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A NATIONAL BANKRUPTCY SERVICES PUBLICATION

JULY 2012

The Escrow Analysis in Bankruptcy Navigating HELOCs in Texas


FORTUNATELY, WE HAVE THE MOST COST EFFECTIVE, COMPLIANT BANKRUPTCY SOLUTIONS FOR KEEPING EVERYTHING IN CHECK.

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Since 1987, we’ve focused on helping companies deal with the maze of bankruptcy cases by consistently increasing recovery results, reducing loan losses, and improving the bottom-line performance of their bankruptcy portfolio. Contact NBS and let us help you stay ahead of the game.

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9441 LBJ Freeway, Suite 250 Dallas, TX 75243 214.550.4204 NBSdefaultservices.com


FOCUS DATA

A NATIONAL BANKRUPTCY SERVICES PUBLICATION

ISSUES

DATA

FOCUS

New rules are designed to increase the efficiency of the HE foreclosure process.

A look at bankruptcy data from across the nation, with detailed state-by-state breakdowns of filings.

An interview with Dennis Dollar, Principal Partner in Dollar Associates LLC.

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THE LEDGER

NBS. HANDLING BANKRUPTCY CASES SINCE 1987.

ISSUES

IN THIS ISSUE

TABLE OF CONTENTS

JULY 2012

Brad Cloud COO bcloud@nbsdefaultservices.com Dave McManus SVP dmcmanus@nbsdefaultservices.com Tom Waters VP tomwaters@nbsdefaultservices.com Contributing Writers Jeffrey W. Martin, Nick McLemore, Alexander Wolfe, Hayden Hooper, Paul W. Cervenka, Wes Wiley Magazine Design HW Creative, HWideas.com THE LEDGER is a National Bankruptcy Services publication. © 2012 National Bankruptcy Services All Rights Reserved 9441 LBJ Freeway, Suite 250 Dallas, TX 75243

» NAVIGATING HELOCS IN TEXAS How the New 2012 Rules are Impacting the Quasi-Judicial Foreclosure Process

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» PREPETITION CLAIMS, ONGOING PAYMENTS, AND THE AUTOMATIC STAY A Deeper Look at In Re Rodriguez

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» COURT-ORDERED COOPERATION An Overview of Loss Mitigation Programs in Bankruptcy

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» THE BIG PAYOFF The New Texas Pay-off Statement Requirements and Best Practices

» BY THE NUMBERS Taking a Look at the State of Bankruptcy



» THE ESCROW ANALYSIS IN BANKRUPTCY What is the Best Practice?

» HOT SEAT Dennis Dollar, Principal Partner in Dollar Associates LLC

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The information in this publication is not a substitute for the advice of an attorney and is not legal advice.

NBSDEFAULTSERVICES.COM « JULY 2012

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Larry Buckley CEO lbuckley@nbsdefaultservices.com


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FOCUS

NAVIGATING HELOCS IN TEXAS

TEXAS

NAVIGATING HELOCs IN

» BY JEFFREY W. MARTIN

ISSUES

DATA

BY JEFFREY W. MARTIN

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HOW THE NEW 2012 RULES ARE IMPACTING THE QUASI-JUDICIAL FORECLOSURE PROCESS


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he laws relating to mortgage-backed securities have been under intense scrutiny over the past few years, and several states, including Texas, have been rewriting various foreclosure laws as a result. The amendment of various rules regulating foreclosure is designed to assuage the general public’s concerns regarding fraudulent foreclosure activities and to increase the efficiency of the quasi-judicial foreclosure process. The amendments the Texas Supreme Court made to the Texas Rules of Civil Procedure (TRCP) 735 and 736 apply to all proceedings filed on or after January 1, 2012. Pending home equity (HE) applications filed before January 1, 2012 continue to be governed by the prior rules. The amended rules are not substantially different from their predecessors; however, they make several modifications to how the home equity foreclosure applications are filed and processed across the state of Texas, and have required careful legal analysis to ensure complete compliance. As with any other new piece of legislature or amended rule, there is a period of adaptation that vendors, servicers, attorneys, and the courts experience as all parties come to terms with the new legal requirements and how to effec-

be charged for the issuance of the citations and service of process. TRCP 736.3(b) specifically provides that the clerk may only charge one fee for each respondent or occupant served under the new rules. This has caused confusion for clerks across Texas, and there have been multiple disputes as to how to properly calculate fees in compliance with the language of the new rules. Legal analysis and interpretation of the plain meaning of the new rules indicate that, although there are technically two citations that must be issued for each obligated borrower to be served, the court clerk may only charge one fee for the issuance and service of those citations. This single fee also includes all fees for certified and first class mailing. The amended rules and fee structure limits excess costs to lenders and servicers while ensuring that notice is properly served upon all obligated parties. BVW has been enclosing a copy of the relevant portion of the amended rules with each HE application sent to the court so that each court clerk can review them before issuing and serving citations. Inevitably, there are still disputes with court clerks over the proper amount of fees that are due. In order to ensure that HE applications are not unduly delayed by these fee disputes with court clerks, BVW has been approving the issuance of

As home equity portfolios increase in size, it is important for lenders and servicers to ensure they have the internal resources to review and approve home equity affidavits in a timely fashion.

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tively and efficiently implement them. This inevitably causes delays; however, Brice, Vander Linden & Wernick (BVW) ensures that these delays are contained and diminished at every possible stage in the process. One of the most immediately recognizable differences between the pre-2012 TRCP 736 and the amended rules is that the parties filing the HE applications are no longer responsible for serving the HE application upon the requisite parties. Responsibility for service of process now resides directly with the respective court clerks in the counties in which the applications are filed. Clerks are now required to issue citations and serve the HE applications via certified mail and first class mail to the parties named in the application. Clerks are also required to serve one citation and application addressed generally to the “occupant” of the property that is the subject of the suit. The new rules also limit the amount of fees that can

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any requested additional funds while these matters are individually negotiated with clerks and the district attorney offices that have been requested to issue opinion letters on the new rules. The Dallas County District Attorney’s office recently issued an opinion letter agreeing with BVW’s interpretation of the new rules, and directed the Dallas County District Court Clerk to charge only one fee per party. BVW anticipates that other county and district attorneys will issue similar opinions. The new rules also now require that each HE application must include reinstatement and payoff quotes with goodthrough dates that are not earlier than 60 days prior to the filing of the application with the court. This presents unique challenges for lenders, servicers, and their attorneys from a workflow perspective. Once a requested reinstatement and payoff quote is received from the servicer or lender, the 60-


FOCUS DATA ISSUES

» BY JEFFREY W. MARTIN

when they are not. If no response is filed by the borrowers, and the petitioner’s application otherwise complies with TRCP 736, “all facts alleged in the application and supported by affidavit of material facts constitute prima facie evidence of the truth of the matters alleged.” See TRCP 736.7(a). TRCP 736.8 mandates that the court issue an order allowing foreclosure if the grounds for foreclosure are properly established, and TRCP 736.7(b) clearly provides that a petitioner need not make an appearance in the court to obtain a default order. The new rule TRCP 736 also changes the requirements of the content of any response filed by a respondent. The new rule requires the parties to affirmatively plead certain issues. TRCP 736.5(c)(1-5) provides that the respondent may file a general denial as before, but now must specifically affirmatively plead: why the respondent believes a respondent did not sign a loan agreement document, if applicable, that is specifically identified by the respondent; why the respondent is not obligated for payment of the lien; why the number of months of alleged default or the reinstatement or pay off amounts are materially incorrect; why any document attached to the application is not a true and correct copy of the original; or proof of payment in accordance with Rule 95. The prior TRCP 736(4) allowed respondents to “file a response setting out as many matters, whether in law or fact, as respondent deems necessary or pertinent to contest the application.” Thus, it appears that the Texas Supreme Court is attempting to narrow the grounds upon which respondents can assert a defense. This allows petitioners the means to challenge deficient and sometimes frivolous responses filed by respondents solely in an attempt to delay the HE quasi-judicial process. The new rules enacted by the Texas Supreme Court appear to be designed to increase the efficiency of the HE foreclosure process, and to ensure that borrowers still have an opportunity to contest the legitimacy of any default alleged. However, respondent delay tactics and court sympathy still hinder the expediency of the HE foreclosure process.

