiated by the lender. The second class of plaintiffs consists of borrowers whose property was sold in foreclosure proceedings after applying for and being denied loan modification, and whose statutory right of redemption period has not yet expired. Both putative classes allege a violation of their constitutional right to procedural due process because their mortgage loan servicers supposedly did not provide written notification of an adverse decision or an opportunity to appeal the denied request for loan modification.
The court denied the Plaintiff's motion for preliminary injunction. In so ruling, the Court considered whether there was a “substantial likelihood” that Plaintiffs would prevail on the merits of their claim by being able to show a deprivation of a protected liberty or property interest. The Court had four primary reasons for concluding that, “the regulations at issue here did not intend to create a property interest in loan modifications for mortgages in default.” First, the language of the HAMP guidelines did not “create an absolute duty on the part of the Secretary to consent to loan modifications.” Second, the loan modification program allows the servicer to make loan modification decisions based on profit calculations and therefore it is not a mandatory entitlement. Third, “the regulations promulgated by Treasury…clearly demonstrate that the Secretary allowed the exercise of some discretion…to the servicers,” and therefore lack the characteristics of a mandate. Fourth, the participation of loan servicers was made voluntary and the program was designed to allow servicers to make loan modification decisions based on their potential profits.
For those reasons, the court determined that the “Plaintiffs do not have a legitimate claim of entitlement to a loan modification.”
As you may recall, the U.S. Treasury's Home Affordable Modification Program provides a series of guidelines for servicers to modify loans in default or likely to default in order to forestall foreclosures. Treasury guidelines outline eligible borrowers and provide incentives to mortgage servicers to reduce monthly payments to sustainable levels.
The Plaintiffs in this case purport to represent two classes of people. The first class consists of borrowers who were delinquent on their mortgage payments, applied for and were denied loan modification, but foreclosure proceedings had not yet been initiated by the lender. The second class of plaintiffs consists of borrowers whose property was sold in foreclosure proceedings after applying for and being denied loan modification, and whose statutory right of redemption period has not yet expired. Both putative classes allege a violation of their constitutional right to procedural due process because their mortgage loan servicers supposedly did not provide written notification of an adverse decision or an opportunity to appeal the denied request for loan modification.
The court denied the Plaintiff's motion for preliminary injunction. In so ruling, the Court considered whether there was a “substantial likelihood” that Plaintiffs would prevail on the merits of their claim by being able to show a deprivation of a protected liberty or property interest. The Court had four primary reasons for concluding that, “the regulations at issue here did not intend to create a property interest in loan modifications for mortgages in default.” First, the language of the HAMP guidelines did not “create an absolute duty on the part of the Secretary to consent to loan modifications.” Second, the loan modification program allows the servicer to make loan modification decisions based on profit calculations and therefore it is not a mandatory entitlement. Third, “the regulations promulgated by Treasury…clearly demonstrate that the Secretary allowed the exercise of some discretion…to the servicers,” and therefore lack the characteristics of a mandate. Fourth, the participation of loan servicers was made voluntary and the program was designed to allow servicers to make loan modification decisions based on their potential profits.
For those reasons, the court determined that the “Plaintiffs do not have a legitimate claim of entitlement to a loan modification.”
Feds Issue Analyses of Mortgage Fraud Trends
The Financial Crimes Enforcement Network released the attached analysis of suspicious activity related to possible mortgage loan and foreclosure rescue fraud reported in the third quarter of 2009. Separately, the Federal Financial Institutions Examination Council updated its white paper on mortgage fraud detection and deterrence to help examiners understand, identify and detect mortgage fraud schemes and elements.
The FFIEC's white paper defines various types of fraud, gives examples of how individuals commit fraud, provides a list of red flags, and outlines best practices. The FFIEC's white paper does not establish any new examination policies or procedures, nor does it impose new requirements on banks. The FFIEC noted that during fiscal year 2008, at least 63 percent of all pending FBI mortgage fraud investigations involved dollar losses of more than $1 million each. The FFIEC's white paper provides red flags for a variety of mortgage frauds, such as builder bailout schemes, equity skimming, loan modification and refinance scams, phantom sales, property flipping and short sale schemes.
