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Bankruptcy Implications of AG Settlement

posted by Katie Porter

Even though I was up at 4am Pacific this morning, the AG and federal government mortgage settlement was nearly old news by then. But in case you haven't heard, here is your official Credit Slips announcement--there was a $26 billion settlement.While the details are still being released, I am already concerned about how the settlement will affect bankruptcy cases. Remember that bankruptcy was one of the first places we saw the misbehavior of mortgage servicers--way back in 2005 when Tara Twomey and I did our study.

As of December 1, new Bankruptcy Rules of Procedure 3001 and 3002 impose new requirements on servicers of loans owed by bankruptcy debtors. Are the terms of the settlement consistent with those new rules? If so, do they add any new procedural benefits to protect bankrupt homeowners against robo-signing and legal violations?

The Department of Justice participated in the settlement and the U.S. Trustee's Office apparently was at the negotiating table. Their press release,  however, is just boilerplate of the general DOJ release. The only mention of bankruptcy is that the settlement will impose "new requirements to undertake pre-filing reviews of certain documents filed in bankruptcy court." I'm not sure what to make of that. Presumably, filing claims under penalty of perjury already required a review of claims, and Rule 9011 required a significant review of motions for relief from stay to permit a foreclosure to continue. What does the settlement add? I hope the US Trustee will let us know soon, as I am sure debtors' attorneys will get calls today on the issue.

An additional observation is that it is important to remember who is not a party to the settlement--the chapter 13 trustees. Those folks are not bound by the settlement, meaning that they can still challenge servicing practices that comply with the settlement, but in the professional judgment of the trustee violate bankruptcy law. Of course, the trustees are supervised by the U.S. Trustee so perhaps there will be political pressure to make the settlement the final word on the obligations of servicers in bankruptcy, but this could be an issue.

Comments and thoughts on the implications of the settlement for bankruptcy cases are very welcome!


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