A NATIONAL BANKRUPTCY SERVICES …nbsdefaultservices.com/wp-content/themes/nbs/pdf/NBS-JulyLedger...A NATIONAL BANKRUPTCY SERVICES PUBLICATION The Escrow ... is not a substitute for

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A NATIONAL BANKRUPTCY SERVICES PUBLICATION

The Escrow Analysis in Bankruptcy

Navigating HELOCs in Texas

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

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.

NATIONAL BANKRUPTCY SERVICES

9441 LBJ Freeway, Suite 250 Dallas, TX 75243

214.550.4204NBSdefaultservices.com

RESIDENTIAL MORTGAGE LENDERS AUTOMOBILE FINANCE COMPANIES BANKS, CREDIT UNIONS, & FINANCIAL INSTITUTIONS CONSUMER LENDING ORGANIZATIONS PORTFOLIO SERVICERS, OWNERS & INVESTORS

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THE LEDGERJULY 2012

Larry Buckley

CEO

[email protected]

Brad Cloud

COO

[email protected]

Dave McManus

SVP

[email protected]

Tom Waters

VP

[email protected]

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

NBSDEFAULTSERVICES.COM « JULY 2012

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

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.

NATIONAL BANKRUPTCY SERVICES

9441 LBJ Freeway, Suite 250 Dallas, TX 75243

214.550.4204NBSdefaultservices.com

RESIDENTIAL MORTGAGE LENDERS AUTOMOBILE FINANCE COMPANIES BANKS, CREDIT UNIONS, & FINANCIAL INSTITUTIONS CONSUMER LENDING ORGANIZATIONS PORTFOLIO SERVICERS, OWNERS & INVESTORS

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

A NATIONAL BANKRUPTCY SERVICES PUBLICATION

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87.

IN THIS ISSUE

ISSUES

New rules are designed to increase the efficiency of the HE

foreclosure process.

2

FOCUS

An interview with Dennis Dollar, Principal Partner in Dollar

Associates LLC.

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DATA

A look at bankruptcy data from across the nation, with detailed

state-by-state breakdowns of filings.

18

TABLE OF CONTENTS

» NAVIGATING HELOCS IN TEXASHow the New 2012 Rules are Impacting the Quasi-Judicial Foreclosure Process 2

» PREPETITION CLAIMS, ONGOING PAYMENTS, AND THE AUTOMATIC STAYA Deeper Look at In Re Rodriguez 6

» COURT-ORDERED COOPERATIONAn Overview of Loss Mitigation Programs in Bankruptcy 8

» THE BIG PAYOFFThe New Texas Pay-off Statement Requirements and Best Practices 12

» BY THE NUMBERSTaking a Look at the State of Bankruptcy 16

» THE ESCROW ANALYSIS IN BANKRUPTCYWhat is the Best Practice? 20

» HOT SEAT

Dennis Dollar, Principal Partner in Dollar Associates LLC 22

THE LEDGER » NBSDEFAULTSERVICES.COM

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BY JEFFREY W. MARTIN

NAVIGATING HELOCs IN

TEXASHOW THE NEW 2012 RULES ARE IMPACTING THE

QUASI-JUDICIAL FORECLOSURE PROCESS


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The laws relating to mortgage-backed securities have been under intense scrutiny over the past few years, and several states, including Texas, have been re-writing various foreclosure laws as a result. The amendment of various rules regulating foreclosure

is designed to assuage the general public’s concerns re-garding 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 con-tinue 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-

tively and efficiently implement them. This inevitably causes delays; however, Brice, Vander Linden & Wernick (BVW) ensures that these delays are contained and dimin-ished at every possible stage in the process.

