US Trustee Estimates Servicing “Errors” at 10x Level Claimed by Banks (and Parroted by Federal Regulators)

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Gretchen Morgenson has an important piece tonight which describes how US Trustee Program, which is the arm of the Department of Justice which oversees bankruptcy courts, has found ongoing servicing abuses in bankruptcy courts which are an order of magnitude worse than claimed by mortgage servicers and their mouthpieces among the Federal banking regulators. And it’s funny how a real prosecutor has managed to find significant problems in a mere six months, when the 50 state attorneys general effort, which has undertaken no investigation, is rushing to get a deal done. If the leader of that effort, Tom Miller of Iowa, instead had gotten to work when the effort was formed last October rather than having tea and cookies with the Treasury Department, they might have something to show by now.

Note that this article provides support what this blog and foreclosure defense attorneys have said: that servicers are engaged in a significant amount of overbilling, via charing impermissible or inflated fees. And experts have pointed out that in addition to these junk fees and/or excessive fees, the servicers apply payments in a manner contrary to Federal law and the terms of the mortgage (to fees first rather than principal and interest first) which leads to fee pyramiding:

The other problematic area showing up in the trustees’ inquiries relates to what Mr. White calls improper default servicing fees. These include charges for legal work, property inspections, insurance and appraisals.

Often, the fees charged to troubled borrowers are not even specified. Trustee program officials found a defaulted borrower who was charged $10,260.50 in “prior service fees” with zero documentation. In another case, a borrower fell behind after the lender doubled his escrow payments with no explanation or justification. Then the bank filed a motion to lift the bankruptcy stay so that it could foreclose.

But it turns out I’ve been giving them too much credit. They also just make up the numbers:

In other cases, proofs of claim filed by servicers are just wildly off base. In one matter, a bank claimed to the court that a borrower owed $52,043. After the borrower objected and a trustee asked for documentation, the amount owed dropped to $3,156.

In other cases, proofs of claim filed by servicers are just wildly off base. In one matter, a bank claimed to the court that a borrower owed $52,043. After the borrower objected and a trustee asked for documentation, the amount owed dropped to $3,156.

I wonder about the timing. Have the phony consent decrees and the shambolic 50 state AG negotiations motivated the heretofore not very vocal director of the Trustee’s executive office, Clifford White, to speak up?

The Trustee’s effort obtained information from 95 field offices in 88 districts. Not surprisingly, the banks have been uncooperative and have engaged in stonewalling. One of their tactics is to provide only narrow responses to discovery demands, and refuse to turn over information relating to policies and procedures.

And there is good reason why. The “errors” happen too often for them to be by accident. And as we have stressed, servicers are highly routinized. They aren’t set up to do much of anything on a one-off basis.

Mistakes happen, of course. And loan servicers like to contend that if errors occur, they are rare and honestly made. But after sifting through the data produced by this investigation, Mr. White disagreed that problems are rare. “In Senate testimony, an executive from Countrywide said its error rate was 1 percent,” Mr. White recalled. “The mortgage servicer industry error rate might be 10 times higher, based on the number of cases we are looking at.”

“There are continued flaws in the process, and they are not merely technical,” Mr. White continued. “Those flaws undermine the integrity of the bankruptcy system. Many homeowners have been harmed, including where the lender has come in and said ‘we want to lift the stay and go back into foreclosure proceedings,’ even though they lacked a sufficient basis to do it.”

He went on: “There are enough examples of this to know that we are not dealing with small numbers.”

It’s increasingly obvious that a concerted coverup is in progress. I gather they forgot to send the memo to the US Trustee.

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  1. ambrit

    Mr. White now, add to this Mr. Levins committee, and I hope we’ll finally have our Pecorra moment.

  2. Jackrabbit

    This and the info relating to how HAMP was designed to help the banks more than the borrowers should be front page news on every news site and blog.

    Note: Linking what we learned from the bloggers meeting with Geithner and what we know now about HAMP as beneficial to the banks makes for a powerful case.

  3. tz


    “overbilling, via charing impermissible or inflated fees” – I think you mean charging.

    Two copies of “In other cases,…”

    Errors are surprisingly rare here, perhaps it was the late hour of the post.

  4. john bougearel

    When all else fails, tea and cookies can be nice. Cuz I guarantee you the Treasury will not stand for any Pecora moments.

    Mr. White, unfortunately, I expect you will be summarily dismissed with prejudice in the due course of time.

  5. chris

    It is clear that we are government run by money and the big banks. Everyday nothing is done to hold the banks accountable is a loss for the people. Did anyone really every think one of those big government programs such as HAMP, was established to benefit anyone other than the banks?
    It seems more like a scam to increase GDP by creating a boon for lawyers and criminals claiming to know how to mediate or get loan modifications.
    The lawyers and scam artists have profited more than anyone because of the HAMP Program and other state ordered mediation requirements.
    Lawyers acting as mediators one day and representing clients in mediation the next. A total scam that lawyers cook the numbers stating that a non agreement or getting the home owner a chance at a short sale as victory. Of course collecting 2500 a pop……complete gaming of the system by the banks and teh lawyers.

  6. Ericmcsquare

    In my experience when the foreclosure mill I worked at audited its foreclosure and bankruptcy filing they found (and then bragged to other FC/BKY attorneys) that the firm’s filings were correct 92% of the time. Needless to say I am happy to be out of there.

  7. skippy

    SF analogy corner…Humans arrive upon lonely planet once teaming with intelligent life, much time is spend examining their demise. Beautiful city’s and evidence of artistic sophistry, rooms full of seemingly technological based knowledge storage devices, reverse engineering and linguistics are applied. Humans become ill with unknown aliment, rescue forthcoming in time.

    Skippy…two facts are discerned before all are dead, the same illness that’s killing them, killed the indigenous population. The other was the disks they thought contained knowledge was their form of currency…the place was littered with it.

  8. Bravo

    Kudos to the US Trustee’s office for speaking up. Counsel in our town advises that the US bankruptcy courts are one’s best and perhaps only hope to get a fair hearing on the key issue of standing. What a choice…….a) file bankruptcy, b) strategically default and allow your home to be fraudulently seized, or c) blindly continue forwarding money to a servicer who is either unable or unwilling to tell you which specific securitization trust they are forwarding your money to, unless that is you are willing to default on your mortgage and thereby get routed through the mindless foreclosure factories that the state court systems seem to have become. Perhaps Mr. White’s shining a spotlight on the magnitude of deficiencies the bankruptcy court system is seeing will lead to a real investigation examining the frequency of chain of title breaches and non-compliance with pooling and servicing agreements that represent the real cover up du jour as Yves has quite succinctly pointed out.

  9. JDNMEsq.

    My wife and I just strategically defaulted to try and force the two banks who own our home to either allow a short or take it back via a Chapter 13 process which will involve stripping the 2nd Lien to zero pursuant to 11 U.S.C. section 506. Not everyone is in a position where the value of their second lien is zero but if you are, pay attention to this post and go find a BK lawyer to walk you through ending your thrall to the Big, Bad, Banks.

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