FinCEN found the two most common types of housing fraud in the third quarter of 2009 to be: (1) "mortgage rescue fraud," in which homeowners were conned into signing quit-claim deeds to their properties, which were then sold to straw borrowers and the former homeowners received eviction notices; and (2) false claims to convince distressed homeowners to pay large advance fees for modification services, with a subsequent failure to take any action on the homeowners' behalf. FinCEN's report showed that in the third quarter of 2009, depository institutions submitted 15,697 mortgage fraud Suspicious Activity Reports, a 7.5 percent increase over the same period in 2008.
California and Florida were the leading states for SARs involving housing fraud.
The FFIEC's white paper defines various types of fraud, gives examples of how individuals commit fraud, provides a list of red flags, and outlines best practices. The FFIEC's white paper does not establish any new examination policies or procedures, nor does it impose new requirements on banks. The FFIEC noted that during fiscal year 2008, at least 63 percent of all pending FBI mortgage fraud investigations involved dollar losses of more than $1 million each. The FFIEC's white paper provides red flags for a variety of mortgage frauds, such as builder bailout schemes, equity skimming, loan modification and refinance scams, phantom sales, property flipping and short sale schemes.
FinCEN found the two most common types of housing fraud in the third quarter of 2009 to be: (1) "mortgage rescue fraud," in which homeowners were conned into signing quit-claim deeds to their properties, which were then sold to straw borrowers and the former homeowners received eviction notices; and (2) false claims to convince distressed homeowners to pay large advance fees for modification services, with a subsequent failure to take any action on the homeowners' behalf. FinCEN's report showed that in the third quarter of 2009, depository institutions submitted 15,697 mortgage fraud Suspicious Activity Reports, a 7.5 percent increase over the same period in 2008.
California and Florida were the leading states for SARs involving housing fraud.
FTC Announces $1M+ Settlement w/ Debt Collector Involving Alleged Failure to Report Debts as Disputed
The Federal Trade Commission announced that a nationwide debt collector has agreed to pay a civil fine of more than $1 million to settle charges that it failed to report debts as disputed, and pressed consumers to pay debts they often did not owe.
According to the FTC’s complaint, the company and two of its officers illegally tried to collect invalid debts and reported them to the credit reporting agencies without noting that consumers disputed them. In addition, the FTC alleged that even after receiving information from consumers that a debt was paid off or did not belong to the consumer, the company continued to assert without a reasonable basis that the consumer owed the debt, without trying to confirm or dispute the consumer’s information, in violation of the FTC Act.
The FTC charged that the company, Credit Bureau Collection Services, and two of its officers, Larry Ebert and Brian Striker, violated the FTC Act and the Fair Debt Collection Practices Act. The company also is charged with violating the Fair Credit Reporting Act by reporting information to credit agencies that consumers had proved was inaccurate, failing to inform the credit agencies that consumers had disputed the debts, and failing to investigate after receiving a notice of dispute from a credit reporting agency.
In addition to imposing the $1.1 million civil penalty on the company, the settlement order:
- Bars them from making claims that a debt is owed or about the amount, without a reasonable basis;
- Requires the defendants, when a debt is questionable or a consumer questions it, to either close the account and end collection efforts or investigate the dispute. If they cannot show that the consumer owes a debt, they cannot sell the debt or provide it to any business other than the original client;
- Bars the defendants from further violations;
- Prohibits them from making unsupported statements to collect a debt or obtain information about a consumer; and
- Bars the company from re-reporting information to credit reporting agencies that it had voluntarily deleted from credit reporting before December 2008.
According to the FTC’s complaint, the company and two of its officers illegally tried to collect invalid debts and reported them to the credit reporting agencies without noting that consumers disputed them. In addition, the FTC alleged that even after receiving information from consumers that a debt was paid off or did not belong to the consumer, the company continued to assert without a reasonable basis that the consumer owed the debt, without trying to confirm or dispute the consumer’s information, in violation of the FTC Act.
The FTC charged that the company, Credit Bureau Collection Services, and two of its officers, Larry Ebert and Brian Striker, violated the FTC Act and the Fair Debt Collection Practices Act. The company also is charged with violating the Fair Credit Reporting Act by reporting information to credit agencies that consumers had proved was inaccurate, failing to inform the credit agencies that consumers had disputed the debts, and failing to investigate after receiving a notice of dispute from a credit reporting agency.
