Hearing of the Senate Administrative Oversight and the Courts Subcommittee of the Judiciary Committee - Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis?
Interview
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SEN. SHELDON WHITEHOUSE (D-RI): Thank you, Mr. Chairman, and thank you for calling this hearing. I think this is extremely instructive, and it's really a tragedy to see people like Ms. Atchley falling into what looks like a mill, basically, and with very little way to find their own way out in an area where a lot of -- everybody else is an expert, but you're the one who has the home. And so I appreciate that you've come in and I appreciate that so many people are here to help us understand this a little bit better.
It sounds like there is not only an abuse of the collections process but widespread abuse of lawyering standards. Why is it that courts aren't pushing back harder at all of this? You've given some instances where they've rattled some cages and called senior partners and so forth, but the recurring nature of this is really pretty astounding. I know Professor Porter has recommended some rules changes but -- let me see if I can find the -- you used a very good phrase. "Unreliable mortgage servicing is pervasive. Current provisions are not sufficiently strong to generate compliance."
And if people -- I just don't get why there isn't a harder smack being delivered by courts to these practitioners. First of all, if you could define why it's happening. I suspect it's just a question of scale and it's sort of mill production and people might, like Ms. Atchley, get caught up in it and they're filing just dozens of these things and it's sort of automatic process and they don't really care; they're just bombing the court with papers. But that would strike me -- I've been around judges quite a lot and that would strike me as really no excuse to most of the judges I've seen. In fact, it would be an aggravating factor in terms of trying to bring a little bit of order and discipline and integrity to the proceedings that they're overseeing.
MS. PORTER: I do think we're starting to see judges take action. Senator Schumer gave some examples of some of the court opinions we've started to see. But I want to emphasize that this is, as Mr. Sessions noted, a high-volume system, and the scale and scope of the servicing operations make even the largest bankruptcy attorney look like a solo practitioner. So we have gigantic servicing operations. They employ national law firms. Those national law firms in turn employ local law firms, and the mistakes and the overcharges just get passed down the line. Nobody bothers to stop and check.
I do think -- your judges tell me -- I've given this talk to a lot of groups including judges -- they say we hammer at the local attorney in front of us and the local attorney tells us, "We try to get information from our national counsel or from the servicer, and they don't give it to us; we don't know the answer to your question." And that leads to these orders to fly in executives from across the country.
The problem with taking a judge-by-judge, court-by-court approach, as Mr. Sessions was suggesting, is the rules already put the burden on the creditor to attach this documentation. That rule has existed since at least 1978, and the reason the rule is there, the burden is on the creditors, because they are the party with the information.
By not attaching notes in 42 percent of their claims, Countrywide shifts that expense onto the debtors, onto the trustees and onto the bankruptcy courts, and ultimately onto the system, and that's an abuse of the rules as they're currently written, in my view.
MR. BAILEY: She has no evidence that we have 42 percent errors in this.
You haven't checked us or audited us.
MS. PORTER: It's in my database.
MR. BAILEY: We're submitting to this audit specifically to deal with this kind of general statement about -- it moves from the industry to Countrywide has a 42 -- that's absolutely false.
MS. PORTER: What I said, to be clear, was that in my -- I'll be clearer -- in my study there were 100 claims filed by Countrywide. There was no note attached to 42 of those claims. That means the note was missing, in violation of Bankruptcy Rule 3001C in 42 percent of the claims. I consider that to be an error that harms a borrower.
MR. BAILEY: How many of those cases, I wonder, would there have been an actual fee that was inappropriate or was objected to by either the debtor's attorney or by the judge or where there was any kind of sanctions or any problem issued with that? And one of the problems we face --
SEN. WHITEHOUSE: But why -- let me --
MR. BAILEY: -- and I really hope --
SEN. WHITEHOUSE: -- interrupt you for one second, Mr. Bailey, since you've jumped into this discussion. Why is it that it's appropriate that there should -- forget the fees and other things to decide -- why is it appropriate that your company should, on those 58 occasions, fail to comply with the bankruptcy law?
