Hearing of the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee - Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis?
Interview
Hearing of the Subcommittee on Administrative Oversight and the Courts of the Senate Judiciary Committee - Policing Lenders and Protecting Homeowners: Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis?
SEN. SCHUMER: (Sounds gavel.) Okay. The hearing will come to order. Over the past year, we have heard much about the questionable lending practices that have harmed homeowners, roiled Wall Street and stalled the economy -- especially the ways that greedy lenders preyed on borrowers with subprime loans that many did not understand and could not afford.
What is far less known is the way that unscrupulous mortgage lenders and servicers have mistreated some of those same borrowers a second time -- when they're down and out and at their most vulnerable -- in bankruptcy. There is a disturbing pattern of piling on that we need to get to the bottom of. So today, I want to pull the curtain back on a hidden corner of the mortgage crisis.
As bankruptcies swell and defaults rise and revenue streams dry up, I fear a vulture mentality is developing in some quarters. And that vulture mentality threatens to turn the dream of homeownership into an even worse nightmare than it has been for many already.
For instance, a homeowner is down on her luck and is forced to file for bankruptcy. She successfully completes a repayment plan to keep her home through Chapter 13 protection. There has been no foreclosure because she has rationally tried to keep her home, through a Chapter 13 workout. That's what Chapter 13's all about. But she then receives word that she owes more money on her mortgage than on the day she filed for bankruptcy or she has to fight off foreclosure even though she's been making payments like clockwork.
How does this happen? How are these companies able to prey on homeowners with such impunity?
As Professor Porter, who is a witness here today, has meticulously documented, they do it through a maze of dubious and undocumented fees. All too often these charges are inflated, duplicative or made up; just as often, they are undocumented, undisclosed or just plain awful. They include late fees, demand fees, overnight delivery fees, fax fees, payoff statement fees, property inspection fees, and legal service fees. This is death by a thousand fees. And the companies know that the hapless homeowner is too poor, too unsophisticated or too overwhelmed to challenge often blatantly fraudulent demands for payment.
Lest anyone think we're exaggerating the problem, consider the record. As Judge Joel B. Rosenthal has noted, an increasing number of lenders, quote, "in their rush to foreclose haphazardly fail to comply with even the most basic legal requirements of the bankruptcy system," unquote.
The catalogue of alleged misconduct is too long to list in full detail here, but companies have: repeatedly sought to foreclose on homes where owners were current in their payments; sought attorneys' fees in bankruptcy court for motions that they have lost; and failed to keep even the most basic records to justify their claims in bankruptcy court.
Consider some of the stories that are unfortunately becoming routine in this lesser known corner of the subprime crisis. In the case of Sharon Diane Hill in Pittsburgh, Countrywide has admitted fabricating documents to wring dubious payments from a homeowner in bankruptcy.
Judge Thomas P. Agresti had this to say about Countrywide's alleged fabrication of letters, quote: "These letters are a smoking gun that somehow (sic) is not right in the state of Denmark." It's a mixed metaphor admittedly, but it makes the point.
In the case of Robin and John Atchley, Countrywide twice wrongly tried to foreclose on their home when they were actually current on their payments. In that case, the regional trustee for the Atlanta area wrote in a brief that, quote, "Countrywide's failure to ensure the accuracy of its pleadings and accounts in the Atchley case is not an isolated incident."
Indeed, Countrywide today says problems exist in only a small number -- maybe 1 percent of their case, about -- that would be -- if it's 1 percent of their cases, which is what they claim, it would be about 650 of the 65,000 cases Countrywide has in bankruptcy.
But even a cursory look at court records seem to tell a different story -- a dramatically different story. In just one judicial district alone, the Western District of Pennsylvania, the trustee is so concerned he is looking at 300 cases involving trouble with Countrywide. If there's 300 potential cases in Pittsburgh, it's hard to believe there are only 650 nationwide. So given that fact alone, the 1 percent number seems dubious, to say the least.
But, of course, the questionable behavior is by no means limited to Countrywide. Unfortunately, it seems dubious practices span the loan servicing industry.
