Articles Posted in Bankruptcy Legislation

As a practicing bankrtuptcy attorney in Sacramento I have followed the states progress in the “robo-signing” settlement talks with great interest. Attorney General Kamala Harris has recently made headlines by refusing to sign on to the national settlement, calling it inadequate to compensate Californians for the many losses they incurred in the housing crash. The California Attorney General’s Office has launched independent investigations, including some in cooperation with Nevada. According to the LA Times in an article written Jan. 25, 2012, titled, California calls $25-billion mortgage settlement ‘inadequate,’ Harris and her deputies were invited back to the negotiating table by further concessions from lenders, but ultimately rejected all offers because they were insufficient. However, A spokesperson for Harris told the media that the settlement would prevent her and other AGs from pursuing further independent investigations.

Despite nearly 16 months of investigations and on going negotiation, and the original participation of AGs from all 50 states and Washington, D.C., no deal has been reached. The investigation has been plagued by politics, with conservative AG’s arguing that the settlement is too aggressive and liberal ones countering that it doesn’t go far enough. Particularly, AGs in New York, Delaware, California, Nevada and elsewhere have opted out of the settlement or threatened to and started their own investigations into lending practices. Harris said in late September that the settlement offer at that time did not include enough remedies from the five major lenders for the foreclosure crisis. She and the other breakaway AGs said they’d prefer to see efforts to stop foreclosures and their negative effects, going beyond addressing the fallout from robo-signing itself. A AG’s office spokesperson said: “The current deal still is not transparent enough or sufficient to address Californians’ needs.”

California’s participation in the talks is considered important to any settlement due to the size of the state; California has the resources to bring large lawsuits on its own. According to the article, the latest proposal includes a $17 billion program that would reduce principal on loans that are “underwater,” or larger than the value of the home. Another $5 billion would be earmarked for people directly harmed by robo-signing and other bad servicing practices, and $3 billion would help underwater homeowners refinance at a rate of 5.25%. (Current rates for a 30-year prime mortgage are 4 to 4.5%.) In return, the AGs would agree to release lenders from actions for improper servicing or origination of mortgages — a provision that Harris and some colleagues believe would stop their existing investigations. Delaware has filed a lawsuit alleging MERS has engaged in deceptive practices; Massachusetts has sued five lenders, alleging they knowingly pursued illegal foreclosures.

As a Sacramento Bankruptcy Attorney I am pleased to see our state continue the fight and pursue a settlement that could provide meaningful help to people who were hurt in the housing crisis. That includes people who were directly harmed by robo-signing or other illegal and unethical behavior by lenders, as well as people who are suffering because housing prices have dropped through no fault of their own. Throughout the robo-signing scandal, lenders have downplayed their responsibility, arguing that there was likely no real harm from that particular kind of illegal behavior. This may or may not be true — instances of wrongful foreclosures have been reported — but there’s certainly widespread harm from, for example, their refusal to give meaningful consideration to loan modifications.
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Lawmakers in Sacramento decided to vote against a bill that would have stopped “dual track” foreclosures across the state last week. The legislation, SB 729, required lenders to completely evaluate a borrower for a loan modification before they filed the notice of default, which officially begins the foreclosure process.

Senate President Pro Tem Darrell Steinberg (D-Sacramento) and Sen. Mark Leno (D-San Francisco) have authored this sweeping legislation that was designed to limit dual tracking, which is the practice by mortgage lenders to pursue foreclosure at the same time they request a loan modification.

According to the LA Times, SB 729 would have gone further than any existing anti-foreclosure measure by preventing dual-track foreclosures for all California mortgages. The bill would have required lenders to completely decline a modification before it began the foreclosure proceedings. Had lenders failed to make a definite decision regarding the modification SB 729 would permit the lender to halt or void the foreclosure for up to a year after the sale of the house.

Sacramento area residents considering Chapter 13 bankruptcy may be interested to know that bankruptcy law allows a filer to “cram down” an automobile loan to its fair market value. A “cramdown” is the lending and bankruptcy term that allows a borrower to eliminate any excess principal owed on a loan to the market value of the property that secures the loan. Mortgage Lender’s made the “cramdown” issue highly visible last year when Congress considered passing a law that would have allowed home mortgages to be “crammed down” under a Chapter 13 bankruptcy. Due to the vociferous opposition posed by the mortgage lending industry Congress never passed that law. However, the law remains settled that a Chapter 13 debtor can use a “cramdown” on just about any loan other than a primary home mortgage.

