A NATIONAL BANKRUPTCY SERVICES PUBLICATION

Right to enforce the note Will the real party in interest please stand up

A WINNING STRATEGY
PREPARING FOR TOMORROWS RULES
VOL. 1, ISSUE 2

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A NATIONAL BANKRUPTCY SERVICES PUBLICATION

IN THIS ISSUE

ISSUES
A discussion of current trends and issues in the world of bankruptcy and bankruptcy servicing.

DATA
Information aggregated from authoritative data sources detailing bankruptcy filing statistics around the nation.

FOCUS
Interviews with industry professionals offering insight into servicing and legal developments.

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TABLE OF CONTENTS
PROOF Right to enforce the note POWER SPORTS, BOATS & AUTOMOBILES Driving higher reaffirmation agreement rates A WINNING STRATEGY Prepare today for the rules of tomorrow PIGS GET FAT, HOGS GET SLAUGHTERED A debtors motto practiced with creditors BY THE NUMBERS Taking a look at the state of bankruptcy CASE STUDY 2 6 8 14 16 20 22

Will the real party in interest please stand up

HOT SEAT: BETSY HANSON The clients view of effective default servicing
Lance Vander Linden, Chairman lvanderlinden@nbsdefaultservices.com Paul Bourke, CEO pbourke@nbsdefaultservices.com Larry Buckley, EVP of Business Development lbuckley@nbsdefaultservices.com Brad Cloud, COO bcloud@nbsdefaultservices.com

The Ledger is a National Bankruptcy Services publication. 2010 National Bankruptcy Services All Rights Reserved

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Contributing Writers Sharmila Bharwani, Paul Bourke, Larry Buckley, Paul Cervenka, Sammy Hooda, Luke Madole Magazine Design The LTV Group, www.theLTVgroup.com
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NBS. HANDLING BANKRUPTCY CASES SINCE 1987.

ISSUES

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PROOF
RIGHT TO ENFORCE THE NOTE
BY LUKE MADOLE

THE

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servicer of a home mortgage acts, in the most simple arrangement, as an independent contractor engaged by the current creditor. The current creditor is almost never the notes payee. It is, rather, a notes holder, owner or transferee with the rights of a holder. That last category of creditor a transferee with the rights of a holder will hereafter be abbreviated TRH. As securitized home loans have made their way into bankruptcy and other courts, some judges have pressed servicers for confirmation of servicer/current creditor alignment. They have asked servicers to produce the contracts, contract assignments and other papers by which the servicer is acting and to align those papers to a creditor demonstrated to be the debtors current creditor. On occasion and in response, servicers (through an honest misunderstanding which somehow the court misapprehended as intentional deception) have sometimes become the object of the courts ire. The sticking point has been that what the servicer calls the holder of the note was not what the court calls the holder. When the court used the term holder of the note as identifying the current creditor, the court meant the technical and legal term holder as defined by the Uniform Commercial Code (UCC). When the servicer heard the term holder, the servicer registered the colloquial term holder as the current physical possessor of the note, e.g., the company for whom the document custodian of the securitized pool physically safeguards the originally signed notes in collateral files.

But the colloquial holder may not be a technical holder under the law of negotiable instruments. The colloquial holder may be, rather, a TRH. And, on occasion, some courts have viewed calling a TRH a holder as misleading. To help avoid those kinds of misunderstandings, the following is offered. If a court demotes a colloquial holder to a TRH, it is usually because of a gap in the chain of endorsements. Using the law of Texas (which adopted the UCC effective July 1, 1966) to illustrate, start with First Nat. Bank in Dallas v. Lampman, 442 S.W.2d 858 (Tex. Civ. App.Eastland 1969, writ refd n.r.e.) which dealt with the effect of an endorsement gap under the UCC. The issue was whether Dozier Productions, Inc. was the holder or owner of a check payable to the order of Joy C. Dozier but endorsed to First National Bank only by Dozier Productions, Inc. The check was deposited in Dozier Productions, Inc.s account at First National Bank in Dallas after Lampman, a creditor of Dozier Productions, Inc., had garnished the bank. Bankers Trust, the bank on which the check was drawn, dishonored the check because it lacked the endorsement of Joy C. Dozier and consequently First National Bank returned the check to Joy C. Dozier rather than paying the proceeds of the check over to Lampman. First National Bank was correct in doing so if the money was Joy Doziers but erred in so doing if the money belonged to Dozier Productions, Inc.. There was, of course, the evidence stamped on the back of the check that Dozier Productions, Inc. transferred its rights, if any,

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LUKE MADOLE is a partner in the Dallas law firm of Carrington, Coleman. Sloman & Blumenthal, L.L.P. Over an extended period of litigation practice, he has represented debtors, creditors, mortgage insurers, lawyers and insureds in commercial and consumer real estate disputes.

in the check to First National but there was no evidence Dozier Productions, Inc. had any rights to transfer. The check was payable to the order of Joy C. Dozier and she testified that the rubber stamp endorsement on the back of the check was not made by her or at her direction but, rather, got there by inadvertence and mistake. In short, it was undisputed the endorsement of the original payee, Joy C. Dozier, was missing. Dozier Productions, Inc. could not, by placing its rubber stamp on the back of the check, appoint itself owner of the check absent any evidence of transfer from Joy C. Dozier to Dozier Productions, Inc. Consequently, the creditors garnishment failed because title to the check did not pass to Dozier Productions, Inc. from Joy C. Dozier by negotiation or otherwise. The court said: Where a check is payable to order the endorsement of the payee, in addition to delivery, is necessary to pass title sufficient to support an action thereon, unless the party in possession otherwise shows ownership of the check.  442 S.W.2d at 861 Note that the issue was not whether the signature of Dozier Productions, Inc. on the check was authorized by Dozier Productions, Inc. First National had the power to supply the signature of its customer even had Dozier Productions, Inc. not rubber-stamped the back of the check. 4.205(a), Texas Business and Commerce Code (TBCC). The point was that Dozier Productions, Inc. had no abil-

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ity to pass title to an order instrument not endorsed by the original payee without showing the title of the original payee, Joy C. Dozier, had been transferred to Dozier Productions, Inc. This is the point servicers do well to understand. Endorsement gaps can usually be accounted for by transfers made not on the face of the note but by separate papers. Had Lampman produced an assignment of the check from Joy Dozier to Dozier Production, Inc., Lampman would have won his case. In Behring International, Inc. v. Greater Houston Bank, 662 S.W.2d 642 (Tex. App.Houston [1st Dist] 1983, writ dismd by agreement), Behring International, Inc. drew a check to the order of Norwegian American Lines, c/o Norton Lilly. Somehow, the check ended up in the possession of Nordship [Nordship Agencies, Inc.] in New Orleans. 662 S.W.2d at 645. Nordship deposited the check in the Nordships account at Greater Houston Bank as follows: For Deposit Only by Nordship Agencies, Inc. as agents. 662 S.W.2d at 646. When the drawee of the check returned the check to Greater Houston Bank (for lack of the payees endorsement), Greater Houston Bank offset the account of Behring International, Inc. at Greater Houston Bank on the theory Greater Houston Bank was the holder and owner of Behrings check to Norwegian American Lines and could enforce Behrings promise to pay. Behring defeated the banks offset. Why? Because the bank never explained the endorsement gap. There were transfers written on the check but they were not endorsements. A true endorsement

PROOF RIGHT TO ENFORCE THE NOTE BY LUKE MADOLE

ISSUES

DATA

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BANKRUPTCY.