NAVIGATING HELOCS IN TEXAS

day timeline initiates. Drafting and compilation of the HE application begins as soon as the referenced reinstatement and payoff quotes are received from the lender or servicer. Completed HE applications are then sent to the lender or servicer for review and execution. The lender or servicer then returns executed copies of the affidavits attached to the application to BVW. Only upon receipt of these executed documents can the finalized HE application be prepared and filed with the Court. BVW has a policy of following up with each client after the expiration of 30 days from when the HE application was originally uploaded for review and execution, in order to ensure that there is sufficient time in which to file the HE application with the court before the reinstatement and payoff quotes expire and the entire drafting process must be restarted. The increasing delinquency of client response times has proven problematic. Lenders and servicers should be cognizant that delays in reviewing and executing the affidavits in support of the HE application jeopardize the HE foreclosure process, and can significantly increase the legal costs they incur if reinstatement and payoff quotes expire and new applications have to be drafted. As HE portfolios increase in size, it is important for lenders and servicers to ensure they have the internal resources to review and approve HE affidavits in a timely fashion, as the costs resulting from expired reinstatement and payoff quotes are unnecessary and avoidable. As with the rules that predate the 2012 revisions, amended TRCP 736 does not require a formal hearing regarding the consideration of home equity foreclosure applications. Petitioners may file a motion for default and include a proposed order for the court to consider if a response is not filed by the requisite parties on or before the first Monday after the expiration of 38 days. However, courts remain reluctant to sign an order allowing foreclosure to proceed without holding a formal hearing on the matter. This position is directly attributable to the political and social climate surrounding foreclosure law as a whole; however, the Texas Supreme Court has provided a clear directive regarding when formal hearings are required and

Jeffrey W. Martin is an attorney for Brice, Vander Linden & Wernick, P.C. and currently assists with the management of the home equity foreclosure portfolio. He has been practicing real estate,

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foreclosure, and bankruptcy law since 2008.

NBSDEFAULTSERVICES.COM « JULY 2012


BY NICK MCLEMORE

Prepetition Claims, Ongoing Payments, and the Automatic Stay A DEEPER LOOK AT IN RE RODRIGUEZ

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n 2010, the U.S. Court of Appeals for the 3rd Circuit was presented with the issue of whether the automatic stay prevented a lender from accounting for a pre-petition escrow shortage in its post-petition calculation of a debtor’s future monthly payments. Crucial to this issue was whether the lender held a “claim,” as defined in §101(5) of the Bankruptcy Code, against the debtors for the unpaid escrow amount prior to the petition date. In reaching its decision in Rodriguez, the court was persuaded by two prior cases in particular, In re Grossman’s, Inc., 607 F.3d 114 (3d Cir. 2010) and Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008). Relying on its decision from In re Grossman’s, Inc., the Third Circuit held that a claim can exist under the Bankrupt-

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cy Code by virtue of the terms included in the definition “contingent, unmatured, and disputed” before a right to payment exists under state law. Turning to Campbell, the 3rd Circuit attempted to apply this broad definition. In Campbell, the court found that under the loan documents, the borrowers had an obligation to pay and the lender held the right to collect past due payments. Specifically, the court found that the loan documents outlined and established an obligation to make payments into the escrow account, thus making the obligation enforceable and providing the lender with a claim. The bottom line: The contingent nature of a right to payment, albeit remote, will still constitute a claim as defined by §101(5) of the Bankruptcy Code.


FOCUS DATA ISSUES bankruptcy associate attorney with Brice, Vander Linden & Wernick, P.C. in Dallas. He is a graduate of the SMU Dedman School of Law.

CONCLUSION Although the Court did not address the issue of whether Countrywide violated the automatic stay, but instead remanded the matter to the district court, it is well established that the automatic stay serves to protect the bankruptcy estate from creditors attempting to recoup pre-petition payments outside the bankruptcy court forum. With that in mind, it is paramount that all creditors understand that the touchstone of any claim is an enforceable right to payment from the debtor and that once such a pre-petition claim exists it should always be sought within the bankruptcy process.

NBSDEFAULTSERVICES.COM « JULY 2012

» BY NICK MCLEMORE

Nick McLemore is a

PREPETITION CLAIMS, ONGOING PAYMENTS, AND THE AUTOMATIC STAY

CASE OVERVIEW In Rodriguez, the debtors financed the purchase of their home with a purchase-money mortgage from First Mutual Corporation, with Countrywide later acquiring the mortgage. Pursuant to the terms of the mortgage, the debtors’ monthly payments consisted of: (1) an amount to cover principal, interest, and late fees; and (2) an amount to cover taxes, insurance, and other charges. The second part of the monthly payment was to be paid into an escrow account and used, as needed, by Countrywide to pay for those expenses as they became due. Pursuant to the Real Estate Settlement Procedures Act of 1974 (“RESPA”), Countrywide required the debtors to pay an amount into an escrow account that was higher than required to cover the actual cost of the taxes, insurance, and other charges. The debtors fell behind on the mortgage payments and eventually filed for Chapter 13 bankruptcy protection on October 10, 2007 (“Petition Date”). As of the Petition Date, the debtors were $20,844.40 in arrears on the mortgage payments. Of that amount, $5,657.60 was attributable to an escrow arrearage for taxes, insurance, and other charges. Of the $5,657.60 escrow arrearage, $3,869.91 consisted of payments that Countrywide had already made. The remaining $1,787.69 was the amount for which Countrywide had not made corresponding payments, and was in fact Countrywide’s escrow cushion amount under RESPA. After the Petition Date, Countrywide revised the escrow payments, excluding the cushioned amount and presuming the escrow balance to be zero at the time of the Petition Date. Simply put, Countrywide did not recognize the $1,787.69 cushion as funds that existed as of Petition Date and calculated the post-petition escrow shortage as including the $1,787.69

cushion that the debtors had never paid. On January 15, 2007, Countrywide filed its proof of claim in the debtors’ bankruptcy case seeking a total of $21,283.71 in pre-petition arrears, which consisted of the $3,869.91 pre-petition escrow deficiency that Countrywide had actually paid for taxes, insurance, and other charges. In essence, Countrywide did not seek to recoup the $1,787.69 equity cushion through the bankruptcy process, but rather by assessing the debtors’ higher post-petition monthly escrow payments to make up for the shortfall. In defending its actions of seeking to recoup the amount outside of the bankruptcy process, Countrywide argued to the Third Circuit that it had no “claim” to the unpaid escrow amounts because Countrywide had not yet paid an escrow expense. Although the Third Circuit recognized that the unpaid escrow amounts may not have constituted a “debt” under the terms of the mortgage, the Court concluded the amounts still constituted a “claim” as outlined under In Re Grossman’s, Inc. The Third Circuit then held that Countrywide’s right to successfully collect against the debtors may be contingent upon a disbursement of its own funds to satisfy an escrow deficiency, but the contingent nature of the right to payment does not change the fact that the right to payment still exists and thereby constitutes a claim. In reaching such a determination, the Third Circuit concluded that the $1,787.69 amount was a pre-petition claim that Countrywide was seeking outside of the bankruptcy process when it should have included the amount in its proof of claim.