In addition to imposing the $1.1 million civil penalty on the company, the settlement order:
- Bars them from making claims that a debt is owed or about the amount, without a reasonable basis;
- Requires the defendants, when a debt is questionable or a consumer questions it, to either close the account and end collection efforts or investigate the dispute. If they cannot show that the consumer owes a debt, they cannot sell the debt or provide it to any business other than the original client;
- Bars the defendants from further violations;
- Prohibits them from making unsupported statements to collect a debt or obtain information about a consumer; and
- Bars the company from re-reporting information to credit reporting agencies that it had voluntarily deleted from credit reporting before December 2008.
Bankruptcy Attorneys Are Debt Relief Agencies
The United States Supreme Court recently held that: 1) attorneys who provide bankruptcy assistance to assisted persons are "debt relief agenc[ies]" under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"); 2) Section 526(a)(4) of the BAPCPA, which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, should be narrowly read; and 3) the disclosure provisions of Section 528 of the BAPCPA are valid as applied to the plaintiffs in this case.
Plaintiffs, a bankruptcy firm, a bankruptcy attorney and two of the bankruptcy firm's clients (collectively, "Milavetz"), filed a preenforcement suit in the district court seeking declaratory relief with respect to the BAPCPA's debt-relief-agency provisions. More specifically, Milavetz asked the court to hold that it is not a "debt relief agency" as that term is defined in the BAPCPA, and therefore is not bound by a number of restrictions and requirements that apply to debt relief agencies under the BAPCPA, such as the advice (§ 526(a)(4)) and disclosure (§ 528) requirements of the BAPCPA. In the alternative, Milavetz sought a judgment that the advice and disclosure requirements under the BAPCPA are unconstitutional as applied to attorneys.The district court found that “debt relief agency” does not include attorneys and that §§ 526 and 528 are unconstitutional as applied to attorneys. The Eighth Circuit rejected the district court’s conclusion that attorneys are not “debt relief agenc[ies]”; upheld application of § 528’s disclosure requirements to attorneys; and found § 526(a)(4) unconstitutional because it broadly prohibits debt relief agencies from advising assisted persons to incur any additional debt in contemplation of bankruptcy.
The Supreme Court granted certiorari in light of a split among the Courts of Appeal as to § 526(a)(4)'s scope, and also agreed to consider the other threshold issues.The Supreme Court agreed with the Eighth Circuit's holdings that attorneys are debt relief agenices when they provide qualifying services and accordingly that § 528's disclosure requirements apply to attorneys, but reversed its judgment that the advice provision in § 526(a)(4) is unconstitutionally overbroad. Justice Sotomayor delivered the opinion of the Court, joined by Justices Roberts, Stevens, Kennedy, Ginsburg, Breyer and Alito and Justices Thomas and Scalia filed opinions concurring in part and concurring in the judgment. As to whether the term "debt relief agency" includes attorneys, the Court found that "the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons," noting that a debt relief agency is “any person who provides any bankruptcy assistance to an assisted person” in return for payment, and by definition, “bankruptcy assistance” includes several services commonly performed by attorneys, such as providing legal representation with respect to a case or proceeding.
The Court also pointed to the fact that, while Congress did enumerate specific exceptions to the definition of debt relief agency, it gave no indication that it intended to exclude attorneys. The Court rejected all of Milavetz's arguments that the term "debt relief agency" should be read to exclude attorneys, including his reliance on the fact that the definition of the term "debt relief agency" does not expressly include attorneys and his claim that reading "debt relief agency" as defined in the BAPCPA to include attorneys impermissibly impedes on an area of traditional state regulation.
In addressing the scope and validity of § 526(a)(4), which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, the Court rejected Milavetz's broad reading of the provision, noting that Milavetz's interpretation rested primarily on the incorrect view that the ordinary meaning of the phrase “in contemplation of” bankruptcy encompasses any advice given to a debtor with the awareness that he might soon file for bankruptcy, even if the advice seeks to eliminate the need to file. Alternatively, the Government advocated a narrower construction of the statute, which rested on reading the phrase "in contemplation of" to forbid only advice to undertake actions to abuse the bankruptcy system.
