When you file Chapter 13 bankruptcy as a homeowner, the servicer of your secured mortgage obligation will become one of your biggest headaches in the process.
This is due to the fees charged to your mortgage account by the servicer for every step they feel required (or entitled) to take during your Chapter 13 bankruptcy process.
These fees must be constantly policed by both you yourself and your bankruptcy attorney.
So how do you know when your mortgage servicer charges a fee to you? Under what authority do they charge these fees? And what can be done about it when they are improper?
Mortgage Fees in Chapter 13: Your Contracts
The first and foremost source of authority for the charging of attorney’s fees, late fees, and other such assessments both inside and outside of a Chapter 13 bankruptcy are the contracts that you signed when you bought your house.
Your mortgage contract and the note that you signed almost surely allow your mortgage servicer to charge, in particular, attorney’s fees.
When you enter a Chapter 13 bankruptcy proceeding, your mortgage servicer will very quickly retain one of a handful of “usual suspect” Michigan law firms to represent its interests within the bankruptcy proceeding.
In southeast Michigan, these are law firms such as Trott, Orlans, Potestivo, and one or two others.
Virtually every mortgage transaction in the United States since the early 2000s has involved the use of what are known as Fannie Mae/Freddie Mac uniform mortgage instruments.
These are pro forma contract documents that do vary slightly by state (whether it is called a “mortgage” or “deed of trust,” for instance, will so vary).
Any individual mortgage contract may have further provisions added to the uniform instrument, or certain provisions may be deleted or crossed out. However, the overall use of these uniform instruments allows for some predictability as to their content.
You can view a blank copy of the Freddie Mac Michigan uniform mortgage instrument here.
Virtually every mortgage (or deed of trust) instrument in use in the U.S. for the last 18 or so years will contain a provision such as Paragraph 14 in the Michigan uniform instrument.
This paragraph reads (in part):
- Loan Charges. Lender may charge Borrower fees for services performed in connection with Borrower’s default, for the purpose of protecting Lender’s interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys’ fees, property inspection and valuation fees. In regard to any other fees, the absence of express authority in this Security Instrument to charge a specific fee to Borrower shall not be construed as a prohibition on the charging of such fee. Lender may not charge fees that are expressly prohibited by this Security Instrument or by Applicable Law.
When you signed the mortgage contract at closing, back when you originally purchased your home, you agreed to pay these fees in connection with any default of the mortgage contract:
- Property inspection fees;
- Attorneys’ fees;
- Valuation fees;
- Any other fee arguably connected to that default.
A great number of Chapter 13 bankruptcy cases are filed because of a default or arrearage in mortgage payments.
Chapter 13 is the proper type of bankruptcy to file if you need to save your home from foreclosure.
However, in that case, the law firm hired by your mortgage servicer will perform any number of actions, major or minor, throughout the Chapter 13 process.
The mortgage servicer’s attorney will:
- Review your bankruptcy petition and Chapter 13 plan;
- Draft and file a proof of claim with the Bankruptcy Court;
- Draft and file a loan payment history;
- Possibly draft and file objections to the confirmation of your Chapter 13 plan;
- File a motion for relief from the automatic stay if entitled;
- Draft and file various disclosures required by the Bankruptcy Code and Rules throughout the Chapter 13 proceeding, such as monthly payment amount change notices and notices disclosing all of these fees and charges described here;
- Draft and file a response to the Chapter 13 Trustee’s Notice of Final Cure Payment Notice.
The fees charged by the servicer must, under prevailing case-law, be “reasonable.”
What is reasonable?
This is highly arguable—and has often been argued.
However, if the servicer charges a fee for any of the above-described actions that is no greater than the Fannie Mae servicing fee guide located here, the servicer will have a good argument before the court that the fee is reasonable. (Though not always!)
What if not connected to a “default?” What if the Chapter 13 was not filed because of a mortgage arrearage but because the debtor needed to restructure his or her debt in order to pay priority Federal tax debt or a child support arrearage?
What if the mortgage is current when the Chapter 13 is filed?
The question of what is or is not a “default” has also been litigated, with conflicting results depending upon your jurisdiction.
The mortgage servicer’s attorney will gloss over this question initially in virtually every case and simply start charging you fees.
It will be up to your bankruptcy attorney to police and protect these fees as supported by local case-law and the precedent established by rulings of both the Federal Circuit Court of Appeal in which the case is filed and the U.S. Supreme Court.
For this reason, among many others, you need a bankruptcy lawyer if you are considering filing for Chapter 13 bankruptcy!
Statutory Rules Regarding Mortgage Fees
Beyond the mortgage and note contracts you signed when you purchased the home, mortgage servicers are also regulated by 2 primary Federal statutes: the Real Estate Settlement and Procedures Act (RESPA) and the U.S. Bankruptcy Code.
RESPA requires mortgage holders and servicers to disclose information about federally insured, residential mortgage loans to homeowners. It is primarily focused upon the disclosures required at the time of home purchase.
However, it also limits the amount of money that lenders can require homeowners to escrow for property and insurance costs. As these are liable to fluctuate annually even during a Chapter 13 bankruptcy, RESPA continues to play a role during the Chapter 13 process.
RESPA requires annual escrow statements to be provided to homeowners.
RESPA also prohibits fee splitting, kickbacks, and unearned fees, in addition to requiring mortgage servicers to timely respond to homeowners’ properly drafted and served Requests for Information regarding mortgage balance, fees, and the true identity of the holder of the mortgage.
The Request for Information is a valuable tool in the hands of an experience bankruptcy attorney reviewing a mortgage servicer’s hastily drafted and filed proof of claim form in a Chapter 13.
The Bankruptcy Code and certain Federal Rules of Bankruptcy Procedure require disclosure of mortgage fees in the bankruptcy process.
In particular, Bankruptcy Rule 3002.1 requires that notices of mortgage payment changes be filed with the Bankruptcy Court no later than 21 days prior to the effective date of the new payment.
This gives your bankruptcy attorney time to review and object to the new payment if necessary—particularly if premised upon an improper escrow account adjustment.
Any other fees, expenses, and charges must also be disclosed within 180 days (6 months) of the date that the fee, expense, or charge is incurred.
This is important because your mortgage servicer is almost certainly keep two sets of financial records as regards your account on its back-end.
One is the standard record of account that it maintains for all homeowners in or out of bankruptcy.
The other is a separate record containing the fees incurred and charged within the bankruptcy process.
Any fee, expense, or charge for which a proper notice under Rule 3002.1 is not filed (or is filed after the 180-day deadline) should not be migrated from the bankruptcy account record to the standard record of your account at the completion of your Chapter 13 case.
Yet, this occurs regularly.
You will want to police your own mortgage statements aggressively after your Chapter 13 is completed and your attorney is no longer on the job. If you see an attorney fee popping up that is unfamiliar to you, you will want to contact your bankruptcy attorney to discuss this.
The fee may be legitimate. However, a failure to read, review, or to communicate with your lawyer can cost you unnecessarily—and profit your mortgage servicer improperly.
Mortgage Fees in Chapter 13 Bankruptcy: The Bottom Line
The bottom line is that it is easy to become overwhelmed with information, disclosures, notices, and stray fees in the Chapter 13 bankruptcy process.
For anyone, but especially for those with mortgage obligations, retaining an experienced bankruptcy attorney to represent you in your Chapter 13 proceeding is an essential ingredient for success.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process.
Attorney Metzen has represented thousands of clients in Chapter 13 bankruptcy for over 30 years and is a Board Certified bankruptcy expert.
Contact us to schedule your free consultation.