MS. PORTER: It was 48 they -- 42 they didn't comply.
SEN. WHITEHOUSE: It's -- 42 makes -- didn't comply, so they --
MS. PORTER: They complied in 58; they did not comply in 42.
MR. BAILEY: It's the other way.
SEN. WHITEHOUSE: Why is it that in 42 they didn't do it?
MR. BAILEY: This is -- sorry.
SEN. WHITEHOUSE: I mean, just stop right there, with that one question --
MR. BAILEY: My answer will be that --
SEN. WHITEHOUSE: -- why in 42 percent, in those 42 cases, didn't you just follow the rules?
MR. BAILEY: Well, these rules that she's referencing aren't necessarily the way that a local judge or jurisdiction would want their process to proceed. So it's as simple as these rules are not consistently enforced; they're not consistently -- if you reach a judge in a particular jurisdiction --
SEN. WHITEHOUSE: Well, they're certainly not consistently enforced if you file floods of these things and judges don't bother to enforce them, but it's still the rule.
MR. BAILEY: Well, but what a particular -- in today's environment, what a particular judge in a particular jurisdiction wants to see, whether it's in the proof of claim and what's attached to it, how you might itemize the different fees, what kind of evidence of those fees you want to submit is set by that judge.
SEN. WHITEHOUSE: But how about Mrs. Atchley? Isn't she entitled to something in this? Isn't the rule there for her benefit, so she knows what's being talked about? It's not just the judge; that's why it's the rule.
MR. BAILEY: I don't think the Atchleys' proof of claim was brought into question here.
SEN. WHITEHOUSE: No, but somebody in her position.
MR. BAILEY: Sure.
SEN. WHITEHOUSE: It's not just between you and the judge. There's somebody whose home is involved here, right?
MR. BAILEY: What I will say --
SEN. WHITEHOUSE: And they're entitled to notice pursuant to the rule -- and I don't know why we're even having a discussion about compliance with the rule. Why is it suddenly optional to comply with the rule?
MR. BAILEY: It's not optional to comply with the rule; the issue would be what is the rule and how is it defined by these local groups? We are -- as I said a few minutes ago -- we are passionately interested in this idea that we would have best practices, clarification of what's required across the board. If in every case every judge wants all these things attached, that's what we will do. We will attach -- if every fee is to be itemized, that's exactly what we will do.
And we're committed to that. We want the playing field to be defined and clarified and not have this variation. And even the fees that are charged, let them be uniform, let them be set, let there not be any variation between those things. And even further, can we establish better interaction between the debtor and the servicer? And that's in these best practices, where there's some specific languages and notices that you send out to customers so they're not wandering blindly not knowing whether or not a payment was received or if a fee was charged. So there's an interaction that can be increased between these parties, even if it deals with going through the trustee.
Today there's not enough communication. If Mrs. Atchley's presence here serves one thing, it's can we please deal with the interaction between servicers and customers? When we're under the cloak of bankruptcy and we're not allowed to have this dialogue with a customer -- I think she made an extremely good point; it underscores the tragedy of that situation -- she admitted to there being a few payments that were late and felt that the trigger was pulled too quickly in these motions for relief, because, yeah, they might have been a little bit late, but they wanted to pay and they were trying to pay.
We can't have a conversation with her about that to see is the payment on the way. Was there just a little one-month problem? We're stuck between a rock and a hard place; an investor is going to come down on you if you do not file that motion for relief within a certain period of time, and an inability to contact the customer to see if there is something going on that could be improved.
Even all these loan modifications that we can do now -- I can't have a conversation with the customer about the ability maybe to rework their mortgage. If we can get that dealt with -- I know you can't change the whole process, but if we can get that dealt with so you can have some kind -- if it's through the attorney, if it's through just letters that you can send, it can help to prevent a future tragedy where somebody wants to pay and is caught just being a little bit late for some interruption. And if we can get that kind of change, we are 100 percent for that.
SEN. WHITEHOUSE: My time expired some time ago, and I appreciate the chairman's indulgence.
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