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2.18.6 Undisclosed Fees and Payment Changes

In curing a default under section 1322(b)(5), the debtor makes payments under the plan on the prepetition arrearage and provides for the “maintenance of payments while the case is pending.”375 For a cure plan to be successful, there must be full disclosure of all postpetition “maintenance” payments.376 Unfortunately, it has become common for mortgage creditors to add fees and charges to mortgage accounts without notice to the borrower, trustee, or bankruptcy court while the bankruptcy case is pending, and without disclosing the fees in a proof of claim or amended claim, and without seeking court approval. Some creditors secretly maintain these charges on the debtor’s account while the bankruptcy is pending and wait to collect the fees once the bankruptcy case is closed or when the loan is paid off or refinanced. In some cases, postpetition fees assessed prior to plan confirmation are included in the arrearage amount on the proof of claim but are not listed separately or itemized. Some servicers refuse to provide normal escrow account statements and payment change notices to debtors in bankruptcy, depriving these debtors of the opportunity to pay the amounts due during the chapter 13 case and subjecting them to later collection efforts.377

As a result of these practices, debtors who have completed their plans often emerge from a chapter 13 case only to have the servicer begin foreclosure anew based on claims of unpaid fees for such items as escrow shortages, attorney fees, property inspections, broker’s price opinions, and other charges allegedly incurred during the chapter 13 case. The fundamental unfairness of these practices has led a number of courts to find that mortgage holders and servicers who fail to disclose fees, payment increases, and account deficiencies waive their right to collect these amounts.378

To address these practices, the Federal Rules of Bankruptcy Procedure were amended to require mortgage creditors to complete a form giving notice of mortgage payment changes when the debtor’s mortgage payment increases during the life of a chapter 13 plan.379 Mortgage creditors must also give notice of any postpetition fees or charges that are recoverable against the debtor.380 At the conclusion of the case, the chapter 13 trustee is directed to file a notice of final cure payment, and the creditor must file a response.381 If a creditor fails to file notices of payment changes, fees, expenses, or charges, or fails to respond to a notice of final cure payment, the court may preclude the creditor from presenting the omitted information as evidence in a contested matter or adversary proceeding, or the court may award other appropriate relief, including attorney fees.382

Footnotes

  • 375 {366} 11 U.S.C. § 1322(b)(5). See National Consumer Law Center, Home Foreclosures § 9.4 (2019), updated at www.nclc.org.

  • 376 {367} In re Sanchez, 372 B.R. 289, 297 (Bankr. S.D. Tex. 2007) (“in order for the bankruptcy system to function—every entity involved in a bankruptcy proceeding must fully disclose all relevant facts”); In re Jones, 366 B.R. 584, 602–603 (Bankr. E.D. La. 2007) (“Bankruptcy courts can not function if secured lenders are allowed to assess postpetition fees without disclosure and then divert estate funds to their satisfaction without court approval.”), aff’d in part, rev’d in part, 391 B.R. 577 (E.D. La. 2008).

  • 377 {368} See, e.g., In re Wright, 461 B.R. 757 (Bankr. N.D. Iowa 2011) (awarding actual damages of $10,000, punitive damages of $40,000, and attorney fees for servicer’s failure to notify trustee, debtor, or debtor’s counsel of changes in mortgage payments as required by confirmed plan); In re Foreman, 2010 WL 2696630 (M.D.N.C. July 7, 2010) (creditor waived its right to collect postpetition arrears because it did not comply with plan that required notice of change in monthly payment and instead permitted a $12,000 arrearage to accrue); In re Dominique, 368 B.R. 913 (Bankr. S.D. Fla. 2007) (servicer failed to provide escrow statements during chapter 13 plan, and just before plan completion provided debtors with an escrow account review indicating a $6397 escrow deficiency); In re Rizzo-Cheerier, 364 B.R. 532 (Bankr. S.D.N.Y. 2007) (servicer allowed deficiency in escrow account to accrue and then, without notice to debtor, applied trustee plan payments intended for prepetition arrears to postpetition escrow deficiency).

  • 378 {369} Craig-Likely v. Wells Fargo Home Mortg., 2007 WL 5185289 (E.D. Mich. Mar. 2, 2007); Chase Manhattan Mortg. Corp. v. Padgett, 268 B.R. 309 (S.D. Fla. 2001) (servicer waived right to collect escrow account deficiency because it failed to notify borrowers of deficiencies as required by RESPA); In re Armstrong, 394 B.R. 794, 798–799 (Bankr. W.D. Pa. 2008) (servicer waived right to increased mortgage payments by failing to give notice of payment changes on an adjustable rate mortgage in violation of local rule); In re Payne, 387 B.R. 614, 637 (Bankr. D. Kan. 2008) (“When a lender silently accepts payments for over three years without notifying the borrower the payments are insufficient, when the borrower believes his taxes and insurance are being paid by his monthly payments to his lender, and when the borrower has no reason to know the lender is advancing taxes and insurance and thereby increasing borrower’s indebtedness, the lender waives his right to recover the advances from the borrower.”); In re Johnson, 384 B.R. 763 (Bankr. E.D. Mich. 2008) (even though debtor’s chapter 13 case was dismissed, court found that creditor waived its right to recover arrearage for taxes and insurance by failing over five-year period to comply with RESPA and local rule requiring disclosure of payment increases); In re Dominique, 368 B.R. 913, 921 (Bankr. S.D. Fla. 2007) (creditor who failed to perform annual escrow analysis and give annual notice of any escrow deficiency waived its right to recover deficiency). See also In re Wilborn, 609 F.3d 748 (5th Cir. 2010) (reversing class certification in challenge to unapproved postpetition fees because individual assessment of the claims was required); Patterson v. Homecomings Fin., L.L.C., 425 B.R. 499 (E.D. Wis. 2010) (denying creditor motion to dismiss claim that the collection of undisclosed fees violated the automatic stay).

  • 379 {370} Fed. R. Bankr. P. 3002.1(b) (effective Dec. 1, 2011). See National Consumer Law Center, Home Foreclosures § 9.4.6.4 (2019), updated at www.nclc.org.

  • 380 {371} Fed. R. Bankr. P. 3002.1(c). See National Consumer Law Center, Home Foreclosures § 9.4.6.1 (2019), updated at www.nclc.org.

  • 381 {372} Fed. R. Bankr. P. 3002.1(f). See National Consumer Law Center, Home Foreclosures § 9.4.6.7 (2019), updated at www.nclc.org. If the trustee does not file this notice, the debtor should do so.

  • 382 {373} Fed. R. Bankr. P. 3002.1(i). See National Consumer Law Center, Home Foreclosures § 9.4.6.8 (2019), updated at www.nclc.org.