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has several ingredients. Not only is an endorsement (a)a group of words (b)written on the instrument itself, but (c) the words must be put on the instrument by a holder! The endorsee side of the endorsement of an order instrument is addressed by 1.201(21) TBCC, which defines a holder of an order instrument as one who possesses an instrument endorsed to him. The endorsor side of the endorsement of an order instrument is addressed by 3.201(b) TBCC which requires that an endorsement be written by or on behalf of the holder. The court, in Behring International. Inc. v. Greater Houston Bank, held that the words looking like an endorsement which Nordship put on the check did not constitute the endorsement needed by Greater Houston Bank to obtain holder status because Nordship was not the payee of the check, i.e., Nordship was not itself a holder of the check. On the face of the check, Norwegian American Lines was the payee. The endorsement of Norwegian American Lines was missing and unexplained There was no evidence adduced showing how the check in question came into Nordships possession.  662 S.W.2d at 651 Under the UCC, an endorsement gap precludes any subsequent possessor of the instrument from being a holder as that term is used in the UCC. In the mortgage servicing context, the possessor of the note in those circumstances is usually a TRH but it will take papers in addition to the note itself to show that. As a graphic Texas case illustrates, even where all the original payee does is change its name and sues in its new name, it is not a holder, in the UCC sense, of notes payable to it under its former name: Prior to the adoption of the Uniform Commercial Code, the mere possession by a plaintiff of notes payable to the order of a different payee, and which were not endorsed by the payee, was not sufficient to establish the prima facie title to the instruments. Texas State Bank & Trust Co. v. St. John, 103 S.W.2d 1104 (Tex. Civ. App.El Paso 1937, err. dismd); 12 Am. Jur. 2d, Bills and Notes, 1194 at 218. The last authority points out that this is clearly the rule under the Uniform Commercial Code. Negotiation of commercial paper not payable to bearer takes effect only when the endorsement is made, and until that time there is no presumption

that the transferee is the owner. The transferee, without endorsement of an order instrument, is not a holder and so is not aided by any presumption that he is entitled to recover on the instrument. He must account for his possession by proving the transaction through which he acquired the note... Contrary to its contention, the Appellee, even though in possession, was not a holder of the instruments. Tex. Bus. & Comm. Code Ann. 1.201(20); 9 Tex. Jur 2d, 150 at 159. It could not enforce payment in its own name under 3.301 without proving its right to the instruments and accounting for the absence of the necessary endorsements. See Note 2 to 3.307. The necessary proof was not furnished by any constructive admission resulting from any failure to comply with Rule 93. None of the subdivisions apply to the allegations that the present plaintiff [Finance America Private Brands, Inc.] was formerly GAC Private Brands, Inc. It is proof as a holder of the instruments that is involved and not the capacity or defect of the party to bring this suit. Lawson v. Finance America Private Brands, Inc., 537 S.W.2d 483, 485.  Tex. Civ. App.El Paso 1976, no writ It should be noted here that in the case quoted above, Cleta Lawson won the battle over holder status but lost the war over note liability. She was unable to escape note liability because she, herself, supplied the missing evidence during her case-in-chief which established that Finance America Private Brands, Inc. was a non-holder owner of the note. So the court noted: However, reversible error is not presented. After the plaintiff had rested, the defendant, upon direct examination by attorney, testified that GAC Private Brands, Inc. [the payee named in the note] was the former name of the present plaintiff. This admission established the missing proof. As the Lawson case also illustrates, endorsement gaps are usually much ado about nothing once the endorsement status is accounted for. Upon demonstration of how the current creditor became the current creditor, it is usually easy for the servicer to accumulate the papers needed to satisfy the courts inquiry into servicer/current creditor alignment.

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PROOF RIGHT TO ENFORCE THE NOTE BY LUKE MADOLE

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Endorsement gaps can usually be accounted for by transfers made not on the face of the note but by separate papers.

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power sports, boats & automobiles

BY LARRY BUCKLEY

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of my favorite all-time film comedies is Planes, Trains & Automobiles starring Steve Martin and the late, great John Candy. It also serves as the inspiration for the title of this article. More importantly, it puts the focus on one of NBS most important and successful lines of business Consumer Secured Bankruptcy Servicing. Consumer lenders come in all shapes and sizes (like Martin & Candy) and they utilize a variety of collateral types to secure their loans. While we have not seen any trains and only a handful of planes in our review of security instruments, our clients offer up the whole gamut of collateral, from automobiles to motorcycles, to tractors, to motor homes, to jet skis, to ATVs and so on. While consumer lenders may specialize in one or more forms of secured lending, one thing they have in common when their loans are affected by a bankruptcy filing is simply this: They either want to get paid, or quickly obtain the legal right to enforce their security interest and recover their collateral.

ONE

The traditional approach to achieving one of these two goals has been to follow a path based on formal legal processes in the bankruptcy courts. Objecting to confirmation of Chapter 13 plans and filing motions for relief from stay certainly are important and necessary functions. Fortunately, secured creditors have other options in the post-bankruptcy reform world in which we have lived since October 2005. Bankruptcy reform provided personal property secured lenders with some additional tools for servicing bankruptcy loans that, when properly implemented and executed upon, can provide tangible benefits for secured creditors. What are some of the potential benefits? How about improved reaffirmation and lease assumption agreement rates; reduced charge-offs; reduced loss severities and improved recovery rates; and one of the major benefits lower legal expense for attorneys fees! Those are benefits that put consumer lenders and servicers in the mood for a good laugh like watching Martin and

Candy in feigned terror as the doors to their car come flying off! So how does a secured lender make all this happen? One way is to look for an outsourcing vendor whose founding and guiding principle is very simple make the best efforts to get loans in bankruptcy to either perform financially or get them out of bankruptcy as quickly as possible. As Lance Vander Linder, chairman of the board and one of the founding members of NBS, is fond of saying, bankruptcy is congressionally-mandated loss mitigation. Creditors should take full advantage of what the law allows. There is no trick or secret sauce that makes a bankruptcy portfolio perform in a way that significantly improves a lenders performance. It takes lots of hard work, a dedicated team of subject matter experts including bankruptcy administrators, managers, executives and attorneys all working in sync to achieve defined goals and performance metrics. And what are some of those goals? How about obtaining every possible reaf-

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LARRY BUCKLEY has served as the executive vice president of business development for National Bankruptcy Services and managing attorney for Brice, Vander Linden & Wernick since 2005. Mr. Buckley previously served as president of First American Title Insurance Companys National Default Title Insurance division from 20032005. Mr. Buckley was also the founding shareholder of The Buckley Firm, P.C. and president of Buckley & Associates, Inc. and served in that capacity for over 20 years. Mr. Buckley is an AV rated attorney licensed to practice law in the states of California, Arizona, Texas & Colorado.

