Consequences for Failing to Comply With Orders Requiring Loan Modification

Over the last two years, the Bankruptcy Court for the District of South Carolina has seen a proliferation of post-confirmation, mortgage loan modifications in Chapter 13 cases.  To address this issue, the Judges in this District have taken steps to clarify the process of obtaining court approval for these modifications to varying degrees.  The most comprehensive process has been outlined by Judge John E. Waites in his Chambers Guidelines regarding Loss Mitigation/Mortgage Modification.  His preferred method of debtors obtaining a loan modification is by applying through the Default Mitigation Management LLC (“DMM”) Portal.  This allows counsel for debtors, the creditor, and the Court to view the correspondence and documentation submitted between the parties during the loan modification process, thereby enhancing the efficiency of loan modification reviews.

Judge Waites has set forth provisions to enforce compliance with his guidelines including a requirement that all parties are required to act in good faith throughout the LM/MM process.  A recent case, In re Davis, C/A No. 15-05030-jw, slip op. (Bankr. D.S.C. Sep. 6, 2016), provides an example of the ramifications of failing to abide by Judge Waites’ Guidelines.  In that case, the Debtors moved for an Order Requiring Loss Mitigation/Mortgage Modification, which was entered on November 20, 2015.  On December 4, 2015, the Debtors initiated the process by submitting their application through the DMM Portal.  The mortgage creditor failed to timely respond to the application by notifying the debtors whether the application was complete or additional documentation was needed.  In the ensuing months, despite the Court holding a status hearing in March 2016, the creditor continually delayed in filing responses leading to earlier provided documents becoming stale and the debtors having to send multiple applications for review.  Ultimately, the creditor denied the debtors’ application on the basis that the investor did not give the contractual authority to the creditor to provide a loan modification offer, rendering the debtors’ efforts over the preceding months futile.

The debtors filed a Motion to Enforce the LM/MM Order arguing the mortgage creditor failed to act in good faith.  The Court ruled in favor of the debtors, awarded the debtors' attorneys’ fees, and issued a civil contempt sanction.  In his opinion, Judge Waites found that the creditor failed to acknowledge receipt of documentation or timely notify the debtors of additional information to complete their application.  The multiple requests for additional documents led to “unnecessary work and expense for both Debtors and their counsel as most of the documentation was ripe for review when it was originally submitted,” but subsequently expired.  Davis, at 13.  More significantly, the Court found that the creditor failed to act in good faith by not disclosing that the debtors would not be eligible for any loan modification programs at the beginning of the LM/MM process.  This lack of disclosure led to the Court to maintain that “this case is a prototypical example of the conduct and communication which have plagued LM/MM reviews and motivated this and other courts to implement a court-supervised Loss Mitigation and Mortgage Modification program as a means to encourage transparent and efficient LM/MM reviews.” Davis, at 14-15.  Had the creditor disclosed that the debtors would not be eligible for modification at the outset of the process, the debtors would have had more options at that time to cure their contractual arrearage.  This case highlights the urgency with which creditors must address loan modification applications in South Carolina and honor the LM/MM guidelines, specifically the disclosure of the eligibility of the debtors at the initiation of the LM/MM process.