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Once the Third Circuit determined a claim existed, the next issue before the court was whether the lender violated the automatic stay pursuant to §362(k) of the Bankruptcy Code when it sought payment outside of the debtors’ bankruptcy case. Although the issue was ultimately remanded to the district court, the Third Circuit stated that the automatic stay only applies to pre-petition claims such as the one in the case at hand.


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BY ALEXANDER WOLFE

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FOCUS DATA ISSUES

COURT-ORDERED COOPERATION

encourage debtors and mortgage creditors to enter into loan modifications. This article will offer an overview of the benefits obtained from such programs by both debtors and creditors, as well as an exploration of the different types of loss mitigation programs being offered by the courts.

» BY ALEXANDER WOLFE

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here’s little question that foreclosure can be a traumatic experience for a homeowner. The trauma is compounded when homeowners file for bankruptcy as part of an effort to save their homes, yet find themselves facing a motion to lift stay when they are unable to bring their mortgage current despite their best efforts. In many of these instances a loan modification would assist the borrower in both keeping his or her home and emerging successfully from bankruptcy. To that end, several courts have instituted loss mitigation programs designed to

AN OVERVIEW OF LOSS MITIGATION PROGRAMS IN BANKRUPTCY

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What is loss mitigation? It has been defined as a term “intended to describe the full range of solutions that may avert the loss of a debtor’s property to foreclosure, increased costs to the lender, or both.” 1 Loss mitigation programs in bankruptcy courts are a relatively new phenomenon, the first formal program having been adopted by the Bankruptcy Court for the Southern District of New York in 2009.2 These programs have arisen largely as an alternative means of dealing with the wave of foreclosures that followed the collapse of the housing market and the downturn of the national economy. Several courts have recognized the benefits that a loss mitigation program can provide to both creditors and debtors, the primary benefit being that court oversight ensures that the parties to any modification negotiations are dealing with each other in good faith.3 Creditors can be assured that the debtor is not merely stalling for time by requesting an unfeasible loan modification, and they also have more insight into the adjustments the debtor is making in his or her income to be able to afford to make an ongoing mortgage payment.4 Also, when debtors emerge successfully from bankruptcy they are in a better position to maintain their modified mortgage payments for the remainder of the life of the loan, saving the creditor from the loss it would have otherwise experienced as a result of foreclosure. In turn, debtors can be assured that they are dealing with a representative of the creditor who has the full authority to authorize a modification, thus preventing the common scenario where a foreclosure is carried out while the debtor is awaiting word on a pending modification application. 5 In addition, effort spent in a loss mitigation program is not necessarily wasted if the mitigation does not result in a loan modification. Parties to the mitigation may still be able to negotiate an outcome that works for both the creditor and the debtor, such as making arrangements for a short sale or negotiating a turnover of the home on a timeframe that works for the debtor.6 Loss mitigation programs also facilitate the purpose of bankruptcy, to not only give the debtor a “fresh start” but to put them in a position to maintain their financial health in the long-run by permitting them to take on a more feasible mortgage payment.

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The loss mitigation programs adopted by courts vary in scope and requirements. Local rules and procedures concerning loan modification first arose in the context of the automatic stay; creditors would often petition the court for an order authorizing them to conduct negotiations over modification with the debtor so as to avoid accusations that they were in violation of the automatic stay, which typically forbids the creditor from having direct contact with the debtor. 7 Some courts without loss mitigation programs maintain rules to this effect. 8 Other courts that do not have loss mitigation programs may nevertheless require court or trustee approval of loan modifications negotiated by the debtor and the creditor. For example, the District of South Carolina simply requires a consent order signed by the debtor, creditor, and Chapter 13 trustee.9 In Vermont, the debtor may obtain a “Certificate of Approval” from the trustee, after which the court will approve the modification. 10 In contrast, the Northern District of Texas not only requires a motion seeking approval from the court, but also directs the trustee to consider certain specific factors when determining whether the motion should be objected to.11 The formal loss mitigation program adopted by the Southern District of New York has served as a model for programs adopted by other courts, and so it is useful to examine the program in detail. It is available to individual debtors in any chapter of bankruptcy, but it is limited to loans pertaining to the debtor’s principal residence. Loss mitigation can be commenced by the debtor or the creditor, while the bankruptcy court retains the authority to enter a loss mitigation order at any time provided that parties bound by an order have had the opportunity to object. No formal mediator is required, though any of the parties to a loss mitigation process may request one from the court. The loss mitigation order serves to establish the timeframes by which parties to the mitigation must fulfill certain obligations to each other, including establishing a designated contact person, the date by which the parties must transmit information to each other, and the date by which either a written report must be filed or a verbal report provided at a status conference. The loss mitigation also prevents the creditor from filing a lift


FOCUS DATA ISSUES

» BY ALEXANDER WOLFE

trict of New York, whose program is identical to the Southern District of New York; Rhode Island; New Jersey; Wisconsin; and the Northern District of Indiana. The requirements for these programs are not necessarily as detailed as those of the Southern District of New York but they are all essentially the same in spirit and function, though specific requirements may differ. For example, the Middle District of Florida requires the parties to engage in the services of a professional mediator.12 The Middle District of Florida and the Eastern District of Wisconsin also impose certain income requirements on the debtor. 13 The Eastern District of Wisconsin restricts the program to Chapter 13 debtors, unlike the New York programs.14 Loss mitigation programs in bankruptcy have emerged as a valuable tool in assisting courts, debtors, and creditors. With no end in sight to either the foreclosure crisis or the nation’s economic troubles, it’s likely that even more courts will adopt loss mitigation programs designed to ease the hardships experienced by both debtors and lenders.

COURT-ORDERED COOPERATION

stay motion, or adjourns until after the termination of loss mitigation any lift stay motion already filed. The order also imposes certain duties on the parties to loss mitigation. First and foremost, it imposes the duty that the parties will negotiate in good faith, and failure to do so may subject the party to sanctions. The parties must also provide each other with contact information; for the creditor this is the name, address, and direct telephone number of a person who has full settlement authority. The creditor must request information from the debtor via affidavit, and the debtor must respond with the requested information in kind. The parties must also provide a written or verbal status report to the bankruptcy court within the timeframe set by the loss mitigation order. The status report must state whether one or more loss mitigation sessions have been conducted, whether a resolution was reached, and whether one or more parties believes that further sessions would likely result in a resolution. At any time either party may request a conference with the court to discuss the loss mitigation efforts. The loss mitigation period is set by the court in the initial order, but the parties may agree to an extension of the period, or one party may petition the court for an extension. Either party may also petition the court for early termination of the loss mitigation efforts, including dismissal of the debtor from their bankruptcy case. A Chapter 13 debtor, however, is not required to request dismissal of the case as part of any resolution or settlement that is agreed to during the loss mitigation period. If the parties are able to reach a settlement, court approval is required. Lastly, debtor’s counsel must file a loss mitigation final report with the court no later than fourteen days after the termination of the loss mitigation period. Some of the other jurisdictions that have adopted form loss mitigation programs include the Eastern Dis-

ENDNOTES 1. 2. 3.

