30 Oct Countrywide’s Failure to Notify Debtor of Mortgage Escrow Account Deficiency Caused Deficiency to be Waived
On May 14, 2007, the United States Bankruptcy Court for the Southern District of Florida held that an escrow shortage regarding which Countrywide failed to timely and properly notify the Debtor and/or Counsel for the Debtor pursuant to the Real Estate Settlement Procedures Act (RESPA) should be deemed waived such that Countrywide may not now or ever collect such shortage from the Debtor.
In this case, the Debtors filed their chapter 13 case in 2002. They proposed a Chapter 13 plan which contemplated a curing of arrears which had accumulated on their mortgage pre-petition. The Plan was confirmed without objection from Countrywide.
In November 2006, Countrywide sent the Debtors an escrow account review citing an arrearage of over $6,000. According to the account review, the arrearage dated back to the date of the filing of the case in 2002. Presumably, the Plan (which we assume was a “conduit plan” providing for the payment of Debtors’ ongoing monthly payments to the Trustee) did not identify the appropriate mortgage payment for the Debtors, a fact of which Countrywide had notice but failed to correct by an appropriate and timely objection. The notice of the escrow shortage which the Debtors received in 2006 comprised Countrywide’s first attempt to notify the Debors of the arrearage.
In response to Countrywide’s notice, the Debtors filed what amounted to a Rule to Show Cause Motion to determine the status of the late-noticed escrow shortage. Following a hearing, the Court entered the opinion described herein.
In support of its finding, the Court cites 12 U.S.C. § 2609(b) of RESPA which states as follows:
If the terms of any federally related mortgage loan require the borrower to make payments to the servicer (as the term is defined in section 2605(i) of this title) of the loan for deposit into an escrow account for the purpose of assuring payment of taxes, insurance premiums, and other charges with respect to the property, the servicer shall notify the borrower not less than annually of any shortage of funds in the escrow account.
The Court rejected the applicability of the argument that Section 1322 of the Code prohibits a Chapter 13 Plan from modifying the terms of a mortgage which is secured only by the debtor’s principal residence. Instead, the Court stated that it was not asked to determine the validity of a modification of the lender’s rights by a chapter 13 plan; rather, the Court was being asked to decide the effect of the lender’s failure to comply with its duties under RESPA. Pursuant to RESPA, the Court had the power to determine that the amounts of which Countrywide failed to timely notify the Debtor were “waived” and were not to be charged to Debtors’ account.
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