Similar, but not identical bankruptcy bills have been introduced in the House (H R 200) and the Senate (S61). Both permit the modification of residential mortgages, which will be discussed in more detail in other blog entries. There are a few significant differences in the bills. If both bills pass, as they presently are written, the will need to go to a conference committee to hammer out a compromise bill. The compromise bill will then be sent back to both the House and Senate for approval.

Both bills permit a Chapter 13 debtor to modify a residential mortgage by reducing the interest rate to match a current rate benchmark. The benchmarks are different. In the Senate, the reference is to most recently published annual yield on conventional mortgages published by the Board of Governors for the Federal Reserve (see, http://www.federalreserve.gov/releases/h15/current/). In the House, the reference is to Federal Financial Institutions Examination Council “Average Prime Offer Rates – Fixed”(see, http://www.ffiec.gov/ratespread/newcalchelp.aspx#1). Both statutes also provide for the addition of a reasonable risk premium. Currently, bankruptcy courts when dealing with car loans use the current Wall Street Journal prime rate of interest plus a risk factor of one to three percent.

The house bill also includes provisions for sharing in the appreciation of the residence should the debtor cram down the value and then sell it for more before the debtor receives a discharge in the Chapter 13. If sold within one year of the confirmation, then the lender receives 80% of the appreciation. If sold during the second year following the confirmation, then the lender receives 60% of the appreciation. If sold during the third year following the confirmation, then the lender receives 40% of the appreciation. If sold during the fourth year following the confirmation, then the lender receives 20% of the appreciation.

The House bill requires the debtor to at least contact the lender to discuss a loan modification prior to approval of a cram down. Under the House bill, there would be a requirement that the debtor contact the lender fifteen days before filing the bankruptcy regarding a modification of the loan. This pre-filing requirement is waived if a foreclosure sale is scheduled to take place within thirty days of the petition date. Nonetheless, there is an independent requirement that the debtor must certify that the borrower attempted to contact the lender regarding a loan modification prior to filing a plan or a motion to amend a confirmed plan. This just means the debtor may file the petition if the foreclosure sale is imminent, but must still attempt a loan modification with the lender, even if this attempt is post petition. Many debtors are reporting little success in attempts to modify their residential mortgage loans. Similarly, many lenders are having trouble staffing the loss mitigation departments to handle the flood of inquiries. This may significantly increase the flood of loss mitigation inquiries.

As the bills pass through the legislative process, there will likely be additional changes. In the coming weeks and months, the Bankruptcy staff at Weltman, Weinberg and Reis will provide you with a detailed analysis of specific provisions in the Bills to help you better understand how this potential new law may affect your business and how you can prepare to deal with its implementation.