4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

See In re Adoption of Loss Mitigation Program Procedures, General Order M-364 (Dec. 18, 2008), amended by General Order M-413 (Dec. 30, 2010). See id. Foreclosure Mediation Programs: Can Bankruptcy Courts Limit Homeowner and Investor Losses?: Hearing Before the Sen. Comm. On the Judiciary, 112th Cong. (2011) (statement of the Honorable Robert Drain). See id. See id. See id. See id. Bankr. M.D. Ga. R. 4001-1(3) (2011). Judges’ Corner (Bankr. S.C. Aug. 11, 2009) at http://www.scb.uscourts.gov/ judges_corner.html. Bankr. Vt. R. 6004-1 (2011). Clerk’s Notice 09-03 (Bankr. N.D. Tex., July 14, 2009). Bankruptcy Mortgage Modification Mediation Program, Bankr. M.D. Fla. (Jan. 1, 2011). See id.; Mortgage Mediation Program, Bankr. E.D. WI (June 1, 2011). See id.

Alexander Wolfe is an attorney with Brice, Vander Linden & Wernick, P.C. in Dallas. He graduated from the Texas Wesleyan School of Law in Forth Worth, and is licensed to practice in the Northern and Eastern District of Texas. Mr. Wolfe assists with general compliance matters and oversees the filing of all notices PAGE 11

required by the new Federal Rule of Bankruptcy 3002.1.

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DATE FOR THE SALE OR OTHER TR ANSACTION, AS PROVIDED IN THE REQUEST PURSUANT TO THIS CHAPTER CAL ADDRESS OF THE UNDERLYING COLLATERA L OF THE LOAN, ORMADE A LEGAL DESCRIPTIO N OF THE PROPERT Y SALE OR OTHER TR ANSACTION, AS PROVIDED IN THE REQUEST MADE PURSUANT TO THIS CHAPTER

PAYOFF

PER DIEM AMOUNT SUFFICIENT INFORMATION TO IDENTIF Y THE LOAN FOR WHICH THE PAYOFF INFORMATION IS PROVIDED THE PAYOFF AMOUNT THAT IS VALID THROUGH THE PROPOSED CLOSING DATE EMENT INFORMATION ADJUSTABLE RATE MORTGAGE INFORMATION L ATE CHARGE INFORMATION RD ING WH ICH PAR TY IS RES OTH ER INFO RMATION NEC PO NSI BLE FO R THE REL EA SE OF LIE N ESSA RY TO PRO VIDE A TE OF THE LOA CLEA R AND CON CISE PAYO N FF STAT EME NT

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very two years we sit with bated breath to see how the most recent acts of legislative leadership will impact the day-to-day operation of those in our industry. As secured creditors operate in an environment still reeling from the economic upheavals, we may anticipate continued legislative action in those areas of law that influence the relationship between mortgagors, mortgagees and servicers, and title insurance companies. Most recently, this action has come in the form of the new Texas pay-off statement requirements.

FOCUS

THE BIG PAYOFF » BY HAYDEN HOOPER

ISSUES

DATA

RULE §155.2

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THE NEW RULES For the majority of mortgagees and mortgage servicers, the redefined pay-off statement requirements enacted by the 82nd Texas Legislative Session pose little practical burden in implementation despite the relatively short time that elapsed between enactment and the effective date of March 12, 2012. More importantly, the example form provided by the drafters exemplifies the sort of transparent communication of terms and obligations that public policy endorses and best practices demand. Helpfully, the legislation also provides definitions for “home loans” necessary for proper statutory interpretation in Section 155.1 of Title 7, Part 8, Chapter 155 of the Texas Administrative Code. It clarifies that the term shares the definition provided by Texas Finance Code §343.001, being “a loan that is: (A) made to one or more individuals for personal, family, or household purposes; and (B) secured in whole or in part by: (i) a manufactured home as defined by §347.002, used or to be used as the borrower’s principal residence; or (ii) real property improved by a dwelling designed for occupancy by four or fewer families and used or to be used as the borrower’s principal residence.” This provides an established working interpretation, rather than one that the courts have to struggle to develop. Under the currently effective requirements, payoff statements must contain the name of the mortgagor, the physical address of the subject property either alone or preferably in conjunction with the legal description of the property, and the proposed clos-

NBSDEFAULTSERVICES.COM « JULY 2012


T H E B I G P AY O F F C O N T I N U E S

ing date for the note in question. While including this information is commonsensical, it is important to give a moment’s pause to consider the import of each element, particularly for mortgagees and servicers who maintain and manage a large portfolio. For large portfolio managers, there are numerous instances in which the portfolio must be dealt with as a whole, but such handling can lead to overlooking the discrete details and the story reflected by each note and deed of trust, which can be easily lost. For example, regular review of the legal description as it is contained in the underlying security documents (such as the warranty deed and deed of trust) is a useful exercise in due diligence. Frequently, mistakes are discovered in critical recorded instruments only when a file is forwarded to legal counsel for loss mitigation and/or foreclosure proceedings. By this point, the attorney has often already forecast definitive timelines and estimates for case management, which puts additional pressure on counsel to effect a corrective action within set time constraints. Practical realities rarely permit such errors to be rectified in a fashion that does not delay the resolution, add avoidable legal fees, and incur additional recordation costs. While systematic verification of the address and legal description adds to the labor cost of servicing the loan and issuing payoff statements, the benefits reaped in terms of file completeness, servicing transparency, and demonstrable regulatory compliance are worth the expense.

BEST-PRACTICE INCLUSIONS When requested by a title insurance company, the payoff statement must likewise include the proposed closing date, payoff amount valid through the proposed closing date, and identifying information on the loan to which the statement relates. However, even if the title insurance company has not requested such information, its inclusion may be regarded as a best practice. Unless a specific proposed closing date is offered by the requesting party, it is often difficult for the mortgagee or servicer to determine what projected date would be most beneficial to that party. Consider when counsel has been engaged by a mortgagee or servicer to pursue a nonjudicial foreclosure, and the mortgagor contacts that firm to request a payoff statement. That firm then contacts the mortgagee or servicer, who then produces the statement, which is then relayed back to counsel who ultimately provides it to the mortgagor. The entire process might take 10 days from start to finish, during which time the quote provided therein risks growing stale. When, as here, no specific closing date is proffered, it behooves the statement issuer to be mindful of the fact that the inability to provide promptly a current payoff statement to an obligor when requested may require a projected sale date to be delayed. If the payoff statement provided is valid through the first Tuesday of the month, two months after requested, this enables counsel to effectively communicate with the re-

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“Ideally, every piece of optional information suggested by §155.2(c) should be included on the payoff statement.”

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FOCUS DATA ISSUES

Another interesting point worthy of note is the timeline requirement for a response when the request comes from a title insurance company. Section 155.3 provides, “A mortgage servicer shall deliver a payoff statement required under §155.2 of this title (relating to Payoff Statement Form) to the title company by the eighth business day after the date the request is received unless federal law requires a shorter response time.” Simultaneously, §155 also encourages the delivery of payoff statement in whatever manner is most expedient and acceptable to the requestor. Codification of the ability to use electronic mail to satisfy timely responses serves to reinforce the legislative intent of communicating as quickly as possible with interested parties when they specify that electronic mail is an acceptable means of communication. Unlike payoff information provided over the phone, which requires call logs and possibly preservation of phone recordings to ensure the proper deliver of required information or the use of physical mail with its delivery times and expense, electronic mail is an ideal manner of efficiently, clearly, and expeditiously preserving information. Likewise, it affords mortgagees and servicers managing a large portfolio the opportunity to leverage their extensive data management systems to largely automate and populate a form substantially similar to that 7 TAC §155.2(c)(6), limiting production labor to verification of data against original documents and transmission to requestors.

