Bank of America Settlement -- A Sign of True Progress?

In my last post I noted the beginnings of some positive movement by consumer protection agencies that have been largely dormant and, in some cases like the United States Trustee program, actively anti-consumer. A few weeks ago, as Katie Porter noted in a recent post, Bank of America (BOA) reached a settlement with the Federal Trade Commission with respect to certain mortgage overcharges, including overcharges in bankruptcy, on mortgages formerly serviced by Countrywide Mortgage. The settlement requires reimbursement to consumers who were overcharged. BOA, in addition to agreeing not to lie, steal, or file documents without reviewing them, will also have to follow notice procedures similar to those that are already required or are likely to be required for all mortgage companies once new Bankruptcy Rule 3002.1 becomes effective in December, 2011. The United States Trustee (UST) Program assisted the FTC in its efforts.  This settlement is the first significant positive result of increased UST scrutiny of mortgage lenders, although the extent of the UST’s participation is not known.

While it is nice to finally see some action by the United States trustees and other regulators on this issue, after well over a decade of complaints by consumer attorneys chapter 13 trustees, and many bankruptcy judges, the settlement raises more questions than it answers. The settlement agreement is very vague on what will be refunded beyond charges that were marked up by the mortgage company from the amounts it actually paid to third party providers. Will it also cover unnecessary charges, such as repeated property inspections when debtors are paying into chapter 13 plans, or attorneys’ fees to obtain stay relief in chapter 7 cases where the stay will end automatically when the case is closed (often around the same time the relief order is granted)? BOA reserved the right to continue to assess charges permitted by its mortgages, and will undoubtedly continue to argue that all its charges are permitted, just as it has always done.

And how is anyone going to find the victims, many of whom have lost their homes due to the overcharges?  Will they receive any compensation for the tremendous hardships caused by losing their homes? Will consumers have to find out about the settlement and submit claims? How was the settlement figure of $108 million calculated? Maybe there are answers to these questions, but they are not in the settlement. Whether the tens (perhaps hundreds) of thousands of consumers who were harmed can actually access the settlement will be the ultimate test of whether it is more than a headline-grabbing press release and source of funds for FTC “informational” efforts.

Even more importantly, what systemic changes will be made to solve the basic problem of mortgage overcharges going forward? It has been apparent for almost twenty years that a basic problem is the refusal of mortgage servicers to create software that reflects the payment scheme of mortgage cures in chapter 13 plans. The settlement does not require any changes other than the adoption of a “data integrity program,” whatever that means.  Because we know that mortgage proofs of claim and motions for stay relief are regularly inaccurate (far more often than debtors’ schedules), the National Association of Consumer Bankruptcy Attorneys (NACBA) has been requesting for some time that the United States trustees institute systematic audits of these documents. However, no such systemic scrutiny appears to be happening, either for BOA or for all the other mortgage servicers who engage in the same types of practices. This settlement, at best, addresses only the tip of the iceberg.

The courts continue to be inhospitable to class relief on this issue, as demonstrated by the recent Wilborn decision of the Fifth Circuit, which reversed class certification in a challenge to mortgage overcharges. Appellate courts still don't seem to understand that it will take major sanctions to get the mortgage servicers to spend the money to make major changes in their business methods, as shown by the recent Nosek decision of the First Circuit that reduced somewhat meaningful sanctions to a slap on the wrist. Otherwise, occasional small penalties will simply be a cost of doing business.  The recent Supreme Court decision in Rent-A-Center v. Jackson, again permitting the use of mandatory arbitration clauses to keep claims out of the court system, also shows us how far we need to go in the courts.

The fact that the mortgage overcharge scandal has gone on for so long (I had my first case arising from systemic overcharges almost 20 years ago) is a prime example of the lack of consumer protection enforcement in recent years. Whether agencies like the FTC and UST take strong action to finally rectify it will be a prime test of whether they have truly turned the corner, and whether the recent settlement was more than a public relations ploy that will not change the underlying practices.

P.S. Incidentally, it just so happens that NACBA's Fall Bankruptcy Workshop will include an intensive one and a half day program, led by Max Gardner, Tara Twomey and others, on litigating against mortgage servicing abuses. Information will soon be available at www.nacba.org.

