The debtors’ chapter 13 plan included a provision requiring the first mortgagee to send the debtors monthly mortgage loan statements. The mortgagee argued that this made the plan unconfirmable.
As with many jurisdictions, the local bankruptcy rules adopted an official chapter 13 plan form. The local rules required that all chapter 13 plans conform to the form “with such alterations as may be appropriate to suit the circumstances.” In fact, the form itself included a section titled “other provisions” which allowed debtors to add provisions not otherwise found in the form. The court noted that standardized plans provide ease and efficiency in the preparation and review of plans, and help reduce the cost of chapter 13 relief. So non-standard or additional terms should be kept to a minimum.
The court began by noting that section 1322 of the Bankruptcy Code allows modification of the rights of secured creditors, except claims secured only by real property that is the debtor’s principal residence – although a debtor is permitted to cure pre-petition monetary defaults while maintaining ongoing post-petition payments even for nonmodifiable mortgage loans.
The debtors had proposed a “cure and maintain” chapter 13 plan: the plan required them to pay their pre-bankruptcy arrearage in 60 monthly payments through the chapter 13 trustee (cure), while making current monthly payments directly to the mortgagee (maintain). In addition to the standardized terms, the debtors’ plan included a requirement in the “other provisions” portion of the plan that the mortgagee send “monthly mortgage statements consistent with its prepetition practice.” The provision explicitly stated that sending the statements would not be considered a violation of the automatic stay.
The mortgagee raised several objections to this requirement. It argued that there were logistical limitations so that it could not provide the debtors the required information. Instead it proposed that the debtors could call to request a determination of the amount that they owed at any time. The mortgagee also argued that (1) federal regulations exempted it from sending statements to borrowers during bankruptcy, (2) sending statements would likely violate the automatic stay, and (3) the requirement was an impermissible modification of its claim.
The court reviewed cases and other support for the proposition that imposing procedural obligations on a mortgagee did not violate the anti-modification provision, and could even be desirable to facilitate a successful “fresh start.” As observed by the authors of the “definitive treatise” on chapter 13 (Lundin & Brown), debtors’ attorneys have developed “best practices” to help ensure successful completion of plans – including the addition of plan provisions requiring monthly statements and periodic accountings of fees and charges.
Based on the weight of the legal authority, the court concluded that the periodic statement requirement did not render the plan unconfirmable. Section 1322 prohibits modification of “rights,” while the requirement for statements was an obligation, or alternatively was so ministerial or procedural in nature that it was not the kind of right that was intended to be protected.
With respect to the automatic stay argument, in addition to the plan provision itself, local bankruptcy rules granted secured creditors relief from the stay to the extent necessary to send statements, payment coupons, and the like. As for the argument that providing a statement presented a logistical challenge, the court found that the burden on the mortgagee was outweighed by the harm to the debtors if statements were not sent.
With respect to the argument that the mortgagee was exempt from providing statements, the court reviewed the history of mortgage servicing rules promulgated by the Consumer Financial Protection Group (CFPB). Amendments to the rules promulgated in 2013 required periodic mortgage statements throughout the life of the loan even if the loan was in foreclosure or the borrower was in bankruptcy. The CFPB amended the regulations in early 2014 to exempt servicers from the periodic statement requirement while their borrowers were in bankruptcy. However, the court noted that the regulations excuse servicers from sending statements, but did not prohibit them from doing so.
The court reiterated that the debtors proposed only one additional requirement, namely to receive the same periodic statements that they received prior to bankruptcy. This was not so onerous that it modified the mortgagee’s substantive rights, and it did not impose any obligation that the mortgagee did not have before. Accordingly, the court overruled the mortgagee’s objection to the plan.
As outlined in the opinion, federal regulations normally require periodic statements for the life of a loan that include: payment amount, due date, amount and date of any late fees, other fees and charges, transaction activity, application of payments, contact information, account information (outstanding principal, interest rate, date of interest rate changes, prepayment penalties) and home ownership counselor information.
It is not clear why the mortgagee so adamantly opposed a requirement that it resume sending statements during implementation of the plan. Presumably the statements are generated automatically by a servicer’s software. Perhaps the software does not easily account for the complication of cure payments as determined in the bankruptcy in addition to standard payments? However, it seems that diligent debtors would require the type of information outlined above in order to ensure compliance with the loan documents, and as between the servicer and the debtor, the servicer is clearly in a better position to provide the information. So the result seems reasonable.
Vicki R Harding, Esq.