Home Loan Servicers Harvest A Bumper Crop In Bankruptcy

Bankruptcy seems a fertile field for loan servicers.  A few charges sown here, a few fees sown there, when the loan is paid off there can be a bumper crop of profits for a loan servicer to harvest.  Creditors are generally prohibited by the automatic stay from billing the debtor in bankruptcy for pre-petition debt. Some servicers claim this prohibition as excuse to stop sending monthly statements.  An unscrupulous servicer is thus provided an excellent opportunity to plant undisclosed fees that will bear fruit when the loan is ultimately paid off or refinanced.

Most debtors trust their loan servicer to properly account for payments and to correctly reflect the ongoing balance due on their home loan. Few borrowers ever re-calculate their loan balances and cross check the “math”.  If the borrower keeps their home after bankruptcy discharge and continues to make monthly payments, it could be years after the case is closed before the inflated payoff blooms and shows itself.

The reasons for this problem are many.  Mortgage insurer servicing guidelines may require the servicer to regularly inspect a home that secures an insured loan and to take steps to protect the security.  Older loan servicing software, designed without the accounting requirements of bankruptcy in mind, contribute to the problem. This problem is particularly acute in a Chapter 13 proceeding because it can last from three to five years.

Courts have rejected attorney fees charged by a loan servicer for the preparation and filing of a proof of claim.  Yet it is not uncommon to see charges of $350 or more for this service show up on a loan payoff statement.  In many jurisdictions like Oregon, a motion for relief from stay has been reduced to a simple form easily completed by a secretary or legal assistant.  Fees as high as $1,200 and more are routinely charged to the debtor, even when the motion has been withdrawn as unwarranted.  Legal fees as well as other charges can significantly increase the loan payoff when they are “discovered” a few days before the closing of a sale or refinance transaction.

Congress made an attempt at curbing some abusive lender practices in 2005 with new section 524(i).  Only time will tell if this statutory provision stems the bitter harvest for a debtor when a home loan is paid long after discharge.

A debtor and the debtor’s attorney can help to prevent this agricultural adventure by keeping a close eye on loans that are being serviced in bankruptcy.  Making payments timely and keeping a record of each payment made to the servicer can be very important in rotecting a borrower’s rights.  Federal law permits a borrower to question a lender about any disputed matter involving the loan.  The lender is required to respond within 60 business days to such a request.  These inquiries should be made regularly and any errors should be promptly brought to the loan servicer’s attention.