Mortgage Servicing Under the Microscope

Rule 3002.1

The judge looked closely at the creditor’s accounting records and found the usual fright.

Having looked, the court held secured creditor  USDA in contempt of the automatic stay and the confirmation order for its loan servicing blunders.

Two years after the debtor’s discharge, after an evidentiary hearing, and a written opinion, the debtor still didn’t have a full accounting of the payments on his loan.  USDA was ordered to pay damages and attorneys fees, and to produce a full and accurate mortgage accounting.

The case is Franklin, Bankr. NH Augsut 24, 2017.  The result is debtor-friendly.

As I read the judge’s discussions of confusing loan histories, inexplicable transactions into and out of suspense accounts, and non chronological transactions, it felt so familiar.  See my tale of my most recent Rule 3002.1 case.

What happened in Franklin

The debtor experienced difficulty with his home loan right from the start of his Chapter 13 case in 2009.  He thought he was current;  the USDA claim alleged he was one payment in arrears. Post petition payments were put in suspense accounts; the debtor was reported delinquent on his home loan to the credit reporting agencies.  Monthly statements failed to credit payments made the month before.

The debtor was in repeated contact with the creditor about its accounting errors over four years.

At the conclusion of the Chapter 13, the trustee filed a Notice of Final Cure Payment, to which the creditor did not respond.

After the debtor filed his motion for contempt, USDA supplied an Amended Loan History, which the court found “confusing and patently inconsistent.”

At the hearing on the motion, the debtor was the only witness;  USDA did not offer a witness to explain its conduct or its records.  The documentary evidence of mortgage statements, loan histories and bank records were not comprehensive.

Nonetheless, the court found that USDA had undoubtedly misapplied payments and has yet to account for properly for all payments received after the Chapter 13 was filed, including omission of the trustee’s first payment under the plan.

The holding

The court held that the payment misapplication during the case violated the automatic stay and the confirmation order.

To effectuate [the cure and maintain provision of the plan] a mortgagee is required to apply regular payments made during the pendency of the Chapter 13 case to the current payments due and owing, and the arrearage payments from the Chapter 13 trustee to the prepetition arrears.  Failure to properly account for payments in this manner renders the mortgagee in contempt of the confirmation order.

Judge Deasy went on

Because the loan history records are cumulative, with each entry building on the last entry, the Court concludes that USDA’s errors at the beginning of the bankrutpcy and its failure to correct those errors, infect their record keeping for the duration of the case.  Therefore, it is clear that the USDA violated both the automatic stay and the confirmation order.

The remedy was damages for an estimate of the debtor’s time wrestling with USDA during the case; attorneys fees; and an order to produce a credible accounting.

The takeaways

I wonder at the lack of mention of Rule 3002.1 throughout the proceedings.   The trustee filed the notice and USDA did not respond.  Under the provisions of 3002.1(g), the holder of the claim shall file a response.  The rule goes on:

Failure to Notify. If the holder of a claim fails to provide any information as required by subdivision (b), (c), or (g) of this rule, the court may, after notice and hearing, take either or both of the following actions:

(1) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or

(2) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.

Thus, the court could have barred USDA from presenting evidence on this issue.

Does it matter that the debtor’s motion sought contempt rather than a determination that the default had been cured?

Secondly, I wonder whether the debtor’s damages might have been substantially greater had he been able to document his time spend with USDA or if he had been able to better estimate his time.  The Court was certainly willing to award damages had it been given more help in trial presentation.

Take note, colleagues, and take up this cause for our clients.