Loopholes Plague New Law.

LAS VEGAS -- The bankruptcy reform law implemented last October was supposed to make life easier for mortgage servicers, but attorneys who represent the industry say that debtors are already finding ways to circumvent some of the law's intent.

That means abuse of bankruptcy protection to prevent or delay foreclosure may continue, and attorneys said creditors such as mortgage servicers have a big stake as case law develops regarding the new statute.

Speaking at a California Mortgage Bankers Association Western States Loan Servicing Conference here, Michael Ackerman, an attorney with Zucker, Goldberg & Ackerman in New Jersey, said that debtors' lawyers are urging debtors in bankruptcy court to sue servicers for "proof of claim" issues involving fees such as broker price opinions and inspections that are routinely required during default servicing.

In part, debtors' counsel are motivated by a desire to use the suits to win attorney fees from bankruptcy courts, he said. With fewer consumer bankruptcy filings, debtors' lawyers are looking for ways to compensate for a drop in bankruptcy filing fees, he noted.

Mr. Ackerman said servicers should consider "proactive litigation" in order to have a greater say in the development of case law involving the bankruptcy statute. Being a plaintiff gives lenders more control over the facts of the case being decided and what bankruptcy judge hears the case, he noted.

Historically, being proactive in filing lawsuits is not something the servicing industry does well, he said. But with the new law still in its infancy, he urged servicers to be proactive because cases decided now will set a baseline for future cases.

"Whoever hits the issue first in each district will have an overwhelming influence on the cases that come after," Mr. Ackerman said.