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Countrywide BK Claims Probed by U.S. Trustee

Lender accused of overstating amounts owed

November 29, 2007


Countrywide Financial Corp. is being investigated by a U.S. trustee to determine, among other things, whether it inflated the amount it is owed on bankruptcy claims. Counsel for Countrywide said the actions by the trustee, who has entered more than 16 cases involving lenders in at least five states, are random instances of prosecution without cause.

Countrywide's efforts in bankruptcy courts to block these investigations continue to fail, most recently on Nov. 28.

The trustee, which monitors the bankruptcy courts and their cases for the public, has "a specific and grave concern" that Countrywide is using bankruptcy court rules and procedures "to obtain money and property from bankruptcy estates on either what appears to be faults factual basis or faults legal basis, a serious concern," stated Leonard DePasquale, acting associate general counsel for the U.S. trustee, at a Nov. 15 hearing on 10 of those cases, which have been consolidated into one.

His office's investigations go beyond Countrywide, he said, explaining that "we have a number of open inquiries into a number of national lenders," and adding that "we're openly and actively investigating abuses."

He cited cases in Texas, Florida, Georgia and Massachusetts as well as Pennsylvania.

The hearing was held in the U.S. Bankruptcy Court for Western Pennsylvania at Countrywide's request to determine whether the trustee's investigation was authorized under federal laws.

The Calabasas, Calif.-based company may have misrepresented the value of properties, the loan arrearages past due, and the amounts of money due for taxes and insurance, according to DePasquale.

"If these allegations are true," he said, "they demonstrate either a reckless disregard for this court's procedures or an attempt to obtain money or property from bankruptcy estates under false pretences or false legal pretences."

In his testimony at the hearing, Tom Connop, lead trial counsel for Countrywide, called the trustee's entry into the 10 Pennsylvania cases part of an ongoing attack on Countrywide that has been prosecuted without cause, randomly throughout the nation.

And in a Nov. 28 filing objecting to the trustee's entry in a Florida bankruptcy case, Countrywide attorneys Connop and Joan Levit stated, "The notice of examination and subpoena served by the U.S. trustee is but one of a series of attempts by the U.S. trustee to conduct a wholesale investigation into Countrywide's policies and procedures."

"If permitted to stand," their memorandum continued, "the breadth of discovery sought by the U.S. trustee would result in an unprecedented extension of the U.S. trustee's statutory powers, placing it in the role of regulator of Countrywide's business affairs."

In a motion filed in the Pennsylvania consolidated case that seeks loan histories from Countrywide and sanctions against the lender, the U.S. trustee alleges that, in nearly 300 cases, Countrywide "lost, destroyed or misplaced" more than $515,000 in checks that were to have been posted to debtors' accounts at Countrywide and that those checks had to be replaced, sometimes more than once. Countrywide also, according to the trustee, "attached impermissible charges, including late fees and attorneys' fees for its unconscionable delay" in posting checks.

In another Pennsylvania bankruptcy case, Countrywide was ordered to pay the U.S. trustee $2,000 as a sanction for its conduct. And in a Florida bankruptcy case, Countrywide was ordered to pay $74,271.33 to the debtors' trust account, representing insurance proceeds received by the lender for repairs to the debtors' home.

Those debtors, Manuel Del Castillo and Maria E. Pena, also had Countrywide's pre-petition escrow advance and insufficient funds fee stricken after the lender failed to appear at a hearing on their request, which had been based on Countrywide's failure to provide a breakdown of its claim. However, that Aug.28 order was vacated and set aside on Nov. 28, although Countrywide was now ordered by pay the debtors' attorney $500 within 30 days.

In a separate decision on Nov. 28, the court overruled in part, Countrywide's objections to the U.S. trustees notice of examination, declaring that the trustee "is empowered to issue a subpoena and conduct an examination of Countrywide Home Loans Inc." The order states that 20 days after the U.S. trustee provides Countrywide with a certificate of compliance with the Right to Privacy Act of 1978, "Countrywide shall respond fully and produce all documents responsive to the document requests contained in Exhibit A to the subpoena."

At issue in this and one other Florida bankruptcy case is the amount of money still owed on mortgages and the U.S. trustee has subpoenaed of all documents related to those mortgages. Countrywide has challenged the trustee's authority to seek those examinations and subpoenas, losing in the Del Castillo-Pena case on Nov. 20. A hearing on the other case is set for Dec. 3.

Further hearings on the U.S. trustee's entry in the Pennsylvania bankruptcy cases are scheduled for Dec. 12 and 31. At the November hearing Judge Thomas P. Agresti implied that the U.S. trustee does have authority to enter bankruptcy cases, but yet to be established is how far the trustee's authority extends, including the scope of its inquiry into Countrywide's bankruptcy-related practices and records.

Agresti had earlier dismissed Countrywide's motion to quash the U.S. trustee's efforts to obtain Countrywide's records pertaining to the 10 bankruptcies.

A recent 48-page report by University of Iowa Associate Professor of Law Katherine Porter alleged mortgage servicers frequently disregard bankruptcy law and submit inadequate or erroneous claims. She suggested lenders and borrowers disagreed on the balance owing in most cases and that illegal fees regularly tacked on to balances without sufficiently identifying the nature of the fees are symptomatic of servicing in general.

"Servicers boost their profits when they charge excessive fees, impose late charges, or create hurdles for borrowers who are trying to cure defaults and stop a cascade of fees," Porter wrote. "A borrower's default can present a servicer with an opportunity for additional profits."

Her findings were reportedly based on a study of 1,733 Chapter 13 bankruptcy cases involving a mortgage filed between April 1, 2006, and April 30, 2006.

Servicers Accused of Overstating Loan Balances
Mortgage servicers frequently disregard bankruptcy law and submit inadequate or erroneous claims, a university law professor alleged in a recent 48-page report that indicated lenders and borrowers disagreed on the balance owing in most cases. She suggested illegal fees regularly tacked on to balances without sufficiently identifying the nature of the fees are symptomatic of servicing in general.

Jerry DeMuth is an award winning journalist who has been reporting for four decades.

e-mail Jerry at [email protected]
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