Law Firm Urges Servicers To Expand Ties to Bankruptcy Trustees
While bankruptcy is always disruptive to a mortgagor's payments, a law firm here says that servicers stand to benefit from closer communication with bankruptcy trustees.
Increasingly, when borrowers seek Chapter 13 bankruptcy protection, a court-designated trustee becomes responsible for making the mortgagor's monthly payment to the mortgage servicer. And that requires servicers to better understand the role of trustees in the process so they can avoid common mistakes, such as failing to conduct escrow analysis on loans in bankruptcy, attorneys at Wilson & Associates here told Mortgage Servicing News recently.
Because of misunderstandings and miscommunication between servicers and trustees, the process sometimes gets servicers into trouble.
Wilson & Associates recently convened a meeting of mortgage servicers and Chapter 13 bankruptcy trustees to discuss problems that have arisen when home loans are affected by a bankruptcy filing.
In the states of Arkansas and Tennessee, where Wilson & Associates serves mortgage bankers, in most cases bankruptcy trustees operate as "conduit trustees," controlling the flow of funds from a borrower during their reorganization to creditors, which includes making mortgage payments on behalf of the borrower.
But sometimes servicers fail to provide basic information that the trustee needs to make these payments, including the monthly payment amount and a breakdown of any arrearage, according to Leslie Mann, an attorney with the firm. Servicers sometimes submit a lump-sum amount of debt owed to the trustee, which doesn't give them enough information to make the scheduled monthly payments.
Ms. Mann told MSN that transfers of servicing rights also "add a big wrinkle to things." Servicing transfers raise the issue of whether the lender is required to file a transfer of claim, she noted. This is one area where legal exposure can be incurred.
"The trustees are involved in a lot of the cases in which the debtors attorneys are filing against our clients, the mortgage servicers," Ms. Mann said.
In many cases servicers are not used to having a trustee make the mortgage payment on behalf of a borrower during the Chapter 13 reorganization, but increasingly this is the trend nationally - not just in Tennessee and Arkansas - as bankruptcy judges seek ways to expedite the Chapter 13 process.
If trustees have inadequate information about the amount of the payment or about a servicing transfer, they may withhold payment.
Escrow accounts for the payment of taxes and insurance can also create problems.
"Another big problem has been when the payments change during bankruptcy, because once again the servicers aren't used to the trustees making these payments," Ms. Mann said. Trustees have to be notified about payment changes, she said. Some mortgage servicers don't perform escrow analysis during bankruptcy, which can cause "huge problems" when a loan emerges from reorganization, she said. Servicers sometimes postpone escrow changes during bankruptcy for fear of litigation if they engage in correspondence with the borrower.
But efforts to collect a delinquency or shortage after the discharge of a bankruptcy also can pose problems and spark litigation. Ms. Mann recommends that escrow analysis be performed and the trustee informed of any necessary adjustments to reflect changes in tax or insurance bills.
Robert Wilson Jr., chairman of the firm's executive committee, said that the recent meeting with Chapter 13 trustees demonstrated that the trustees want to communicate with the mortgage servicing industry. Too often, the relationship between trustees and servicers hinges on a kind of "tribal knowledge" between the parties. "Over the past 26 years that I've been practicing mortgage banking law, there seems to be an aura or a mystique that surrounds chapter 13 bankruptcy trustees," Mr. Wilson said.
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