Systemic failures to serve notices of mortgage payment changes resulted in Wells Fargo Bank, N.A., having to pay $81.6 million in restitution earlier this month. Payment change notices (PCNs) are required for borrowers who file Chapter 13 bankruptcy and try to cure their existing mortgage delinquencies. Other mortgage servicers with lax PCN procedures should take heed of Wells Fargo’s costly lesson.
In 2011, Bankruptcy Rule 3002.1 was changed to require mortgage companies to send a PCN whenever a borrower is in Chapter 13 bankruptcy and the amount of that person’s mortgage payment is set to change, due to, for example, an increased interest rate or an escrow account adjustment. The notice allows the borrower or the bankruptcy trustee to challenge the validity of the change and, if appropriate, to adjust the borrower’s bankruptcy plan.
According to the U.S. Department of Justice, Wells Fargo admitted that it “failed to timely file more than 100,000 [PCNs] and failed to timely perform more than 18,000 escrow analyses in cases involving nearly 68,000 accounts of homeowners in bankruptcy between December 1, 2011, and March 31, 2015.” The $81.6 million in restitution will be paid to borrowers, primarily in the form of lump sum credits to mortgage accounts. The average credit, the DOJ reported, is $1,254.
Homeowners in bankruptcy have the right to proper and timely notices, particularly when they are being asked to pay more.
–Cliff White, Director, U.S. Trustee Program
Awareness of this type of problem is important for two reasons. First, the DOJ’s actions show that it is ready, willing, and able to hit mortgage servicers with substantial penalties for these violations. Second, these types of repetitive violations often lead to copy-cat class actions. Although I am not aware of any class actions being filed as a result of inadequate PCNs, creative plaintiffs lawyers are constantly looking for these sorts of situations—precisely to threaten class liability against other industry participants.