As chairman of the Legislative and Legal Affairs Committee for the National Association of Chapter 13 Trustees (NACTT), Henry Hildebrand III has been a recognizable force in prompting better communication between trustees and servicers. This week, MortgageOrb checks in with Hildebrand to examine how Chapter 13 may be handled more efficiently.
Q: On the subject of servicing best practices, how far apart are servicers and trustees from agreeing on a set of standards?
Henry Hildebrand: The NACTT, several of the mortgage servicers and their counsel have labored long and hard at crafting a set of practices that will help both trustees and mortgage servicers comply with the obligations that are placed upon them by the Bankruptcy Code, the National Bankruptcy Rules, court orders and local rules.
Since the process started, judges and debtors' counsel have contributed to the end product. This process has not been easy, nor has it been quick. All participants in the process carefully considered what was in the best interests of each industry and the bankruptcy system, and these best practices are the result.
I believe that the practices are essentially a finished product, perhaps with further tweaking and modifications as courts and servicers put them into practice. The important step that the best practices took was to attempt to make national one set of standards so that anyone involved in the interaction between mortgage servicing and bankruptcy can see what is expected and how to meet those expectations.
There are additional steps that we must all take to complete the journey that we started years ago. We must work to bring these standards into the bankruptcy rules on a national level and, until that can be accomplished, work together to bring them into local rules. Uniformity will then follow.
Q: There has seemingly been a longstanding distance between servicers and trustees. What steps must be taken to bring these two counterparties onto the same page?
Hildebrand: The gulf between servicers and trustees stems from the very marginal part that bankruptcy has played in mortgage servicing. In the past, so few mortgage loans went into bankruptcy relative to the overall mortgage pools serviced, and little attention was paid to the very unique character of reorganization bankruptcies and the severe impact that a bankruptcy filing can have on what otherwise would be appropriate and acceptable conduct.
The process that created the best practices demonstrates that the servicing industry and the bankruptcy world can work together to understand the different interests and needs each has.
This year, in San Francisco, dozens of mortgage servicers and their counsel made a real effort to work with trustees, to sit with them and open up a dialogue with them. Simple questions on how a trustee's office can communicate with a servicer on the administration of a loan or how loss mitigation might be effected when a borrower is in Chapter 13 were aired, and there was a sense of mutual respect and cooperation.
To the extent that the trustees can continue to work with the servicers on an individual basis, with USFN, AFN, Fannie and Freddie and the MBA, we can expand this dialogue and improve the way trustees and servicers deal with each other.
The trustees just created and are developing a Web-based educational portal called ConsiderChapter13.org. This Web site will permit the easy exchange of ideas and training, allowing trustees to assist in helping servicers and their personnel understand the way the bankruptcy system works and the mortgage servicers' place in that system.
The Web portal is also hoping to add educational materials from the servicer industry so that trustees and their staffs can understand how the servicer does business.
Q: Of those servicing best practices suggested by the National Association of Chapter 13 Trustees, which are most urgently needed? Which do you imagine will be the most challenging for servicers to adopt?
Hildebrand: The best practices seek to put into practice things that should be embraced by everyone. Servicers should work now to implement them comprehensively and set target dates to make them happen.
The initial communication on the status of a mortgage when the borrower is in a Chapter 13 case is the proof of claim. Getting the information right on this important document is critical, and the accurate and timely preparation and filing of the proof of claim as contemplated by the best practices will start the entire cure process off on the right foot.
This type of analysis – looking at a mortgage obligation as having an ongoing component and an arrears component – is somewhat new to many servicers. This will be challenging, particularly considering the speed with which most courts seek to operate.
During the pendency of the Chapter 13 case, the advances and adjustments made to the account must be promptly and accurately communicated. The best practices call for these to be filed with the court so that all parties can be made aware of how the mortgage obligations may have adjusted since that initial proof of claim.
We have learned that there are some servicers that do not even conduct an analysis – not even internally – when an account is in Chapter 13. For these servicers, the regular and timely communication of the adjustments to an account will be difficult.
Many trustees are now serving as the disbursing agents for post-filing installment payments on mortgages, and are turning to the courts to verify that the payments that have been made during the period that a Chapter 13 repayment program has been in place have, in fact, cured any default and that there are no hidden charges or fees that remain.
It will be difficult for many servicers to respond to the actions by trustees, but this verification of an accounts standing at the conclusion of a Chapter 13 repayment program is critical. Resources will need to be applied to respond to these actions by trustees.
Q: How do you respond to the argument that some NACTT best practices aren't practicable for small-sized servicing shops?
Hildebrand: The best practices are designed to be within the reach of any entity that undertakes the burden of administering a mortgage obligation. While it was not the intent of the trustees, the servicers, the attorneys or the judges involved in this process to impose an unnecessary burden on a ‘small-size servicing shop,’ the truth is that any servicer should be able to meet the steps outlined.
If a small-sized shop cannot meet the minimum requirements of the best practices, it may be necessary for that servicer to pass on that obligation to a servicer that can meet the requirements of the code.
Remember, the best practices are one way that a servicer can minimize costly litigation and protect itself. The best practices are not simply a good idea suggested by a number of trustees who have become concerned over the lack of communication between servicers administering a mortgage in bankruptcy; they represent the best way that a servicer can accomplish effective administration at the least risk of judicial intervention.
Q: While servicers and trustees have not always seen eye to eye, it might be argued that the current environment demands streamlined, compatible efforts more than ever. How do you believe today's market volatility and uncertainty will reshape the relationship?
Hildebrand: The growth of bankruptcy and the uncertainty in the mortgage world compel us to work together more and more. Most trustees are just anxious to administer the cases assigned to them in the way directed by a federal judge: They harbor no ill will. Where, however, servicer conduct impairs the ability of the trustee to meet her fiduciary obligations to the court, the debtors and the other creditors, you can expect the trustee to take some action.
Working together – mediating – is what most Chapter 13 trustees do well. It is my hope that the dialogue that has opened up between servicers and trustees will grow and that we will come to recognize the important position each of us play in this process. Continued cooperation towards our mutual goals is vital, and I know that the Chapter 13 trustees are willing to do so.