THE BIG PAYOFF » BY HAYDEN HOOPER

questing party without necessarily delaying ongoing processes. The inclusion of additional, not mandatory, information in a payoff statement enhances the statement’s utility to the requesting party and demonstrates a commitment to truth in lending, clarity, and meaningful communication. Despite the fact that underlying notes may include information on adjustable rates either in the body of the document or as a separate attached rider, the details of these provisions are often nebulous and confusing to parties not regularly accustomed to dealing with the calculations they reference. A concise reminder of these terms helps the payoff statement better tell a holistic story of the underlying obligation. Providing the per diem amount is enormously beneficial in that it provides as clear an illustration of the financial impact delays can have on the amount necessary to ultimately satisfy an obligation. When this information is coupled with escrow disbursements and an explanation of late charges, the payoff statement becomes a substantially more useful document for a mortgagor, title insurance company, and legal counsel. Ideally, every piece of optional information suggested by §155.2(c) should be included on the payoff statement. In doing so, payoff statement issuers acknowledge the important public policy consideration of transactional transparency, as well as ensuring that every stakeholder is empowered to make fully informed decisions.

PAGE 15

Texas native Hayden Hooper’s diverse background has brought him from a professional start in television production to a stint in the defense industry before embracing the law and arriving at Brice, Vander Linden & Wernick, P.C. in 2012. He is presently serves as the foreclosure compliance attorney, and he believes that creativity and innovation yield elegant solutions to complicated problems.

NBSDEFAULTSERVICES.COM « JULY 2012


BY THE

NUMBERS DATA 2012 YTD STATE-BY-STATE HOUSEHOLDS PER FILING

D.C.

< 100 100-200 200-300

126.6 NATIONAL AVERAGE TOP 10

BOTTOM 10 State

Households Filings Per per Capita filing

Nevada Utah Georgia Nevada California Georgia Tennessee Tennessee Alabama California Michigan Alabama Illinois Illinois Utah Indiana Arizona Michigan Kentucky Colorado PAGE 16

> 300

Percent Change1

7.69 53.0

-3.41 -11.5%

7.10 54.3

-0.82 -24.1%

6.2 55.7

-0.71 -12.2%

6.19 56.3

-1.67 -5.3%

5.47 63.0

-1.69 -19.9%

5.23 67.2

-1.47 -7.9%

5.02 67.5

-1.23 -6.6%

4.92 68.3

-1.53 -10.7%

4.73 69.4

-1.58 -12.9%

4.57 72.5

-1.03 -11.4%

State

Households Filings Per per Capita filing

Percent Change1

1.10 179.2

-0.48 -18.9%

1.40 181.6

-0.74 -20.1%

Alaska Iowa DistrictVirginia of Columbia West South Dakota Texas Vermont South Dakota South Carolina Montana North Dakota South Carolina New York Vermont Wyoming North Dakota Montana Washington D.C. Iowa Alaska

AS OF MAY 2012; PERCENT CHANGE BASED ON COMPARISON OF JAN/FEB 2012 FILINGS VS PREVIOUS YEAR Source: LCI 5/31/2012 THE LEDGER Âť NBSDEFAULTSERVICES.COM

1.45 187.0

-0.99 -6.3%

1.51 189.3

-1.11 -14.2%

1.54 199.5

-0.50 -19.7%

1.71 218.1

-0.76 -2.9%

1.78 224.9

-1.06 -8.8%

1.81 268.6

-0.98 -22.0%

1.92 271.0

-1.11 -1.3%

1.95 302.2

-1.26 -18.6%


Alabama Alaska Arizona Arkansas California Colorado Connecticut Washington DC Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Total States and DC

Chapter 7 Filings

Chapter 13 Filings

11,249 351 11,776 5,285 82,022 11,268 3,598 388 1,381 33,957 26,073 1,156 2,726 29,321 15,065 2,845 3,646 8,684 6,444 1,289 10,138 7,559 22,867 7,673 5,033 10,796 841 2,405 7,595 1,748 13,809 2,075 17,826 9,032

41.8% 82.9% 85.9% 56.0% 74.9% 83.1% 87.4% 86.1% 70.3% 72.3% 51.7% 76.0% 88.5% 73.4% 74.4% 91.0% 67.2% 74.8% 36.5% 85.7% 81.3% 72.6% 84.5% 83.4% 56.1% 73.6% 81.8% 73.4% 80.3% 76.1% 78.9% 91.2% 84.9% 46.2%

58.1% 16.8% 13.4% 43.9% 24.7% 16.8% 12.1% 13.1% 29.5% 27.4% 48.1% 23.9% 11.1% 26.5% 25.6% 8.8% 32.7% 25.0% 63.3% 14.0% 18.4% 26.8% 15.4% 16.5% 43.8% 26.3% 17.7% 26.4% 18.7% 23.9% 20.9% 8.4% 14.9% 53.3%

435 21,593 5,016 6,582 12,564 1,853 3,365 702 18,055 19,476 6,912 476 13,002 11,899 1,702 11,511 532 513,245

90.3% 77.0% 83.9% 79.4% 69.7% 85.4% 46.3% 91.2% 49.5% 45.6% 66.9% 80.7% 66.4% 81.0% 87.4% 77.1% 85.3% 71.1%

9.4% 22.9% 15.9% 20.5% 30.1% 14.5% 53.4% 8.5% 50.1% 54.1% 32.9% 19.3% 33.5% 18.8% 12.5% 22.7% 13.9% 28.6%

