Law Firm Urges Servicers To Expand Ties to Bankruptcy Trustees.(analysis)

While bankruptcy is always disruptive to a mortgagor's payments, a law firm here says that servicers stand to benefit from closer communication with bankruptcy trustees.

Increasingly, when borrowers seek Chapter 13 bankruptcy protection, a court-designated trustee becomes responsible for making the mortgagor's monthly payment to the mortgage servicer. And that requires servicers to better understand the role of trustees in the process so they can avoid common mistakes, such as failing to conduct escrow analysis on loans in bankruptcy, attorneys at Wilson & Associates here told Mortgage Servicing News recently.

Because of misunderstandings and miscommunication between servicers and trustees, the process sometimes gets servicers into trouble.

Wilson & Associates recently convened a meeting of mortgage servicers and Chapter 13 bankruptcy trustees to discuss problems that have arisen when home loans are affected by a bankruptcy filing.

In the states of Arkansas and Tennessee, where Wilson & Associates serves mortgage bankers, in most cases bankruptcy trustees operate as "conduit trustees," controlling the flow of funds from a borrower during their reorganization to creditors, which includes making mortgage payments on behalf of the borrower.

But sometimes servicers fail to provide basic information that the trustee needs to make these payments, including the monthly payment amount and a breakdown of any arrearage, according to Leslie Mann, an attorney with the firm. Servicers sometimes submit a lump-sum amount of debt owed to the trustee, which doesn't give them enough information to make the scheduled monthly payments.

Ms. Mann told MSN that transfers of servicing rights also "add a big wrinkle to things." Servicing transfers raise the issue of whether the lender is required to file a transfer of claim, she noted. This is one area where legal exposure can be incurred.