firmation agreement in your Chapter 7 portfolio? How do you make that happen? Jeff Dowdle, vice president of consumer bankruptcy operations at NBS, says it works like this: Reaffirmation and loan assumption agreement performance is obtained by having a well-defined solicitation strategy that focuses on a pre-determined eligible population of loans. Providing experienced administrators with clearly defined client performance expectations is a key driver in this process. Our approach at NBS has pushed reaffirmation agreement rates north of 55% across our entire portfolio of cases referred by captive auto finance companies, indirect lenders, national and regional banks and credit unions. The NBS approach to driving higher reaffirmation agreement rates is coupled with utilization of another benefit of bankruptcy reform, stay lift by operation of law. Bankruptcy code amendments in 2005 required debtors to state their intent with regard to personal property secured loans. Debtors must either affirmatively state whether they

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intend to reaffirm their debt, redeem the amount owed, or surrender the collateral. Failure to act on one of these intents starts the clock ticking, so that the automatic stay is lifted by operation of law when debtors do not timely perform their stated intent, rather than through the filing of a motion for relief from stay. Jennifer Brown, senior bankruptcy counsel at NBS, says, Stay lift by operation of law has dramatically changed the approach creditors may take to obtain the right to obtain possession of their collateral. NBS monitors debtors intents and measures the time frames upon which stay lift by operation of law can take effect. This approach has significantly lowered legal fees and costs for our clients. It also expedites the process of collateral recovery without the necessity of filing motions for relief from stay. NBS utilizes a similar approach in Chapter 13 cases to ensure its clients are receiving the proper treatment in Chapter 13 plans, from both delinquency and valuation perspectives. Wes Wiley, NBS director of client man-

agement, says a vast majority of objectionable Chapter 13 plans proposed by debtors are resolved at NBS via negotiation with debtors counsel. Our proactive approach is designed to obtain proper creditor treatment without the unnecessary expenditure of legal fees. We utilize the formal legal process when it is necessary based on the servicing strategy defined by a given client. As executive vice president of business development at NBS, my views on bankruptcy outsourcing are colored by my passion for what we have done at NBS during the five plus years of my employment. More importantly, my observations are factually based on empirical performance metrics, reduced internal costs, losses and legal expenses, coupled with improved recoveries. There is no singular way to service bankruptcy loans. Outsourcing this complex, costly and risk-intensive process is one very viable alternative for consumer lenders of all stripes. We like to think that in the end the NBS approach winds up like a lot of movies do with a happy ending!

POWER SPORTS, BOATS AND AUTOMOBILES

BY LARRY BUCKLEY

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COVER STORY

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TRENDS IN BANKRUPTCY BECOME LAW: PREPARE TODAY FOR THE RULES OF TOMORROW
BY PAUL CERVENKA

WITH

the ever increasing number of bankruptcy cases filling the courts dockets, there has been a consistent amount of time and energy placed toward elaborating and expanding upon the Federal Rules of Bankruptcy Procedure. Amendments to the rules are often needed to address repeating problems or concerns within the bankruptcy process. Any changes to these rules are not taken lightly and the process can be quite lengthy. This article will examine two specific proposed rules as they relate directly to the proof of claim and specifically to Chapter 13 bankruptcy requirements. These newly proposed rules will follow

the same path as any other amendment. They began in the Advisory Committee where they were created and will soon be reviewed by the Standing Committee. If approved, they will then move on to the Judicial Conference, followed by the U.S. Supreme Court. Assuming all groups approve, the rules will be sent to the U.S. Congress for final review. If no changes are made by Congress, these rules take effect on December 1, 2011. Even though these proposed rules will not take effect until 2011, it is important that all lenders and servicers in the mortgage industry are aware of where the bankruptcy process is headed. While these

federal rules may not yet be in effect, they are an excellent indicator of bankruptcy trends across the nation. Typically, changes in the federal rules have already been addressed by many jurisdictions through their individual local rules. Thus, by familiarizing oneself with the latest trends, a lender/servicer can always stay ahead of the curve and better avoid the dreaded objection to claim. The prudent lender/ servicer should take these new trends and adopt them as part of their internal procedures to ensure compliance across the nation. Additionally, acting now will save time and money later spent in defending claims through litigation.

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A WINNING STRATEGY BY PAUL CERVENKA

A WINNING STRATEGY

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PAUL W. CERVENKA is an associate attorney at Brice, Vander Linden, & Wernick, P.C. with a primary focus on the Real Property bankruptcy portfolio. He is a graduate of The University of Texas at Dallas and Southern Methodist University Dedman School of Law who is licensed to practice in Texas.

RULE 3001 PROOF OF CLAIM AND SUPPORTING DOCUMENTATION The proposed rule change to Rule 3001 involves a few amendments regarding the filing of a proof of claim, with a special emphasis on supporting documentation. As we look at where we are now with proof of claims, we remember the all too familiar Rule 3001(c) requiring that any claim based on a written agreement must have the writing filed with the proof of claim. This is followed by Rule 3001(d) which requires proof of perfection of a secured claim. When read in conjunction with one another, a secured claim for real property must have the Note (written agreement) and Recorded Deed of Trust (proof of perfections) attached as supporting documentation to every filed proof of claim. This federal standard is the minimum requirement. However, many local rules across the nation have expanded upon this to require an increasing amount of additional documentation. Additionally, many trustees have interpreted these rules to require assignments or endorsed notes to prove the lender/servicer is the correct successor

in interest to file the claim. It was only a matter of time before the Federal Rules of Bankruptcy would follow suit and expand upon these minimum national standards. That time is now. Revolving or Open-end Loans The first proposed amendment to Rule 3001 involves an open-end or revolving loan (typically a credit card type of agreement). This new amendment requires an attachment to the proof of claim which is: the last account statement sent to the debtor prior to the filing of the petition. (Proposed Rule 3001(c)(1)). A requirement such as this is not an entirely new or unheard of practice, as there are some jurisdictions that have already adopted this as part of their local rules (Maryland Local Rule 3001-1(a)). What distinguishes this type of rule is that this statement is required, even if the last statement was sent out by a prior lender/servicer. Thus, it is the responsibility of the current lender/servicer to provide this prior statement with the proof of claim filing, even if the current lender was not responsible for sending it out. The prudent lender/servicer who deals with these types of loans should develop a business prac-

tice to accommodate this rule. Whether this means having an immediate contact with the prior lender, or obtaining this documentation when the loan is acquired, the lender/service should assume this will be required for all open-end or revolving loans. As a best practice, every lender/ service dealing with these types of loans should be able to produce this account statement in a reasonable amount of time. Supporting Documentation Itemization and Escrow Analysis The second amendment to Rule 3001 lays out a detailed list of supporting documentation specifically required when the debtor is an individual. This section of proposed Rule 3001(c)(2) requires an itemized statement of all interest, fees, expenses, or other charges included in the proof of claim. It also puts special requirements on secured claims by requiring a statement of the amount necessary to cure any default as of petition date. Additionally, if the secured claim is regarding the debtors principal residence, an escrow statement must be provided for all escrowing loans. This escrow statement must be prepared as of the petition date and must be filed with the proof of claim.

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IT WAS ONLY A MATTER OF TIME.  THAT TIME IS NOW.