Ultimately, the Court held that the phrase "in contemplation of" refers to a specific type of misconduct, concluding that the section "prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose," such that the prohibition primarily targets advising a client to "load up" on debt in anticipation of bankruptcy, with the expectation of obtaining its discharge. Under this reading of the provision, the Court looked to specific situations and noted in a footnote that "advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause" and "[a]dvice to incur additional debt to buy groceries, pay medical bills, or make other certain other purchases is also permissible"
Finally, the Court addressed the validity of § 528’s challenged disclosure requirements, which requires debt relief agencies to identify themselves as such and to disclose in their advertisements for certain services that the services are with respect to or may involve bankruptcy relief. Noting that the challenged provision regulates only commercial speech, the Court identified the standard for reviewing such requirements is intermediate scrutiny, meaning that "they must directly advance a substantial governmental interest and be no more extensive than is necessary to serve that interest.” Relying on this standard, the Court found that the disclosure requirements in § 528 both a) directly advance a substantial government interest - specifically, the deception of consumers with promise of debt relief without any reference to the possibility of filing for bankruptcy and b) are no more extensive than necessary to serve that interest given that the requirements only require a debt relief agency to give an accurate statement of the advertiser's legal status and the character of assistance provided, and do not prevent debt relief agencies from conveying any additional information.
Plaintiffs, a bankruptcy firm, a bankruptcy attorney and two of the bankruptcy firm's clients (collectively, "Milavetz"), filed a preenforcement suit in the district court seeking declaratory relief with respect to the BAPCPA's debt-relief-agency provisions. More specifically, Milavetz asked the court to hold that it is not a "debt relief agency" as that term is defined in the BAPCPA, and therefore is not bound by a number of restrictions and requirements that apply to debt relief agencies under the BAPCPA, such as the advice (§ 526(a)(4)) and disclosure (§ 528) requirements of the BAPCPA. In the alternative, Milavetz sought a judgment that the advice and disclosure requirements under the BAPCPA are unconstitutional as applied to attorneys.The district court found that “debt relief agency” does not include attorneys and that §§ 526 and 528 are unconstitutional as applied to attorneys. The Eighth Circuit rejected the district court’s conclusion that attorneys are not “debt relief agenc[ies]”; upheld application of § 528’s disclosure requirements to attorneys; and found § 526(a)(4) unconstitutional because it broadly prohibits debt relief agencies from advising assisted persons to incur any additional debt in contemplation of bankruptcy.
The Supreme Court granted certiorari in light of a split among the Courts of Appeal as to § 526(a)(4)'s scope, and also agreed to consider the other threshold issues.The Supreme Court agreed with the Eighth Circuit's holdings that attorneys are debt relief agenices when they provide qualifying services and accordingly that § 528's disclosure requirements apply to attorneys, but reversed its judgment that the advice provision in § 526(a)(4) is unconstitutionally overbroad. Justice Sotomayor delivered the opinion of the Court, joined by Justices Roberts, Stevens, Kennedy, Ginsburg, Breyer and Alito and Justices Thomas and Scalia filed opinions concurring in part and concurring in the judgment. As to whether the term "debt relief agency" includes attorneys, the Court found that "the statutory text clearly indicates that attorneys are debt relief agencies when they provide qualifying services to assisted persons," noting that a debt relief agency is “any person who provides any bankruptcy assistance to an assisted person” in return for payment, and by definition, “bankruptcy assistance” includes several services commonly performed by attorneys, such as providing legal representation with respect to a case or proceeding.
The Court also pointed to the fact that, while Congress did enumerate specific exceptions to the definition of debt relief agency, it gave no indication that it intended to exclude attorneys. The Court rejected all of Milavetz's arguments that the term "debt relief agency" should be read to exclude attorneys, including his reliance on the fact that the definition of the term "debt relief agency" does not expressly include attorneys and his claim that reading "debt relief agency" as defined in the BAPCPA to include attorneys impermissibly impedes on an area of traditional state regulation.
