April 3, 2010
New HAMP Guidelines
The Treasury Department released new HAMP guidelines last Wednesday; the guidelines include various new protections for borrowers facing foreclosure, as well as protections for borrowers in bankruptcy. The document is called "New HAMP Borrower Outreach and Communication Guidelines" and can be accessed here. See below a brief summary of the new HAMP bankruptcy guidelines.
Marisa H. Hawkins
Senior Staff Attorney, Public Counsel
Debtor Assistance Project &
Consumer Law Project
From John Rao to the BK listserv on 3/26/2010:
Supplemental Directive 10-02 marks a significant change in Treasury's HAMP policy with respect to borrowers in bankruptcy. Treasury's initial policy as stated in SD 09-01 was that a borrower actively involved in a bankruptcy proceeding was eligible for HAMP "at the servicer's discretion." Many of us urged Treasury to change this policy, noting that servicer discretion has meant that borrowers in bankruptcy are often not considered for HAMP. After SD 10-02 takes effect on June 1, 2010, servicers will no longer be able to contend that their refusal to consider a HAMP modification was a proper exercise of discretion. Borrowers in an active chapter 7 or chapter 13 bankruptcy case must be considered for HAMP if the borrower, borrower's counsel or bankruptcy trustee submits a request to the servicer. In addition, borrowers who are in a trial period plan and subsequently file for bankruptcy may not be denied a permanent HAMP modification on the basis of the bankruptcy filing.
SD 10-02 also requires the servicer and its counsel to work with the borrower or borrower's counsel to obtain any court or trustee approvals of the modification as required by local court rules and procedures. Some courts have required that a motion be filed seeking approval of a permanent modification, while others have permitted approval to come from the trustee followed by the submission of an agreed order. SD 10-02 provides that if additional time is needed to obtain the necessary approvals, the servicer should extend the trial period plan for up to an additional two months (resulting in a total five-month trial period).
SD 10-02 also addresses the problem of servicers filing motions for relief from the stay and plan objections while the borrower is being considered for a HAMP modification. We had urged Treasury to prohibit this practice even before a trial plan is approved, as long as the borrower has been paying an amount equal to a greater than the anticipated trial plan payment. Although the policy adopted in SD 10-02 does not extend to the pre-trial plan period, it should help reduce unnecessary litigation costs for borrowers. SD 10-02 provides that if a borrower in a chapter 13 case is in a trial period plan and making post-petition mortgage payments as required by the trial period plan, a servicer must not object to confirmation of a borrower's plan, move for
relief from the automatic stay, or move for dismissal of the chapter 13 case on the basis that the borrower paid only the trial period plan payments rather than the scheduled mortgage payments.
SD 10-02 also restates the policy contained in SD 09-01 that borrowers who have received a chapter 7 discharge and did not reaffirm the mortgage debt are eligible for HAMP. As under the prior SD, the following language must be added to the modification agreement: "I was discharged in a Chapter 7 bankruptcy proceeding subsequent to the execution of the Loan Documents. Based on this representation, Lender agrees that I will not have personal liability on the debt pursuant to this Agreement."
Several other suggestions from consumer advocates and chapter 13 trustees were adopted in part by Treasury:
Substitution of Income Documents - For borrowers in bankruptcy, the servicer may accept copies of the bankruptcy schedules and tax returns filed in the case in lieu of the RMA and Form 4506T-EZ, and may use this information to determine eligibility. If the schedules are more than 90 days old, the borrower must provide updated evidence of income. Borrowers must still provide a Hardship Affidavit (or RMA).
Waiver of Trial Period Plan - Borrowers in a chapter 13 case who are determined eligible for HAMP may be converted to a permanent modification without completing a trial period plan if:
* The borrower makes all post-petition payments on the mortgage to be modified and at least three of those payments are equal to or greater than the proposed modified payment;
* The modification is approved by the bankruptcy court, if required; and
* The trial period plan waiver is permitted by the applicable investor guidelines.
Waivers under this policy will not begin until "system capability" and reporting issues have been worked out by Treasury. Moreover, the effectiveness of this policy change is uncertain because SD 10-02 gives servicers discretion to grant these waivers and servicers may also contend that investor guidelines prohibit such waivers.
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