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Again, these requirements are not news to the bankruptcy world. Many trustees have followed the guidelines established by the National Association of Chapter 13 Trustees (NACTT), which suggest a detailed itemization of any amounts listed in the proof of claim. The goal of detailed itemization is to clearly show all parties (debtor, trustee, and court) exactly what dollar amounts are being collected and what each dollar is being collected for. For the lender/servicer this means you must be able to clearly label every amount you wish to collect in the claim. A clear label must be a court friendly description, meaning anyone outside of the mortgage industry (for example the debtor, trustee, or judge) can ascertain exactly what each fee is for. Words such as Prior Servicer Fees, Other Corporate Advances, Fee Assessed or any other vague language will not be considered a detailed itemization under this proposed rule. From a practical standpoint, vague descriptions such as those mentioned above have already proven to be accidents waiting to happen. Diligent trustees and debtors attorneys are constantly on the lookout for these unclear words. The best case scenario for the lender/servicer is a phone call seeking clarification. The worst case scenario is an adversary or show cause, resulting in more money spent than the lender/servicer bargained for. Once again, the goal is to put forth the extra effort to accomplish this task early on (when the proof of claim is filed). This effort will pay for itself through reduced objections and litigation costs for all parties.

Requiring an escrow statement at petition helps to better explain the escrow amounts included in the claim. If this new rules takes effect, it may require an actual escrow analysis at petition for every escrowing mortgage. This ensures an accurate snapshot is taken of each escrowing loan at the start of the bankruptcy. Ideally, this would help to ensure all pre-petition escrow amounts are included in the proof of claim, while also reducing the likelihood that a pre-petition shortage is being collected in the ongoing post-petition monthly payment. Once again, this is not a new requirement (To name a few: Delaware Local Rule 3023-1(b)(ii)(C); Florida Local Rule 30011(B)(3); Maryland Local Rule 3001-1(b)(3); New Jersey General Order 3904). However, this new rule makes this a minimum requirement across all jurisdictions, not just a select few. Thus, lenders/servicers will be forced to conduct an escrow analysis on every escrowing loan at the time of petition. As a lender/servicer, if you have not yet developed an escrow analysis process as it relates to bankruptcy, now is the time to get to work! Loan History for the Southern District of Texas One cannot discuss supporting documentation and proof of claims without at least some mention of the Southern District of Texas. When it comes to supporting documentation requirements, this district leads the way. Judge Marvin Isgur advocates a loan history form for Chapter 13 arrears claims to help ensure

compliance with Fifth Circuit case-law requiring all pre-petition escrow amounts be captured within the proof of claim arrears (see Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (2008)). This idea has been mentioned to the advisory committee as a possible future amendment and the loan history requirement has already been adopted as part of the local rules for the Southern District of Texas (Southern District of Texas Local Rule 3001-1). To comply with this local rule, the lender/servicer must provide a complete history of all transactions on the loan relating to the current delinquency. The more delinquent the debtor, the more months (and in some cases years) the lender/servicer will have to go back. Every transaction must be accurately described using court-friendly terms so that the history can be easily understood by the court, debtor, and trustee. The amount of detail required by such a form may seem quite burdensome from the lender/servicers perspective. However, the goal of the court is the same as all the other federal courts around the nation: paint an accurate picture of the total debt owed by the debtor at petition. While the Southern District of Texas requires a more precise and specific snapshot of the delinquency, the motive remains the same. As seen with some of the examples above, the trend of one jurisdiction soon becomes the trend of the nation. Dont be surprised when this Texas loan history requirement becomes the norm in fact expect it!

A WINNING STRATEGY BY PAUL CERVENKA

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Sanctions One of the most concerning amendments to this section governs sanctions. Proposed Rule 3001(c)(2)(D) states that if a lender fails to provide any of the above supporting documentation with the proof of claim, the lender is prohibited from presenting the documentation at any later time. This means the missing information cannot be presented as evidence at any subsequent proceeding for the bankruptcy case, such as an adversary hearing or any other contested matter. The ONLY exception is if the court can be convinced that failure to provide the documentation earlier was substantially justified or is harmless. Additionally, the court may award other appropriate relief which could include reasonable attorney fees and other expenses caused by the failure. While it remains to be seen exactly how the courts will use this substantially justified standard, suffice it to say they will require a genuine and legitimate reason for failure to follow the federal rules. It is also difficult to imagine a scenario where the courts will deem such a failure to be harmless, especially from the perspective from the debtor. The bottom-line is that these rules must

be followed if the lender/servicer wishes to collect any amount of debt. The best way for the lender/servicer to protect itself is to be proactive and tackle these new compliance issues before they come with a penalty attached for failure to comply. RULE 3002.1 NOTICE MUST BE GIVEN Proposed Rule 3002.1 would be a completely new rule added to the Federal Rules of Bankruptcy Procedure. This new rule applies to Chapter 13 cases where the debtors principal residence is the secured collateral. It is being added to help in the implementation of 1322(b)(5) of the United States Bankruptcy Code (which allows the debtor in a Chapter 13 case to cure a default and maintain home mortgage payments throughout the course of the debtors plan). This goal is accomplished by requiring notice in several situations. Payment Change Notice First, a Notice of Payment Change is required at least 30 days before any new payment amount is due. This has been a common trend among many districts across the nation, and again this is another requirement that falls in line with recom-

mendations of the NACTT. Under this new rule, payment change notices are required across the nation. While the advisory committee has recommended the notice requirement be reduced to at least 21 days notice, it remains to be seen exactly how the final version will play out. The format of this payment change notice must be substantially similar to the format used outside of bankruptcy and must be sent to the debtor, debtors attorney, trustee, and the court. As stated in the Advisory Committee notes, Timely notice of these changes will permit the debtor or trustee to challenge the validity of any such charges, if necessary, and to adjust post-petition mortgage payments to cover any properly claimed adjustment. The committee goes on to state that these rules will also eliminate any concern the lender/servicer might have that giving notice of a postpetition payment change might violate automatic stay. Once again, many local rules already require a payment change notice during bankruptcy. The truly prepared lender/servicer will have a process in place for its national portfolio before this rule even takes effect.

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Notice of Post-Petition Fees, Expenses, and Charges As it relates to the secured property mentioned above, any post-petition fees, expenses, and charges that a lender deems recoverable against the debtor must be itemized and notice must be sent to the debtor, debtors attorney, trustee, and the court. This notice must be filed within 180 days of when the charge occurred. The debtor or trustee then has one year to file a motion with the court to determine whether these fees and charges are allowed under the agreement. For lenders/servicers this means there is no time to drag your feet. If an expense is incurred that should be passed onto the debtor, get notice to all parties involved in the bankruptcy and be sure this is filed with the court (typically via amended or supplemental claim). The faster the better. Notice of Final Cure Payment Under this part of the proposed new rule, the trustee is required to give notice to all parties within 30 days after the entire pre-petition default has been paid in full. This issuance of notice starts a 21 day clock for the lender/servicer to respond. The lender/servicer must respond in agreement or disagreement with the trustees notice and lender/servicer must also state whether or not the debtor is current on all post-petition mortgage payments. Any remaining pre-petition or postpetition delinquency must be itemized as part of this response. This itemization must follow the same detailed requirements listed under Rule 3001 above. If this response is disputed by the trustee or

