While the issue of lien stripping in no discharge chapter 13’s continues to work its way through the appellate courts, two bankruptcy courts have recently weighed in and sided with the majority, which permits lien stripping even when a discharge is unavailable. The courts in In re Wapshare, 492 B.R. 211 (S.D. N.Y. 2013) and In re Dolinak, 2013 WL 3294277 (Bankr. D.N.H. June 28, 2013), both concluded that the lack of a discharge did no preclude lien avoidance of undersecured junior mortgages, but rather that permanent lien avoidance is conditioned upon completion of payments under the debtor’s confirmed plan. Finding that the junior mortgagees did not have “allowed secured claims” both courts also rejected the argument that 1325(a)(5)(B) required debtors to pay in full the debt on the junior mortgage or obtain a discharge.
Wells Fargo Financial Finally Moving to Claims Review and Compensation
In 2011, the Federal Reserve Board issued a cease and desist order and assessed an $85 million civil money penalty against Wells Fargo & Company of San Francisco, a registered bank holding company, and Wells Fargo Financial, Inc., of Des Moines. (as distinguished from Wells Fargo Home Mortgage or by Wells Fargo Bank, N.A.) The order addresses allegations that Wells Fargo Financial employees steered potential prime borrowers into more costly subprime loans and separately falsified income information in mortgage applications. The order affect certain mortgage loans made between January 1, 2004 and September 30, 2008. In addition to the civil money penalty, the order requires that Wells Fargo compensate affected borrowers.
Wells Fargo Financial made subprime loans that primarily refinanced existing home mortgages in which borrowers received additional money from the loan proceeds in so-called cash-out refinancing loans. The order addresses allegations that Wells Fargo Financial sales personnel steered borrowers who were potentially eligible for prime interest rate loans into loans at higher, subprime interest rates, resulting in greater costs to borrowers. The order also addresses separate allegations that Wells Fargo Financial sales personnel falsified information about borrowers’ incomes to make it appear that the borrowers qualified for loans when they would not have qualified based on their actual incomes.
According to both the Federal Reserve Board and Wells Fargo, some current and former customers of Wells Fargo Financial will receive notices that they may be eligible to file a claim. For more information, you can visit the Wells Fargo Financial Consent Order Website.
FHFA Turns to Industry Lobbyist for Advice on Force-placed Insurance
Mortgage lenders routinely require homeowners to purchase property insurance to protect the lender’s interest in the home in the case of fire or other casualty. If the homeowner fails to purchase such insurance or fails to provide evidence of insurance, most loan documents will authorize the lender to purchase insurance to protect its interest. This coverage is called forced-placed or collateral protection insurance. Force-placed insurance has long been an area of abuse. Not only do servicers improperly place policies, but the field is filled with price gouging and illegal kickbacks. Bankruptcy debtors have not been immune from troubles caused by force-placed insurance. For example, in In re Cothern, 422 B.R. 494 (Bankr. N.D. Miss. 2010), the servicer’s unrelenting and improper efforts to collect force-placed insurance premiums drove the borrowers into bankruptcy. “The incompetence here is absolutely radiant” is how the judge in Cothern describes the servicer’s conduct.
After years of effort to get Fannie Mae and Freddie Mac to address the problem of force-placed insurance, Fannie Mae unveiled a plan last year that would have limited financial ties between servicers and insurers. In February of this year, FHFA, the agency that oversees Fannie Mae, vetoed Fannie Mae’s plan–a plan that would have lowered the cost of force-placed insurance significantly. Now we learn from Jeff Horwitz at American Banker that FHFA’s “outside expert” on force-placed insurance is actually an industry lobbyist who is well versed in protecting financial institutions. For more details, read Jeff’s article here.
Are subprime loans making a comeback?
An article in Sunday’s Los Angeles Times suggests that lenders in markets with rising property values such as California are looking to increase their subprime lending. While current mortgage interest rates are around 3.5%, these subprime loans comes with interest rates starting at 7.95% and going up from there. As with the old subprime products, high fees are common for this next generation of subprime loans. So what’s different? Most new subprime loans require much higher down payments and evidence of an ability to pay.
Forgiving Our Debtors (Unless They Are Prisoners)
Through various provisions in the Bankruptcy Code, Congress has identified debts that should not be forgiven. These include, for example, debts for certain taxes, debts for money obtain through fraud, debts for domestic support obligations, and debts incurred from drunk driving (think, personal injury or wrongful death judgments). Congress has also identified debtors that will be denied a fresh start because they acted badly and contrary to the bankruptcy process. This usually happens when the debtor is not honest and makes false disclosures with respect to assets and property.
Nowhere in the Bankruptcy Code does Congress prohibit prisoners from filing bankruptcy.
While Congress has not precluded prisoners from being debtors, a bankruptcy court in the recent decision In re Moore, 2012 Bankr. LEXIS 3897 (Aug. 24, 2012) has effectively done just that. If you are a prisoner, your case will be dismissed. Why? Because as a prisoner, you are not at liberty to personally attend the meeting of creditors (also known as the 341 meeting). Section 343 of the Bankruptcy Code and Federal Rule of Bankruptcy Procedure 4002 require the debtor’s presence at the meeting of creditors. However, the Moore court acknowledged that it had discretion to waive debtor’s presence at the meeting of creditors for the physically disabled, gravely ill, or deployed military personnel. But the court concluded that “incarceration did not constitute a good and sufficient reason to waive the debtor’s attendance.” Since issuing its opinion, the court has issued a show cause order why the debtor’s case should not be dismissed for failing to attend the 341 meeting.
