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Michigan: Bankruptcy Court Reviews Payment Change Notices & HELOCs

Posted By USFN, Tuesday, May 7, 2013
Updated: Monday, November 30, 2015

May 7, 2013


by Michael J. McCormick
McCalla Raymer, LLC – USFN Member (Georgia)

Editor's Note: In the USFN e-Update (distributed May 14, 2013), the bankruptcy court decision in Pillow was incorrectly referenced as being a Georgia (rather than a Michigan) one. That headline and the citation have been corrected, and a link to the actual Pillow court decision has been added for convenient reference.

As mortgage servicers are aware, effective December 1, 2011, notice of payment changes during the course of a Chapter 13 case (if the property is the debtor’s principal residence) must be provided to the debtor, the debtor’s attorney, and the trustee at least 21 days before the new payment amount is due. In addition, the notice shall be filed as a supplemental claim using the new official Form B10 (Supplement 1) instead of on the docket. There is no accommodation or exception for home equity lines of credit (HELOCs) or other types of loans where the payment changes on a monthly basis (or otherwise frequently) despite vociferous objection and comments by servicers, attorneys, and scholars during the public comment period for the bankruptcy rules changes that ran between August 2009 and February 2010.

In In re Pillow, Case No. 11-11688 (Bankr. W.D. Mich. 2013), Fifth Third Bank filed a motion to relax the reporting requirements under Rule 3002.1. The bank’s claim arose from a HELOC that was a revolving or “open end” credit arrangement secured by residential real estate. The loan documents provided that the interest rate on the HELOC changed every month, therefore resulting in a change in the debtor’s payment obligation on a monthly basis.

In its motion, the bank cited the “unique burden” that Rule 3002.1 placed on the holder of a HELOC loan with frequent payment adjustments. In lieu of having to file a payment change notice each month, the bank proposed a six-month reporting interval, and asserted that the court had the authority to enlarge deadlines under Rule 9006. The court entered an order granting the bank’s motion without objection and then the U.S. Trustee (UST) filed a motion for reconsideration pursuant to Rule 9024.

In its motion for reconsideration, the UST argued that it did not receive notice of the bank’s motion and, more importantly, that the court did not have the authority to modify the reporting requirements under Rule 3002.1. The bank and the UST stipulated that the bank held a claim falling under Rule 3002.1 because the claim was secured by the debtor’s principal residence and the debtor provided for the claim under 11 USC § 1322(b)(5). Therefore, the parties also agreed that absent the court’s order, the bank would be required to file a notice of payment change every month, no later than 21 days before the payment change takes place. Under the circumstances, that would mean the bank would have a small window of nine days each month to calculate and communicate the payment change in time for counsel to prepare and timely file the payment change notice with the court.

At the time of the hearing on the UST’s motion for reconsideration, the bank had filed two notices of payment change in the case. The first notice showed a payment change of $2.68 and the bank’s counsel stated that in some months the payment had changed by as little as 32 cents. The court agreed that the purpose of Rule 3002.1 (i.e., to permit debtors to “cure and maintain” under 11 USC § 1322(b)(5) and avoid surprises) would not be advanced by requiring the bank to give monthly notice of these small changes.

The court was further swayed by the fact that the clerical and legal expenses associated with the preparation, filing, and serving of monthly payment change notices for “nominal or negative adjustments” supported the bank’s position that the notice requirements imposed a unique burden. Furthermore, although initially concurring in the UST’s motion for reconsideration, counsel for the Chapter 13 trustee stated that the filing of monthly payment change notices by the bank would impose a burden on the trustee.

Interestingly, the court stated that “it seems safe to assume” that the lender will pass on the costs of complying with Rule 3002.1 onto the borrower, resulting in the lender having to file a notice for fees, charges, and expenses under Rule 3002.1. Therefore, over a five-year period, “a debtor could be required to pay substantial additional collection costs to compensate her HELOC lender for giving notice of payment changes in the range of $1.00-$3.00 per month, all in the name of transparency.”

In reaching its decision in favor of the bank, the court noted that Rule 9006 was “inescapably broad and flexible,” containing phrases such as “at any time,” “in its discretion,” “with or without a motion,” and “for cause.” Moreover, Rule 3002.1 was not a rule listed in the exceptions under Rule 9006(b)(2) or Rule 9006(b)(3). Furthermore, the bank had filed its motion and as “cause” had articulated the “unique burden” associated with the twenty-one day deadline given the nature of HELOC loans. Finally, after no objection by the debtor, trustee, or UST, the court entered its order relaxing the reporting requirements, concluding the bank’s motion established cause to modify the 21-day period in this case under Rule 9006(b).

While denying the UST’s motion, to the extent the motion sought relief beyond reconsideration the bankruptcy court did make a few minor changes to its earlier order. To ensure the debtor has ample opportunity to address the impact of minor payment changes before she concludes her Chapter 13 case, the bank will be required to file payment change notices on a quarterly basis during the final year of the debtor’s plan. In addition, if developments arise in the case to persuade either the debtor or trustee that cause exists to revisit the reporting interval, the court indicated it would consider readjusting the period.

© Copyright 2013 USFN and McCalla Raymer, LLC. All rights reserved.
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