By Maria Tsagaris, Esq

McCalla Raymer LeibertPierce, LLP *

USFN Member (AL, CA, CT, FL, GA, IL, KY, MS, NJ, NV, NY, OH, OR, PA, TX, WA)

And Travis Menk, Esq.

Brock &Scott, PLLC *

USFN Member (AL, CT, DC, FL, GA, KY, MA, MD, ME, MI, NC, NH, NJ, OH, PA, RI, SC, TN, VA, VT, WV)

USFN submitted a formal comment in response to the Middle District of North Carolina’s proposed Model Chapter 13 Plan § 8.3 and Local Rule 4001-1(e). The proposed plan and rule if enacted could also expose mortgage servicers to significant legal risk both within North Carolina and across the country.

I. Legislative Overreach: A Challenge to Federal Law and Judicial Authority

At the heart of USFN’s concern is the improper expansion of local judicial authority. Under Federal Rule of Bankruptcy Procedure 9029, local courts may only establish rules governing “practice and procedure.” However, USFN argues that the Middle District’s proposals do much more: They effectively legislate new substantive rights and obligations for mortgage creditors, infringing upon the role of Congress and federal regulatory agencies such as the CFPB.

In support of its position, USFN points to In re Klemkowski, 664 B.R. 681 (Bankr. D. Md. 2024), in which the court declined to mandate that servicers provide online account access to debtors in Chapter 13. The court explicitly acknowledged that any requirement of that nature must come from Congress or a regulatory agency — not the judiciary.

Yet, Section 8.3(d) of the proposed model plan states:

“The Holder shall send to the Debtor a Periodic Monthly Statement, each month, either by mail or electronically as requested by the debtor.”

This requirement, USFN notes, directly conflicts with 12 C.F.R. § 1026.41 which grants servicers, not borrowers, the discretion to determine how periodic statements are delivered. The proposed mandate, according to USFN, exceeds the scope of permissible rulemaking and violates the Rules Enabling Act (28 U.S.C. § 2075), which prohibits the judiciary from modifying substantive rights via rule.

II. Operational Risks and National Impact for Creditors

Mortgage servicers operate on a national scale, often managing loans in multiple states and districts. The proposed plan and rule would impose local-specific obligations — such as providing online payment portals and continuing non-bankruptcy statement formats — that many servicers are not currently equipped to meet.

Implementing these changes would require extensive and costly overhauls to servicing systems, which are typically not designed to reflect individualized bankruptcy requirements across multiple jurisdictions. Moreover, applying different rules for just one of the 94 federal districts could inadvertently create systemic risks.

USFN references the CFPB’s 2024 enforcement action against VyStar Credit Union, where inadequate technical systems and mismanagement of borrower communications led to significant regulatory penalties. The lesson, according to USFN, is clear: When system demands exceed operational capacity, borrower harm and regulatory exposure follow.

While the model plan includes a sentence intended to shield creditors from liability in attempting to comply, USFN argues this protection is too limited and fails to cover the broader risks, especially for servicers operating outside the Middle District.

III. Lack of Uniformity and National Conflict

Article I, Section 8 of the U.S. Constitution gives Congress the exclusive power to establish “uniform Laws on the subject of Bankruptcies.” USFN warns that by enacting these provisions through a local rule and plan, the Middle District undermines this constitutional principle.

Furthermore, inconsistencies between the proposed plan language and the local rules create confusion. For example:

• Section 8.3 applies specifically to mortgage claims in Chapter 13, while Local Rule 4001-1(e) appears to extend requirements to all secured claims in all bankruptcy chapters, including automobile loans.
• The local rule mandates online access and statement delivery “in the same manner as existed prepetition,” whereas the model plan merely requires “online access to make payments.”
• The rule mandates delivery of non-bankruptcy customer statements, while the plan seems to reference periodic statements under TILA, which may not apply to all loan types (e.g., open-end credit lines like HELOCs).
  
  

This framework, USFN argues, not only complicates compliance but also increases the risk of unintended violations of federal law, particularly for national banks and servicers.

IV. The Need for a Deliberate, Collaborative Process

USFN emphasized that major changes to bankruptcy processes should be made through a deliberative legislative or national rulemaking process, not by a local rule or plan. Historically, significant reforms — like those to national plan forms or the Bankruptcy Code — undergo years of stakeholder consultation, public comments, and congressional or Supreme Court approval.

In contrast, the Middle District’s proposed changes represent a fundamental departure from established practices without adequate time for industry input or adjustment. This rapid implementation risks not only legal invalidity but also significant disruption to national servicing standards.

Conclusion and Call for Revisions

In its conclusion, USFN respectfully urged the Court and the Rulemaking Committee of the Middle District of North Carolina to revisit and revise Model Plan § 8.3 and Local Rule 4001-1(e). It called for a framework that aligns with existing federal law, preserves the constitutional separation of powers, and reflects the operational realities of mortgage servicers.

USFN encouraged ongoing dialogue to ensure that bankruptcy procedures remain fair, practical, and legally compliant.

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USFNews - Nov. 5, 2025