By Keri P. Ebeck, Attorney
What is loss mitigation and how does it affect a credit union/lender as the mortgagee? Loss mitigation is a term used to describe loan workouts and negotiations between the homeowner and lender to prevent or rectify default and foreclosure. Typically, loss mitigation encompasses: loan modifications, short sales, forbearance agreements, deeds-in-lieu of foreclosure and any cash-for-keys options.
When a borrower is in default on their mortgage and/or in foreclosure, several states and jurisdictions at the state court level have court sanctioned loss mitigation programs. These programs allow the lender and homeowner to negotiate towards a loss mitigation workout to help the homeowner avoid further default and foreclosure before the lender can proceed with the foreclosure/sheriff’s sale process, but typically these processes create an uncertain amount of delay.
Within the last couple of years, this process has now moved to the federal bankruptcy courts. Unlike many state court programs, where a certain amount of delay is present, the bankruptcy court’s loss mitigation programs are tailored towards recognizing that the borrower/debtor is eligible for loss mitigation, having the lender review the borrower/debtor’s loan to determine within a short period of time whether or not a resolution of either one of the loss mitigation options is approved by the lender, or after thorough review, a borrower/debtor does not meet the requirements of the lenders’ loss mitigation programs. Either way, the bankruptcy court’s ultimate goal is to offer a program within the court process to facilitate a structured, meaningful negotiation but not to cause delay to the overall bankruptcy process.
How do the bankruptcy loss mitigation programs work and how does this affect the individual credit union lenders? Typically, most programs begin with the borrower/debtor filing a notice of request for loss mitigation, after which the bankruptcy court enters an order setting forth the loss mitigation terms and deadlines. These deadlines are: how long parties have to exchange financial information for the loss mitigation review; how long the lender has to review the debtor’s financial information; how long the parties have to negotiate a loss mitigation option; and overall, how long the loss mitigation program shall last in the bankruptcy. For example, in the Western District of Pennsylvania, the entire program from start to finish shall not proceed longer than 90 days from the date of the court’s order. This order also sets forth any status conferences or status reports that need to be filed with the court in an attempt to show the court that both parties are working in good faith.
When looking at the individual requirements of these programs, a credit union or any other lender may have several questions: (1) What financial information is exchanged between the parties? Any financial information that the lender deems relevant (within reason) to review a borrower/debtor for a loan workout. This could include: list of expenses, income, proof of income, tax returns, bank statements and a hardship explanation letter; (2) How is this information exchanged between the parties? Some loss mitigation programs are informal and are done through the normal course of dealing with the borrower’s/debtor’s attorney. Other more involved programs, such as the Western District of Pennsylvania, whose loss mitigation program is run through a loss mitigation portal online, allows both parties to register, access and upload/retrieve documents; (3) Is the lender required to participate in the loss mitigation process? The answer is yes, unless the lender successfully objects to the participation for a valid reason (i.e. loss mitigation review has already been done and/or offered to this borrower/debtor); (4) What happens to the bankruptcy process during this time? The bankruptcy process proceeds as normal and runs simultaneously with the loss mitigation process in order to avoid delay in payment to the creditors. Most, if not all of the loss mitigation programs do not allow motions for relief to be filed during the review process, but otherwise, the bankruptcy proceeds as normal; and (5) Can the bankruptcy court order the lender to offer a loss mitigation option? In short, the answer is no. Under Section 1322 (b)(2) of the Bankruptcy Code, it expressly prevents the court from altering the rights of secured mortgage lenders with claims on the debtor’s principal residence. The court’s purpose is to provide an environment where both parties can work in good faith towards a resolution. The court however, can order the parties to do just that, act in good faith throughout the process.
So the ultimate question is: What should the lender/credit union do if it receives a notice of loss mitigation in one of these jurisdictions? The best advice would be to contact WWR and allow us to walk you through the process and getting the documents needed for the loss mitigation review. Although the process may seem uncomplicated, it does require a strict adherence to the guidelines and deadlines set by the court.
As of today, very few bankruptcy courts have instituted loss mitigation programs such as those in New York, New Jersey, Rhode Island and just recently in the Western District of Pennsylvania. Some bankruptcy courts have an informal, less structured process such as Indiana. To date, there are no loss mitigation programs in Ohio, Michigan, Florida, or Illinois.
As more information and more bankruptcy loss mitigation programs become available, WWR will update the credit unions with this information through its bankruptcy blog wwrbankruptcy.com.
Keri Ebeck is an attorney practicing in the Bankruptcy unit of Weltman, Weinberg & Reis Co., LPA, located in the Pittsburgh office. She can be reached at 412.434.7959 and firstname.lastname@example.org.