One of the most immediately recognizable differences be-tween the pre-2012 TRCP 736 and the amended rules is that the parties filing the HE applications are no longer respon-sible 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 ap-plications 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 gen-erally to the “occupant” of the property that is the subject of the suit. The new rules also limit the amount of fees that can

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 cita-tions. This single fee also includes all fees for certified and first class mailing. The amended rules and fee structure lim-its 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 cita-tions. 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

any requested additional funds while these matters are indi-vidually negotiated with clerks and the district attorney of-fices that have been requested to issue opinion letters on the new rules. The Dallas County District Attorney’s office re-cently issued an opinion letter agreeing with BVW’s interpre-tation of the new rules, and directed the Dallas County Dis-trict 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 good-through 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-

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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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 draft-ing 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 significant-ly increase the legal costs they incur if reinstatement and payoff quotes expire and new applications have to be draft-ed. As HE portfolios increase in size, it is important for lend-ers 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 re-garding the consideration of home equity foreclosure ap-plications. Petitioners may file a motion for default and include a proposed order for the court to consider if a re-sponse 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 foreclo-sure 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

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 sup-ported 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 or-der 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 specifi-cally affirmatively plead: why the respondent believes a respondent did not sign a loan agreement document, if applicable, that is specifically identified by the respon-dent; 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 incor-rect; 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 re-spondents can assert a defense. This allows petitioners the means to challenge deficient and sometimes frivolous re-sponses 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 opportu-nity to contest the legitimacy of any default alleged. How-ever, respondent delay tactics and court sympathy still hin-der the expediency of the HE foreclosure process.

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,

foreclosure, and bankruptcy law since 2008.


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In 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 es-

crow 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 Bank-ruptcy 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-

cy Code by virtue of the terms included in the definition “con-tingent, 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 col-lect 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.

B Y N I C K M C L E M O R E

A D E E P E R L O O K A T I N R E R O D R I G U E Z

Prepetition Claims,Ongoing Payments,

and the Automatic Stay

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Once the Third Circuit determined a claim ex-isted, 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.

CASE OVERVIEWIn Rodriguez, the debtors financed the purchase of their home with a purchase-money mortgage from First Mutual Corporation, with Country-wide 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 pay-ment 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 pay-ments. Of that amount, $5,657.60 was attribut-able to an escrow arrearage for taxes, insurance, and other charges. Of the $5,657.60 escrow ar-rearage, $3,869.91 consisted of payments that Countrywide had already made. The remaining $1,787.69 was the amount for which Country-wide 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 es-sence, Countrywide did not seek to recoup the $1,787.69 equity cushion through the bank-ruptcy process, but rather by assessing the debt-ors’ higher post-petition monthly escrow pay-ments 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 mort-gage, the Court concluded the amounts still con-stituted a “claim” as outlined under In Re Gross-man’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 es-crow deficiency, but the contingent nature of the right to payment does not change the fact that the right to payment still exists and thereby con-stitutes a claim. In reaching such a determina-tion, the Third Circuit concluded that the $1,787.69 amount was a pre-petition claim that Countrywide was seeking outside of the bank-ruptcy process when it should have included the amount in its proof of claim.

CONCLUSIONAlthough the Court did not address the issue of whether Countrywide violated the automatic stay, but instead remanded the matter to the dis-trict court, it is well established that the auto-matic stay serves to protect the bankruptcy es-tate 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.

Nick McLemore is a

bankruptcy associate

attorney with Brice,

Vander Linden &

Wernick, P.C. in Dallas.

He is a graduate of the

SMU Dedman School

of Law.


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There’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

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.

AN OVERVIEW OF LOSS

MITIGATION PROGRAMS IN

BANKRUPTCY

0.1667 IN


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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 cred-itors 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 mod-ification, and they also have more insight into the adjust-ments 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 bank-ruptcy 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 modifi-cation 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 out-come that works for both the creditor and the debtor, such as making arrangements for a short sale or nego-tiating 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.

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 negotia-tions 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 Oth-er 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 re-quires 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 deter-mining 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 indi-vidual 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 re-tains 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 re-quired, though any of the parties to a loss mitigation process may request one from the court.

The loss mitigation order serves to establish the time-frames by which parties to the mitigation must fulfill certain obligations to each other, including establishing a designated contact person, the date by which the par-ties 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

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Estay 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 tele-phone number of a person who has full settlement au-thority. 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 bank-ruptcy court within the timeframe set by the loss mitiga-tion 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 re-quest 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, includ-ing 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 settle-ment that is agreed to during the loss mitigation period. If the parties are able to reach a settlement, court ap-proval 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 mitiga-tion period.