Consider the case of Jacalyn Nosek in Massachusetts, who desperately tried to save her home by diligently paying off her debts over five years in Chapter 13. But Ameriquest, the company servicing her loan, botched receipt of her payments so badly they ruined her credit and made it impossible for her to refinance.
Said Mrs. Nosek of how she was treated, quote: "I felt like somebody hit me in the stomach and, you know, sucker-punched me. I became tremendously depressed, and really since then I haven't been able to get my feet under me."
The court agreed with that assessment and sanctioned Ameriquest to the tune of ($)500,000 in punitive damages and ($)250,000 for emotional distress.
In the case of Pearl Maxwell, an 83-year-old Massachusetts woman with limited education, Fairbanks Capital Corporation took advantage of her by repeatedly demanding payments from her that she didn't owe. The bankruptcy court lambasted the company's conduct, calling it, quote, "egregious and inexcusable."
In another case, in the Northern District of Texas, a company filed a proof of claim that it was owed more than $1 million, when the principal balance on the note was only $60,000.
The list goes on and on. And the bad behavior is not even limited to mortgage companies. Law firms -- unscrupulous law firms have also gotten into the act. For instance, one federal bankruptcy judge has criticized what he called, quote, "a corrosive assembly line culture of practicing law." And another bankruptcy judge had this to say, quote: "Above all else, what kind of culture condones its lawyers lying to the court and then retreating to the office hoping that the court will forget about the whole matter?"
We invited a law firm to testify about its practices, but it refused, claiming, over-broadly, that the attorney client privilege prevented its appearance.
Well, I hope today we can begin to get to the bottom of this practice of piling on. To be sure, there is some good news. The United States Trustee Program has launched a series of investigations into these practices, as we will hear about today. Judges are finally starting to hold the firms accountable. And now, Congress will, indeed, play its part.
My message to unscrupulous lenders and servicers should be heard loud and clear: Congress will no longer countenance this vulture mentality. We will not stand for the continued abuse of homeowners who have worked hard and played by the rules of bankruptcy only to have their homes and credit ratings and livelihoods threatened by misconduct at the hand of greedy corporations who made poor bets in the first place.
Given the record, I think the burden has shifted to these mortgage companies to demonstrate that their bad practices do not form an intentional pattern or a deliberate business strategy.
There are too many horror stories, too many investigations, too many sanctions imposed for us to simply take the word of a company spokesman that, quote, "mistakes were made," unquote, and that they were few in number. We need a thorough and public accounting of industry practices.
And let me make a point about Countrywide here. I've always wondered why Bank of America -- a fine institution with a good reputation -- was willing to purchase Countrywide, given its recent history, and I understand that there has been encouragement by the financial regulators to make this transaction happen. These latest revelations should make Bank of America think even harder about how they want to proceed with the deal. If it turns out that the purchase price for Countrywide was based in part on profits from these bad practices, Bank of America should demand a lower price, because these practices will not -- will not -- be allowed to continue.
As we go forward, we'll look closely at any and all solutions to these problems. Do we need better deterrence, stiffer penalties, more robust disclosures? We will consider any and all such options. And I look forward to hearing from all of our witnesses.
I now recognize Senator Sessions for an opening statement.
BREAK IN TRANSCRIPT
SEN. SCHUMER: Great. Thank you, Senator Sessions, and thank you for your statement.
We're now going to undergo a -- the formality of swearing all the witnesses in. So will you please rise, each of you, and raise your right hand?
(Witnesses sworn in.)
Okay. And we have four witnesses here. And I'd like to introduce each one, and then we'll hear from each of them.
Steve Bailey is a senior managing director for loan administration at Countrywide Financial Corporation. In that capacity, Mr. Bailey is responsible for overseeing Countrywide's loan servicing operations.
Debra Miller is a standing Chapter 13 trustee for the Northern District of Indiana, serving federal courts in Fort Wayne and South Bend. She is treasurer of the National Association of Chapter 13 Trustees. And earlier in her career, she was a special agent for the United States Secret Service in Cleveland, where she specialized in credit card and white collar fraud.
