Bankruptcy

CSF: 7.3.1.1 Process Management: Servicers must have processes and written procedures to control and monitor bankruptcy proceedings effectively. These processes and procedures must cover bankruptcies filed under Chapters 7, 11, 12, and 13 of the Bankruptcy Code.

Throughout the life of the bankruptcy, servicers should implement a system and processes to continuously monitor pre- and post-petition status and payments for Chapters 11, 12, and 13 bankruptcies, as well as tracking the status and contractual payments for Chapter 7 bankruptcies, and ensure timely Motion for Relief processes are followed. Proper payment status reporting is vital to identify contractual or post-petition defaulted loans.

The servicer provides accurate and timely cash management processes and written procedures, as well as ensuring effective post-closing servicing occurs.

Servicers must also have procedures to verify bankruptcy laws are adhered to regarding the servicing of Chapter 7 post-discharge loans.

Assessment: Proof of Claim Filing and Case Review

To protect Fannie Mae’s assets, servicers must file Proofs of Claim in accordance with local requirements. As a matter of practice, servicers should file Proofs of Claim as soon as possible, but no later than deadlines established by the courts. For escrowed loans, servicers should also ensure that an accurate and timely escrow analysis is completed and provided to all appropriate parties. For Chapters 12 and 13, the escrow analysis should reflect properly in the borrower’s post-petition payments.

Servicers must obtain and review the case docket and any proposed reorganization plan prior to the confirmation hearing and any deadline to object to confirmation. The review should address:

• Modifications to the security deed or mortgage or terms of the promissory note
• Determination of asset/no-asset case
• Correct arrearage amounts and payments of interest (provided that it is permissible in the filing district)
• Arrearage claims filed in a reasonable period of time in accordance with local rules and practices, as applicable
• First post-petition payment due dates, as applicable
• Filings that occurred in a conduit district, as applicable
• Inclusion of attorney fees, where applicable

 

Bankruptcy: Process Management: Proof of Claim Filing and Case Review

Evidence Documentation of Proof of Claim preparation and filing process  Management exception reports    Documentation of quality control procedures in place for plan review and proof of claim preparation

Evaluation and Recommendations

To prepare all personnel to adequately address new bankruptcy filings, the servicer must implement procedures that ensure key milestones are met.

• Timely notifications to all internal and external departments involved with a bankruptcy are completed and documented. All departments affected by the bankruptcy filing take the necessary actions to ensure adequate remedies are pursued, and the servicer’s and investors’ risks are appropriately managed. This includes the immediate cessation of debt collection efforts upon bankruptcy verification.
• A bankruptcy case file is established and maintained in accordance with the Fannie Mae Servicing Guide.
• Bankruptcy personnel are trained on the differences between Chapters 7, 11, 12, and 13, and how those differences impact the initial case review and bankruptcy milestones. Additionally, bankruptcy personnel review and address risks, including but not limited to cramdowns and bad faith filings.
• Checklists or decision trees are used to assist bankruptcy personnel in reviewing bankruptcy cases and reorganization plans.
• Claims and escrow analyses are processed accurately and in a timely manner.

Management uses reporting to monitor the bankruptcy portfolio and review and address exceptions.

• Exception management reports are reviewed to identify and address process inefficiencies.

Assessment: Adherence to Payment Plans or Other Arrangements

The servicer must retain and maintain accurate records of the payments (contractual, pre-petition, and post-petition) it receives from the debtor or trustee, before, during, and after the bankruptcy process to ensure that payments are applied in a timely manner and are properly accounted for, in accordance with Fannie Mae's standard servicing requirements, the debtor's contractual obligations, and the rules of the bankruptcy court. The servicer must keep the bankruptcy attorney informed about the debtor's payment record.

 

Bankruptcy: Process Management: Adherence to Payment Plans or Other Arrangements

Evidence Cash management reports showing total funds, including pre- and post-petition, for all bankruptcy chapters    Policies and procedures detailing bankruptcy cash management processes and requirements

Assessment: Managing Post-Discharged Chapter 7 Loans

Case completion for a Chapter 7 bankruptcy proceeding is defined as the termination of the automatic stay, the case being dismissed or closed, or when the borrower receives a discharge and the trustee abandons all interest in the secured property. Although the servicer may not attempt to collect on the debt from the borrower personally once a discharge is received, the servicer should still pursue the applicable foreclosure prevention alternatives if the loan is delinquent. In situations where retention options are implemented with borrowers who received a Chapter 7 discharge but have not reaffirmed the mortgage debt, servicers must ensure they follow Fannie Mae guidelines to make clear they are not seeking to collect the debt as a personal liability of the borrowers.

Evaluation and Recommendations

Servicers must monitor post-petition status throughout the life of the plan to determine if and when an account defaults. Upon default, the servicer must take appropriate action to seek relief from the bankruptcy stay.

• Routine monthly audits of post-petition status for all active bankruptcies.
• Routine audits of unapplied partial balances to ensure funds are applied in a timely manner. Unapplied funds could result in an account being mistakenly reported as being in default.

To ensure court orders are adhered to regarding the posting of incoming funds throughout the bankruptcy, servicers must have systems capable of tracking incoming funds, as well as designating whether these funds are for post-petition payments or pre-petition arrears.

