Thursday, November 20, 2008

New Chapter 13 Mortgage Modification Bill Introduced During Lame-Duck Session

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys,

Earlier this week Senator Richard Durbin introduced another Chapter 13 mortgage modification bill, S.3690, during this lame-duck session of Congress. It is called the Homeowner Assistance and Taxpayer Protection Act. Here is the full text of the bill in the Congressional Record for 11/17/08, with Senator Durbin's introductory speech. In truth this bill is highly unlikely to pass during this short session--which is expected to be over with in a matter of days, but in light of all the political and financial upheavals since last spring when a somewhat similar bill was narrowly defeated in committee, this new version merits at least a few moments of attention. The bill is very likely to be reintroduced early in the next Congress.

The Proposed Modification Language

We have all heard much talk about a Chapter 13 mortgage modification amendment to the Bankruptcy Code during the last year or so, with this issue and other bankruptcy law reform proposals even getting into the campaign speeches and website of candidate Obama. See my Bulletin from late August entitled Prospects for Amendments to BAPCPA Under an Obama-Biden Administration.

But have you ever looked at the terms of any of these mortgage modification proposals? Frankly, the details are quite interesting.The core language would amend section 1322 of the Code ("Contents of plan") so a chapter 13 plan would be able to modify a secured claim secured solely by the debtor's principal residence, as follows:
        (A) modify an allowed secured claim secured by the debtor's principal residence, as described in subparagraph (B), if, after deduction from the debtor's current monthly income of the expenses permitted for debtors described in section 1325(b)(3) of this title (other than amounts contractually due to creditors holding such allowed secured claims and additional payments necessary to maintain possession of that residence), the debtor has insufficient remaining income to retain possession of the residence by curing a default and maintaining payments while the case is pending, as provided under paragraph (5); and
        (B) provide for payment of such claim--
        (i) in an amount equal to the amount of the allowed secured claim;
        (ii) for a period that is not longer than 40 years; and
        (iii) at a rate of interest accruing after such date calculated at a fixed annual percentage rate, in an amount equal to the most recently published annual yield on conventional mortgages published by the Board of Governors of the Federal Reserve System, as of the applicable time set forth in the rules of the Board, plus a reasonable premium for risk."
So if Chapter 13 debtors would be able to work their budget into the calculations indicated, they would be permitted to reduce their mortgage claim down to the value of their residence, change the interest rate as indicated, and increase the term for up to 40 years.

Other Noteworthy Provisions of the Homeowner Assistance and Taxpayer Protection Act
  • A Chapter 13 plan would also be able to provide for the waiver of any prepayment penalty.
  • The credit counseling requirement would be waived for any debtor who files a certification that her principal residence has been scheduled for a foreclosure.
  • The recent Emergency Economic Stabilization Act would be amended to require instead of merely encourage the Department of the Treasury, the Federal Reserve, the FDIC and FHFA to restructure mortgage loans which these entities now own or have a controlling interest in.
  • Loan servicers would be required to restructure mortgage loans that qualify for the Hope for Homeowners program, rather than simply be encouraged to do so.
  • Creditors would be required to go through a noticing procedure to add any post-petition contractual fees or costs to a claim secured by a principal residence, thereby avoiding the addition of hidden costs.
  • The Bankruptcy Code amendments would apply to cases filed on or after the date of enactment, as well as cases pending on that date.
The "Taxpayer Protection" Portion of the Bill

Senator Durbin's website's news release contains the following summary of the remaining non-bankruptcy provisions of the bill:

"The financial rescue bill also failed to put in place enough taxpayer protections. Congress meant for banks to use the money provided by the Treasury to lend to qualified borrowers, rather than enriching their shareholders and executives. Recent reports indicating that AIG will lavish more than a half billion dollars on its employees at the same time that it receives an even larger $152 billion taxpayer bailout than originally announced speaks loudly to this problem.

"Durbin’s bill would add additional taxpayer protections by:

  • Baring banks participating in the Capital Purchase Program, authorized by the Emergency Economic Stabilization Act, from increasing common share dividends as long as the government owns preferred shares; and by
  • Requiring participating banks to reduce the next year's dividends in an amount equal to the compensation paid to the top five executives in excess of $500,000."

by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys

Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2008 Bankruptcy Litigation Support for Attorneys