So much for forgiving our debtors…
Life After Bankruptcy
Vicki Elmer at the New York Times has written about getting a mortgage after filing for bankruptcy (here). The bottom line is that bankruptcy isn’t the end of the world. Indeed, for many, bankruptcy provides a much needed fresh start, putting people on sounder financial footing and allowing them to rebuild their credit. It is even possible to get a mortgage.
Heritage Pacific’s Debt Collection Practices Garner More Attention
Heritage Pacific Financial, a debt buyer of foreclosed second mortgages, first popped up on my radar screen nearly two years ago. At that time Heritage was filing multi-defendent complaints in state and federal courts against California home loan borrowers–mostly Latino–claiming that the borrowers fraudulently misstated their monthly income on their loan applications. I suspect that they were trying to get people to settle with them and save filing fees, but at least most federal district court judges recognized that suing multiple defendants on multiple contracts in the same complaint is not proper under the Rule 20 of the Federal Rules of Civil Procedure. (See Order here). As a result, those cases didn’t go very far in court. With the multi-defendant model out the door, Heritage turned its attention to bringing non-dischargeability actions against bankruptcy debtors. Court documents show debtors, many chapter 7 pro se debtors, entering into settlement agreements to pay Heritage thousands of dollars over several years. Sadly, in many of these cases, the underlying debt is uncollectable based on state anti-deficiency laws, Heritage cannot show that is has been assigned the original lender’s fraud claim, or Heritage is unable to demonstrate that the borrower made any false statements or that the original lender relied on any false statement.
Several cases are now pending against Heritage in state courts alleging violations of California’s anti-deficiency laws, the Fair Debt Collection Practices Act, the Rosenthal Act (the state’s version of FDCPA) and state unlawful business practices law.
Earlier this week, Rick Jurgens of Center for Investigative Reporting, wrote a story that focuses on some of the borrowers that have been targeted by Heritage. ABC affiliate, KGO-TV, in conjunction with CIR, also put together a video news story on Heritage.
NCBRC is looking into Heritage’s practice of bringing frivolous non-dischargeability actions in bankruptcy courts throughout California. The United States Trustee should also consider a thorough investigation of Heritage and its bankruptcy practices.
Shared Responsibility, Shared Risk
NCBRC Project Director, Tara Twomey, and co-author, Prof. Katie Porter, have written a chapter in the newly released book Shared Responsibility, Shared Risk: Government, Markets and Social Policy in the Twenty-First Century (Jacob S. Hacker and Ann O’Leary eds., Oxford University Press 2012). The chapter, “Risk Allocation in Home Ownership,” focuses on how changes in mortgage contract terms increased home ownership risks for families. After discussing how recent decades of mortgage product innovation both increased the risk of home ownership and shifted more of that risk to borrowers, the chapter offers three core principles to guide the future regulation of mortgages. “First government should collect comprehensive reliable data on mortgage products and should monitor the way in which those products allocate the risks between borrowers and lenders. Second, any effort to rebalance the risks inherent in the mortgage process must consider consumers’ limited abilities to evaluate complex financial products. Third, any successful regulation of mortgage products requires the development and deployment of effective enforcement tools for consumer protection laws.”
Supreme Court Denies Cert. in Baud v. Carroll
Today the Supreme Court denied certiorari in the case of Baud v. Carroll, which raised the issue of the appropriate applicable commitment period for an above-median income debtor with no “projected disposable income.” The Sixth Circuit Court of Appeals held below that above-median income debtors with no projected disposable income must propose five year plans if the trustee or unsecured creditor objects to a shorter plan period. See 634 F.3d 327 (6th Cir. 2011). Attention will now turn to Flores v. Danielson, No. 11-55452 (9th Cir.), where the Ninth Circuit will consider whether the Supreme Court’s ruling in Hamilton v. Lanning, 130 S.Ct.2464 (2010), abrogated the Ninth’s Circuit prior ruling on the applicable commitment period in Kagenveama v. Maney, 541 F.3d 868 (9th Cir. 2008).
Seventh Circuit on Jurisdiction Post-Stern
The fallout from Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) is really picking up. The Seventh Circuit Court of Appeals became the first circuit court to weigh in, ruling, in a case with facts similar to those of Stern, that the bankruptcy court lacked jurisdiction to issue a final judgment on a claim, asserted by debtors in two proposed class actions, that a medical services creditor violated a Wisconsin state statute by filing proofs of claim revealing the debtors’ medical information. In re Ortiz, — F.3d —-, 2011 WL 6880651 (7th Cir., Dec 30, 2011). Courts disagree over whether a bankruptcy court may issue a final judgment in a proceeding to avoid an allegedly fraudulent transfer. Compare In re Citron, 2011 WL 4711942 (Bankr. E.D. N.Y., Oct. 6, 2011) (court may issue final judgment), with In re Heller Ehrman LLP, — F.Supp.2d —-, 2011 WL 6179149 (N.D. Cal., Dec. 13, 2011) (court may not issue final judgment). A question several courts have asked is what a bankruptcy court should do when a matter designated as “core” in 28 U.S.C. § 157(b)(2) is one that must be decided by an Article III court. The two possibilities are that “unconstitutional core” matters default to the procedure used for non-core matters, (i.e., proposed findings and recommendations under 28 U.S.C. § 157(c)) or, alternatively, that such matters should be entirely removed from the bankruptcy courts. Most courts considering the issue hold that bankruptcy courts retain the power to enter proposed findings and recommendations in this class of cases. See, e.g., In re Byce, 2011 WL 6210938 (D. Idaho, Dec. 14, 2011); In re Mortgage Store, Inc., 2011 WL 5056990 (D. Hawai’i, Oct. 5, 2011); In re Heller Ehrman LLP, above.