debtor within the next 21 days, the court will conduct a hearing to make a determination on whether the loan is deemed current. This puts into rule a practice that occurs on a regular basis in many jurisdictions. Motions to Deem Current are often filed by debtors at or near the end of bankruptcy. Failure to adequately respond to such a motion can leave the lender/servicer with an order forcing them to make the loan current (and writing off any amounts not allowed by the courts). When reading this rule in conjunction with the notice regarding post-petition fees, expenses, and charges the message is clear. Lenders/servicers should promptly give notice of any post-petition charges to the debtor to ensure these can be recovered during the bankruptcy case. If notice is not given, the risk is never being able to collect this amount from the debtor. Sanctions Again there are penalties for not complying with these rules. If proper notice is not given for any of the three situations mentioned above (payment change, postpetition charge, or delinquency after final cure) then the lender/servicer is prohibited from presenting this information at any later date. The only exception is convincing the court the failure was substantially justified or harmless, which as discussed above, could prove quite difficult. Again, the court also has discretion to award other relief, such as attorney fees and other reasonable expenses resulting from the failure. One very important

note from the advisory committee cautions that if the lender/servicer tries to recover an amount that should have been disclosed under this rule, the debtor may move to have the [bankruptcy] case reopened in order to seek sanctions against the holder of the claim In other words, speak up about the debtors delinquency when you are supposed toor forever hold your peace. What Can You Do? While these new Federal Rules of Bankruptcy Procedure may seem to impose a great burden on lenders/servicers, one must remember the purpose of these rules are to promote consistency across the nation while also addressing concerns within the bankruptcy process. The idea is that one standardized federal rule is better than several variations of local rules for each bankruptcy district. The bottom-line is that change is coming. New requirements for one district spread to another, and before you know it a new trend has developed in the bankruptcy world. By the time the federal rules are approved and take full effect, there is often already a new trend that has emerged across the nation (with local rules to back it up). Dont be caught off guard. Develop best business practices today to follow the most recent trends. Its better to put forth the extra effort at the front end of the bankruptcy case and cover all of your bases, than to have to litigate the discrepancies later at an increased cost. By working on building these best practices now, you can avoid the headache of an objection later.

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A WINNING STRATEGY BY PAUL CERVENKA

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Pigs get fat Hogs get slaughtered

A DEBTORS MOTTO PRACTICED WITH CREDITORS

THREE COMMON STRATEGIES PRACTICED BY DEBTOR ATTORNEYS THAT HARM CREDITORS

BY SHARMILA BHARWANI

process, the creditor and debtor debate numerous topics, including notice requirements, accurate arrearage amounts and standing issues. When debtor attorneys file a bankruptcy, there are a few strategies they employ in dealing with creditors. These strategies are based on the behavior of creditors and allow debtor attorneys to design an efficient practice in the eyes of the Debtor and Court; however, these practices can be harmful to over-burdened creditors. It is a system that relies on the weaknesses of creditors. Debtor attorneys try to use certain methods to create an ideal situation for the debtor. These systems often impair creditors with unfair, burdensome, and sometimes illegal plan treatment. This article discusses three major strategies debtor attorneys exploit, which cause major harm to the unaware creditor.

DURING THE BANKRUPTCY

THE SHEER SIZE OF CREDITORS

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The large size of financial service companies with numerous locations servicing hundreds of thousands of loans is a trait debtor attorneys rely on when filing a bankruptcy case. Being aware of the size of creditors, debtor attorneys file a case knowing the creditor may not even become aware of the case before plans are confirmed. For example, the majority of Chapter 13 bankruptcies are filed immediately before foreclosure.

Due to the stringent timeline of foreclosure, some debtor attorneys file the case first and ask the debtor questions later. Debtor attorneys utilize the bankruptcy notice requirements to their benefit. Knowing that notice of a bankruptcy to creditors is mandatory, they provide notice, but often timing and delivery of notice to creditors is incorrect. A prime example is in the Bankruptcy Code 362, that provides for the automatic stay. The automatic stay is in effect for any debtor who files within a 12-month period. However, when a debtor has two active bankruptcy cases within one calendar year, a motion is brought extending the automatic stay. Each creditor is required to be notified of this motion and hearing in order to object or allow the stay to continue. A creditors response time is limited, and if no response is received, the stay is extended at the hearing without their knowledge. Many debtor attorneys send the notice to a mailing address that may not be the appropriate address for the creditor, such as a billing or payment address. Therefore, when the creditor becomes aware of the case, the stay has already been imposed. If proper notice is given, it is given with limited advance time, and creditors have insufficient time to properly object. Debtor attorneys are aware creditors are large entities that have numerous layers of departmental approval and attorneys use that fact to benefit the debtor.

THE BANKRUPTCY MILL

The more bankruptcies a debtor attorney files, the more money he makes. The more clients they have and the more cases they can file, the bigger the trustee check. This cycle requires extraordinary salesmanship for their cause. A debtor may have an initial consultation with what to them is a unique and dire situation; however most times debtors are simply categorized and placed in a pile. Sometimes, debtors are promised more than the bankruptcy code allows. Even more surprising, due to time restraints, debtors may have received incorrect statements on the benefits of a bankruptcy filing. For example, the majority of debtors enter into a bankruptcy to save their home, with high hopes of modifying their mortgage. The bankruptcy code does not require a loan modification on a first lien mortgage; nonetheless, many bankruptcy attorneys regularly suggest that a loan modification is probable. Other methods commonly utilized by bankruptcy attorneys are filing a plan without verifying the arrears on the mortgage or the payoff on a vehicle. If the jurisdiction is one in which the trustee pays pursuant to the amounts in the Plan, as opposed to the proof of claim, the creditor may not have adequate notice to object to the amount listed in the plan. Another common practice is impairing secured debt or cramming down the value and waiting for the creditor objection be-

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SHARMILA BHARWANI is an associate attorney at Brice, Vander Linden & Wernick, P.C. She has been practicing consumer bankruptcy since 2008. Previously as a debtor attorney, her caseload included over 150 bankruptcy cases a month. She is well versed in Bankruptcy Chapters 7, 11, 12 and 13.

fore confirmation. Debtor attorneys may also reverse engineer bankruptcy schedules, specifically exemptions (Schedule C), income and expenses (Schedule I and J) to match the payment plan. This can cause major issues in court if the debtor attorney is found to be embellishing the debtors income and or exemptions. In fact, some courts have issued necessary and appropriate orders to debtors that have had numerous misstatements and falsehoods in the sworn bankruptcy petition and schedules in a deliberate effort to mislead creditors. The United States Trustee is litigating more cases where debtor attorneys embellish the debtors assets, exemptions and amounts to defraud creditors. Knowing the creditors resources are strained by the sheer volume of activity, debtor attorneys are in a better position to take advantage in preparation of the petition.

THE CURRENT POLITICAL SITUATION

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Since the burst of the mortgage bubble and the Obama administrations announcement of the home-rescue plan in 2009, the mortgage industry has received widespread negative publicity. This shift in perception of mortgage companies has manifested itself in the courtroom. A bankruptcy attorneys primary responsibility is to protect the interests of the debtor in the case and to provide him the best treatment the bankruptcy code allows.