Associate Professor Katherine M. Porter teaches bankruptcy, commercial and consumer law at the University of Iowa. Her current research examines mortgage claims in consumer bankruptcies.
Professor Porter, I note that Senator Grassley, who is very proud of his Iowa Hawkeyes, is tied up at the conference on the farm bill now but wanted to be here to greet you and introduce you personally. He may be able to do that later. He sends his regards.
And finally, Mrs. Robin Atchley is a letter carrier from Ball Ground, Georgia. She'll speak with us today about some of the issues she faced with her bankruptcy in 2005.
The entire statements of each witness will be read into the record.
Mr. Bailey, you may proceed.
BREAK IN TRANSCRIPT
SEN. SCHUMER: Thank you, Ms. Atchley.
I want to thank all the witnesses, particularly you, Ms. Atchley. I know it's not easy to come and talk about it, but it will help others. I want to assure you of that. So you're doing a good deed for others, and I would like your children to know just that about you.
MS. ATCHLEY: Thank you.
SEN. SCHUMER: We have a vote. I think we have about four minutes left. So I think we'll take a brief recess. There are three votes, so we'll try to resume at about 3:15, as soon as we begin the third vote. I'll vote quickly, Jeff will, and we'll come right back and begin questions. So the hearing is temporarily recessed for a half hour. (Sounds gavel.)
(Recess.)
SEN. SCHUMER: (Sounds gavel.) Okay, the hearing will come to order. I'm sure Senator Sessions will be here shortly, but we do want to move along. So we'll try to do seven rounds -- seven-minute rounds for questioning and then we'll come back.
My questions first are -- are to Mr. Bailey. Now, Mr. Bailey, in a news release last fall, Countrywide stated that, quote, "Our number one priority is to help borrowers stay in their homes." And you said, "At the end of the day, foreclosure avoidance is the theme we're going after." You've also said that foreclosure is always an absolutely the last resort, and today you repeated similar comments in your testimony.
Now, I just want to test that commitment. First -- and please answer as succinctly as you can, because we have limited time -- isn't it true Countrywide holds only a fraction of the loans it services on its books?
MR. BAILEY: Yes, that's true.
SEN. SCHUMER: Yeah. What's the percentage?
MR. BAILEY: It's about one in eight.
SEN. SCHUMER: Okay, so that would be about 12 percent.
MR. BAILEY: Yeah.
SEN. SCHUMER: And so if you're not holding a particular home loan on your books, that means you won't have to take any write-down in the event of foreclosure on the home, isn't that correct?
MR. BAILEY: It's not necessarily true. Some of the structures of deals that we have have a (sine ?) loss position even if the loan isn't on our books
SEN. SCHUMER: And how many are those -- small number, right?
MR. BAILEY: No, several hundred thousand.
SEN. SCHUMER: What percentage is that?
MR. BAILEY: It's probably another 10 percent.
SEN. SCHUMER: Okay. So it's still three-quarters are not in that situation. Okay. And so for the vast majority of loans you service, then, I think it's fair to say the bulk of the adverse financial impact from foreclosure is borne not by Countrywide but by the ultimate investor, at least on three-quarters of those?
MR. BAILEY: It won't be exactly that math, because the loans --
SEN. SCHUMER: I understand.
MR. BAILEY: -- especially the couple of hundred thousand have a much higher risk --
SEN. SCHUMER: I'm not trying to get an exact number here --
MR. BAILEY: Okay.
SEN. SCHUMER: It's the concept, and I don't think --
MR. BAILEY: There's significant risk outside of Countrywide's book, yes.
SEN. SCHUMER: Okay. Now let's assume that, as you predict, that the housing market, as you predict, as most analysts have, the housing market continues to slide, and you believe you're servicing many loans that have a high likelihood of default.
The option ARM that you've originated in areas that are experiencing steep home depreciation, like California -- in those circumstances, isn't it true that Countrywide's business model is to offset the servicing losses from defaults and foreclosures by levying a host of ancillary fees on the borrower before there is nothing left for a borrower to give?
MR. BAILEY: It's a good question. I think -- I hope -- give me a little bit of time to respond to this, because I hope to bring some clarity to this, because it's a question that continues to come up in one form or another.
