Mortgage industry probes grow
July 28, 2008
By Pamela A. MacLean
Allegations of shoddy accounting and padded bankruptcy claims have grown to such a pitch against the mortgage loan servicing industry and its lawyers that investigations have been launched by the Executive Office for U.S. Trustees and the Federal Trade Commission (FTC).
The Office for U.S. Trustees currently has 30 cases under review that have not yet been filed. The director of the office, Clifford White III, disclosed to a U.S. Senate subcommittee earlier this year that it has already intervened in 16 pending cases.
The FTC staff continues its expanded compliance inquiries into mortgage servicing industry practices, according to Frank Dorman, FTC spokesman. This comes on the heels of The Bear Stearns Cos.' April disclosure that the FTC has Bear's mortgage service subsidiary, EMC Mortgage Corp., under review for potential violation of consumer protection laws.
And the consumer subcommittee of the federal Judicial Conference Bankruptcy Rules Committee set up a working group earlier this summer to explore potential national rule changes to address nondisclosure of fees and other potential creditor abuses of Chapter 13 bankruptcies, according to John Rao, attorney with the National Consumer Law Center in Boston and a member of the rules subcommittee.
But this is small vindication for years of complaints by a few private Chapter 13 trustees who say the problems have festered for years in the lightly regulated mortgage-servicing industry that is hired by lenders to collect mortgage payments and disburse funds to banks. Chapter 13 trustees are private lawyers hired by the Executive Office of U.S. Trustees to act as neutral monitors between debtors and creditors.
"For years I tried to get trustees to do something about it, but they would not," said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys in Philadelphia, who runs a pro bono consumer bankruptcy clinic. "Even with all the sanctions so far, to the mortgage companies it is just a cost of doing business," he said.
But Andrea E. Celli, president of the National Association of Chapter Thirteen Trustees (NACTT) Academy, and a Chapter 13 trustee in Albany, N.Y., noted that "[w]e are the ones leading the charge on some of the bigger cases.
"Debtors' attorneys may be aware of problems for a longer time because they are making direct payments to creditors, but trustees are bringing it to the fore with considerable force now," Celli said.
The banking industry, for its part, wasted no time in defending itself.
"There is always a concern in the industry to accurately and properly disclose fees incurred," said Alan Wolf, a mortgage banking attorney in Irvine, Calif., referred by the Mortgage Bankers Association.
"The fees that are charged for services are minuscule compared to what is normally charged in any other environment. The industry has no problem with disclosure — the question is how to do it in a way that is cost effective and allowable by the courts," he said.
At issue are fees charged for attorneys, property inspections, escrow, court filing or insurance that may be proper but are either undisclosed to debtors and the court or excessive. The fees are imposed on already cash-strapped families seeking to save their homes from foreclosure through Chapter 13 protection. Chapter 13 allows wage earners to reorganize and pay creditors without losing their property.
Allegations in suits around the United States have ranged from servicers wrongly accusing homeowners of falling behind on payments in bankruptcy, then commencing foreclosure; "recreating" documents to be used as evidence of debt in a bankruptcy; charging monthly drive-by inspection fees on a New Orleans home even while it was inaccessible after Hurricane Katrina; and requiring fee kickbacks from lawyers in a Texas class action.
Many of the questionable costs are imposed by mortgage-servicing firms, hired by lending banks to track the collection of payments. The most common complaint by debtors and courts is failure to notify them of charges and an inability to verify the purported costs.
Last year, the NACTT concluded three years of negotiations with servicing company representatives to devise "best practices" standards, but despite the agreement, so far no companies have formally adopted them, according to Henry Hildebrand, a Chapter 13 trustee in Nashville, Tenn., who worked on the project. Hildebrand of Lassiter, Tidwell & Hildebrand began publicly complaining about fee overcharges in these cases as early as 2003.
"People servicing the mortgages are not doing a good job," he said during an interview at the NACTT's educational conference in San Francisco this month. Some companies have been "shockingly deficient and hit with major sanctions," he said. "This is a new area of increasing litigation," said Hildebrand.
But the system may be difficult to repair because of a patchwork of reporting and claims requirements among courts. There should be federal rules that are consistent throughout the country, but they are not, said Wolf of The Wolf Firm in Irvine. "In some jurisdictions it is considered fraud not to include Chapter 13 attorney fees in proofs of claim, while in other [jurisdictions] it is considered fraud if you do," he said. "The industry would like nothing more than to comply and comply completely, they just need to know what to do," he said.
Jeffrey Norton of Harwood Feffer in New York filed a class action in Delaware federal court against Countrywide Financial Services Inc. alleging that the company imposes fees that are inflated, unverifiable or false in its enforcement of default proceedings. O'Gara v. Countrywide Home Loans Inc., No. 08cv113 (D. Del.).
"The class could be millions of people and the numbers could be staggering," Norton said. There is no allegation of fraud, but it is a due process issue. When the fees get passed to borrowers there is no way to know what the charges represent, he said. "It has become a revenue source for them," he said.
Steve Bailey, Countrywide Financial Corp. chief executive for loan administration, told the Senate subcommittee in May that the reports of systematic excessive charges in bankruptcy or abuse of the process are inaccurate and contrary to Countrywide's goal to help borrowers avoid foreclosure.
Bank of America, which owns Countrywide, failed to get back with promised comment by press time.
"If you ask banks, they would say they are assessing charges that we are permitted under the loan documents," said Rudolph J. Di Massa Jr. of Duane Morris in Philadelphia, who represents creditors. "What needs to happen is banks need to pay more attention on an ad hoc basis," he said. He added there appears to be an appetite in Congress to do something, "but it is very politically charged." Di Massa warned that the possibility of more class actions is in the air, with more city and county governments thinking about going after lenders than ever before.
The wave of sanctions imposed by bankruptcy judges have hit, among others, a Houston foreclosure law firm, Barrett Burke Wilson Castle Daffin & Frappier that was criticized in eight court opinions between 2003 and 2007, and received monetary sanctions in four of them, ranging from $2,500 to $75,000. Bruce Vincent, a spokesman for the firm, now renamed Barrett Daffin Frappier Turner & Engel, declined comment but cited a court transcript by Houston bankruptcy Judge Jeff Bohm, who has previously chastised the firm. Bohm said in March, "the recent performance that I've seen from some Barrett Burke attorneys in my courtroom has been much improved." He noted that the firm hired two of his former law partners and that his earlier criticisms represented "past history, not present day."
Another lawsuit alleges that Fidelity National Information Services Inc., one of the nation's largest mortgage servicers, allegedly received kickbacks from lawyers it hired to represent the firm in bankruptcy cases. Harris v. Fidelity National Information Services, No. C08-3014 (S.D. Texas). The suit claims Fidelity received a 25% to 50% kickback of fees it paid to the Mann & Stevens law firm in Houston for major filings in bankruptcy. June Mann of Houston's Mann & Stevens did not return calls for comment.
Michelle Kersch, senior vice president for communications at Lender Processing Services Inc., a recent spinoff of Fidelity, called the allegations "unfounded." She said, "Fidelity provides specific services for defined, flat fees. There is simply no fee splitting relationship between the attorneys and Fidelity."