However, debtor attorneys now see themselves as saviors against corrupt creditors. New contingents of debtor attorneys question the standing of mortgage companies; the documents and actions of creditors in a case. Recently, adversary proceedings as well as objections to claims have risen to argue such items as standing, proper title, proper assignments, issues with MERS and other such adversaries. In fact, numerous programs now teach debtor attorneys how to strip a lien, invalidate a sale or argue an assignment. Regardless of the Debtors intent as to the property, creditors are at a disadvantage if for no other reason than the current political environment. This self-righteous behavior is seen in evidentiary hearings in Bankruptcy Courts around the nation. Debtor attorneys take advantage of the Bankruptcy Courts sometimes inconsistent adherence to evidentiary standards. In certain instances where the burden of proof is on debtor attorneys, it turns

again to creditors to prove the validity of the debt. This exemplified in Real Estate Settlement Procedures Act (RESPA) requests made by debtor attorneys. RESPA was originally created with the buying and selling of real estate because different parties in sale transactions were inflating costs; however, now Debtors Attorneys are now using RESPA as an informal vehicle to avoid formal discovery requests. Debtor attorneys take broad liberties with such requests because of the negative publicity and the prevailing political atmosphere regarding mortgage companies. The practices of many debtor attorneys may not strictly violate the Bankruptcy Code but they do stretch the spirit of what the code is actually intended to provide in the way of debt relief. Creditors must be aware of the political climate and the common practices utilized by debtor attorneys. Having strong internal management controls and procedures, along with utilizing third party providers and outside counsel, is critical to reducing losses and managing risk.

REFERENCES
maxbankruptcybootcamp.com The Honorable Joe Lee, Chapter 12. Bankruptcy Code 101-112, Code 105. Power of the Court Part Two. Digests of Decisions IV. Enforcement of Orders and Authority of Court C. Acts Warranting Sanctions Other than Contempt, Bankruptcy Service, Lawyers Edition. July 2010, 2. Bankruptcy Code 362(c)(4)(a). National Conference of Bankruptcy Judges: Judges, Insolvency Professionals Discuss Gag Rule, Creditor Claims, Counsels Duties, Bankruptcy Law Daily, October 23, 2007 at 4. Bankruptcy Law Daily Highlights The Bureau of National Affairs, Inc Katherine Porter, Consumer Debtor Class Actions: One More Windmill, or the Ultimate Remedy for the Subprime Mess? American Bankruptcy Institute, April 3, 2008 at 3.

PIGS GET FAT, HOGS GET SLAUGHTERED BY SHARMILA BHARWANI

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DATA
STATE-BY-STATE FILINGS PER CAPITA

D.C.

> 7.5 6 7.5 4.5 6

5.16% NATIONAL PER CAPITAL FILINGS

FILINGS PER CAPITA: TOP 10
State Filings Per Capita
11.44 8.01 7.95 7.49 7.30 7.01 6.97 6.67 6.49 6.41

3 4.5 <3

FILINGS PER CAPITA: BOTTOM 10

Percent Change1
0.21 -0.62 0.35 0.21 -0.14 1.40 0.20 1.00 1.20 1.18

State

Filings Per Capita

1.61 2.07 2.17 2.32 2.52 2.53 2.74 2.84 2.87 2.93

Percent Change1
0.17 -0.11 0.21 0.07 0.23 0.14 0.25 -0.13 0.40 0.01

Nevada Tennessee Georgia Indiana Alabama California Michigan Colorado Utah Arizona
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Alaska South Carolina District of Columbia Texas South Dakota North Dakota Vermont North Carolina Wyoming New York

PER CAPITA FILINGS BASED ON ESTIMATED JULY 1, 2009 CENSUS; 1. PERCERNT CHANGE VS PREVIOUS YEAR

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State
Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware District of Columbia Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Total States and DC

Cumulative 2010 Filings

25,764 844 31,701 12,389 194,279 25,129 8,764 3,191 976 84,503 58,590 3,028 6,305 61,967 36,082 7,639 8,587 18,932 14,254 3,160 22,559 17,763 52,127 17,120 10,564 25,044 2,387 5,857 22,670 4,276 30,535 5,005 42,988 19,950 1,228 54,073 11,278 15,378 29,666 4,140 7,065 1,538 37,821 43,082 13,563 1,276 28,447 25,644 4,739 23,394 1,173 1,188,434

Ratio of Chapter 7 Filings

44% 82% 83% 56% 77% 84% 90% 74% 68% 76% 54% 80% 88% 76% 75% 92% 71% 75% 39% 87% 73% 77% 85% 87% 57% 73% 86% 74% 76% 81% 78% 92% 81% 55% 89% 77% 83% 79% 72% 87% 51% 91% 51% 50% 67% 80% 68% 79% 90% 82% 87% 73%

Ratio of Chapter 13 Filings

56% 18% 17% 44% 23% 16% 10% 26% 32% 24% 46% 20% 12% 24% 25% 8% 29% 25% 61% 13% 27% 23% 15% 13% 43% 27% 14% 26% 24% 19% 22% 8% 19% 45% 11% 23% 17% 21% 28% 13% 49% 9% 49% 50% 33% 20% 32% 21% 10% 18% 13% 27%

Please turn the page for a visual representation of this data.

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STATE-BY-STATE TOTAL 2010 BANKRUPTCY FILINGS AND PERCENTAGES OF CHAPTER 7 VS. CHAPTER 13

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STACKED UP
STATE-BY-STATE COMPARISON OF 2010 CUMULATIVE FILINGS (HEIGHT OF LETTERS REPRESENT FILING TOTALS)

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BOTTOM TEN

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WWW.NBSDEFAULTSERVICES.COM VOL. 1, ISSUE 2

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CASE STUDY

WILL THE REAL PARTY IN INTEREST PLEASE STAND UP

IN RE HWANGS AFFECT ON THE MORTGAGE SERVICING WORLD
BY SAMMY HOODA

a bankruptcy judge in the Central District of California shocked the mortgage servicing world by denying a motion for relief from the automatic stay filed by a servicer. In Hwang , the court concluded that even though IndyMac (the servicer) held the note with the power to enforce it under California law, it failed to satisfy the procedural requirements of federal law in seeking relief from the automatic stay. The court concluded that IndyMac must join the notes owner on two separate grounds; first, the notes owner is the real party in interest under Federal Rules of Civil Procedure 17 (Rule 17), and second the notes owner is a required party under Federal Rules of Civil Procedure 19 (Rule 19). In re Hwang, 396 B.R. 757, 772 (Bankr. C.D. Cal. 2008).

IN 2008

The Hwang case has significant implications for the mortgage servicing world, dealing with motions for relief from the automatic stay and foreclosure actions. However, on July 21, 2010, the United States District Judge for the Central District of California reversed on appeal In re Hwang and returned the mortgage servicing worlds bankruptcy and foreclosure processes back to status quo. The district court held that a note-holder is the real party in interest and the notes owner does not need to join as a necessary party. In re Kang Jin Hwang, Case No. CV- 08-7871-PSG (C.D. Cal. July 21, 2010).

