Mortgage Servicing errors in Bankruptcy, the RESPA violation problem

Servicer Bankruptcy Harm Template to Determine a Quality Assessment of Damages

© 2013 E-bRM, LLC - CONFIDENTIAL 2

Needles in a HaystackThe US Bankruptcy Trustee Leadership has reviewed and agreed that this is a comprehensive list of needles that determine Servicer bankruptcy harm. E-bRM is finding those needles in the mortgage document haystacks. With millions of mortgages and tens of millions of mortgage documents, trying to find a mortgage with documentation or process errors is quite literally like trying to find a needle in a haystack. Documents are spread around a wide range of servicers and government agencies from county, state, federal, GSE, and various court jurisdictions. Each of these documents needs to be matched up in the proper timing sequence to paint an accurate picture of the life of a mortgage. E-bRM uses software tools to quickly and accurately identify a wide variety of processing error pattern "needles."

© 2013 E-bRM, LLC - CONFIDENTIAL

Servicer Bankruptcy Harm – Toxic Assets Library 30 Compliance & Operational Risk, Key Risk Indicators

• Executive Summary

• US Bankruptcy Trustees

• The US Bankruptcy Trustee Leadership has reviewed the following comprehensive library of 30 Servicer mortgage default attributes that can be utilized to determine bankruptcy harm. Results from the reviews have been immediate and positive. Similar to over exposure to a nuclear event with an long half life, toxic assets appear almost normal without being tested with customized diagnostic tools which can provide high volume loan accuracy down to the “Local Local” level of the court system.

• Shareholder Value

• Particularly perplexing is the belief that transferring tainted files from one firm to another will eliminate the MSR problem. On the contrary, when discovered by the Regulators the infected mortgage loan files are diffused, resulting in multi party investigations with potentially more severe negative outcomes for both parties involved while concurrently burdening the courts with a heavier caseload. Eventually, one has to ponder the possibilities that sellers of troubled non-compliant RESPA files are in a difficult position regarding the next best step to maintain legal and Regulator compliance while preserving shareholder value.

• RESPA Solutions

• The new RESPA (Regulation X) and TILA (Regulation Z) Rules which will become effective January 10, 2014 are large documents with close to 1,100 pages. This daunting set of regulations is challenging to even the most seasoned mortgage servicing veterans. The good news is that many of the computer generated solutions are binary. You are either in compliance or not as stated in the law. Therefore, at the mortgage loan level, a large portfolio will be filtered through a calibrated set of protocols to be; captured, registered, and processed to achieve compliance.

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Hunt

Searching for thousands of mortgages and tens of thousands of mortgage documents with documentation or process errors is quite literally like trying to find a needle in a haystack. Documents are spread around a wide range of servicers and government agencies from county, state, federal, GSE, and various court jurisdictions.

Sequence

Each of these documents needs to be matched up in the proper timing sequence to paint an accurate picture of the life of a mortgage. Certainly, the capability to manually discover and process mortgage loans in breach of regulatory law is possible, however, the speed, accuracy and quality of the out put will be limited to hundred of documents rather than thousands or millions if an entire mortgage portfolio needed to be certified (Pass-Fail -computer runs of the loan files with regulatory criteria embedded within the audits.) or quarantined.

“Toxic Asset Library”

The E-bRM compendium of potential Servicer Bankruptcy Harm attributes was crafted collaboratively with an eye on decades of legal law experience, compliance and price determination within the default mortgage sector, to unify legal and risk management expertise, these 30 attributes are vetted and comprehensive.

