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UST Turned Loose on Countrywide

posted by Adam Levitin

The UST has been turned loose on Countrywide. The United States Trustee has sought to conduct discovery on Countrywide as part of a motion for sanctions against Countrywide for abusing the bankruptcy process by filing claims that included fees Countrywide knew were not authorized. (See Katie Porter's article on this troubling phenomenon here.) Countrywide sought to squash the discovery motion. Yesterday, the Bankruptcy Court for the Western District of Pennsylvania denied Countrywide's motion. The bankruptcy court was unimpressed by Countrywide's slippery slope argument that this will open up the door to discovery on the entire lending industry. I have to think, though, that if anythign shocking comes out of discovery, trustees (and debtors) elsewhere might think about taking a closer look at creditors' claims. The decision can be found here.



Look also at In Re: Parsley S.D. Texas, Houston Division 05-90374 dated 3/5/2008. Judge Bohm and the UST teamed up on this one against Countrywide. This Mem. Op Cited Katie and I believe you had a hand in that paper "Misbehavior and Mistake in Bankruptcy Mortgage Claims". There is a ton of testimony cited in the Mem. Op. It shows how Countrywide’s Bankruptcy Attorneys and their legal assistants "Cut and Paste" pay histories to submit with their POC's and Relief from Stays. They say its because BK Judges around the country were demanding a pay history that they could understand. I know a lot of the Attorneys cited in the Mem. OP. and the practice that has come under scrutiny has been around a long time. The cutting and pasting is something that is a bit newer but the misapplication of the debtors Mortgage payments in the context of Chapter 13 Bankruptcy has been around a while. Well ever since I can remember.

A new hick comes up when the Servicer or Mortgage Co. pays off Ad Valorem Taxes when there is no escrow agreement. The Servicer has a right to protect the property to be sure but the problem that arises is that local taxing authorities have the same accounting problem! When they bill the servicer they often bill for pre and post petition debt. The debtor is paying pre-petition debt thru a 13 Plan and when the servicer pays the tax bill the Taxing authority applies it to pre-petition debt often applying funds to Interest and Attorneys fees. This is what servicers are getting in trouble for nowadays. So now the Mortgage Co. files a Relief from Stay for not paying post-petition taxes, which is a good reason, but now we have a “right to cure” problem and the Taxing Authority has been paid sometimes up to double.

Testimony in the Parsley op. shows that Countrywide “supposedly” writes off all of the illegal charges upon discharge and that is what I am seeing the Taxing entities do time and time again. I have no problem with that if they did it right. But by conducting their accounting in that manner it is too easy to slip up and again when servicer pays those taxes they are misapplying it. It makes it look like the debtor owes more that he or she does.

Again in “Parsley” the mortgage co. sought to suppress testimony and challenged the UST authority to conduct such an inquiry. Which was all denied. It was done pursuant to a "Show Cause" order and all came about when Barett Burk requested to withdraw a Relief from Stay Motion.


Piling On: Borrowers Buried by Fees

April 20, 2008

SLOWLY but surely, a handful of public-minded bankruptcy court judges are drawing back the curtain on the mortgage servicing business, exposing, among other questionable practices, the sundry and onerous fees that big banks and financial companies levy on troubled borrowers.

It isn’t a pretty sight, if you are a borrower. But shining a light on this dark corner certainly qualifies as progress.

The cases come out of bankruptcy courts in Delaware, Louisiana and New York, and each one shows how improper, undisclosed or questionable fees unfairly penalize borrowers already struggling with mortgage debt or bankruptcy.

Given the number of new borrowers falling daily into the foreclosure mire, dubious practices by servicers are beyond troubling. Foreclosure filings rose 57 percent in March over the same period in 2007, according to RealtyTrac, the real estate and foreclosure Web site. It also said that banks repossessed more than 50,000 homes last month, more than twice the amount of one year earlier.

If even one of those repossessions was owing to improper fees or practices, that would be one too many.

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