In addressing the scope and validity of § 526(a)(4), which prohibits a debt relief agency from, among other things, advising an assisted person to incur more debt in contemplation of filing for bankruptcy, the Court rejected Milavetz's broad reading of the provision, noting that Milavetz's interpretation rested primarily on the incorrect view that the ordinary meaning of the phrase “in contemplation of” bankruptcy encompasses any advice given to a debtor with the awareness that he might soon file for bankruptcy, even if the advice seeks to eliminate the need to file. Alternatively, the Government advocated a narrower construction of the statute, which rested on reading the phrase "in contemplation of" to forbid only advice to undertake actions to abuse the bankruptcy system.
Ultimately, the Court held that the phrase "in contemplation of" refers to a specific type of misconduct, concluding that the section "prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose," such that the prohibition primarily targets advising a client to "load up" on debt in anticipation of bankruptcy, with the expectation of obtaining its discharge. Under this reading of the provision, the Court looked to specific situations and noted in a footnote that "advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause" and "[a]dvice to incur additional debt to buy groceries, pay medical bills, or make other certain other purchases is also permissible"
Finally, the Court addressed the validity of § 528’s challenged disclosure requirements, which requires debt relief agencies to identify themselves as such and to disclose in their advertisements for certain services that the services are with respect to or may involve bankruptcy relief. Noting that the challenged provision regulates only commercial speech, the Court identified the standard for reviewing such requirements is intermediate scrutiny, meaning that "they must directly advance a substantial governmental interest and be no more extensive than is necessary to serve that interest.” Relying on this standard, the Court found that the disclosure requirements in § 528 both a) directly advance a substantial government interest - specifically, the deception of consumers with promise of debt relief without any reference to the possibility of filing for bankruptcy and b) are no more extensive than necessary to serve that interest given that the requirements only require a debt relief agency to give an accurate statement of the advertiser's legal status and the character of assistance provided, and do not prevent debt relief agencies from conveying any additional information.
Below, law professor M. Jonathan Hayes, who writes the BankruptcyProf Blog, previews the oral argument in Hamilton v. Lanning (08-998). For briefs and later updates in the case, check the Hamilton v. Lanning SCOTUSwiki page.
Hamilton v. Lanning will be argued on March 22, 2010. In it, the Supreme Court will consider the issue of whether a bankruptcy court “may consider evidence suggesting that [a chapter 13] debtor’s income or expenses during [the plan period] are likely to be different from her income or expenses during the pre-filing period.”
Respondent Stephanie Lanning filed a chapter 13 bankruptcy petition in October 2006. Shortly thereafter, as required by the Bankruptcy Code, she filed a chapter 13 Plan that proposed to pay the chapter 13 trustee (petitioner Jan Hamilton) monthly payments of $144 for thirty-six months – an amount based on her actual salary at the time of filing less her actual monthly living expenses.
Hamilton objected to the confirmation of the plan, arguing that the plain language of section 1325(b) of the Bankruptcy Code requires Ms. Lanning to make payments of $1,115 for sixty months. That provision provides a specific framework for computing the debtor’s “disposable income,” which is then projected for the plan period. Because such a plan would pay all creditors in full over approximately thirty-seven months, the trustee proposed that the debtor make payments of $756 for sixty months, although acknowledging that Ms. Lanning currently had no ability to make those payments. The difference between the debtor’s plan payment and the trustee’s plan payment arises from section 1325(b), which provides that the debtor’s income for plan purposes is her actual income for the previous six months and not her actual income at the time of filing the plan. Here, Ms. Lanning had received a bonus in the past six months that artificially increased her “income.”
The bankruptcy court agreed with Hamilton on the sixty-month requirement but overruled his objection with regard to the amount of the payment. Both the Bankruptcy Appellate Panel and Tenth Circuit affirmed. Hamilton then filed a petition for certiorari, which the Supreme Court granted on November 2, 2009.
