How does the $25 billion Mortgage Settlement affect Bankruptcy Debtors?

After extensive investigations and negotiation, 49 state attorney generals, in conjunction with the federal government, have finally reached an agreement with the five chief mortgage loan servicers in the U.S.   J.P. Morgan Chase, Bank of America, Citigroup, Wells Fargo and Ally Financial, formerly known as GMAC Mortgage have agreed to a $25 billion mortgage settlement. This is the largest federal and state civil settlement in the United States since the 1998 Tobacco Settlement. Bank of America has the largest monetary responsibility of $11.8 billion.

Under the agreement, the five servicers will provide $20 billion towards a variety of financial relief options for distressed mortgagees. Banks must make a cash payment of $5 billion to federal and state governments of which $1.5 billion will go towards a cash payments to 750,000 homeowners who lost their homes to foreclosure, bankruptcy or sale between January 1, 2008 and December 31, 2011.

According to the complaint filed in the United States District Court for the District of Columbia, the servicers:

  • Issued improper mortgages.
  • Conducted unauthorized and premature foreclosures.
  • Violated service members’ and other homeowners rights and bankruptcy protections.
  • Used false and deceptive affidavits and other documents.
  • Wasted and abused taxpayer funds.

The settlement provides :

  • Reduced loan principals for homeowners who are delinquent, at risk of foreclosure or underwater (owe more than the home’s value).
  • Refinancing for homeowners who are current, but underwater.
  • Cash payments to borrowers who lost their residence to foreclosure.
  • State attorney general oversight. For the first time, servicers must report settlement compliance to an independent agency, monitored by the state’s attorney general. Banks will pay heavy penalties for non-compliance.

Bankruptcy Violations

The United States Trustee Program participated in negotiations because of bankruptcy violations by the major servicers. Bankruptcy affords debtors certain protection such as an automatic stay. According to the complaint, these major loan servicers disregarded the debtors’ legal rights under federal bankruptcy rules.

The mortgage servicers made inaccurate, false or unreasonably based representations to obtain relief from automatic stay protection. Servicers also sought principal, interest, fees, escrow or advance payments they were not entitled to collect. Other violations included collecting attorney, filing and preparation fees for withdrawn or dismissed proof of claims, motions for relief from stay or other documents. Commencing collection actions against debtors under an automatic stay, violating Chapter 13 payment plans and failing to notify debtors of payment increases violated bankruptcy debtors’ rights. As a result, many debtors lost their homes to foreclosure.

To rectify the violations, the settlement requires new servicing standard reforms. Banks must provide a designated point of contact, trained staff and improved communication with the borrower. Banks must also implement effective document execution in foreclosure cases, terminate improper servicing and document fees and end dual-track foreclosures. Dual tracking occurs when the servicer continues the foreclosure process while the borrower seeks a loan modification.

The acceptance of the settlement does not release servicers from future civil liability. If you filed a Chapter 7 or 13 bankruptcy that directly affected your home, you may be entitled to additional financial relief. Contact an experienced attorney to discuss your legal rights.