Some of the other jurisdictions that have adopted form loss mitigation programs include the Eastern Dis-

trict of New York, whose program is identical to the Southern District of New York; Rhode Island; New Jer-sey; Wisconsin; and the Northern District of Indiana. The requirements for these programs are not necessar-ily 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 me-diator.12 The Middle District of Florida and the Eastern District of Wisconsin also impose certain income re-quirements 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 fore-closure 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.

ENDNOTES1. 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).2. See id.3. 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).

4. See id.5. See id.6. See id.7. See id.8. Bankr. M.D. Ga. R. 4001-1(3) (2011).9. Judges’ Corner (Bankr. S.C. Aug. 11, 2009) at http://www.scb.uscourts.gov/

judges_corner.html.10. Bankr. Vt. R. 6004-1 (2011).11. Clerk’s Notice 09-03 (Bankr. N.D. Tex., July 14, 2009).12. Bankruptcy Mortgage Modification Mediation Program, Bankr. M.D. Fla.

(Jan. 1, 2011).13. See id.; Mortgage Mediation Program, Bankr. E.D. WI (June 1, 2011).14. 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

required by the new Federal Rule of Bankruptcy 3002.1.


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R U L E § 1 5 5 . 2

BY H AY D E N H O O P E R

Every two years we sit with bated breath to see how the most recent acts of legisla-tive 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 up-

heavals, we may anticipate continued legislative action in those areas of law that influ-ence 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.

THE NEW RULESFor 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 prefer-ably in conjunction with the legal description of the property, and the proposed clos-


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ing date for the note in question. While including this information is common-sensical, it is important to give a mo-ment’s pause to consider the import of each element, particularly for mortgagees and servicers who maintain and manage a large portfolio. For large portfolio man-agers, 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 under-lying security documents (such as the war-ranty deed and deed of trust) is a useful exercise in due diligence. Frequently, mis-takes 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 defini-tive timelines and estimates for case man-agement, which puts additional pressure on counsel to effect a corrective action within set time constraints. Practical re-alities rarely permit such errors to be recti-fied 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 state-ments, 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 com-pany, the payoff statement must likewise include the proposed closing date, payoff amount valid through the proposed clos-ing date, and identifying information on the loan to which the statement relates. However, even if the title insurance com-pany has not requested such informa-tion, its inclusion may be regarded as a best practice.

Unless a specific proposed closing date is offered by the requesting party, it is of-ten 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 non-judicial 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 be-hooves 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 pro-jected 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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questing party without necessarily delay-ing ongoing processes.

The inclusion of additional, not manda-tory, 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 in-clude information on adjustable rates ei-ther 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 accus-tomed to dealing with the calculations they reference. A concise reminder of these terms helps the payoff statement better tell a holistic story of the underly-ing obligation.

Providing the per diem amount is enor-mously 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 op-tional information suggested by §155.2(c) should be included on the payoff state-ment. In doing so, payoff statement issuers acknowledge the important public policy consideration of transactional transpar-ency, as well as ensuring that every stake-holder is empowered to make fully in-formed decisions.

Another interesting point worthy of note is the timeline requirement for a re-sponse when the request comes from a title insurance company. Section 155.3 provides, “A mortgage servicer shall de-liver a payoff statement required under §155.2 of this title (relating to Payoff State-ment Form) to the title company by the eighth business day after the date the re-quest is received unless federal law re-quires a shorter response time.” Simulta-neously, §155 also encourages the delivery of payoff statement in whatever manner is most expedient and acceptable to the requestor. Codification of the abil-ity to use electronic mail to satisfy timely responses serves to reinforce the legisla-tive intent of communicating as quickly as possible with interested parties when they specify that electronic mail is an ac-ceptable means of communication. Un-like payoff information provided over the phone, which requires call logs and pos-sibly preservation of phone recordings to ensure the proper deliver of required in-formation or the use of physical mail with its delivery times and expense, electronic mail is an ideal manner of efficiently, clearly, and expeditiously preserving in-formation. Likewise, it affords mortgag-ees and servicers managing a large port-folio 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 docu-ments and transmission to requestors.