Hamilton argues that section 1325(b) provides a specific “mechanical test” for computing how much chapter 13 debtors must pay. The payment must be based on the debtor’s “current monthly income,” a term defined in section 101(10A) as all income for the past six months, not on the debtor’s current ability to pay. Why? Because that is what Congress said in the statute. He argues that the legislative history leaves “no question” but that Congress specifically intended to “reduce judicial discretion” by requiring the use of the mechanical test. By contrast, the “well intentioned” “forward-looking test” that Lanning urges the Court to adopt is “result driven” and ignores the plain language of the Bankruptcy Code. Holding that the application of the mechanical test is not required in every case, and therefore a court may – as the Tenth Circuit held – consider a “substantial change in circumstances,” would add language and concepts to the Code that are simply not there. Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the amount that a chapter 13 debtor was required to pay was determined using a simple “ability to pay” test, and that amount was then multiplied, i.e., “projected,” by the number of months in the payment plan. Congress changed that in 2005 by redefining disposable income. According to the trustee, the Code now says that the court “shall” approve a plan such as the debtor’s only if the plan payment is computed using the mechanical test. Nothing in the Code permits the court to modify the computation by looking at “special circumstances.”
Finally, Hamilton argues that the mechanical test does not lead to a harsh result here because the debtor could have waited to file her petition (which would have changed the calculation of disposable income because there would then be a different prior six months) or could have simply filed under chapter 7 instead. It also does not lead to an absurd result simply because this debtor cannot get a plan confirmed. Someone is always disadvantaged by the limits placed in a statute.
Lanning responds that the Court must look to the statute as a whole. Congress intended that chapter 13 debtors pay as much as they can afford, and that has been the test since chapter 13 was originally enacted. Language in the Code supports the arguments: the debtor must pay projected disposable income “to be received” in the future; courts are permitted to modify plans without using a mechanical test; and courts must look at the debtor’s projected disposable income “as of the effective date of the plan.” All of these statutory provisions lead to the conclusion that courts must be able to consider factors other than those which existed on the petition date. It makes no sense to allow the court to consider something the day after the plan is confirmed but not the day before. Moreover, the term “projected” must mean to look into the future. To “project” the debtor’s disposable income, the court must be permitted to consider changed circumstances. If Congress meant disposable income “multiplied” by x months, it would have said so.
Lanning concedes that the mechanical test is usually the starting point for the determination of the plan payment and usually also the end. That said, Congress could not have intended “significant anomalies” to contravene the structure of chapter 13. The plan must be feasible and proposed in good faith. Debtors whose prior six months of earnings are lower than their current earnings “as of the effective date” will be able to confirm a plan paying less than they can afford using the mechanical test, i.e., the opposite of this case. Also, the trustee’s arguments encourage debtors to manipulate the system by timing the petition date to coincide with the ability to propose artificially low payments.
In his reply, Hamilton counters that Lanning concedes that the word “projected” means computing some monthly amount and multiplying that by some number of months. Here, he argues, she is simply unhappy with the amount required to be multiplied. He asserts again that section 1325 mandates the use of “current monthly income” as defined in section 101(10A) and reasserts that Lanning could have changed the results by filing at a different time or asking the court to use a different period. He reminds the court that in the Ninth Circuit case, Haney v. Kagenveama (In re Kagenveama), it was the chapter 13 trustee arguing for the forward-looking test, and therefore the mechanical test does not result in a blanket benefit for either side. It is a matter of what Congress intended, not which side benefits the most.
Hamilton v. Lanning will be argued on March 22, 2010. In it, the Supreme Court will consider the issue of whether a bankruptcy court “may consider evidence suggesting that [a chapter 13] debtor’s income or expenses during [the plan period] are likely to be different from her income or expenses during the pre-filing period.”
Respondent Stephanie Lanning filed a chapter 13 bankruptcy petition in October 2006. Shortly thereafter, as required by the Bankruptcy Code, she filed a chapter 13 Plan that proposed to pay the chapter 13 trustee (petitioner Jan Hamilton) monthly payments of $144 for thirty-six months – an amount based on her actual salary at the time of filing less her actual monthly living expenses.
Hamilton objected to the confirmation of the plan, arguing that the plain language of section 1325(b) of the Bankruptcy Code requires Ms. Lanning to make payments of $1,115 for sixty months. That provision provides a specific framework for computing the debtor’s “disposable income,” which is then projected for the plan period. Because such a plan would pay all creditors in full over approximately thirty-seven months, the trustee proposed that the debtor make payments of $756 for sixty months, although acknowledging that Ms. Lanning currently had no ability to make those payments. The difference between the debtor’s plan payment and the trustee’s plan payment arises from section 1325(b), which provides that the debtor’s income for plan purposes is her actual income for the previous six months and not her actual income at the time of filing the plan. Here, Ms. Lanning had received a bonus in the past six months that artificially increased her “income.”
