default servicing in print and online @ dsnews.com 01.2016
ANNUAL DIRECTORY OF
DEFAULT SERVICING LAW FIRMS
A 2016 UPDATE ON THE STATE OF THE LEGAL PROFESSION
FROM THOSE IN MORTGAGE SERVICING WHO KNOW IT BEST
Legal Industry Update National Focus
SCOT T A. SYDELNIK , ESQ., DAVIDSON FINK , LLP
A HIGHER BAR TO
Changing Proof of Claim Requirements Increase
the Burden of Proof for Secured Creditors
With the advent of the revised Proof of Claim form, that took effect nationwide
on December 1, 2015, creditors will be required to provide more detailed loan
information, which they, for various reasons, may not necessarily possess. The
changes to the form, necessitated by the Federal Rules of Bankruptcy Procedure,
mark a dramatic shift from just a few years ago when the documentary proof
and detail needed were extremely limited. For creditors, the implications of these
changes include, most significantly, the need to spend more time and incur more
costs to complete a claim and the increased susceptibility to sanctions for filing an
insufficient claim. As a result, creditors may feel caught in a catch-22 situation: file
a proof of claim with partial or missing information or sit out the bankruptcy and
don’t file one at all to avoid the risk of sanctions. However, by increasing attention
to loan histories and loan transfers, as well as working closely with counsel,
servicers can successfully navigate the demands of this increased burden of proof.
The claim form effective December 1, 2015
marks a continued move toward increasing
the information needed, and consequently, the
burden on creditors. The increased detail comes
in response to a demand from judges, trustees,
and debtor’s counsel for more transparency
in regards to what the debtor owes on their
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mortgage and what must be paid through
their Chapter 13 plan in order to effectuate
an effective reorganization. This follows the
bankruptcy rules that took effect in December
2011, which first introduced the Mortgage Proof
of Claim attachment.
Previously, prior to the 2011 change, claims
were rudimentary and lacking in detail: a
creditor’s proof of claim could be supported
solely by Official form 10, which set out very
basic information regarding the claim and
were used universally. To complete the form,
creditors simply needed to set forth the amount
of the claim, whether the claim was secured or
unsecured, whether or not the claim is entitled
to priority, the origin for the claim, the amount
of arrears owing at the time of the petition,
and the date the debt was incurred. While not
required in the Code, most creditor’s attorneys
made it a practice to attach an unofficial
worksheet, containing a basic breakdown of
the arrears owing including missed payments,
corporate advances and escrow advances (though
a breakdown of those fees was generally not
included). The introduction of the Mortgage
Proof of Claim Attachment in December
2011 marked the beginning of the shift toward
Federal regulations demanding greater detail:
creditors now needed to provide an itemized
statement with the principal amount of the
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CLEAR
“For servicers, particularly for
smaller servicers and for loans
that have been service transferred
multiple times during a default,
providing payment history details required
could prove difficult.”
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Legal Industry Update National Focus
claim and a breakdown of all other sums
owed (interest, fees, costs, attorneys’ fees, late
charges, etc., and an escrow statement). In
the first date of default is defined as the first
instance in the borrower’s most recent, and not
fully cured, default. To put it differently, if the
“For creditor’s attorneys, the time to
complete could likely double as the
full history of default must now be
physically entered into the new form.”
addition, creditors who were unable to provide
these details now faced sanctions pursuant to
Bankruptcy Rule 3001(c)(2)(D), for failure to
provide the information required by the form,
including an “award of other appropriate relief,
including reasonable expenses and attorney’s
fees caused by the failure.” (Bankruptcy Rule
3001(c)(2)(D)). So while under 11 U.S. Code §
502 a claim is “deemed allowed, unless a party
in interest” objects, the threat of sanctions places
the onus on the creditor to make sure the claim
is accurate and lessens the burden on the debtor
to proffer the necessary evidence to object to a
claim.
The Mortgage Proof of Claim Attachment
is undergoing another significant revision under
the new rule and changes to this form are some
of the most relevant for servicers. The new form
drastically differs from the existing form in that
it requires the creditor to provide a detailed list
of all transactions on the claim from the first
default date to the petition date. This obligates
creditors to provide a loan history that “reveals
when payments were received, how they were
applied, when fees and charges were incurred,
and when escrow charges were satisfied”
(Committee Note).
Upon the release of the new guidelines, there
was concern that the loan history would need to
include payments from the date of origination.
However, according to the revised guidelines,
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borrower defaulted on the loan but subsequently
fully cured, that time period would not need to
be included. However, if the borrower defaulted
further and did not fully cure, the payment
history covering that default period would need
to be included in the transaction history.
The requirement of a more detailed loan
history also entails the need to input all of this
information into the Mortgage Proof of Claim
Attachment; the form does not allow creditors
to simply attach their own payment histories.
There is hope that this task will not prove too
daunting for creditors and their attorneys as the
Committee on Rules of Practice and Procedure
notes explain that “completion of the revised
form can be automated,” and will therefore
“permit claimants to comply with Rule 3001(c)
(2)(C) with efficiency and accuracy” (Committee
Note). Nevertheless, it is uncertain whether
automation will be practical or useful at all for
all creditors due to vast variations in creditors’
systems and record keeping practices. It remains
to be seen whether the automation will be
compatible with the technology used by all
creditors.
While the argument from the committee
and backed by judges, trustees, and debtor’s
attorneys that the increased levels information
required to be provided by secured mortgage
creditors provides clarity and cuts down on
costs and time relating to the filing of objections
to proof of claims is certainly compelling, the
increased regulation also means more time
expended by servicers and creditor’s attorneys
completing the form. For creditor’s attorneys,
the time to complete could likely double as the
full history of default must now be physically
entered into the new form. If a payment hasn’t
been made in 3 years for example, that means
a creditor will need to list in detail 36 missed
payments along with any partial payments made
and exactly how those partial payments were
applied. The increased time required to properly
input the payment history data could ultimately
lead to higher servicing and attorney’s fees
incurred, which consequently could be passed
onto the debtor. A more practical solution would
be to require creditors to attach a loan history,
but in the format used in their ordinary course
of business.
For servicers, particularly for smaller
servicers and for loans that have been service
transferred multiple times during a default,
providing payment history details required could
prove difficult. Unfortunately, due to service
transfers involving improperly boarded loans,
servicers are sometimes unable to provide loan
history details—this occurs predominantly
where partial payments and trial modifications
payments were made and no permanent
modification followed. Moving forward, it will
be incumbent on the servicers to ensure that
when a loan is received as a service transfer, that
the full history of loan since default is received,
including all notes and annotations made in the
file. Given the increased time and complexity
involved in completing a claim, it will be
incumbent on creditors to provide referrals for
claims to their attorneys well in advance of the
bar date.
With the ever present threat of sanctions
for failure to provide information required by
the form, creditors find themselves in a very
precarious position if the information required
is not available. While these changes pose
challenges such as increased time and cost,
missing information resulting from service
transfers and the threat of sanctions, by ensuring
proper boarding of loans and providing payment
history to creditor’s attorneys well in advance of
the bar date, servicers can make this transition
as smooth as possible.