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.


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Source: LCI 5/31/2012

DATA

< 100

200-300

100-200

> 300

D.C.

NATIONAL AVERAGE126.6

StateFilings Per

CapitaPercent Change1

Nevada 7.69 -3.41

Georgia 7.10 -0.82

California 6.2 -0.71

Tennessee 6.19 -1.67

Alabama 5.47 -1.69

Michigan 5.23 -1.47

Illinois 5.02 -1.23

Utah 4.92 -1.53

Arizona 4.73 -1.58

Kentucky 4.57 -1.03

StateFilings Per

CapitaPercent Change1

Alaska 1.10 -0.48

District of Columbia 1.40 -0.74

South Dakota 1.45 -0.99

Vermont 1.51 -1.11

South Carolina 1.54 -0.50

North Dakota 1.71 -0.76

New York 1.78 -1.06

Wyoming 1.81 -0.98

Montana 1.92 -1.11

Iowa 1.95 -1.26

BY THE

NUMBERS

StateHouseholds

per filingPercent Change1

Utah 53.0 -11.5%

Nevada 54.3 -24.1%

Georgia 55.7 -12.2%

Tennessee 56.3 -5.3%

California 63.0 -19.9%

Alabama 67.2 -7.9%

Illinois 67.5 -6.6%

Indiana 68.3 -10.7%

Michigan 69.4 -12.9%

Colorado 72.5 -11.4%

StateHouseholds

per filingPercent Change1

Iowa 179.2 -18.9%

West Virginia 181.6 -20.1%

Texas 187.0 -6.3%

South Dakota 189.3 -14.2%

Montana 199.5 -19.7%

South Carolina 218.1 -2.9%

Vermont 224.9 -8.8%

North Dakota 268.6 -22.0%

Washington D.C. 271.0 -1.3%

Alaska 302.2 -18.6%

AS OF MAY 2012; PERCENT CHANGE BASED ON COMPARISON OF JAN/FEB 2012 FILINGS VS PREVIOUS YEAR

2012 YTD STATE-BY-STATE HOUSEHOLDS PER FILING

TOP 10 BOTTOM 10BOTTOM 10

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

State Total 2011 Chapter 7 Filings Chapter 13 Filings

Alabama 11,249 41.8% 58.1%

Alaska 351 82.9% 16.8%

Arizona 11,776 85.9% 13.4%

Arkansas 5,285 56.0% 43.9%

California 82,022 74.9% 24.7%

Colorado 11,268 83.1% 16.8%

Connecticut 3,598 87.4% 12.1%

Washington DC 388 86.1% 13.1%

Delaware 1,381 70.3% 29.5%

Florida 33,957 72.3% 27.4%

Georgia 26,073 51.7% 48.1%

Hawaii 1,156 76.0% 23.9%

Idaho 2,726 88.5% 11.1%

Illinois 29,321 73.4% 26.5%

Indiana 15,065 74.4% 25.6%

Iowa 2,845 91.0% 8.8%

Kansas 3,646 67.2% 32.7%

Kentucky 8,684 74.8% 25.0%

Louisiana 6,444 36.5% 63.3%

Maine 1,289 85.7% 14.0%

Maryland 10,138 81.3% 18.4%

Massachusetts 7,559 72.6% 26.8%

Michigan 22,867 84.5% 15.4%

Minnesota 7,673 83.4% 16.5%

Mississippi 5,033 56.1% 43.8%

Missouri 10,796 73.6% 26.3%

Montana 841 81.8% 17.7%

Nebraska 2,405 73.4% 26.4%

Nevada 7,595 80.3% 18.7%

New Hampshire 1,748 76.1% 23.9%

New Jersey 13,809 78.9% 20.9%

New Mexico 2,075 91.2% 8.4%

New York 17,826 84.9% 14.9%

North Carolina 9,032 46.2% 53.3%

North Dakota 435 90.3% 9.4%

Ohio 21,593 77.0% 22.9%

Oklahoma 5,016 83.9% 15.9%

Oregon 6,582 79.4% 20.5%

Pennsylvania 12,564 69.7% 30.1%

Rhode Island 1,853 85.4% 14.5%

South Carolina 3,365 46.3% 53.4%

South Dakota 702 91.2% 8.5%

Tennessee 18,055 49.5% 50.1%

Texas 19,476 45.6% 54.1%

Utah 6,912 66.9% 32.9%

Vermont 476 80.7% 19.3%

Virginia 13,002 66.4% 33.5%

Washington 11,899 81.0% 18.8%

West Virginia 1,702 87.4% 12.5%

Wisconsin 11,511 77.1% 22.7%

Wyoming 532 85.3% 13.9%

Total States and DC 513,245 71.1% 28.6%

2012 YTD as of May 31, 2012


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517

,814

TOTAL2012 YTD AS OF MAY 31

2012 YTD AS OF MAY 31

DISTRICT-BY-DISTRICTBAN K R U PTC Y F I L I N G S

517,814

Source: LCI 5/31/2012

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

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ID MAIN 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

LA WESTERN 4,041 NV MAIN 7,595 TX EASTERN 2,495

LA EASTERN 1,597 NY NORTHERN 3,520 TX NORTHERN 7,246

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 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

PR MAIN 4,218


