Congress Moves On Foreclosures 

Posted: 8:41 pm Wednesday, February 25th, 2009

By Jamie Dupree

Just over a week after President Obama laid out his plans to stem the rising tide of home foreclosures, the House is expected to approve one controversial part of that.

Today lawmakers will vote on a bill that would allow bankruptcy judges to modify the terms of a mortgage loan, both the interest rate and the principal that’s owed on a house.

That’s what is known as the “cram-down” provision, an idea that is hotly opposed by the mortgage industry, the banking industry and many Republicans.

“That’s a provision that would restrict the flow of capital into the mortgage market, it would increase the cost certainly going forward of obtaining a mortgage for anybody,” argues Republican Rep. Ed Royce of California.

Right now though, Republicans don’t have enough votes to stop a plan like this, which Mr. Obama last week argued is central to helping people stay in the homes, and not be tossed out by foreclosure proceedings.

“I just want everybody to understand, that’s the rule for investors who own two, three, and four homes.  So it should be the rule for folks who just own one home, as an alternative to foreclosure,” said Obama to cheers in Arizona last week.

Like many issues that I will report on this year, this bill will get through the House today, meaning the real battle will be in the Senate.

One major lender is supporting the idea, but with a series of caveats, that’s Citigroup, which of course has received billions in federal aid.

The plan is part of a broader bill dealing with home foreclosures, H.R. 200, the Helping Families Save Their Homes Act.  What follows is the text of that bill.

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This Act may be cited as the `Helping Families Save Their Homes in Bankruptcy Act of 2009′.

SEC. 2. ELIGIBILITY FOR RELIEF.

Section 109 of title 11, United States Code, is amended–

(1) by adding at the end of subsection (e) the following: `For purposes of this subsection, the computation of debts shall not include the secured or unsecured portions of–

`(1) debts secured by the debtor’s principal residence if the current value of such residence is less than the secured debt limit; or

`(2) debts secured or formerly secured by real property that was the debtor’s principal residence that was sold in foreclosure or that the debtor surrendered to the creditor if the current value of such real property is less than the secured debt limit.’, and

(2) by adding at the end of subsection (h) the following:

`(5) The requirements of paragraph (1) shall not apply in a case under chapter 13 with respect to a debtor who submits to the court a certification that the debtor has received notice that the holder of a claim secured by the debtor’s principal residence may commence a foreclosure on the debtor’s principal residence.’.

SEC. 3. PROHIBITING CLAIMS ARISING FROM VIOLATIONS OF THE TRUTH IN LENDING ACT.

Section 502(b) of title 11, United States Code, is amended–

(1) in paragraph (8) by striking `or’ at the end,

(2) in paragraph (9) by striking the period at the end and inserting `; or’, and

(3) by adding at the end the following:

`(10) the claim for a loan secured by a security interest in the debtor’s principal residence is subject to a remedy for rescission under the Truth in Lending Act notwithstanding the prior entry of a foreclosure judgment, except that nothing in this paragraph shall be construed to modify, impair, or supersede any other right of the debtor.’.

SEC. 4. AUTHORITY TO MODIFY CERTAIN MORTGAGES.

Section 1322 of title 11, United States Code, is amended–

(1) in subsection (b)–

(A) by redesignating paragraph (11) as paragraph (12),

(B) in paragraph (10) by striking `and’ at the end, and

(C) by inserting after paragraph (10) the following:

`(11) notwithstanding paragraph (2) and otherwise applicable nonbankruptcy law, with respect to a claim for a loan originated before the effective date of this paragraph and secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced with respect to such loan, modify the rights of the holder of such claim (and the rights of the holder of any claim secured by a subordinate security interest in such residence)–

`(A) by providing for payment of the amount of the allowed secured claim as determined under section 506(a)(1);

`(B) if any applicable rate of interest is adjustable under the terms of such security interest by prohibiting, reducing, or delaying adjustments to such rate of interest applicable on and after the date of filing of the plan;

`(C) by modifying the terms and conditions of such loan–

`(i) to extend the repayment period for a period that is no longer than the longer of 40 years (reduced by the period for which such loan has been outstanding) or the remaining term of such loan, beginning on the date of the order for relief under this chapter; and

`(ii) to provide for the payment of interest accruing after the date of the order for relief under this chapter at a fixed annual rate equal to the currently applicable average prime offer rate as of the date of the order for relief under this chapter, corresponding to the repayment term determined under the preceding paragraph, as published by the Federal Financial Institutions Examination Council in its table entitled `Average Prime Offer Rates–Fixed’, plus a reasonable premium for risk; and

`(D) by providing for payments of such modified loan directly to the holder of the claim; and’, and

(2) by adding at the end the following:

`(g) A claim may be reduced under subsection (b)(11)(A) only on the condition that if the debtor sells the principal residence securing such claim, before receiving a discharge under this chapter and receives net proceeds from the sale of such residence, then the debtor agrees to pay to such holder–

`(1) if such residence is sold in the 1st year occurring after the effective date of the plan, 80 percent of the amount of the difference between the sales price and the amount of such claim (plus costs of sale and improvements), but not to exceed the amount of the allowed secured claim determined as if such claim had not been reduced under such subsection;

`(2) if such residence is sold in the 2d year occurring after the effective date of the plan, 60 percent of the amount of the difference between the sales price and the amount of such claim (plus costs of sale and improvements), but not to exceed the amount of the allowed secured claim determined as if such claim had not been reduced under such subsection;

`(3) if such residence is sold in the 3d year occurring after the effective date of the plan, 40 percent of the amount of the difference between the sales price and the amount of such claim (plus costs of sale and improvements), but not to exceed the amount of the allowed secured claim determined as if such claim had not been reduced under such subsection; and

`(4) if such residence is sold in the 4th year occurring after the effective date of the plan, 20 percent of the amount of the difference between the sales price and the amount of such claim (plus costs of sale and improvements), but not to exceed the amount of the allowed secured claim determined as if such claim had not been reduced under such subsection.

