July 10, 2017
Borrowers are entitled to receive monthly statements each month so that they know the amount of their monthly mortgage payment. Without receipt of these monthly statements, it may be difficult for a borrower to know the amount of monthly mortgage payment that he/she has to pay each month. While a borrower may know the principal and interest component of each payment because it is subject to a fixed interest rate (and thus, not subject to change), the escrow component of each payment, which is normally used to pay the property insurance and property taxes that come due and owing, can change every single year.
Despite the importance for borrowers to receive monthly statements, when a borrower files a bankruptcy, whether a Chapter 7, Chapter 11, or a Chapter 13, a lender in California is not required by any specific law to send monthly statements to the borrower, while the bankruptcy is active. While borrowers often demand these statements, the lender has no obligation to comply with these demands. However, the bankruptcy law does not leave borrowers completely in the dark. Federal Rule of Bankruptcy Procedure 3002.1 was enacted to ensure that borrowers know what their monthly mortgage payment is while in a Chapter 13 bankruptcy.
When Does Federal Rule of Bankruptcy Procedure 3002.1 Apply?
Federal Rule of Bankruptcy Procedure (“FRBP”) 3002.1 only applies in Chapter 13 cases. It also only applies to a lender that has a lien in first position (not a junior lien or a second deed of trust) against Debtor’s principal residence. If the lender/bank has a lien secured by a deed of trust against Debtor’s commercial property, the rule will not apply. Additionally, as the rule came into effect on December 1, 2011, any payment changes that came before that date are not subject to the Rule.
Additionally, a lender is required to comply with the rule so long as the Borrower is in bankruptcy and no relief from the automatic stay was granted by the Court. In Chapter 13 cases, lenders move for relief from the automatic stay if a borrower does not make monthly mortgage payments; if said Motion by a lender is granted, the lender no longer has to comply with the notice requirement in FRBP 3002.1.
What Must a Lender or the Bank Due Pursuant to FRBP 3002.1
Assuming the borrower’s bankruptcy and the loan at question is subject to the FRBP 3002.1, the lender must give the borrower notices of any change in the monthly mortgage payment, whether it be a change in the principal and interest component of the payment (such as an interest rate change) or a change in the escrow component of the payment. The lender must complete and file with the a Court a specific form that outlines exactly which component of the payment is changing. Additionally, the form requires that the lender attached a notice (usually computerized), such as an annual escrow analysis, which provides further details on how the new payment is calculated.
What Happens if a Lender Fails to Comply with FRBP 3002.1?
FRBP 3002.1(f) provides that if a lender fails to file a Notice of Monthly Mortgage Payment Change, the lender will be precluded from requiring the Debtor to pay the amount set forth in the Notice. In other words, if the payment was subject to an increase, but no Notice of Mortgage Payment Change was filed, the lender could not hold the Debtor to pay this amount “unless the court determines that the failure was substantially justified or is harmless.” Additionally, FRBP 3002.1 specifically provides that the Court may “award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” Thus, the borrower may be entitled for sanctions if the lender fails to comply with the rule requiring notices of mortgage payment change.
What Happens if the Lender Complies with FRBP 3002.1, but Files a Late Notice of Mortgage Payment Change?
FRBP 3002.1 provides that a lender will be subject to the above-described penalties if the lender “fails to provide any information;” however, FRBP 3002.1 does not explain what happens if a lender files the Notice of Mortgage Payment Change required pursuant to FRBP 3002.1, but files said Notice late. In such a situation, a lender should not hold the borrower liable for a higher payment that he/she did not have notice of. Thus, the Debtor should receive credit for any monthly mortgage payments that were tendered, in a lower amount, because the borrower did not receive the Notice required pursuant to FRBP 3002.1. Will the borrower be entitled to sanctions? The answer depends on the arguments that are made to the judge regarding the prejudice sustained by the borrower. Despite that the rule does not provide for sanctions in a case in which a Notice of Payment Change is filed late (as opposed to not being filed at all), a court may choose to award sanctions or attorneys’ fees if a convincing argument is made.
Consult With A Qualified California Bankruptcy Attorney Now!
Katz Law has experience representing Debtors and Creditors, and has litigated issues concerning FRBP 3002.1 on many occasions. If you have any questions regarding FRBP 3002.1 or need the assistance of a qualified bankruptcy attorney, contact Katz Law now! We are California attorneys located in Los Angeles who have dealt with various scenarios involving bankruptcy.
Call us at (844) KATZ-LAW for a FREE consultation!