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The world of bankruptcy compliance is constant-ly changing. Now, more than ever, mortgage ser-vicers must strive to ensure the information pre-sented 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 ad-vanced for escrow. Second, it includes the amount of money required under the Real Estate Settle-ment Procedures Act (RESPA), including the es-crow cushion. The focus here is specifically on Chapter 13 bankruptcies.

THE BANKRUPTCY ESCROW ANALYSISAn 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) re-quire 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 pre-petition debt. The bankruptcy escrow analysis must treat the debtor’s escrow account as being cur-

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 pre-petition 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 judi-cial decisions on this issue. [See Campbell v. Coun-trywide Home Loans Inc., 545 F.3d 348 (5th Cir. 2008) and In re: Rodriguez, No. 09-2724 (3rd Cir. Dec. 23, 2010)].

FUTURE PAYMENT CHANGEAfter the bankruptcy escrow analysis has calcu-lated the escrow shortage to be included in the proof of claim, the next issue is the payment change (if applicable) due to this bankruptcy es-crow analysis. If a payment change is warranted due to the bankruptcy escrow analysis, it should occur with the initial ongoing post-petition pay-ment. The initial ongoing post-petition payment

THE ESCROW ANALYSIS IN BANKRUPTCYWHAT IS THE BEST PRACTICE?

BY PAUL W. CERVENKA

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.

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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 peti-tion dates are less than 21 days before the initial ongoing post-petition payment is due.

THE BANKRUPTCY ESCROW STATEMENTRule 3001 requires an escrow statement as of petition date in a form consistent with non-bankruptcy practice. This require-ment can be somewhat contradictory. An escrow analysis out-side of bankruptcy is typically conducted based upon the in-formation 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 go-ing back in time to calculate the escrow shortage amount at a time in the past. In addition, the purpose of the escrow analy-sis is to estimate the escrow disbursements over the next twelve months to determine if the escrow payment needs to be ad-justed and also to determine if there is a deficiency on the es-crow account. Outside of bankruptcy this escrow deficiency would typically be collected in the ongoing mortgage pay-ments 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 on-going post-petition payments. This is a best practice approach to ensure there are no misunderstandings related to a pre-pe-tition debt collected post-petition.

POST-PETITION ESCROW DISBURSEMENTSOn 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 on-going 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 ser-vicer is attempting to collect a pre-petition debt in a post-peti-tion payment or that the servicer is double-dipping. Further-more, 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

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 fed-eral 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 ac-tual advance may not have occurred until a post-petition date.

THE BEST PRACTICE SUMMARYIn 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 pay-ment 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 post-petition payment should also be listed with a breakdown indi-cating 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 ex-plains the escrow calculation in a form consistent with non-bankruptcy practice and ensures a best practice approach.


