31 January 2023 / Scott D. Fink

Mortgage Lenders Beware: The Perils of Failing to File Payment Change Notices or Respond to Final Cure Notices

Topics: Bankruptcy

A recent decision out of the District of Kansas highlights the dangers mortgage lenders face when failing to file the appropriate Notice of Mortgage Payment Change and/or failing to respond to a chapter 13 trustee’s Notice of Final Cure. The Bankruptcy Court in In re Kinderknecht (2023 WL 320984, D. Kansas) addressed a situation where a mortgage lender sent a letter to a debtor post-discharge seeking increased monthly payments on the mortgage debt due to an escrow deficiency. Prior to the letter, the lender had failed to file the necessary notices of mortgage payment change in a timely manner and had also failed to respond to the chapter 13 trustee’s Notice of Final Cure, which stated that debtors had cured all defaults and were current on the mortgage loan.

As a result of receiving the letter from their lender, debtors reopened their bankruptcy case and brought a motion for sanctions against the lender. In ruling for the debtors, the Kinderknecht Court stated, “The failure to ‘provide any information’ required by Rule 3002.1(b) during the case, or required by Rule 3002.1(g) at the end of plan payments, has consequences.”

Bankruptcy Rule 3002.1(b) provides that a mortgage lender must file a notice of any change in the payment amount, including a change that results from an interest rate or escrow account adjustment. The notice must be filed no later than 21 days before payment in the new amount that is due. Bankruptcy Rule 3002.1(g) provides that once the trustee files a Notice of Final Cure of mortgage payments, a mortgage lender must file a response within 21 days indicating whether it agrees that the arrears have been fully cured and whether payments are current.

Failure by the mortgage lender to adhere to the above Rules can allow the Bankruptcy Court to preclude the lender from presenting any evidence of the omitted payment changes or uncured arrears in any contested matter and can also allow the Court to award any other appropriate relief, including reasonable expenses and attorney fees. As a result of the lender’s inaction in the case and its subsequent attempt to collect an escrow shortage from the debtor post-discharge, the Kinderknecht Court ultimately excluded any evidence from the lender that there was an escrow deficiency and found that the mortgage was current as of the chapter 13 trustee’s Notice of Final Cure payment. In addition, the Court prohibited the lender from assessing any fees to the debtors and further awarded attorney fees to debtors and their counsel.

The lesson from this case is clear: 

Payment change notices and responses to trustee final cure notices are not optional for lenders. Inattention to these matters can have serious consequences. If you are having difficulty keeping up with the filing of payment change notices, the attorneys at Weltman, Weinberg & Reis Co., LPA may have a solution for you: a motion to waive the requirement to file Notice of Payment Change. If you’d like to learn more about this process and how it may benefit your organization, please contact shareholder and Bankruptcy Group chair Scott Fink at any time.

This blog is not a solicitation for business and it is not intended to constitute legal advice on specific matters, create an attorney-client relationship or be legally binding in any way.

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