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1) Double Dipping on Recovery of Escrow-Claiming the recovery of the shortage in the escrow account, caused by the default, through both the Proof of Claim (POC) filed in the Chapter 13 and through an increase in the escrow portion of the monthly payment;

2) The filing of POC claiming arrearages that are too high because there was a loan modification in place and the POC did not capture the reduced loan modification, any capital reduction or lump sum payment made pursuant to the loan modification;

3) Filing of a POC with arrearages too high because there was no credit for payments made and not credited or being held in a suspense account;

4) A Secured Creditor not filing a Notice of Payment Change pursuant to Federal Rules of Bankruptcy Procedure 3002.1(b) in a timely fashion and attempting to collect the increased payment amount or collecting the increased amount;

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5) A Secured Creditor either attempting to collect or collecting an increase in a mortgage payment, while a borrower is in a chapter 13 bankruptcy, when the Secured Creditor did not properly file a Notice of Payment Change in the appropriate time in any one of the 34 bankruptcy districts which had adopted a Local Rule that required the filing of a Payment Change Notice prior to the adoption of the Federal Rule 3002.1(b);

6) The Secured Creditor claiming an improper payment through the filing of a motion to vacate the automatic stay because of the borrower’s failure to make their ongoing mortgage payment because the payment amount alleged in the motion was improper because the Secured Creditor did not file a payment change notice in one of the 34 Bankruptcy Districts that adopted a payment change notice requirement by way of a Local Rule prior to the enactment of 3002.1(b);

7) A Secured Creditor has collected a “non-escrowed for charge(s) “without the appropriate Notice of Fees, Expenses and Charges being filed within 180 days of the charge being incurred in violation of Federal Rule 3002.1 (c);

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8) A Secured Creditor attempting to collect a “non-escrowed for charge” because the Secured Creditor has not filed a Notice of Fees, Expenses and Charges within 180 days of the charge being incurred in the 34 bankruptcy districts that attempted this requirement by Local Rule prior to the enactment of Federal Rule 3002.1 (c );

9) A Secured Creditor has violated a Court Order mandating the removal of the “non-escrowed for charge” from a chapter 13 borrower’s loan account because the Secured Creditor did not file the appropriate Notice of Fees, Expenses and Charges pursuant to Federal Rule 3002.1 (c ) or the appropriate Local Rule;

10) When a Secured Creditor violates a Court Order mandating the removal or reduction of the amount received as a monthly mortgage payment because the Secured Creditor failed to file the appropriate Notice of Payment change, pursuant to Federal Rule 3002.1 (b) or the appropriate Local Bankruptcy Rule

11) In a “Trustee Pay All” jurisdiction the Secured Creditor has failed to post bankruptcy cash pursuant to the terms of the plan or in accordance with the terms of the note and mortgage;

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12) In a conventional Chapter 13 Bankruptcy District the Secured Creditor has not applied the payments received from the trustee in accordance of the Chapter 13 Plan;

13) A Secured Creditor in a conventional Chapter 13 district fails to post the borrowers payments outside of the plan correctly;

14) A Secured Creditor fails to file a POC with the correct Escrow Account statement attached in violation of Federal Rule 3001 (c )(2)(C);

15) A Secured Creditor fails to file a POC in a Chapter 13 proceeding with the correct Escrow Statement attached in violation of a Local Rule requiring such a statement be attached when such a Local Rule was adopted prior to the enactment of Federal rule 3001 (c )(2) (C);

16) When a secured Creditor has not filed a response within 21 days to a Chapter 13 Trustee’s Notice of Final Distribution in violation of Federal Rule 3002.1 (g);

17) A Secured Creditor continues to collect payments and applies them to pre-petition arrearages when the Secured Creditor has not filed a response to the Chapter 13 Trustee’s Notice of Final Cure;

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18) When a Secured Creditor either does not deem a loan current or continues to collect arrearages after a Bankruptcy Court has issued an Order that Deems the Loan Current in those Districts that allowed the filing of motions to deem a loan current prior to the enactment of Federal Rule 3002.1 (g);

19) In a payoff Chapter 13 case a Secured Creditor files a motion to vacate the stay for the failure of the borrower to make payments outside of the Chapter 13 plan;