FOCUS DATA

Total 2011

PAGE 17

State

ISSUES

STATE-BY-STATE TOTAL 2012 YTD BANKRUPTCY FILINGS AND PERCENTAGES OF CHAPTER 7 VS. CHAPTER 13

2012 YTD as of May 31, 2012

NBSDEFAULTSERVICES.COM ÂŤ JULY 2012


2012 YTD AS OF MAY 31

DISTRICT-BY-DISTRICT

PAGE 18

517,814

B A N K R U P TC Y F I L I N G S

Source: LCI 5/31/2012 THE LEDGER » NBSDEFAULTSERVICES.COM

TOTAL 2012 YTD AS OF MAY 31

517,814 AK

MAIN

351

CT

MAIN

3,598

AL

MIDDLE

2,996

DC

DISTRICT OF COLUMBIA

388

AL

NORTHERN

6,406

DE

MAIN

1,381

AL

SOUTHERN

1,847

FL

MIDDLE

19,217

AR

EASTERN

3,150

FL

NORTHERN

1,601

AR

WESTERN

2,135

FL

SOUTHERN

13,139

AZ

MAIN

11,776

GA

MIDDLE

4,105

CA

CENTRAL

45,510

GA

NORTHERN

18,532

CA

EASTERN

16,844

GA

SOUTHERN

3,436

CA

NORTHERN

11,867

HI

MAIN

1,156

CA

SOUTHERN

7,801

IA

NORTHERN

1,077

CO

MAIN

11,268

IA

SOUTHERN

1,768

PR

MAIN

4,218


FOCUS DATA

2,726

MT

MAIN

841

PA

WESTERN

4,100

IL

CENTRAL

3,468

NC

EASTERN

3,954

RI

MAIN

1,853

IL

NORTHERN

23,912

NC

WESTERNA

2,732

SC

MAIN

3,365

IL

SOUTHERN

1,941

NC

MIDDLE

2,346

SD

MAIN

702

IN

NORTHERN

6,165

ND

MAIN

435

TN

EASTERN

5,957

IN

SOUTHERN

8,900

NE

MAIN

2,405

TN

MIDDLE

5,027

KS

MAIN

3,646

NH

MAIN

1,748

TN

WESTERN

7,071

KY

EASTERN

4,159

NJ

MAIN

13,809

TX

SOUTHERN

5,297

KY

WESTERN

4,525

NM

MAIN

2,075

TX

WESTERN

4,438

LA

WESTERN

4,041

NV

MAIN

7,595

TX

EASTERN

2,495

LA

EASTERN

1,597

NY

NORTHERN

3,520

TX

NORTHERN

7,246

LA

MIDDLE

806

NY

SOUTHERN

4,323

UT

MAIN

6,912

MA

MAIN

7,559

NY

WESTERN

2,644

VA

EASTERN

9,919

MD

MAIN

10,138

NY

EASTERN

7,339

VA

WESTERN

3,083

ME

MAIN

1,289

OH

NORTHERN

11,284

VT

MAIN

476

MI

EASTERN

17,391

OH

SOUTHERN

10,309

WA

EASTERN

2,478

MI

WESTERN

5,476

OK

EASTERN

805

WA

WESTERN

9,421

MN

MAIN

7,673

OK

NORTHERN

1,489

WI

EASTERN

8,293

MO

EASTERN

5,981

OK

WESTERN

2,722

WI

WESTERN

3,218

MO

WESTERN

4,815

OR

MAIN

6,582

WV

NORTHERN

763

MS

SOUTHERN

2,862

PA

EASTERN

5,243

WV

SOUTHERN

939

MS

NORTHERN

2,171

PA

MIDDLE

3,221

WY

MAIN

532

ISSUES

MAIN

PAGE 19

ID

NBSDEFAULTSERVICES.COM « JULY 2012


THE ESCROW ANALYSIS IN BANKRUPTCY WHAT IS THE BEST PRACTICE? BY PAUL W. CERVENKA

PAGE 20

PAUL W. CERVENKA is an associate attorney at Brice, Vander Linden & Wernick, P.C. in Dallas with a primary focus on the real property bankruptcy portfolio. He is a graduate of The University of Texas at Dallas and SMU Dedman School of Law. He is licensed to practice in Texas.

The world of bankruptcy compliance is constantly changing. Now, more than ever, mortgage servicers must strive to ensure the information presented in the bankruptcy is as accurate as possible. One crucial compliance piece every servicer should examine is the bankruptcy escrow process. The following guide should help in that effort. In this article, the phrase “escrow shortage” refers to a combination of two things. First, it refers to the amount of money that has already been advanced for escrow. Second, it includes the amount of money required under the Real Estate Settlement Procedures Act (RESPA), including the escrow cushion. The focus here is specifically on Chapter 13 bankruptcies. THE BANKRUPTCY ESCROW ANALYSIS An escrow analysis should be run on every account with escrow disbursements that enters bankruptcy in order to accurately calculate the escrow shortage as of the petition date. In fact, the Federal Rules of Bankruptcy Procedure (see FRBP Rule 3001) require an escrow analysis statement as of petition date. This is the best way to ensure the proof of claim information is correct and to ensure the ongoing post-petition payment does not collect any prepetition debt. The bankruptcy escrow analysis must treat the debtor’s escrow account as being cur-

THE LEDGER » NBSDEFAULTSERVICES.COM

rent as of petition date, which means it must also account for any pre-petition RESPA cushion that would have been required on that date. All prepetition escrow shortages should be included in the proof of claim and therefore not calculated as part of any future post-petition escrow analysis during the life of the bankruptcy. This also means that the ongoing post-petition payments should not collect for any pre-petition shortages, as this would not only violate the automatic stay but it would also collect the same debt twice (once in the proof of claim and then again in the ongoing payment, which is commonly referred to as double dipping). This process is supported by recent and past judicial decisions on this issue. [See Campbell v. Countrywide Home Loans Inc., 545 F.3d 348 (5th Cir. 2008) and In re: Rodriguez, No. 09-2724 (3rd Cir. Dec. 23, 2010)]. FUTURE PAYMENT CHANGE After the bankruptcy escrow analysis has calculated the escrow shortage to be included in the proof of claim, the next issue is the payment change (if applicable) due to this bankruptcy escrow analysis. If a payment change is warranted due to the bankruptcy escrow analysis, it should occur with the initial ongoing post-petition payment. The initial ongoing post-petition payment


NBSDEFAULTSERVICES.COM « JULY 2012

» BY PAUL W. CERVENKA

ISSUES

DATA

FOCUS

POST-PETITION ESCROW DISBURSEMENTS On occasion, servicers may find themselves with post-petition escrow disbursements that can alter the bankruptcy escrow calculation. Sometimes this may create a shortage in the ongoing post-petition payment. Allowing a shortage to remain in the on-going post-petition payments does create a risk for the mortgage servicer. Any shortage collected in the initial ongoing post-petition payment can give the appearance that the servicer is attempting to collect a pre-petition debt in a post-petition payment or that the servicer is double-dipping. Furthermore, this can lead debtors, debtors’ attorneys, Chapter 13 trustees, United States trustees, and judges to put the proof of claim under additional scrutiny which can lead to inquiries and later litigation. Another thing to consider is the fact that running the escrow analysis based on the current escrow account (at a time as close

THE BEST PRACTICE SUMMARY In summary, the best practice for the servicer is to run the bankruptcy escrow analysis as soon as possible upon notice of bankruptcy filing. The sooner the analysis is complete, the less likely post-petition escrow disbursements will become an issue. The bankruptcy escrow analysis should adjust the initial post-petition payment and remove any shortage from this payment amount. The entire escrow shortage amount should be collected in the proof of claim arrearage to be paid through the debtor’s plan. Ideally, the escrow statement should reflect this shortage calculation and display it on the statement as being collected in the bankruptcy proof of claim. The initial postpetition payment should also be listed with a breakdown indicating there is no shortage being collected in the payment. The idea is to provide as much clarity and transparency as possible on the statement. This option presents the least risk and least exposure to the servicer as it relates to inquiries and potential litigation. In this way, the bankruptcy escrow statement explains the escrow calculation in a form consistent with nonbankruptcy practice and ensures a best practice approach.