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THE LEDGER: Tell us a little bit about your

career within the credit union space.

DD: After eight years in the Mississippi

House of Representatives, my business ca-

reer landed me in 1991 as president and

CEO of the Gulfport VA Federal Credit Union

in my hometown of Gulfport, Mississippi.

After seven years there, my political and

credit union careers came together with a

presidential appointment to the National

Credit Union Administration (NCUA) Board.

I served seven years on the NCUA Board

from 1997 to 2004. President Bush named

me to chair the NCUA Board in 2004. Fol-

lowing the end of my tenure at NCUA, my

consultancy was formed as Dollar Associ-

ates LLC. We work with over 500 credit

unions and organizations that serve them.

Our primary areas of consultative support

are regulatory matters, compliance, exam-

ination issues, charter changes, strategic

planning, training, organizational support,

field of membership work, and executive

recruiting—all specifically tailored to the

credit union industry.

THE LEDGER: For those who don’t know,

can you share with us some of the major

operational/strategic differences between

credit unions and other finance compa-

nies/banks?

DD: Credit unions are unique because of

their structure as not-for-profit financial

cooperatives. Unlike for-profit banks

owned by their stockholders and governed

by a board elected by those stockholders,

credit unions are member-owned and gov-

erned by a volunteer board elected by the

member-owners of the credit union. That

structural difference is the key to credit

union service structure, pricing, tax treat-

ment, and regulatory approach. Credit

unions are mostly smaller institutions. If

you add the total assets of the 7,000 credit unions in the United States, the entire in-dustry is not as big as Citibank. Only about 1,000 credit unions are over $100 million in assets; therefore, their issues are largely issues of seeking to build economies of scale and market share in a marketplace dominated by much larger financial insti-tutions. While only having 6 percent of the deposit market in federally insured institu-tions, credit unions have still managed to become significant marketplace players with the highest customer satisfaction rat-ings in every consumer survey and ap-proximately 100 million members nation-wide. From humble beginnings as a source of financial self-sufficiency for underserved Americans first recognized by Congress in the depression era of 1934, credit unions have managed to build a loyal constituency in all 50 states that helps consumers by holding down prices on financial services

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 Mis-

sissippi 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 Credit Union ConversationAN INTERVIEW WITH DENNIS DOLLAR, PRINCIPAL PARTNER IN DOLLAR ASSOCIATES LLC

INTERVIEWER: WES WILEY

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through their not-for-profit, member-own-ership structure. It’s a great American suc-cess story.

THE LEDGER: In finance companies out-side 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 com-pliant manner. Is the credit union industry feeling the same push toward better compli-ance and more regulations? If so, what are some of the governing bodies that credit unions work with?

DD: There are both federally chartered and state chartered credit unions. The fed-eral 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 char-tering agencies within the governments of their individual states. The deposits of al-most 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 instru-mentalities 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-

posits have never cost the US taxpayers a

single penny in losses above what the fund

could handle. Unfortunately, over its his-

tory the FDIC fund has not been able to

make that claim. Credit unions are very

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 espe-

cially burdensome on smaller institutions.

Credit unions are definitely watching the

CFPB and its actions with a watchful eye.

Credit unions face every regulation that

banks face, with the exception of corporate

income taxation and CRA. Credit unions are

exempt from federal income taxation be-

cause of their structure as not-for-profit

cooperatives. They are exempt from CRA

because they were not involved in the red-

lining practices that initiated congressional

action on CRA in 1977 and can only serve

their members, regardless of where they

may live. Other than those two areas, cred-

it unions face every financial and consumer

protection regulation that the banking in-

dustry does—either from NCUA, the Fed,

the Treasury Department, FTC, the FFIEC,

and, now, the CFPB. Regulation and super-

vision are in credit union land, just as in the

banking industry, big time issues with

growing compliance costs involved.

THE LEDGER: Has the external compli-ance scrutiny resulted in any major trends for credit unions?