• Post- and pre-petition funds should be tracked separately.
• Upon discharge of all bankruptcies with plan payments, an audit should be conducted to ensure all funds received were accurately applied.

Clear treatment of Chapter 7 post-discharge accounts should be outlined in servicer’s policies and procedures.

• Policies and procedures should be updated immediately in the event of any regulatory change.
• Documentation of handling foreclosure prevention alternatives for Chapter 7 post- discharged and non-reaffirmed loans.
• Training regarding the proper handling of Chapter 7 post-discharge loans should be provided to employees who service these accounts.

Routine audits should be performed to ensure treatment of Chapter 7 post-discharge loans are being handled in a manner consistent with federal bankruptcy law.

• Updated reports of Chapter 7 post-discharge loans should be maintained to track status and ensure proper handling.
• Alternatively, the account should be clearly marked as a Chapter 7 post- discharge loan in the servicer’s systems.
• Training regarding the proper handling of Chapter 7 post-discharge loans should be provided to employees who service these accounts.

CSF: 7.3.1.2 Timeline Management and Reporting: Maintain an accurate bankruptcy timeline and status tracking system.

The STAR Program rates servicers on their ability to efficiently and effectively manage the bankruptcy process. Servicers should implement a system that tracks bankruptcy status to ensure milestones are met within the appropriate timelines.

Servicers should have processes that support, facilitate, and monitor bankruptcy attorney inquiries and communication response times with the servicer’s bankruptcy function. Continuous bankruptcy attorney and servicer feedback minimizes response turn-around time and bankruptcy processing delays. Servicers must stay compliant with statutory, regulatory and Fannie Mae-driven changes.

Assessment: Managing Key Bankruptcy Milestones and Timelines

Given the increased importance of foreclosure prevention in connection with bankruptcy filings, the servicer's bankruptcy staff must be knowledgeable about Fannie Mae's overall foreclosure prevention practices.

In each bankruptcy case, servicers must consider forbearance, a repayment plan, modification, Mortgage Release™, or short sale. In addition, the servicer’s bankruptcy monitoring process must include procedures to identify foreclosure prevention opportunities, and the servicer and the bankruptcy attorney must work together to pursue these opportunities during all phases of the bankruptcy process.

 

Bankruptcy: Timeline Management and Reporting: Managing Key Bankruptcy Milestones and Timelines

Evidence Reports used to monitor and manage bankruptcy milestones and timelines   Reports or scorecard to monitor bankruptcy vendor performance including service level agreements     Exception reports and procedure to identify and manage loans in defaulted status Reports on bankruptcy accounts with active title issues (i.e. chain of title issues, lack of assignments of mortgage) Documentation of quality control process Policies and procedures on foreclosure prevention efforts for loans in bankruptcy

Assessment: Adherence to Fannie Mae Bankruptcy Referral Guidelines

When a Motion for Relief referral is appropriate, the servicer must send a complete referral package to the attorney within the timelines established in the Fannie Mae Servicing Guide. The referral package must include all legal documents the attorney needs to conduct the bankruptcy proceedings, property inspection, and all necessary information about the status of the property, the borrower, the mortgage loan, and the bankruptcy filing. The servicer also must include all relevant information on the current and any prior bankruptcy filings involving the borrower or the subject property (such as plans, pleadings, schedules, and proofs of claim), foreclosure prevention activities, loan collection history, any previous (or current) foreclosure status information, and all information the servicer has regarding the value of the security property (if applicable).

 

Bankruptcy: Timeline Management and Reporting: Adherence to Fannie Mae Bankruptcy Referral Guidelines

Evidence Copies of current policies and procedures depicting when loans should be referred to bankruptcy attorney   Exception reports used to monitor the referral      Documentation of quality control procedures for the referral process

Evaluation and Recommendations

Servicer must efficiently and effectively manage the bankruptcy process.

• Bankruptcy loans do not exceed estimated/required bankruptcy timelines within each major milestone.
• Use state-specific referral checklists to ensure status reports are complete, timely, and accurate.
• Referral packages contain all required documentation and are sent within the timeframes established in the Fannie Mae Servicing Guide.

To ensure the servicer complies with the guidelines, effective exception handling procedures should be in place. Servicers must:

• Generate frequent, automatic and comprehensive management reports on all bankruptcy cases.
• Implement procedures to address, in a timely manner, bankruptcy cases which do not meet Fannie Mae guidelines.

Servicer must review and remediate SDQ loans that are in Bankruptcy Chapter 7 or Chapter 13 with no LPI (Last Paid Installment) movement for a defined time period.

• Monitor bankruptcy payments and take appropriate and timely action when payments are missed.
• Monitor bankruptcy dockets to determine updated bankruptcy status and take necessary actions.
• Ensure Fannie Mae bankruptcy delinquency status codes are reported accurately.

Servicers should continually train and coach staff on new foreclosure prevention initiatives.

• Training guides and resources should be available for reference by employees.
• Periodic audits should be conducted for quality assurance.

Policies and procedures should be continually updated to reflect current foreclosure prevention initiatives.

• Policies and procedures should be available to all employees for reference and guidance.
• Routine audits should be conducted to ensure policies and procedures are up to date.
• Adequate controls are in place to ensure borrower solicitation packages are centralized and monitored for loans in bankruptcy.