Comments

[Brian]

I'd like to cross-post this on the Consumer Law and Policy Blog, but, first, I'd love to get more detail on exactly the kind of overcharges you are talking about (you mention specifically property inspections, but what else?), the magnitude of the charges (you mention that people may have lost their homes because of overcharges), and the specific reforms you propose. Thanks!

Brian

[Transor Z]

That's really a Catch-22, isn't it? No class actions to pursue patterned behavior and patterned behavior as a factor in 9011 sanctions.

In fairness to the First Circuit in Nosek, the $5000 penalty is presented as a sort-of offset for appellate legal fees ($150k was assessed against the lawyers!) so I don't think it represents a real benchmark figure. It also misses the fact that Judge Rosenthal hit the lawyers sanctions in six figures and hit Wells Fargo with a $250k sanction. I haven't seen any of those appealed.

So I think we can find a silver lining in Nosek, taken as a whole...

[Henry Sommer]

Brian - The overcharges range from property inspections to unnecessary broker price opinions to forced placed insurance to improper late charges, "bankruptcy monitoring fees", and attorney's fees to file a proof of claim (which should be a ministerial task, but for the servicers' accounting deficiencies) all of which in turn lead to unfounded motions that add attorney's fees. There is often double-counting of escrow deficiencies (including them in the arrears and also adjusting current payments to add them in.) In chapter 7 cases, mortgage servicers file motions for relief from an automatic stay that will end shortly as a matter of course, in order to churn more attorney's fees. (The attorney's fees have their own dimension of abuse - often the work is subcontracted by large national firms to local counsel who are paid less than the fee being charged to the debtor.)

Many cases involve thousands of dollars in improper charges. What often happens in these cases is that debtors complete their chapter 13 plans, thinking they have cured their mortgage defaults, and then receive a foreclosure notice soon afterward saying they are several payments behind. The proposed Bankruptcy Rule 3002.1 is an attempt to deal with this problem, at least by providing notice and an opportunity to contest the charges during the bankruptcy case.

Judge Elizabeth Magner in New Orleans has written some great opinions about this where she has done the painstaking work to unravel some of these accounts. In Jones v. Wells Fargo Home Mortg. (In re Jones), 366 B.R. 584 (Bankr. E.D. La. 2007), aff'd Wells Fargo v. Jones, 391 B.R. 577, she found $24,450 in illegal fees and interest and explained the accounting well. This case included a property inspection charge for September 2005, when access to the property was impossible because of Hurricane Katrina.

If you have the National Consumer Law Center consumer law manuals, you can find many more cases in my book, Consumer Bankruptcy Law and Practice, sections 11.6.1.3.3.5, 12.11nn.521-23, and 14.4.3.4 (9th edition. The corresponding section for 14.4.3.4 was in chapter 13 in earlier editions.)

[Mike Dillon]

When I saw the title, Attorney Sommer, I have to admit that I nearly jumped through my monitor at you. Then I figured that the benefit of the doubt was in order and and actually READ the piece. I'm glad I did... :)

Frankly, the latest C-wide/BAHLS $108M settlement is nothing more than the latest installment in a trilogy authored by the Federal Trade Commission that never should have been written in the first place. USA/Curry v. Fairbanks, FTC v. EMC/Bear Sterns and now FTC v. C-Wide/BAHLS. Collectively, that's 566,100 victims collectively splitting $176,000,000.00. Spread across the board, that's $316 apiece. Not a bad batting average in Major League Baseball - crappy settlement number for any suffering from Mortgage Servicing Fraud ESPECIALLY if you have already lost your home as a result of the fraudulent fees and accounting. And I didn't even bother to factor in the pathetic $500k settlement for the CA Litton action.

Davis v. Ocwen had an $11.5M verdict. Stark v. EMC $6M. Even Castillo v. Fairbanks had $110,000.00 for emotional distress.

The FTC repeatedly and almost religiously states that it does not take action on behalf of individual consumers. That's fine, but when you have more than HALF a MILLION VICTIMS of one particular sector of commerce coming to you with virtually identical claims of fraud then something really should be done to, oh I don't know, actually STOP the fraudulent action perhaps.

If I had a nickel for every time I've said it... Until and unless servicers either voluntarily or are forced to admit wrongdoing in these cases, any "settlement" obtained is simply nothing more than the cost of doing business that is most likely covered by insurance policies and business tax write offs.

