The Lack of Evidentiary Foundations Fosters Fraud

The expanding market for that buying, selling and securitization of consumer debts has resulted in a serious problem regarding the “quality and admissibility” of the computer data that is being tendered to the United States Bankruptcy Courts to prove the nature and extent of consumer debt obligations. The same thing can be said with respect to the quality of the evidence that is being offered by Mortgage Servicers with respect to the nature and extent of the mortgage obligations of homeowners in bankruptcy cases. The analysis of these records by the attorneys for the debtors and by the Court has tended to overlook the underlying evidentiary foundations necessary to authenticate the same in order to create admissible and competent evidence. Also, since none of these records are generated in the normal course of business of an entity other than the proponent of the evidence in court, the business record foundation has also been either ignored or overlooked by the litigants and the courts. These are all important concepts in a consumer bankruptcy practice since the evidence presented in a proof of claim and in support of motion for relief from stay normally consist exclusively of “electronic evidence.”

Show Me the Original Note and I Will Show You the Money

As mortgage delinquencies rise each month, and as the number of foreclosures increase each quarter, the “new mantra” of many pro-se and represented consumers is to demand that the mortgage servicer “prove up the original note.” Is this just some new and creative gimmick that has been sold to the desperate homeowners and to a few lawyers who have attended “progressive” seminars or is there really something to it? I submit that there is really something to it.

In my last Credit Slips post, I wrote about what I call the “Alphabet Problem.” Succinctly stated, this problem arises out of the necessity for a true sale of the mortgage note and mortgage from the originator to the sponsor for the securitized trust; then from the sponsor to the depositor for the securitized trust; and finally from the depositor to the owner Trustee for the trust. These multiple “true sales” are necessary in order to make the original asset (the note and mortgage) bankruptcy-remote and FDIC-remote frin the originator in the event the originator files for bankruptcy or is taken over by the FDIC.

The Alphabet Problem and the Pooling and Servicing Agreements

The securitization of residential mortgage notes has created a maze of complex issues and problems for the bankruptcy and foreclosure courts. One fundamental issue is who is the actual holder and owner of the mortgage note. In order to answer this question, it is necessary to dig deep into the contracts, warranties and representations that were executed in the formation of the securitized trust.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage backed securitized trust and establishes the obligations and authority of the Master Servicer and the Primary Servicer. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called “The Alphabet Problem.”

What Does RESPA Have to do with Consumer Bankruptcy Cases?

I have trained over 350 attorneys at my Bankruptcy Boot Camps and to my surprise less than 10 percent know what I mean when I refer to a "QWR." This is shocking in that a reasonable QWR can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor's money and the disbursements on the arrearage claim from the Chapter 13 Trustee. It can also be used to identify all of the "ancillary fees" and "collateral charges" that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account, without any notice or the right to a hearing.

The provisions of RESPA which deal with mortgage servicing are generally found in either 12 U.S.C. § 2605 or § 2609. Section 2605, known as the "Servicer Act," requires servicers to respond to borrower requests for information and correction of account errors. The "Servicer Act" provisions are where you find the authority for a Qualified Written Request. The Servicer Act provisions in § 2605 are significant because borrowers are given the right to sue for violations based on the express private right of action found in § 2605(f).

HAMP--Is It Really All About the Money?

Are mortgage servicers really refusing to modify mortgage loans solely because of all of the "ancillary fees" they can generate from a completed foreclosure? Is the problem really all about the money or is there something more to it?

The New York Times reported about ten days ago that the HAMP mortgage servicers were reluctant to engage consumers in modifications because the companies collect such lucrative fees on delinquent mortgage loans. There is certainly a substantial body of evidence to support the "lucrative fees" disincentive theories. For example, the Federal Reserve Bank of Boston recently shed some light on this problem with a new study that concluded that only 3% of the seriously delinquent mortgages had been modified due to the "the simple fact that the lenders expect to recover more from a foreclosure that from a modified loan." And, the number of reported bankruptcy cases where mortgage servicers have been sanctioned for imposing unlawful, illegal and unreasonable "collateral and ancillary fees" is substantial and perhaps monumental in their numbers.

Truth in Lending or Truth in Ownership of Residential Mortgage Notes

During my last two Bankruptcy Boot Camps, one of the topics we have discussed has been the recent amendments to the Truth in Lending Act, brought about by Section 404 of Public Law 111-22. Specifically, our interest has been focused on the new statutory requirement that a consumer-borrower must be sent a written notice within 30 days of any sale or assignment of a mortgage loan secured by his or her principal residence. Violations of this Section provide for statutory damages of up to $4,000 and reasonable legal fees. The amendments also clearly provide that the new notice rules are enforceable by a private right of action. 15 USC 1641.