DD: Compliance is the biggest issue being discussed in credit union circles today. Compliance costs are rising, and compli-ance 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 man-agement 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 person-nel, policy, procedure, and performance is a major credit union industry perfor-mance today. And, to carry the impact of this compliance investment trend fur-ther—because of the smaller size of cred-it unions in relation to their competitors—there is a tremendous growth in credit union mergers in hopes of building great-er efficiencies and more effective risk management through the synergies of two smaller credit unions coming together to make a larger one.

There has been an average of one credit union merger per business day since 2000. Since the current hyper-regulatory era be-gan and compliance issues became such a focus, the number of credit union mergers has spiked even further. Our firm predicts that the number of credit unions will be around 5,000 by the year 2016. Credit union mergers is a major trend, and compliance issues are among the key driving factors.

The Credit Union Conversation


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“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: Any advice you would give

to leaders of credit unions as it relates to

ensuring that their institution is performing

in a compliant manner?

DD: Because credit unions are smaller in-

stitutions, most have historically handled

compliance issues in-house. Today’s com-

pliance demands, however, make han-

dling everything in house quite demand-

ing and potentially overwhelming. Credit

unions are finding themselves in need of

outsourcing many of their operational and

service areas that they historically han-

dled in-house, and this is not an unhealthy

trend. Even though we are a consulting

firm and the advice may sound self-serv-

ing, we strongly encourage our clients to

look for third-party partners that can re-

move as much of the compliance burden as

possible in a cost-effective manner and

produce results.

THE LEDGER: From a default perspective,

can you share with us how the typical cred-

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

for credit unions as their reaffirmation rates

have been lower than many banks and their

recoveries have not kept pace with what

some of their larger competitors see. As smaller institutions, credit unions cannot afford to look at bankruptcy and default management as an automatic loss—particu-larly not in this economy. Credit unions need to look at bankruptcy and default manage-ment 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 third-parties for support in this arena.

We have had a number of our credit union clients outsource their bankruptcy man-agement with great cost savings and im-pressive results. It is never an easy deci-sion, because they have historically handled it in-house or through a friendly local attorney, but there are too many dol-lars being left on the table and too much potential compliance risk involved for many credit unions to ignore the expertise that is available in the marketplace for bankruptcy and default management.

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.

THE LEDGER: Given their different lend-ing strategies, how prevalent are bankrupt-cies within your typical credit union port-

folio? How are most credit unions managing those accounts?

DD: Credit unions have historically been consumer lenders, only having increased their mortgage and business lending port-folios significantly in recent years. There-fore, 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 cred-it 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 signifi-cantly over the past five years.

Particularly in larger credit unions with a community-based field of membership, bankruptcies are beginning to average dou-ble 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 de-fault management the most seriously have determined that they just can’t have their favorite local attorney deal with bankrupt-cies 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 as a book of business. This has been a slow trend to develop, but it is developing dra-matically in credit unions today.

» CONTINUED

OUR MISSION IS SIMPLE. We strive to improve the

bottom line performance of our clients’ bankruptcy portfolios

through careful, efficient, and client-specific management of

each individual case.

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.

ABOUT NBS

WWW. N B S D E FAU LTS E RV I C E S .CO M

NBS RECENTLY INTRODUCED PROCEEDINGS A PERIODIC PERSPECTIVE ON BANKRUPTCY SERVICING

Developed and published by a panel of NBS bankruptcy

experts, Proceedings features an assortment of quick-

hitting 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.

NBS TRADESHOW PRESENCE 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

• Collection and Recovery Solutions (CRS), May 2012,

Las Vegas, NV

• NACTT Seminar 2012, July 11, New Orleans, LA

BANKRUPTCY SYMPOSIUM SERIES NBS will be hosting our next Bankruptcy

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 [email protected].

NBS NEWS DESK

To learn more about NBS and our free portfolio help

assessment offer, please visit our website and watch our

brief introduction video.

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

If you’d like to receive future editions of Proceedings and other NBS updates, please submit your email ad-dress to the Newsletter Signup field on our home page.

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 memo-

rable evening of great food and conversation with

invaluable insights on improving consumer bank-

ruptcy results.

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