SEN. SCHUMER: Okay.
MR. BAILEY: So the idea that if we sell a loan to an investor -- so Freddie or Fannie or HUD is insuring it -- that if we don't have the ultimate credit loss risk, then that -- if that's removed, then the idea that levying fees that are unnecessary or taking income through a subsidiary will then give us an incentive to want to foreclose, where foreclosure might not be necessary, is a question that continues to come up. So just -- I'll try to keep math --
SEN. SCHUMER: Or that other fees -- if you raise other fees on the route to foreclosure or after foreclosure, they'll mitigate -- you know, they'll make you more profitable -- same thing.
MR. BAILEY: Same general question -- so couple of points: The first one is, the most primary way that we make money in the servicing model -- put aside the idea that you have a loan on your book. This would be for loans that are not on your books. The primary way you make money is if a borrower is making payments, so the service fee that you collect is what you withhold from what you would pass through to an investor. If you did not --
SEN. SCHUMER: But that's --
MR. BAILEY: -- collect the payments --
SEN. SCHUMER: Sir, I -- we are limited in time. That's before any foreclosure or -- correct?
MR. BAILEY: But it's -- it -- the main motive is to keep that loan on the books and keep the customer paying. That's how you get the bulk of your payments. A second way you make money is money that you hold, whether it's in escrow money waiting to disperse in the future, or principal and interest you're holding prior to advancing it to investors, you make money on float. You don't make any float if a payment didn't come in. So again, these --
SEN. SCHUMER: But you can make money from fees, extra fees. Let me read to you a few things here, okay?
MR. BAILEY: If I could --
SEN. SCHUMER: I just want to get these out, and then you can answer them --
MR. BAILEY: Okay.
SEN. SCHUMER: -- because, again, I want to -- in your third- quarter earnings presentation, you report that Countrywide's net loan servicing income more than doubled, from ($)517 million in -- from the second quarter to ($)1 billion in the third quarter -- huge increase in the fees from loan servicing.
And then let me read you this -- this is Mr. Sambol, your president -- in the report, he says, "Now we're frequently asked what the impact of our servicing costs and earnings will be from increased delinquencies and loss mitigation efforts and what happens to costs, and what we point out is, as I now will, that increased operating expenses in times like this tend to be fully offset by increases in ancillary income in our servicing operation. Greater fee income from items like late charges and, importantly, from in-sourced vendor functions that represent part of our diversification strategy, counter-cyclical diversification strategy, such as our business involved in foreclosure trustee and default title services and property inspection services."
What your president, Mr. Sambol, is saying, is by charging people like Mrs. Atchley, who are already in Chapter 13 or in foreclosure, extra fees, you're going to make up for the losses you made in making bad mortgages. That's just what he's saying here, is he not?
MR. BAILEY: Okay, so --
SEN. SCHUMER: Can you answer that? Isn't that what Mr. Sambol is saying?
MR. BAILEY: I can answer that question. It takes a little bit of time.
SEN. SCHUMER: Okay.
MR. BAILEY: If you'll give me -- first, again, in order for any of that income to come in an annuity that's going forward -- let's take this late charge income -- it would need to come from a borrower who made a payment. Late charges is overwhelmingly, of those items that he referred to, is overwhelmingly the biggest fee income that you get. Most of that comes from people who miss one payment, maybe two. They pay a late charge, and they're back on course. That's the overwhelmingly largest fee income that is there.
Second, this idea of these subsidiaries that are involved somehow on the peripheral, involved in foreclosures that pursue -- first, those actions are required in order to proceed with a foreclosure. They're directed. You have to hire an attorney. You have to go through the process of the court in order to enforce the contract. Those fees are going to be collected by someone, whether it was a Countrywide subsidiary -- just -- I know it's --
SEN. SCHUMER: That is not -- Mr. Bailey, in all due respect, to say someone's going to collect these fees doesn't answer the question whether it's in Countrywide's interest --
MR. BAILEY: I will get to that --
SEN. SCHUMER: -- when they're losing money on the basic mortgage --
MR. BAILEY: I will get to that --
SEN. SCHUMER: -- in part because the person couldn't pay, to then pile on and charge the Mrs. Atchleys of the world -- and there are hundreds of thousands of them -- extra fees. Your president says that's how you keep your profit model -- fee -- fee income increased greatly. So you're telling me that someone's going to have to collect these fees. If it's not you, it's someone else. That doesn't answer the question.