A “cramdown” is available to a Chapter 13 debtor on just about every type of secured loan besides the loan on a first deed of trust or mortgage. This means the “cramdown” is available for loans on trucks, cars, second homes, boats, and just about any property that would be foreclosed or repossessed in the borrower fails to make payments. Most Chapter 13 debtors use this law on their personal vehicles. Pursuant to the Bankruptcy Code, the “cramdown” remains available on vehicles purchased more than 30 months ago. Thus, if a debtor owes $15,000 on a vehicle whose value is only $12,000, he/she could “cram down” the remaining $3,000 son long as the vehicle was bought more than 30 months ago. The bankruptcy law also allows the debtor to modify the interest rate affecting the loan to the current “prime” interest rate plus 3 percent. Depending on the conditions whereby a debtor received the loan this could drop their interest rate substantially.

Use of the Chapter 13 “cramdown” can benefit a Chapter 13 debtor substantially by allowing him/her to retain their personal vehicle at a more affordable monthly payment. This mechanism allows my client’s to maintain their possessions and experience as little change as possible after filing the voluntary petition.

Today, the California State Assembly blocked legislation proposed by the State Senate that would protect homeowners against foreclosure while pursuing a loan modification. The legislation was heavily supported by consumer interest groups and opposed by the California banking industry and business interests.

The Assembly rejected SB1275 towards the end of their daily session. If passed by the Assembly and signed by Governor Schwarzenegger, the Bill would have required institutional lenders to consider a loan modification on all distressed homeowners before making the decision to foreclose on the property. SB1275 differs from federal legislation because it creates a cause of action against the lender if they fail to consider a loan modification before the decision to foreclose. At this point federal legislation requires a bank who participates in Obama’s Mortgage Protection Plan to refrain from foreclosing against a homeowner who is attempting to negotiate a loan modification. Unfortunately, these rules are voluntary and have no ramifications if the bank decides to foreclose.

Statistical data show that 10% of California homeowners are 60 or more days behind on their mortgage payments. This number is almost 4% higher than the data compiled for the entire country. More than a third of California’s mortgage holders owe more on their homes than the market value of the house itself.

Today, the New York Times noted that the California State Legislature is currently considering measures that seek to protect homeowners who go into foreclosure against deficiency judgments. A deficiency is the difference between what the lender receives at the foreclosure sale on a property and the outstanding balance on the mortgage. For example, if borrower has a $300,000 mortgage on his residence and goes into default whereby the lender recovers $250,000 at the foreclosure sale a $50,000 deficiency exists. In many states a lender can file a lawsuit against the borrower and seek to recover that difference. If successful, the lender gets what is called a deficiency judgment.

California law currently protects Sacramento area residents against deficiency judgments on their first deed of trust. This means if you only have a first mortgage then you can simply walk away from your property and you need not worry about personal liability on any difference between the balance owed on your mortgage and what the bank recovers at the foreclosure sale. However, if you have refinanced your property to get a better interest rate or taken out a second loan against the property or the distressed property is your second home, these protections do not apply.

Since many people have re-financed their properties over the last few years these anti-deficiency protections do not apply to many homeowners. This is why SB1178 seeks to extend the protection against deficiency judgments to people who refinanced and took out home equity loans. The catch is that the protections only rise to the level of the original loan amount. This means if a homeowner took out a $300,000 original loan and refinanced for $350,000, taking $50,000 of equity out of the house, the homeowner would be protected for up to $300,000 but would remain liable for the $50,000. So, if that same house sold for $250,000 then the homeowner would potentially owe the bank $50,000 instead of $100,000 if a deficiency was granted.

President Obama signed sweeping legislation affecting thousands of college students along with the acclaimed health-care bill on March 30, 2010. This overhaul changes the way students will finance their higher education. Obama’s higher education overhaul encourages individuals seeking to borrow money to pay tuition and education related expenses to take the loans directly from the federal government instead of private lenders. The law also caps a graduate’s repayments of the loans to 10 percent of their salary, which currently stands at 15 percent. Designed to save the federal government $68 Billion dollars and streamline the entire lending process, students may nonetheless find themselves in the exact same situation as they do now if they cannot afford to pay their loans: STUCK.

Current bankruptcy laws allow a student to discharge his or her student loans only if he or she can show that paying the loan constitutes an “undue hardship.” The definition of “undue hardship” remains vague to most courts and has been applied to debtors inconsistently. Regardless, “undue hardship” continues to be a high standard for a student debtor to prove in bankruptcy court. Basically, this means for a student debtor to ensure that his or her student loans would be discharged through bankruptcy he or she would have to prove that she has no way of producing income; a difficult standard to achieve.

Legislation proposed this month, in the U.S. House of Representatives, seeks to alter the bankruptcy code and permit individuals to include private student loans with his or her Chapter 7 filing by having the private loan stripped off along with credit-card balances, gambling debts, and mortgages. According to Andrea Fuller’s article, Lawmakers Introduce Bills to Change Student-Loans Bankruptcy Policy, this new bill seeks to eliminate the “undue hardship” standard for private student loans. Surprisingly, however, the legislation remains completely silent with regard to a debtor’s inclusion of student loans in the bankruptcy that have been provided by the federal government.