THE ESCROW ANALYSIS IN BANKRUPTCY

THE BANKRUPTCY ESCROW STATEMENT Rule 3001 requires an escrow statement as of petition date in a form consistent with non-bankruptcy practice. This requirement can be somewhat contradictory. An escrow analysis outside of bankruptcy is typically conducted based upon the information in the mortgage system as of the day the analysis is being run. This includes the escrow account balance as of that day. Many servicing systems are not capable of accurately going back in time to calculate the escrow shortage amount at a time in the past. In addition, the purpose of the escrow analysis is to estimate the escrow disbursements over the next twelve months to determine if the escrow payment needs to be adjusted and also to determine if there is a deficiency on the escrow account. Outside of bankruptcy this escrow deficiency would typically be collected in the ongoing mortgage payments and spread over 12 months. In bankruptcy this escrow deficiency should be collected as a lump sum in the proof of claim, as part of the escrow shortage amount described above. This means there should be no remaining shortage in the ongoing post-petition payments. This is a best practice approach to ensure there are no misunderstandings related to a pre-petition debt collected post-petition.

to petition as practicable) can put the debtor in a better position than they may have been in at petition. An escrow analysis estimates the escrow disbursements over the next year based on the most recent escrow information available. The more recent the actual disbursement, the more accurately the escrow analysis can predict both the escrow shortage and the ongoing escrow payments required under RESPA. With the benefit of recent disbursements post-petition, the debtor is able to receive a more accurate post-petition payment as it relates to escrow. This may assist with plan feasibility and success for the debtor in bankruptcy. If these disbursements are not accounted for during the bankruptcy analysis, they will be accounted for during the first post-petition escrow analysis, and may result in increased monthly payments for the debtor at that time. As discussed above, there are many factors to consider when examining the bankruptcy escrow analysis process. The federal rules do impose new requirements regarding the escrow statement, but they do not specifically address the situation of escrow disbursements that occur between petition date and date the escrow analysis is completed. However, as cited above, there is case law that offers some perspective on the issue. [See Campbell v. Countrywide Home Loans Inc., 545 F.3d 348 (5th Cir. 2008) and In re: Rodriguez, No. 09-2724 (3rd Cir. Dec. 23, 2010)]. Generally, at petition, if the servicer knew about an upcoming escrow disbursement then it should be accounted for in the proof of claim arrearage. The argument is that the servicer knew it was owed to the entity (such as the taxing authority) at the time of petition, even though the actual advance may not have occurred until a post-petition date.

PAGE 21

is the next payment that is due after the petition date and it should be reflected on the proof of claim to ensure all parties are aware of the new payment amount. In this instance, a special payment change notice is not required in addition to the proof of claim. Per the Federal Rules of Bankruptcy Procedure, Rule 3002.1 requires 21 days’ notice before a payment change. It would be extremely difficult and impossible in some cases to comply with this notice requirement, as some bankruptcy petition dates are less than 21 days before the initial ongoing postpetition payment is due.


The Credit Union Conversation AN INTERVIEW WITH DENNIS DOLLAR, PRINCIPAL PARTNER IN DOLLAR ASSOCIATES LLC INTERVIEWER: WES WILEY

DENNIS DOLLAR was appointed by President Bill Clinton to the National Credit Union Administration Board in 1997, after over six years as president and CEO of the Gulfport VA Federal Credit Union in Gulfport, Mississippi. A former two-term member of the Mississippi House of Representatives, Mr. Dollar served with distinction on the NCUA Board from 1997-2004 and was named its chairman by President George W. Bush in 2001. An award-winning credit union leader, Mr. Dollar started his own full-service consulting firm immediately after concluding his tenure at NCUA. That firm, Dollar Associates, is a leading credit union consultancy that works with credit unions and the organizations that serve them on regulatory issues, strategic planning, operational efficiencies, growth strategies, and executive recruiting. He is a recognized columnist and popular presenter at credit union associational conferences, and is a graduate of Ole Miss, a Baptist deacon, and a Sunday School teacher. Mr. Dollar is married to his wife, Janie, of 35 years and has two children and three grandchildren.

THE LEDGER: Tell us a little bit about your

planning, training, organizational support,

you add the total assets of the 7,000 credit

career within the credit union space.

field of membership work, and executive

unions in the United States, the entire in-

recruiting—all specifically tailored to the

dustry is not as big as Citibank. Only about

credit union industry.

1,000 credit unions are over $100 million

DD: After eight years in the Mississippi

PAGE 22

House of Representatives, my business ca-

in assets; therefore, their issues are largely

reer landed me in 1991 as president and

THE LEDGER: For those who don’t know,

CEO of the Gulfport VA Federal Credit Union

can you share with us some of the major

in my hometown of Gulfport, Mississippi.

operational/strategic differences between

After seven years there, my political and

credit unions and other finance compa-

credit union careers came together with a

nies/banks?

presidential appointment to the National

DD: Credit unions are unique because of

Credit Union Administration (NCUA) Board.

tions, credit unions have still managed to

their structure as not-for-profit financial

I served seven years on the NCUA Board

become significant marketplace players

cooperatives. Unlike for-profit banks

from 1997 to 2004. President Bush named

with the highest customer satisfaction rat-

owned by their stockholders and governed

ings in every consumer survey and ap-

me to chair the NCUA Board in 2004. Fol-

by a board elected by those stockholders,

proximately 100 million members nation-

lowing the end of my tenure at NCUA, my

credit unions are member-owned and gov-

wide. From humble beginnings as a source

consultancy was formed as Dollar Associ-

erned by a volunteer board elected by the

of financial self-sufficiency for underserved

ates LLC. We work with over 500 credit

member-owners of the credit union. That

Americans first recognized by Congress in

unions and organizations that serve them.

structural difference is the key to credit

the depression era of 1934, credit unions

Our primary areas of consultative support

union service structure, pricing, tax treat-

have managed to build a loyal constituency

are regulatory matters, compliance, exam-

ment, and regulatory approach. Credit

in all 50 states that helps consumers by

ination issues, charter changes, strategic

unions are mostly smaller institutions. If

holding down prices on financial services

THE LEDGER » NBSDEFAULTSERVICES.COM

issues of seeking to build economies of scale and market share in a marketplace dominated by much larger financial institutions. While only having 6 percent of the deposit market in federally insured institu-


FOCUS DATA ISSUES

THE LEDGER: Has the external compli-

single penny in losses above what the fund

ance scrutiny resulted in any major trends

could handle. Unfortunately, over its his-

for credit unions?

THE LEDGER: In finance companies outside of the credit union world, there has been a consistent trend toward outside agencies (OCC, CFPB, etc.) ensuring that institutions are operating in a fair and compliant manner. Is the credit union industry feeling the same push toward better compliance and more regulations? If so, what are some of the governing bodies that credit unions work with?

tory the FDIC fund has not been able to safe and sound, and they tend to maintain a very conservative balance sheet—thus their losses are normally quite manageable even in tough times. The CFPB will be a new regulatory force for credit unions to reckon with. Like banks and particularly community banks, credit unions are concerned about the potential of overreach by the CFPB that may be especially burdensome on smaller institutions. Credit unions are definitely watching the CFPB and its actions with a watchful eye.

DD: Compliance is the biggest issue being discussed in credit union circles today. Compliance costs are rising, and compliance efforts are increasing. The biggest trend in credit unions today is to budget more for compliance and to move toward an enterprise-wide approach to risk management with compliance as the driving force. No one in credit union land looks for compliance burdens to lower in the next few years, so investment in personnel, policy, procedure, and performance is a major credit union industry performance today. And, to carry the impact of

Credit unions face every regulation that

this compliance investment trend fur-

banks face, with the exception of corporate

ther—because of the smaller size of cred-

income taxation and CRA. Credit unions are

it unions in relation to their competitors—

exempt from federal income taxation be-

there is a tremendous growth in credit

cause of their structure as not-for-profit

union mergers in hopes of building great-

cooperatives. They are exempt from CRA

er efficiencies and more effective risk

because they were not involved in the red-

management through the synergies of two

lining practices that initiated congressional

smaller credit unions coming together to

action on CRA in 1977 and can only serve

make a larger one.

their members, regardless of where they

There has been an average of one credit

may live. Other than those two areas, cred-

union merger per business day since 2000.

it unions face every financial and consumer

Since the current hyper-regulatory era be-

protection regulation that the banking in-

gan and compliance issues became such a

dustry does—either from NCUA, the Fed,

focus, the number of credit union mergers

the Treasury Department, FTC, the FFIEC,

has spiked even further. Our firm predicts

and, now, the CFPB. Regulation and super-

that the number of credit unions will be

vision are in credit union land, just as in the

around 5,000 by the year 2016. Credit union

banking industry, big time issues with

mergers is a major trend, and compliance

growing compliance costs involved.

issues are among the key driving factors.

