Two bankruptcy cases in Louisiana that have revealed systematic, persistent foreclosure abuses by Wells Fargo have gotten enough media attention that it is inconceivable that banking regulators don’t know about them. The lack of any intervention, or even so much as a throat-clearing by the Office of the Comptroller of the Currency is yet another proof of how the regulator apparently sees its role as fronting for banks rather than enforcing rules.
This story is back in the news thanks to an appeals court smackdown of Wells, which has engaged in a long-standing war of attrition with one of the plaintiffs, a Michael Jones. The reason for the appeal was that the bank was fighting the judge’s imposition of punitive damages of $3.1 million for Wells’ “reprehensible” conduct.
We wrote about the underlying case a year ago. Bankruptcy judge, Elizabeth Magner of the Eastern District of Louisiana, had found Wells Fargo guilty of egregious foreclosure abuses in a 2007 case, Jones v. Wells Fargo. In it, the bank admitted that the types of overcharges it made in bankruptcy cases were “part of its normal course of conduct, practiced in perhaps thousands of cases.” The judge awarded damages and recovery of attorney fees on top of repayment of the impermissible charges, and ordered the bank to fix its accounting.
Fast forward four months, and another case appears in Mangers’s court with the same sort of verboten charges, proving that Wells has not taken the required corrective measures. As the Center for Public Integrity described it:
In an April 2008 ruling, Elizabeth Magner, a U.S. bankruptcy judge in New Orleans, rejected the two charges [for broker price opinions charged when the parish in which the home was located was evacuated thanks to Hurricane Katrina] as invalid. She also disallowed 43 home inspections, 39 late charges, and thousands of dollars in legal fees charged to the Stewarts’ account.
Almost every disallowed fee was imposed while the Stewarts were making regular monthly payments on their home…
Magner determined that Wells Fargo had been “duplicitous and misleading” and ordered the bank to pay $27,000 in damages and attorneys’ fees. She also took the unusual step of requiring the servicer to audit about 400 home loan files in cases in the Eastern District of Louisiana.
Wells fought successfully to keep the results of the audit under seal, and last summer a federal appeals court overturned the part of Magner’s ruling that required the audit. But two people familiar with the results told iWatch News that Wells Fargo’s audit had turned up accounting errors in nearly every loan file it reviewed.
Now remember that Wells at first agreed to injunctive relief in the original case, Jones, then changed its mind. Wells repeatedly engaged in scorched earth tactics. Again from Magner:
While every litigant has a right to pursue appeal, Wells Fargo’s style of litigation was particularly vexing. After agreeing at trial to the initial injunctive relief in order to escape a punitive damage award, Wells Fargo changed its position and appealed. This resulted in:
1. A total of seven (7) days spent in the original trial, status conferences, and hearings before this Court;
2. Eighteen (18) post-trial, pre-remand motions or responsive pleadings filed by Wells Fargo, requiring nine (9) memoranda and nine (9) objections or responsive pleadings;
3. Eight (8) appeals or notices of appeal to the District Court by Wells Fargo, with fifteen (15) assignments of error and fifty-seven (57) sub-assignments of error, requiring 261 pages in briefing, and resulting in a delay of 493 days from the date the Amended Judgment was entered to the date the Fifth Circuit dismissed Wells Fargo’s appeal for lack of jurisdiction;47 and
4. Twenty-two (22) issues raised by Wells Fargo for remand, requiring 161 pages of briefing from the parties in the District Court and 269 additional days since the Fifth Circuit dismissed Wells Fargo’s appeal.
The above was only the first round of litigation contained in this case….
The appeals court affirmed the original bankruptcy court ruling and increased the compensatory award (the recovery of costs for the poor litigant Jones) to $170,000. The case went back to Magner to determine what punitive damages should be (remember, the injunctive relief was in lieu of punitive damages, but Wells took that off the table). Oh, and Stewart with its charming BPOs during Katrina had shown up in the interim.
Magner issued a tough ruling, including the afore-mentioned $3.1 million in punitive damages. Wells, predictably, appealed.
Last week, the appeals court issued a terse ruling against Wells, wasting minimal ink in dismissing Wells’ arguments and noted in passing,
We resisted the inclination to consider Wells Fargo’s rationale here as a frivolous obstruction that needlessly delays and shockingly harasses the ends of justice.