MR. BAILEY: I will get to this. I know it's frustrating to go through the detail, but if I can get to the detail, I hope -- please --
SEN. SCHUMER: But if you can answer my question?
MR. BAILEY: I will answer the question.
SEN. SCHUMER: Okay.
MR. BAILEY: The point I'm making about somebody is going to be paid a fee is if a foreclosure process -- which, by the way, isn't the fees that were charged to the Atchleys, which I'd love to talk about that in a minute -- the foreclosure fees that are charged are set by state and investor allowables. We do not set the fees for these allowables. Investors do. As --
SEN. SCHUMER: Excuse me. Do you agree with that, Professor Porter or Ms. Miller? There are many fees that they set on their own and add on their own, isn't that right?
MS. PORTER: Some fees are set by the investors; late fees, for example, are usually in the mortgage contract. Things like demand fees, fax fees -- those are all in the discretion of the servicer.
SEN. SCHUMER: Exactly.
MR. BAILEY: We're talking about foreclosure fees --
SEN. SCHUMER: We're talking about --
MR. BAILEY: -- that are part of the subsidiaries.
SEN. SCHUMER: No, no, no. We're talking about all these extra fees, the kind of piling on that we object to --
MR. BAILEY: Okay.
SEN. SCHUMER: -- to make up for losses elsewhere.
Ms. Miller, is Professor Porter right, Trustee Miller?
MS. MILLER: Yes, Your Honor. In fact, there was a new case that came out in the last couple of weeks in which the servicer actually admitted to the court that they -- that the -- the BPOs, the broker price opinions, were actually sent out by a computer instead of by someone within a servicer and so the BPOs would go out and continue to accrue to the account with no one actually being aware that they were going on the account.
SEN. SCHUMER: Yeah.
MR. BAILEY: I don't know about that.
SEN. SCHUMER: And those are in the discretion of Countrywide or whatever other firm.
MR. BAILEY: So let me go to this issue of profitability and foreclosure.
SEN. SCHUMER: Yes. That's what I asked.
MR. BAILEY: We have made a decision in order to put this to bed on foreclosures, whether it's a default title or whether it's a foreclosure processing, we made a decision to waive all of the -- attorney-related foreclosure fees for anybody who's trying to reinstate their loan out of foreclosure. So actually, us holding those subsidiaries will be in a customer's best interest, because it's the only place they're going to go where we can demonstrate we would much rather work this out, we'd much rather that you would come current. We're going to forgo --
SEN. SCHUMER: When does that take effect?
MR. BAILEY: It already has been put in place this month.
SEN. SCHUMER: This month. So until this month, all the things you say you shouldn't do, you could have done and in some cases did do?
MR. BAILEY: Again, we -- the fees are defendable by market, by legal proceedings, they're defendable. We're trying to go an extra mile and kill any belief that we would rather take income in a subsidiary for a foreclosure. We would much rather have the borrower remain in their home, have no fee, continue the loan, keep them in their home. We're a company that's about homeownership. That's what we were founded on. That's what we're trying to be in the marketplace.
SEN. SCHUMER: That -- many of your practices -- no-doc loans, charging people more than they could ever afford -- call that into question, but we'll get to that in a second round. My time is up. I would just say this: that any business model that says we're going to make up for lost income in the regular mortgage process by extra fees and fees relating to foreclosure and default title services and property inspection in my judgment is not a company that wants to keep people in their homes.
Senator Sessions?
BREAK IN TRANSCRIPT
SEN. SCHUMER: Thank you. We're going to do a second round.
And I would just say, Mr. Bailey, I followed Countrywide for a while, and you're always adopting good practices after you're exposed. I'd like to see some -- I'd like to see Countrywide take a step before there's a negative article, a negative statement in a newspaper or on a TV, and say you're going to do something to move this process forward.