NBSDEFAULTSERVICES.COM « JULY 2012

PAGE 23

DD: There are both federally chartered and state chartered credit unions. The federal charters, which represent about 60 percent of credit unions, are regulated and supervised by the National Credit Union Administration (NCUA). State chartered credit unions, of course, are regulated and supervised by their respective state chartering agencies within the governments of their individual states. The deposits of almost all credit unions, federal and state, are insured by the NCUA, which has its own deposit insurance fund similar to the FDIC fund that insures bank deposits. All depository insurance coverage levels and full backing by the US government are equal and have parity between the NCUA and FDIC deposit insurance funds. While both the NCUA and FDIC funds are instrumentalities of the federal government with its full faith and credit backing, credit unions are alway s quick to point out that the NCUA funds insuring credit union de-

make that claim. Credit unions are very

» DENNIS DOLLAR

posits have never cost the US taxpayers a

HOT SEAT

through their not-for-profit, member-ownership structure. It’s a great American success story.


» CONTINUED

HOT SEAT

» DENNIS DOLLAR

ISSUES

DATA

FOCUS

THE LEDGER: Any advice you would give

some of their larger competitors see. As

folio? How are most credit unions managing

to leaders of credit unions as it relates to

smaller institutions, credit unions cannot

those accounts?

ensuring that their institution is performing

afford to look at bankruptcy and default

in a compliant manner?

management as an automatic loss—particu-

DD: Because credit unions are smaller institutions, most have historically handled compliance issues in-house. Today’s compliance demands, however, make handling everything in house quite demanding and potentially overwhelming. Credit unions are finding themselves in need of outsourcing many of their operational and service areas that they historically handled in-house, and this is not an unhealthy trend. Even though we are a consulting firm and the advice may sound self-serving, we strongly encourage our clients to look for third-party partners that can remove as much of the compliance burden as possible in a cost-effective manner and produce results.

to look at bankruptcy and default management as a book of business and manage it accordingly. If they cannot effectively do so in-house (and most cannot because of the complexity and compliance issues involved), credit unions need to look to solid thirdparties for support in this arena. We have had a number of our credit union clients outsource their bankruptcy management with great cost savings and impressive results. It is never an easy decision, because they have historically handled it in-house or through a friendly local attorney, but there are too many dollars being left on the table and too much potential compliance risk involved for many credit unions to ignore the expertise

THE LEDGER: From a default perspective,

that is available in the marketplace for

can you share with us how the typical cred-

bankruptcy and default management.

it union processes those accounts? DD: Bankruptcy and default management is an example of an area in which credit unions have traditionally handled in house or with a local attorney they have had on retainer for years. The results have been less than stellar

PAGE 24

larly not in this economy. Credit unions need

We are seeing good results among our credit union clients that have a sizable bankruptcy portfolio and hire third-party expertise to manage it. They are treating default management as a book of business and seeing great benefit in doing so.

DD: Credit unions have historically been consumer lenders, only having increased their mortgage and business lending portfolios significantly in recent years. Therefore, the amount of bankruptcy losses for credit unions has been fairly manageable over the years because, frankly, the filing only cost them a smaller unsecured credit card balance or personal loan. However, with the growth in mortgage loans on credit union books and the increase in business loans as well, the bankruptcy losses in credit unions has risen significantly over the past five years. Particularly in larger credit unions with a community-based field of membership, bankruptcies are beginning to average double and triple what they were just a few years ago. No longer are credit unions able to treat default management as “just a cost of doing business.” Credit unions that are taking default management the most seriously have determined that they just can’t have their favorite local attorney deal with bankruptcies as a sideline any longer. Credit unions are coming of age in bankruptcy and default management and, with that maturity, they are looking for partners to help them treat it

for credit unions as their reaffirmation rates

THE LEDGER: Given their different lend-

as a book of business. This has been a slow

have been lower than many banks and their

ing strategies, how prevalent are bankrupt-

trend to develop, but it is developing dra-

recoveries have not kept pace with what

cies within your typical credit union port-

matically in credit unions today.

“The biggest trend in credit unions today is to budget more for compliance and to move toward an enterprise-wide approach to risk management with compliance as the driving force.”

THE LEDGER » NBSDEFAULTSERVICES.COM


NBS NEWS DESK NBS TRADESHOW PRESENCE

NBS RECENTLY INTRODUCED PROCEEDINGS

Nation Bankruptcy Services continues to take an active role at many of the industry’s top events. Most recently, NBS participated at: • The Auto Finance Risk Summit (AFRS), May 2012, Dallas, TX

A PERIODIC PERSPECTIVE ON BANKRUPTCY SERVICING

• Collection and Recovery Solutions (CRS), May 2012, Las Vegas, NV • NACTT Seminar 2012, July 11, New Orleans, LA

Thank you to those of you who kicked off the NACTT at our Bankruptcy Symposium. The hosted dinner and presentation at the exquisite Muriel’s Jackson Square featured nationally-recognized bankruptcy expert Katherine Porter, who topped off a memorable evening of great food and conversation with invaluable insights on improving consumer bankruptcy results.

LOOK FOR NBS NEXT AT THESE CONFERENCES: • Debt Connection Symposium and Expo 2012 (DCS), Sept. 2012, Las Vegas, NV, Booth #607 • REperform, Oct. 2012, Dallas, TX • Auto Finance Summit (AFS), Oct. 2012, Las Vegas, NV

ABOUT NBS

Developed and published by a panel of NBS bankruptcy experts, Proceedings features an assortment of quickhitting articles spotlighting the current events affecting bankruptcy servicing. The June edition features articles on due diligence and deeds of trust, the latest on HAMP, and a game-changing precedent regarding strip-offs in wholly unsecured liens. Please be our guest and review this and other editions of Proceedings by visiting the Perspective web page at NBSdefaultservices.com. If you’d like to receive future editions of Proceedings and other NBS updates, please submit your email address to the Newsletter Signup field on our home page.

OUR MISSION IS SIMPLE. We strive to improve the

BANKRUPTCY SYMPOSIUM SERIES

bottom line performance of our clients’ bankruptcy portfolios through careful, efficient, and client-specific management of each individual case.

N B S will b e h os ting o ur n ex t B a n kruptc y Symposium in Las Vegas on Monday, October 22, prior to the AFS conference. We’ll spend the afternoon discussing the latest statistics, trends, and rule changes affecting bankruptcy in the auto sector and cap it off with a night out on the town. Please request an invitation by sending an email to Wes Wiley at wwiley@nbsdefaultservices.com.

NBS provides nationwide bankruptcy management services to the following types of organizations:

* Residential Mortgage Lenders * Automobile Finance Companies * Banks and Financial Institutions * Consumer Lending Organizations * Portfolio Servicers, Owners, and Investors NBS is a leader in bankruptcy servicing for the consumer finance industry. NBS is a subsidiary of Advent International.

W W W. N B S D E FA U LT S E R V I C E S . C O M To learn more about NBS and our free portfolio help assessment offer, please visit our website and watch our brief introduction video.


JULY 2012

THE LEDGER


Court-Ordered Cooperation