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BK Judge Rules Against Ameriquest

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BK Judge Rules Against AmeriquestDecision was previously overturned

April 12, 2007

By JERRY DeMUTH

A bankruptcy judge has suggested his ruling against Ameriquest Mortgage Co. could open the door for a class action lawsuit on behalf of all the company’s borrowers who are operating under Chapter VIII bankruptcy. At issue is how the lender reported and applied payments.

The Orange, Calif.-based company’s accounting practices were deemed “wholly unacceptable for a national mortgage lender” by the bankruptcy judge — who then fined the company $750,000 for punitive and emotional distress damages .

The amount in punitive damages, $500,000, had to be “significant enough to garner its [Ameriquest’s] attention” and “encourage” the company to “conform its accounting practices to what is required under the Bankruptcy Code,” wrote U.S. Bankruptcy Judge Joel B. Rosenthal of the District of Massachusetts when explaining why those damages were set so high.

For a violation of RESPA, debtor and plaintiff Jacalyn S. Nosek was awarded “nominal damages of $1.00.”

Under her bankruptcy plan, Nosek made separate and regular payments for pre-bankruptcy petition delinquent payments and for post-petition payments on which she had kept current, according to court documents. However, all her payments were posted to only the oldest outstanding pre-petition delinquencies.

“Although Ameriquest claimed to have manually credited Nosek with having made the payments and internally considered her current, nothing in its accounting system, or on the payment history provided to her, reflected this,” Rosenthal noted in his March ruling that upheld an earlier decision by the U.S. District Court for Massachusetts.

Further, “the payment history Ameriquest generated for the rest of the world gave the impression that Nosek was delinquent in her payments. It did not show that Nosek was current, something she claimed prevented her from refinancing her note with another lender,” he pointed out.

“Our accounting of the payments,” an Ameriquest spokesman told MortgageDaily.com, “was consistent with industry standards and state and federal law. The District Court agreed with that position and overturned the bankruptcy judge’s original ruling. The facts have not changed and we are confident our appeal back to the District Court of the bankruptcy judge’s recent ruling will again be successful.”

In its appeal of the earlier decision, Ameriquest said that the requirement that it had to “apply post-petition payments in accordance with the terms of the [Bankruptcy] Plan” was an “erroneous belief.”

“Lenders,” countered Rosenthal, “do not decide which of its [bankruptcy code’s] provisions apply to them.”

Ameriquest also had argued in a reply brief that Chapter 13 did not require lenders to change their accounting procedures and thus readjust their accounting methodologies and continually recalculate how payments should be applied. The company further maintained that it could not use its computer system to track bankruptcy payments because no software exists to track such payments and thus they could only do it manually for its internal system.

But Rosenthal declared that “Ameriquest must adjust its accounting practices” for this bankruptcy, even if this requires accurately accounting for payments by manual methods. But he said that the court “is not convinced that a computer system could not be developed with the appropriate investment of time and money.”

Payments must be accounted for accurately, not only internally, Rosenthal wrote in his opinion, but also must be reflected in Ameriquest’s external payment history, “which is shared with the debtor and the outside world and which is usually necessary for a refinancing, something a lender of Ameriquest’s experience should recognize.”

Plaintiff Nosek was quoted as saying that when she saw Ameriquest’s payment history for her account that “doesn’t represents my payments post-petition” she felt like she had been “sucker punched” in the stomach. She said that “to get another mortgage, they need to see that I was making the correct payments … and this doesn’t show that. I was devastated. I felt there was no hope.”

Rosenthal noted that of the 437,000 loans that Ameriquest serviced as of July 2006, nearly 7,200 involved borrowers who are currently Chapter 13 debtors.

“Ameriquest uses the same accounting system in servicing all of its Chapter 13 debtors, which shows how widespread the problem could potentially be,” he warned.

Andrew Nelson, managing attorney in the bankruptcy department at the Chicago law firm of Pierce & Associates P.C., which represents many mortgage banking companies, told MortgageDaily.com that servicing systems at many servicer shops utilize the same method as Ameriquest. The case demonstrates, he said, that servicers should be very cautious when posting and sending out payment histories of borrowers who are in Chapter 13.

Ameriquest has filed a notice of appeal in the case.


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