Incidentally, for the last two weeks I've been watching the owner of one local FC mill and his attorneys fabricate Assignments of Mortgage from C-Wide/BAHLS to Fannie Mae in the name of MERS, notarize them using his own employees and file the assignments at the county registry the same day that the first foreclosure notice runs in the public notices. According to the assignments and public notices, every one of the cases that I've looked at are likely class members of C-Wide/BAHLS. And still they're being foreclosed upon.

The bottom line for me is simply that, to date, consumer protection on a collective scale has simply been abysmal if not embarrassing.

[Hogarth]

In March of 2009, the Nat’l Assoc. of Chapter 13 Trustees and the US Trustee established guidelines regarding the review of mortgage proofs of claim. These guidelines involving the following:

1. Verify that copies of documents supporting a perfected security interest are attached to the proof of claim.

2. Verify that there is an itemization of the pre-petition fees, costs, and other charges attached to the proof of claim.

3. Verify whether the proof of claim includes a flat fee for review of the chapter 13 plan prior to confirmation and for preparation of the proof of claim and, if so, whether the fee is reasonable and fairly reflects the attorney's fee incurred.

Since the implementation of these guidelines, Chapter 13 trustees have reviewed literally thousands of mortgage proofs of claim and taken appropriate action where justified.

[Mike Dillon]

Well then there is a potential problem with at least one U.S. Trustee, Hogarth, because - while admittedly the incident with which I am familiar took place a year before the passage of the guidelines - a U.S. Trustee allowed the fraudulent foreclosure of a home while the homeowner was in a Ch 13 and current in their payments at the time the foreclosure was allowed. Payments being made from the trustee to the mortgagee were not properly applied to the mortgage arrearage by the mortgagee resulting in the dismissal of the BK plan and foreclosure of the property.

To the best of my knowledge, this happened without the benefit of a proper evidentiary hearing and upon foreclosure of the property the homeowner lost upwards of $100,000.00 in equity which was never returned to them. No proof of legal standing to foreclose was required. No production of the original note. Homeowner was served by sheriff the Friday afternoon of Columbus Day weekend and told to vacate the premises within 48 hours which did not allow the homeowner the opportunity to avail themselves of the court system before vacation of the property.

Incidentally, the property in question was FC'd and purchased by the mortgagee for approximately $70,000.00. Said property was then flipped by the entity that purchased said property at an auction located 4 hours north of said property at a sale price upwards of $170,000.00.

So, not being familiar with bankruptcy procedure, I guess my question is, "Is there any automatic mechanism for determining an entity's legal standing to foreclose on a property during a bankruptcy proceeding or is it necessary in every instance to object to a motion to lift stay in order to force production of a mortgagee's evidence of legal standing, title and interest in a subject property?"

[Hogarth]

The short answer is that the mortgage creditor makes factual allegations in the motion for relief from stay and unless those allegations are challenged by the debtor with some supporting evidence (e.g., proof of payment), the motion will be granted -- even if the allegations are without merit. Due process requires notice and an opportunity to be heard. If debtors do not avail themselves of that opportunity, then such an unfortunate outcome is possible.

If there was a question as to the allocation of trustee disbursements to the creditor, the debtor could have requested the trustee to produce an accounting of such disbursements – which is readily available. If there was a disagreement as to the trustee’s accounting and the creditor’s accounting, the matter should have been adjudicated by the bankruptcy court.

You do not say if the debtor had an attorney in this situation, but debtors and their counsel are usually in the best position to first raise questions regarding the mortgage creditor's standing and the accuracy of the accounting because they are the ones with the most knowledge of the relevant facts.

[Hogarth]

Directly related to this topic, the NACTT Academy is hosting a free webinar on July 7 at 1:00 p.m. CDT on the “United States Trustee's Initiative to Monitor Proofs of Claim, and UST POC Checklist Review.”

One can register for free at http://considerchapter13.org/

[Ed Jarney]

We have been working with Bank of America on a "refinancing plan" (meanwhile paying our regular mortgage payments even though they said we don't have to, because we don't trust them) and were suddenly served a paper last night that said to pay over $50,000-- by tomorrow --or the house would be sold on [specific date in a few months}. The last communication we had with them was two weeks ago when they said that they would be "working out the details" and that they would contact us. We have no idea what we should do.

[Settlement]

I have a $25,000 settlement check drawn to Bank Of America, will I be able to cash it from that specific bank?