FUTURE OF THE REAL PARTY IN INTEREST REQUIREMENT

Even though the district courts decision reversed the bankruptcy courts determination that IndyMac was not the real party in interest under Rule 17 and its determination that Rule 19 required the owner of the note to join the motion, the mortgage servicing world should be extremely cautious of the reasoning behind the reversal. The district court held the bankruptcy courts conclusion that IndyMac failed to join the real party in interest was an abuse of discretion, which is defined as a decision based on an erroneous conclusion of law or when the record contains no evidence on which the court could have rationally based that decision. Simply put, the bankruptcy courts decision was not supported by any evidence in the record therefore the conclusion of law was erroneous. Hence, if a record contains sufficient evidence that the note was securitized, then a bankruptcy courts determination that the servicer failed to join the real party in interest would not be an erroneous conclusion of law. It is plausible that a bankruptcy court could determine that a note is securitized, based on the evidence in the record (e.g., an endorsed note to a securitization trust), requiring a servicer to join the real party in interest (i.e. the trustee of the securitization trust). In Hwang, both the courts expressly recognized that under

CASE OVERVIEW
In Hwang , the debtor executed a note in favor of MortgageIT Inc., secured by a first lien on his primary residence. The loan was transferred to IndyMac before the debtor filed for bankruptcy. IndyMac then sold the note to unidentified investors through Freddie Mac, and the court assumed the note was ultimately sold to a securitization trust. When the debtor filed for bankruptcy, the loan was owned by unidentified investors, but the original note was still in the possession of IndyMac. IndyMac filed a motion for relief from the automatic stay. The evidence established that IndyMac physically possessed the note; the deed of trust had been assigned to it and recorded. IndyMac remained the note-holder even though it had sold the loan to Freddie Mac and serviced it on Freddie Macs behalf. Based on the assumption that the loan was securitized, the court concluded that IndyMac was not the real party of interest. In the courts view, the real party in interest was the securitized trust. Thus, the court required that the trustee of the securitized trust must be involved with IndyMac to prosecute the note.

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SAMMY HOODA is a bankruptcy attorney at Brice, Vander Linden & Wernick. Sammy was the Valedictorian of his graduating law school class, served as the Editor-in-Chief of the Law Review and was a Judicial Intern to the Honorable Jeff Bohm, U.S. Bankruptcy Judge for the Southern District of Texas.

California law, the holder of a note has the right to enforce the note, regardless of whether or not the holder is the owner of the note. The district court went a step further, stating that IndyMac, as the party with the right to enforce a claim on the note, is the real party in interest on a motion for relief from the automatic stay. However, the district court did not reverse the bankruptcy courts decision on that ground. The district court merely concluded that, the record simply does not support the bankruptcy courts supposition that the note was likely securitized. In re Hwang, Case No. CV- 08-7871PSG (C.D. Cal. July 21, 2010). This leaves the bigger question unanswered: whether it is necessary to join the trustee of a securitization trust as a real party in interest if the evidence shows the note was securitized. It is likely that this will be the central issue in future cases, but it is uncertain in which partys favor the gavel will fall. Therefore, it would behoove the mortgage servicing world to reevaluate current practices and procedures regarding motions for relief from the automatic stay and foreclosure actions. One best practice suggestion is to bring actions in both parties names and clearly identify the relationship (e.g., ABC Servicing Company, as servicing agent for XYZ Trust). Regardless of whether debtors or servicers win the battle in bankruptcy court, ultimately the issue is likely to be decided by the highest court, especially because there seems to be a split of authority among the circuits on who is the real party in interest under Rule 17. In re Hwang, 396 B.R. at 770 (Bankr. C.D. Cal. 2008).

FUTURE OF THE REQUIRED JOINDER OF THE NOTES OWNER

The district court reversed and held that the bankruptcy court abused its discretion in concluding that Rule 19 requires the notes owner to join IndyMacs motion for relief from the automatic stay. The court reasoned that the bankruptcy court failed to recognize that, to qualify as a necessary party under Rule 19, the impair-

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ment of the partys ability to protect its interest must be caused by the partys absence from the litigation. The district court was not persuaded by the bankruptcy courts argument. Thus, one interpretation of the district courts holding is that joinder of a notes owner is not required when the note holder is a party to a motion for relief from the automatic stay. The likelihood of this issue being relitigated under substantially similar sets of facts is less than the real party in interest issue. This conclusion rests on the district courts explanation that necessary parties under Rule 19 are only those parties whose ability to protect their interest would be impaired because of that partys absence from the litigation. In re Hwang, Case No. CV- 087871-PSG (C.D. Cal. July 21, 2010). In Hwang , the district court observed that only IndyMac, as the note-holder had the right to enforce the note; neither Freddie Mac nor any subsequent owner of the note had that right. In re Hwang, Case No. CV- 08-7871-PSG (C.D. Cal. July 21, 2010). Thus, the court concluded that the difficulties perceived by the bankruptcy court in protecting the note owners interests on this motion did not result from the owners absence from the motion, but from the owner not having the right under California law to enforce the note. In re Hwang, Case No. CV- 08-7871-PSG (C.D. Cal. July 21, 2010). Thus, the mortgage servicing world can breathe a sigh of relief on this particular issue. The district court did an analysis of the bankruptcy courts holding and expressly stated the reasons for reversing, rather than simply stating that the evidence in the record did not support the holding, as it did for the real party in interest issue. However, the mortgage servicing world should be cognizant of cases where the notes owner is a person who claims an interest relating to the subject matter of the action, and is so situated that disposing of the action in the persons absence may, as a practical matter, impair or impede the persons ability to protect their interest. Fed. R. Civ. P. 19(a)(1)(B).

WILL THE REAL PARTY IN INTEREST PLEASE STAND UP

BY SAMMY HOODA

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HOT SEAT
BY PAUL BOURKE

Up Close with Betsy Hanson

HANSON THE LEDGER: Tell us a little bit about your career in servicing? BETSY HANSON: I have been in the industry more than 25 years. I started my career on the origination side and transitioned over to servicing, working in bankruptcy, foreclosure, loss mitigation, escrow and DIL, REO and recovery units. The ability to adapt to change and look for process improvements has afforded me the opportunity to be exposed to all parts of the mortgage industry. I believe in laying out a process, testing it and continually refining it until you have the best in class. Learn to use resources and systems that are around you and listen to people who may have a better way of doing something. I have been fortunate to work with good role models who have been in the industry far longer than myself and who continually challenged me to get better. L: How did you become familiar with NBS prior to coming on board and what drove your decision to make the move to vendor world? BH: NBS is well known within the industry and was already a vendor of mine, so I knew the management at NBS from firsthand experience. I have long felt that servicers didnt use their vendors to their full capacity. There are lots of opportunities in this industry for vendors and servicers to bridge the gaps and help each other be more successful in their partnerships. Part of that can be done through reporting and sharing data, identifying the root cause of delays in a process and providing ongoing training for the servicers to equip their staff and vendors with what is needed to be successful. L: Having managed REO as a servicer, what were your general views on outsourcing key pieces of this internal function? BH: Very good question. When you have the volume servicers have today, its important to know where you have the most exposure for curtailments and reputational risk, and if the vendors can meet the demands and adjust to an ever changing regulatory environment. It is also difficult for vendors to take on the financial responsibilities surrounding code violations and HOA fines. You must determine a capacity plan for every vendor and monitor their performance. As a servicer, you must have confidence in your vendors. Due to the various platforms that we work on, there is not always transparency and often times a vendor or servicer may miss critical information. It is important when reviewing a new file, to identify all pertinent documents that are necessary to begin and complete the transaction. L: Default management processes have largely been measured by timeline assessments over the last 10+ years. What other aspects of managing the foreclosure process have you discovered as critical in addition to timelines? BH: Servicers today more than ever are having to react to the ever changing laws regarding foreclosure, eviction and loss mitigation, and thus, rely strongly on their vendors to help facilitate all actions. Along with the high unemployment

