I call your attention to this Wall Street Journal story, “Countrywide Draws Ire of Judges,” for three reasons. First is Countrywide schadenfreude. I freely admit to having what may be called a bias. I have read and been told enough about Countrywide to be persuaded that it is a corrupt organization, even if it manages to barely stay on the right side of the law (pending lawsuits will prove out how successful those efforts really were). So I take pleasure in seeing them get their comeuppance.
Second is that I have said, repeatedly, that Bank of America buying such a disreputable operation is a bad move that they will come to regret. Some readers have suggested that this deal may nevertheless be the lesser of bad options, positing that BofA has large derivative exposures to CFC, and it may be cheaper for them to salvage the company than take those losses. Nevertheless, Bank of America does have a reputation to protect. In the stone ages of finance when I was growing up, no one would have considered acquiring a large, high profile entity like Countrywide unless it was on the verge of collapse (and we mean Chapter 11 about to be filed, not rumor-mongering) and all of the incumbent management was summarily shown the door. That isn’t happening here. Continuing news of Countrywide’s bad practices confirms that these problems are deeply rooted and will prove hard to eradicate.
Third, and most important, I am concerned that “mistakes as policy” is becoming established as acceptable practice in American companies, so I applaud the bankruptcy judges’ moves against it. I have been this become entrenched at my health insurer, Cigna. I have been with them for over two decades. It used to be that my claims would be processed, and the fights would be on charges they deemed to be excessive or procedures they didn’t like, such as chiropractic and acupuncture (before you get on your high horse about alternative medicine, Cigna promotes its coverage of acupuncture on its website, but then seeks not to pay for it, even for conditions where there is a considerable body of research saying it produces superior outcomes). I am persistent and have always prevailed (I believe people should live up to their contracts, what a novel concept, and am considerably aided by the fact that I live in the communist state of New York, which allows for external appeal to a state board which then turns to independent experts).
But I have seen a pattern with Cigna very similar to Countrywide’s, that of making persistent mistakes that are clearly errors in their favor, and hoping that the consumer doesn’t catch them. Before 2006, Cigna never mislaid a single claim I sent them. Suddenly, they failed to receive (meaning threw out) about 20%, which puts the onus on me to notice what hasn’t been reimbursed, confirm that it isn’t in their system, and resubmit the claim. Even with customers like me, they get the benefit of hanging on to their dough longer. Their new 2007 trick was trying to reinterpret how the applied claims to the deductible, which since I kept my records and there had been no change in my policy, was not successful. But I imagine that sort of move would have succeeded with at least half the plan members they tried it on.
So that is a long-winded way of saying I believe Countrywide-type practices are becoming more pervasive, and I encourage you to be alert to them, contest them, and talk about them.
From the Wall Street Journal:
More federal bankruptcy judges are calling into question the business practices of Countrywide Financial Corp., as Bank of America Corp. prepares to buy the ailing mortgage lender.
According to court documents in a bankruptcy case in Houston, Countrywide didn’t properly credit a borrower’s payments made during bankruptcy but instead applied them to prebankruptcy debt, which isn’t allowed. In the same case, involving a debtor named William Allen Parsley, Countrywide represented to the court that Mr. Parsley owed fees that turned out to be unsubstantiated and in error. These included an improper $450 fee and a $65 unsubstantiated fee.
During a hearing last month, U.S. Bankruptcy Judge Jeff Bohm chastised Countrywide and its lawyers after the company admitted making numerous errors in the case. “How many times do I have to listen to that before I conclude, ‘You know, there’s got to be some kind of reckoning’ when I keep hearing time after time, ‘we made a mistake, we made a mistake, we made a mistake, we made a mistake?'” Judge Bohm said. He is considering sanctions against the company.
Countrywide says it has incurred at least $400,000 in costs associated with the case after having its employees deposed by the U.S. Trustee Program, a division of the Justice Department that oversees the bankruptcy system. The agency has been investigating the company’s handling of loan payments and court claims in cases across the country.
In Miami, Bankruptcy Judge A. Jay Cristol last month approved a U.S. trustee’s requests to subpoena and depose Countrywide to obtain information about how it made mistakes in a case. Initially, the company claimed in court that the borrower would need to pay $4,800 a month for a mortgage during bankruptcy. But after the borrower objected, Countrywide said it had erred and reduced its claim to about $2,400 a month. In a hearing in December, Judge Cristol said Countrywide had been found “with its hand in the cookie jar.”
Countrywide has said it was investigating what happened in the case.
Bankruptcy litigation is among a list of potential legal liabilities Bank of America may inherit from the company if the planned acquisition, announced last week, is completed. These include inquiries from the Securities and Exchange Commission and several state attorneys general, as well as shareholder lawsuits tied to Countrywide’s financial decline and other class-action and individual suits brought by borrowers for alleged abuses by the company. In some cases Countrywide has denied allegations and in some it hasn’t yet answered allegations; in others it has said it is cooperating with authorities…
In the SEC inquiry, one area under scrutiny is whether the mortgage lender set aside the appropriate amount of reserves to cover potential losses from loans still held on the company’s books, known as loan-loss reserves.
Among the areas of interest to the SEC is whether Countrywide adequately increased its loan-loss reserves to reflect slowing or delayed payments from homeowners or if the mortgage lender failed to increase the reserve to purposefully forestall taking a charge to its financial statements. The SEC is also investigating stock sales made by Countrywide founder Angelo Mozilo made through prearranged sales plans.
Let me share another “mistake” Countrywide made; they purchased my mortgage from First Horizon and then started the 360 months over …. I had already made payments to First Horizon on the regular mortgage after it had converted from a construction loan, but Countrywide says no … now I am trying to get their mistake straightened out … and will likely have to do amended tax returns for 2005 & 2006 if I can get my payments corrected on the actual balance I should have had … I nor others have a choice when a loan is sold or another entity starts servicing it …. and no one will tell me who actually owns the loan … no body seems to know. Glad they died.
Yves, Thanks for your aside about the corrupt practices of your health insurer. Last year I had to object 5 times when my health insurer tried to claim co-pays for services that are supposed to be covered 100%. The money involved in each instance was trivial, but the overall impact across their client base is probably millions of dollars. The insurance company conceded I was right 4 out of 5 times, and I dropped the last protest because it wasn’t worth my time to continue fighting for $9.12. My significant other currently has an appeal in process with the same insurer; they told her that a provider was a member of the plan and then denied the claim because she saw him at clinic A instead of clinic B. If they persist in denying this claim, the Minnesota attorney general’s office will hear about it.
On the pervasiveness of outrageous business practices:
From NYTimes 1/15/08
“In dissent, Justice John Paul Stevens asserted that the majority had gone way beyond the boundaries of the 1994 Central Bank ruling, largely because Scientific-Atlanta and Motorola had clearly engaged in a fraud, unlike the defendant in the 1994 case.”
Yep, and and it will continue. The Roberts court says its OK with them.