20) In a Chapter 13 payoff case the Secured creditor has not marked the loan “paid in full” and taken steps to cancel its mortgage or deed in trust of record when the Secured Creditor has received all funds due pursuant to the Chapter 13 plan after a discharge has been issued or no response is filed to a Notice of Final Distribution;

21) In a Chapter 13 cram-down case the Secured Creditor does not adjust its records to show the reduced amount due on the loan and continues to service the loan as if it is unaffected by the Chapter 13 either after the date or confirmation of the plan or the issuance of a discharge;

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22) A Secured Creditor files a POC without a correct copy of the note, mortgage and appropriate assignment of mortgage;

23) A Secured Creditor does not file a POC properly designating who is the Secured Creditor and who is the Servicing Agent;

24) A Secured Creditor files a motion to vacate the stay for failure to make payments outside a Chapter 13 plan while the borrower is current because either the money was not accounted for or the money was received prior to the referral of the motion to vacate but not properly and promptly credited;

25) A Secured Creditor files a motion in a Chapter 13 proceeding to vacate the automatic stay while failing to give the borrower credit for all payments made outside of the Chapter 13 plan or because they failed to take into account appropriate credits by virtue of a loan modification agreement entered into with the borrower;

26) A Secured Creditor files a motion to vacate in a “Trustee Pay-All’ jurisdiction and fails to give the borrower credit for all of the funds received from the Chapter 13 Trustee;

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27) The Secured Creditor continues with collection activity after the property is surrendered in the Chapter plan and the plan has been confirmed;

28) The Secured Creditor assesses post-petition property inspection fee when the borrower is current in those jurisdictions or in those cases where Judges have ruled that property inspection fees are improper;

29) In any bankruptcy proceeding when a Secured Creditor either starts or continues with its foreclosure action while the borrower is protected by the automatic stay.

30) A Secured Creditor proceeds with a foreclosure action against a borrower in default that is in the active military service.

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Servicer Bankruptcy Harm – Toxic Assets Library Conclusion

Preventative Portfolio Protection

Mortgage Default Management is an emerging Servicer problem falling within the operational compliance side of a robust risk management strategy. Macro economic excesses stemming from 2008 – 2009 mortgage consolidation exacerbated the deficiencies of the underdeveloped Mortgage Default Management Servicing Industry while exacerbating most of the extra servicing profits associated with the disposing of properties during less volatile times. Currently, with waves of new regulation and agencies in the mix, it is a different legal enforcement playing field requiring different tools.

GSE Guaranty

Operational omissions early in the mortgage default cycle can unintentionally create a cascading event of lost payments, fees, penalties, and a continuously running cycle of legal breaches if the baseline calculations are incorrect or not permissible. Adverse outcomes can quickly stack up including potential agency put-backs if the profile of the legal breaches fall outside the compliance bands required to be maintained by the Servicers usually impairing the economic value of an asset.

Boardroom

As demonstrated in the “Toxic Asset Library” without strong infrastructural safeguards and a periodic monitoring program that will identify Default Risk encased with Board Level approved risk parameter, progress will continue to be slow. Strong reporting metrics from the front line staff to the boardroom should help control future performance.

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© 2013 E-bRM, LLC - CONFIDENTIAL 13

Contact Information E-bRM – professional services, risk management and project management,

licensed software solutions for mortgage industry.

E-bRM - is positioned to work with clients to identify all your legal, compliance, RESPA, valuation, mortgage default data needs, implement projects to gather, organize, analyze and distribute information and to execute portfolio restructuring and loan-level solutions as each Client’s requirements dictate.

Automated solutions for high value transactions are available now. Upon completion of a set-up the solutions are: fast, accurate and comprehensive.

For more information or a live demo, contact:

Richard Ellis, Evidence-based Risk Management (E-bRM)

www.e-brm.com

914-643-6111

[email protected],

Economy & Finance

Mortgage Servicing errors in Bankruptcy, the RESPA violation problem