`(h) With respect to a claim of the kind described in subsection (b)(11), the plan may not contain a modification under the authority of subsection (b)(11)–

`(1) in a case commenced under this chapter after the expiration of the 15-day period beginning on the effective date of this subsection, unless–

`(A) the debtor certifies that the debtor attempted, not less than 15 days before the commencement of the case, to contact the holder of such claim (or the entity collecting payments on behalf of such holder) regarding modification of the loan that is the subject of such claim; or

`(B) a foreclosure sale is scheduled to occur on a date in the 30-day period beginning on the date the case is commenced; and

`(2) in any other case pending under this chapter, unless the debtor certifies that the debtor attempted to contact the holder of such claim (or the entity collecting payments on behalf of such holder) regarding modification of the loan that is the subject of such claim, before–

`(A) filing a plan under section 1321 that contains a modification under the authority of subsection (b)(11); or

`(B) modifying a plan under section 1323 or 1329 to contain a modification under the authority of subsection (b)(11).’.

SEC. 5. COMBATING EXCESSIVE FEES.

Section 1322(c) of title 11, United States Code, is amended–

(1) in paragraph (1) by striking `and’ at the end,

(2) in paragraph (2) by striking the period at the end and inserting a semicolon, and

(3) by adding at the end the following:

`(3) the debtor, the debtor’s property, and property of the estate are not liable for a fee, cost, or charge that is incurred while the case is pending and arises from a debt that is secured by the debtor’s principal residence except to the extent that–

`(A) the holder of the claim for such debt files with the court (annually or, in order to permit filing consistent with clause (ii), at such more frequent periodicity as the court determines necessary) notice of such fee, cost, or charge before the earlier of–

`(i) 1 year after such fee, cost, or charge is incurred; or

`(ii) 60 days before the closing of the case; and

`(B) such fee, cost, or charge–

`(i) is lawful under applicable nonbankruptcy law, reasonable, and provided for in the applicable security agreement; and

`(ii) is secured by property the value of which is greater than the amount of such claim, including such fee, cost, or charge;

`(4) the failure of a party to give notice described in paragraph (3) shall be deemed a waiver of any claim for fees, costs, or charges described in paragraph (3) for all purposes, and any attempt to collect such fees, costs, or charges shall constitute a violation of section 524(a)(2) or, if the violation occurs before the date of discharge, of section 362(a); and

`(5) a plan may provide for the waiver of any prepayment penalty on a claim secured by the debtor’s principal residence.’.

SEC. 6. CONFIRMATION OF PLAN.

Section 1325(a) of title 11, United States Code, is amended–

(1) in paragraph (8) by striking `and’ at the end,

(2) in paragraph (9) by striking the period at the end and inserting a semicolon, and

(3) by inserting after paragraph (9) the following:

`(10) notwithstanding subclause (I) of paragraph (5)(B)(i), whenever the plan modifies a claim in accordance with section 1322(b)(11), the plan provides that the holder of such claim retain the lien until the later of–

`(A) the payment of such holder’s allowed secured claim; or

`(B) discharge under section 1328; and

`(11) whenever the plan modifies a claim in accordance with section 1322(b)(11), the court finds that such modification is in good faith and that the debtor did not obtain the extension, renewal, or refinancing of credit that gives rise to a modified claim by the debtor’s material misrepresentation, false pretenses, or actual fraud.’.

SEC. 7. DISCHARGE.

Section 1328 of title 11, United States Code, is amended–

(1) in subsection (a)–

(A) by inserting `(other than payments to holders of claims whose rights are modified under section 1322(b)(11))’ after `paid’, and

(B) in paragraph (1) by inserting `or, to the extent of the unpaid portion of an allowed secured claim, provided for in section 1322(b)(11)’ after `1322(b)(5)’, and

(2) in subsection (c)(1) by inserting `or, to the extent of the unpaid portion of an allowed secured claim, provided for in section 1322(b)(11)’ after `1322(b)(5)’.

SEC. 8. RULE OF CONSTRUCTION.

Nothing in this Act or the amendments made by this Act shall be construed to modify any obligation of the Federal Housing Administration, the Veterans Administration, or the Department of Agriculture under a contract that guarantees or insures the payment of any part of a loan secured by a security interest in a principal residence.

SEC. 9. EFFECTIVE DATE; APPLICATION OF AMENDMENTS.

(a) Effective Date- Except as provided in subsection (b), this Act and the amendments made by this Act shall take effect on the date of the enactment of this Act.

(b) Application of Amendments- The amendments made by this Act shall apply with respect to cases commenced under title 11 of the United States Code before, on, or after the date of the enactment of this Act.