Betsy Hanson is a seasoned servicing executive with a broad range of experience in the mortgage and consumer lending spaces. Her decisive management style might best be described as challenging, innovative and inspirational. Betsy combines an old school approach of leading by example with a more modern approach driven by metrics, reporting transparency and process improvement. Having assumed leadership over a business segment that has been effectively operating for more than 20 years, Betsy has taken a measured but aggressive approach to assessing the status quo and determining where changes are required. She has brought a fresh perspective to foreclosure and related state court processes that incorporate technology, people and compliance. Betsys extensive servicing experience has provided clear insight into the clients view of effective default servicing.
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rates and increasing fines surrounding code violations, it is a challenge to reach the massive population needing assistance and to satisfy the investors whom they serve. Servicers must rely on the vendors they use to provide factual information regarding loss mitigation activity, condition of the property, code violations and past due taxes to be able to make the best possible decision to move forward with a foreclosure. Failure to do so can be costly. L: How do you compare managing from the vendor side of the equation as opposed to working for a major loan servicer? BH: Surprisingly enough, its quite similar. Throughout my career, I have been called upon to build start-up operations or develop process improvement from existing operations. The basic fundamentals of learning ones job and ensuring the employee understands ones decisions on a file can mitigate risk, improve bottom-line profit, increase customer satisfaction or can have the opposite effect. The more time a manager has to invest in an employee by teaching them the business from all aspects makes them well rounded. It also makes the employee feel more valuable and empowered in making their daily decisions. What I hope to bring to the table at NBS is teaching the perspective of what a servicer is wanting from their vendor. L: The Texas foreclosure process is widely noted for its expedited timeline and singular monthly sale date on First Tuesday. What benefits and challenges do you see arising from this expedited process?

BH: An obvious benefit for the servicer is once they gain possession, especially on abandoned homes, they can quickly begin property preservation to prevent blight on neighborhoods and get the property listed. Code violations are escalating nationwide and can be very expensive to cure.

I believe in laying out a process, testing it and continually refining it until you have the BEST IN CLASS. Learn to use resources and systems that are around you and LISTEN to people who may have a better way of doing something.

Many cities around the nation are looking for a fast track foreclosure process on homes that have been abandoned. The servicers challenge is identifying if the home is abandoned, tenant, or mortgagor occupied. There are neighborhood stabilization programs in many cities which have funds allocated to assist in purchasing property from banks in order to allow tenants to stay in the property, and in some cases, even work with a former mortgagor. This is an opportunity for the servicer, city and attorney to help facilitate the foreclosure process and assist with the closing in a timely manner. The challenge with the short process is managing your volume to the peak timelines. The servicer has to learn to manage around the short sale and loss mitigation opportunities and make every reasonable effort to keep someone in their home. Our goal here is to ensure that, as their vendor, we are passing along every communication that we receive from a mortgagor to the servicer, and the servicer is working to do the same thing. We have learned to staff around the peak call times as well as ensure our posting deadlines are met month in and month out. L: Loss mitigation has been dominating the headlines for some time now. How effective do you believe are the various programs offered to borrowers in default, and what are some of the roadblocks to success loan workouts? BH: The ultimate goal for any servicer it to try and prevent a home from going to sale. That being said, the servicer, mortgagor

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and vendor must work together to make this happen. One of the challenges for all parties experiencing todays volumes is making contact with the individual who can affect change. Most mortgagors want to stay in their home but have limited knowledge on what programs are available or if they may qualify for a program. The good news is that more and more servicers are providing information on their websites, along with enlisting vendors to help facilitate transactions. Another obstacle in large institutions is that certain departments and associates may only handle DIL, short sale or foreclosure, and therefore are unfamiliar with other remedies to recommend. Other issues can come from departments using different software applications that do not share current information with other departments. L: You also have responsibility for managing the REO eviction process at NBS. What are some of the strategies you have found most effective for getting REO properties back in the hands of servicers for liquidation and sale? BH: The first thing the vendor needs to know is whether you have a mortgagor, personal property, or a tenant in the property this drives the timelines under the PTAF Act. The tenant occupancy can create the longest timeline. To prevent delays in the process, its critical to have a solid working relationship with your broker, property manage-

ment and servicer, and to keep everyone informed as the process moves forward. It is not uncommon to see more and more mortgagors filing wrongful foreclosures or issuing a TRO to halt the eviction. It is important to quickly understand what the issues surrounding the claims are and to engage the servicer and broker to provide all the facts in order to be prepared for hearings. One of the common themes I heard at a Legal League conference when I was on the servicing side was that firms would appear at a hearing, but be unaware of facts that the mortgagor or tenant would bring forward. This creates delays in the process. Other issues that you have to mine for post foreclosure are HOAs, code violations and other types of liens that may be working behind the scenes but the investor has not yet provided the servicer with the information. Code violations are on the radar in every city, and it is imperative that if we find those issues, we report them and have the servicer start curing the issue sooner than later. Finally, you have to invest in creating reporting to identify and report to the servicer if and when these types of impediments occur. L: What advice would you give to aspiring managers and executives in the default management space? BH: Take a step back and review your metrics against best practices in the industry. If your timelines are deficient, identify what process is causing the most signifi-

cant problem. Identify what defects there are in the current process. For example, you determine your closing dates are all pushed back 10 days consistently because there are title impediments, you should create a process to start curing the issue upon file entry into REO, not at the closing. Evaluate your staffing: Do you have the right people in place to drive performance? What is the skill set of those around you? Do they understand the daily objectives and how to recognize issues? Over communicate, dont under communicate, and make sure you stay engaged in the business at hand. Develop leaders within your organization; you cannot do it all by yourself. You need to rely on others around you to assist and carry part of the load. Give praise and recognition; that goes a long way with everyone! L: What motivates you to continue to take on the unique challenges in the default servicing environment? BH: I started in customer service many years ago. What Ive discovered is that I like working with people. An employee and a customer both want the same thing to understand all that is available to them and weigh all of their options. You have to learn to approach situations and people on their level. Never assume the person you are speaking with understands everything you are trying to communicate; ask questions, follow up and make sure they are informed every step of the way.

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LATEST NEWS
NBS WINS DIAMOND AWARD
NBS is proud to announce that Dallas-based bankruptcy and foreclosure law firm, Brice, Vander Linden & Wernick, P.C., has, for the tenth consecutive year, been named a recipient of USFNs Award of Excellence. Since 1993, the annual Award of Excellence has been given to USFN member firms that meet rigorous standards evaluating the professional activities, industry volunteerism and community and charitable involvement of the firm. The prestigious 2010 DIAMOND AWARD was presented on November 6th at USFNs AnnualMember Education RetreatinParadise Island, Bahamas. Please join us in congratulating Brice, Vander Linden & Wernick, P.C. for achieving these high standards of excellence in service to industry clients and their communities.

ABOUT NBS
OUR MISSION IS SIMPLE. We strive to improve the bottom line performance of our clients bankruptcy portfolios through careful, efficient and client-specific management of each individual case. NBS provides nationwide bankruptcy management services to the following types of organizations: * Residential Mortgage Lenders * Automobile Finance Companies * Banks and Financial Institutions * Consumer Lending Organizations * Portfolio Servicers, Owners and Investors Learn more about how our services, our technology and our people can help your organization today. Contact us and let us have the opportunity to discuss how we can work together. NBS is a leader in bankruptcy servicing for the consumer finance industry. NBS is a subsidiary of Advent International.

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THE LEDGER

VOL. 1, ISSUE 2