The bankruptcy court agreed with Hamilton on the sixty-month requirement but overruled his objection with regard to the amount of the payment. Both the Bankruptcy Appellate Panel and Tenth Circuit affirmed. Hamilton then filed a petition for certiorari, which the Supreme Court granted on November 2, 2009.
Hamilton argues that section 1325(b) provides a specific “mechanical test” for computing how much chapter 13 debtors must pay. The payment must be based on the debtor’s “current monthly income,” a term defined in section 101(10A) as all income for the past six months, not on the debtor’s current ability to pay. Why? Because that is what Congress said in the statute. He argues that the legislative history leaves “no question” but that Congress specifically intended to “reduce judicial discretion” by requiring the use of the mechanical test. By contrast, the “well intentioned” “forward-looking test” that Lanning urges the Court to adopt is “result driven” and ignores the plain language of the Bankruptcy Code. Holding that the application of the mechanical test is not required in every case, and therefore a court may – as the Tenth Circuit held – consider a “substantial change in circumstances,” would add language and concepts to the Code that are simply not there. Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), the amount that a chapter 13 debtor was required to pay was determined using a simple “ability to pay” test, and that amount was then multiplied, i.e., “projected,” by the number of months in the payment plan. Congress changed that in 2005 by redefining disposable income. According to the trustee, the Code now says that the court “shall” approve a plan such as the debtor’s only if the plan payment is computed using the mechanical test. Nothing in the Code permits the court to modify the computation by looking at “special circumstances.”
Finally, Hamilton argues that the mechanical test does not lead to a harsh result here because the debtor could have waited to file her petition (which would have changed the calculation of disposable income because there would then be a different prior six months) or could have simply filed under chapter 7 instead. It also does not lead to an absurd result simply because this debtor cannot get a plan confirmed. Someone is always disadvantaged by the limits placed in a statute.
Lanning responds that the Court must look to the statute as a whole. Congress intended that chapter 13 debtors pay as much as they can afford, and that has been the test since chapter 13 was originally enacted. Language in the Code supports the arguments: the debtor must pay projected disposable income “to be received” in the future; courts are permitted to modify plans without using a mechanical test; and courts must look at the debtor’s projected disposable income “as of the effective date of the plan.” All of these statutory provisions lead to the conclusion that courts must be able to consider factors other than those which existed on the petition date. It makes no sense to allow the court to consider something the day after the plan is confirmed but not the day before. Moreover, the term “projected” must mean to look into the future. To “project” the debtor’s disposable income, the court must be permitted to consider changed circumstances. If Congress meant disposable income “multiplied” by x months, it would have said so.
Lanning concedes that the mechanical test is usually the starting point for the determination of the plan payment and usually also the end. That said, Congress could not have intended “significant anomalies” to contravene the structure of chapter 13. The plan must be feasible and proposed in good faith. Debtors whose prior six months of earnings are lower than their current earnings “as of the effective date” will be able to confirm a plan paying less than they can afford using the mechanical test, i.e., the opposite of this case. Also, the trustee’s arguments encourage debtors to manipulate the system by timing the petition date to coincide with the ability to propose artificially low payments.
In his reply, Hamilton counters that Lanning concedes that the word “projected” means computing some monthly amount and multiplying that by some number of months. Here, he argues, she is simply unhappy with the amount required to be multiplied. He asserts again that section 1325 mandates the use of “current monthly income” as defined in section 101(10A) and reasserts that Lanning could have changed the results by filing at a different time or asking the court to use a different period. He reminds the court that in the Ninth Circuit case, Haney v. Kagenveama (In re Kagenveama), it was the chapter 13 trustee arguing for the forward-looking test, and therefore the mechanical test does not result in a blanket benefit for either side. It is a matter of what Congress intended, not which side benefits the most.
Subscribe to:
Posts (Atom)
Posts
