The Southern District of New York has a so-called loss mitigation program designed to promote settlement talks between mortgage lenders and bankrupt consumers at risk of losing their homes in foreclosure.
The local rules governing the program require participation in good faith. Unless good-faith participation can be enforced on pain of sanctions, success of the program is doomed.
District Judge Vincent L. Bricetti of White Plains, N.Y., upheld a $3,500 sanction against a lender that did not negotiate in good faith. His opinion leaves open the possibility that another court at another time might void the program for contravening the Bankruptcy Code.
Behind on her mortgage, a woman in chapter 13 elected to participate in loss mitigation and attempted negotiating a loan restructuring. After four months of providing documentation to the lender, the bankrupt for the first time was told that her request for modification was being denied because the servicer’s policies required a down payment covering part of the arrears.
Southern District Chief Bankruptcy Judge Cecelia Morris held the servicer in contempt of the loss mitigation order and assessed a $3,500 sanction for failure to participate in good faith. For wasting the bankrupt and her attorney’s time, the sanction represented the debtor’s expenses and counsel fees incurred in the loss mitigation program.
The lender appealed and lost when Judge Bricetti handed down his opinion on Jan. 11. He held that the imposition of sanctions was not an abuse of discretion because the debtor “was not apprised of the down payment requirement before her loan modification application was denied.”
On appeal, the lender challenged the program, contending it directly contravenes the Bankruptcy Code because it can bar a mortgagee from pursuing modification of the automatic stay. Judge Bricetti declined to entertain this argument because it had been raised for the first time on appeal.
If there are other challenges in the future, lenders could have difficulty proving that the program deprives secured creditors of rights assured by the Code. While a debtor can propose loss mitigation unilaterally, a creditor can oppose. Although the program does bar lift stay motions until negotiations conclude, the court can modify the stay to “prevent irreparable injury, loss or damage.”
Arguably, the program erects a higher standard for modifying the stay than would otherwise apply under Section 362(d). However, the lender could have opposed imposition of the program by showing why negotiations “would not be successful.” Consequently, the court’s findings inherent in imposing loss mitigation may rebalance the factors related to stay modification, thus resulting in temporary waiver of some of a creditor’s rights under Section 362(d).
The Southern District of New York has a so-called loss mitigation program designed to promote settlement talks between mortgage lenders and bankrupt consumers at risk of losing their homes in foreclosure.