This is the meat of the ruling:
We accept the Bankruptcy Court’s findings of fact as true and substantially supported by the record. Wells Fargo knew of Debtor’s pending bankruptcy and Wells Fargo is a sophisticated lender with thousands of claims in bankruptcy cases pending throughout the country. It is familiar with the provisions of the Bankruptcy Code, particularly those regarding automatic stay. (Rec. Doc. No. 1-2, at 11). Wells Fargo assessed postpetition charges on this loan while in bankruptcy. (Id.). Despite assessing postpetition charges, Wells Fargo withheld this fact from its borrower and diverted payments made by the trustee and Debtor to satisfy claims not authorized by the plan or Court. (Id.). Wells Fargo admitted that these actions were part of its normal course of conduct, practiced in perhaps thousands of cases. (Id.). Considering these facts, the Bankruptcy Court found that Wells Fargo’s conduct was willful, egregious and exhibited a reckless disregard for the stay it violated.
It also repeated these sections of Manger’s ruling in its section “Degree of Reprehensibility”:
Wells Fargo did not adjust Jones’ loan as current on the petition date and instead continued to carry the past due amounts contained in the its proof of claim in Jones’ balance. It also misapplied funds regardless of source or intended application, to pre and post-petition charges, interest and non-interest bearing debt in contravention of the note, mortgage, plan, and confirmation order. Wells Fargo assessed and paid itself post-petition fees and charges without approval from the Court or notice to Jones. The net effect of Wells Fargo’s actions was an overcharge in excess of $24,000. When Jones questioned the amounts owed, Wells Fargo refused to explain its calculations or provide an amortization schedule. When Jones sued Wells Fargo, it again failed to properly account for its calculations. After judgment was awarded, Wells Fargo fought the compensatory portion of the award despite never challenging the calculations of the overpayment. In fact, Wells Fargo’s initial legal position both before this Court and in its first appeal denied any responsibility to refused payments demanded in error. The cost to Jones was hundreds of thousands of dollars in legal fees and five years of litigation…
Wells Fargo has taken the position that every debtor in the district should be made to challenge, by separate suit, the proofs of claim or motions for relief from the automatic stay it files. It has steadfastly refused to audit its pleadings or proofs of claim for errors and has refused to voluntarily correct any errors that come to light except through threat of litigation. Although its own representatives have admitted that it routinely misapplied payments on loans and improperly charged fees, they have refused to correct past errors. They stubbornly insist on limiting any change in their conduct prospectively, even as they seek to collect on loans in other cases for amounts owed in error. Wells Fargo’s conduct is clandestine. Rather than provide Jones with a complete history of his debt on an ongoing basis, Wells Fargo simply stopped communicating with Jones once it deemed him in default. At that point in time, fees and costs were assessed against his account and satisfied with post-petition payments intended for other debt without notice. Only through litigation was this practice discovered. Wells Fargo admitted to the same practices for all other loans in bankruptcy or default….
Over eighty percent of chapter 13 debtors in this district have incomes of less than $40,000 per year. The burden of extensive discovery and delay is particularly overwhelming. In [the Bankruptcy Court's] experience, it takes 4 to 6 months for Wells Fargo to produce a simple accounting of a loan’s history and over 4 court hearings. Most debtors simply do not have the personal resources to demand the production of a simple accounting for their loans, much less verify its accuracy, through a litigation process. Well Fargo has taken advantage of borrowers who rely on it to accurately apply payments and calculate the amounts owed. . .[it relies] on the ignorance of borrowers or their inability to fund a challenge to its demands, rather than voluntarily relinquish gains obtained through improper accounting methods. . .[W]hen exposed, it revealed its true corporate character by denying any obligation to correct its past transgressions and mounting a legal assault to ensure it never had to. Society requires that those in business conduct themselves with honestly and fair dealing. Thus, there is a strong societal interest in deterring such future conduct through the imposition of punitive relief.
The last paragraph lifted from Magner’s ruling not only explains why punitive damages were warranted, it also describes why regulation is necessary. Large, powerful players can afford to bully and bulldoze the small, and few have the energy and resources to wage a courtroom battle. Look at Michael Jones: he has been fighting Wells for over six years. The first Order and Partial Judgment in his favor was dated April 13, 2007.
Yet where are the regulators, most importantly the OCC, which jumped ahead of other regulators to issue consent decrees on mortgage servicing in 2011? Wells, after wasting the Bankruptcy court’s time in negotiating how it would correct its accounting and then reversing itself, apparently decided it would rather pay a “cost of doing business” fine in the form of punitive damages and keep ripping off other borrowers in bankruptcy. All the courts involved have affirmed Magner’s depiction of Wells’ conduct as “reprehensible” and “egregious”. Wells has been found to be a serial predator and yet the regulators are sitting pat. Indeed, the OCC has the temerity to contend that hardly anyone was harmed during the period of the scuttled foreclosure reviews, when if nothing else, Wells’ systematic bankruptcy abuses were ongoing.
It’s time to admit the OCC is beyond repair. It should be abolished and its responsibilities folded into the FDIC, the CFPB, and the Fed. One hopelessly corrupt regulator is one too many.