But what I want to talk to you now about is your -- and by the way, my view, given the statements of Mr. Sambol and given the model that Countrywide seems to be using, once you adopt these best practices, if you actually abide by them -- and I think it's good that you do -- your profitability is going to go down because a huge percentage of your income, and in increasing percentages for many of these fees, and my guess is a good percentage of these fees won't be allowed under the best practices.
But let's go to your internal review. You've indicated that Countrywide has completed a number of internal reviews that indicate an error rate of less than 1 percent for mistakes that adversely impact a borrower. I must say, given the track record, it's hard to believe the error rate's so low. I wouldn't give you credit for it based simply on say-so.
So the first question I have is how many -- you used the word plural -- how many internal reviews were conducted?
MR. BAILEY: Maybe to address your broader concern -- and I'll answer that question in just a second. We expect, whether it's your own concerns based on your perspective from the comments you made a minute ago or others, we don't expect somebody to say, "So they did an internal review, that's great; then there's nothing to worry about."
That's why the announcement today about we're going to hire a certified third party, let those results drive -- either if it's worse than what we said, let that be known. If it's as we said, let that be known. But even if the error rate is what we've said, from this third party, and they uncover further best practices, like one of the big best practices we've adopted -- and I'm not aware anybody else has -- is how much review we're doing after we've given information to an attorney, before they're going to submit it with the court.
We did not used to do that; we relied on the attorney. We've changed that. We believe that should have a big impact on errors going forward. If that's not enough and this review reveals that there's further things we should do, we're going to be committed to doing those further things. We do not want to be associated with errors or unnecessary fees at all.
SEN. SCHUMER: Okay. So let's go to these questions. How many internal reviews were conducted, since you used the word plural?
MR. BAILEY: There's been ongoing reviews for the last couple of months --
SEN. SCHUMER: Mr. Bailey, I'm going to ask you to answer my question. How many?
MR. BAILEY: Are you talking about types of reviews or accounts?
SEN. SCHUMER: Well, I said internal reviews. I'll get to accounts in a minute. How many reviews? You used the word plural. Most people would say we did an internal review. You're saying we did internal reviews.
MR. BAILEY: Sure. There has been at least three.
SEN. SCHUMER: Three, okay. Who conducted them?
MR. BAILEY: Various groups within the company.
SEN. SCHUMER: Okay. That doesn't really answer my -- what are you mean -- various employees of the company?
MR. BAILEY: Yes.
SEN. SCHUMER: From the auditing division?
MR. BAILEY: One of them.
SEN. SCHUMER: One. And what were the other two?
MR. BAILEY: From people within the -- people that report to me.
SEN. SCHUMER: Okay. When were they conducted and completed?
MR. BAILEY: Over the last couple of months.
SEN. SCHUMER: And why did you announce them today? Why did you announce the three-point plan today if they were finished awhile ago? Were they finished awhile ago?
MR. BAILEY: Not all of them were finished; some of them were done recently.
SEN. SCHUMER: Okay. Any outside counsel auditors or experts involved, or was it totally internal?
MR. BAILEY: Internal so far, but again it's --
SEN. SCHUMER: I know what you said today. I'm asking about the previous review, because that's what you trumpeted. Why didn't you engage anyone from the outside here?
MR. BAILEY: It's just a matter of time. It would be the next logical step that we would go to.
SEN. SCHUMER: And why did these reviews only start a few months ago?
MR. BAILEY: Again, this is part of adopting the new practices of having further reviews of these --
SEN. SCHUMER: So would you say, sir, given everything you've said, that, say, six months ago, given all the changes you've made as of today, and you're proud of those, would you say that six months ago you weren't doing the right thing here?
MR. BAILEY: No, I wouldn't go that far, because these reviews --
SEN. SCHUMER: So why -- wait, wait, wait --
MR. BAILEY: -- didn't only just deal with --
SEN. SCHUMER: -- let me just ask --
MR. BAILEY: -- the recent transactions, they dealt with transactions --
SEN. SCHUMER: Yeah. I'm asking, on the previous transactions -- here you are, you're adopting new rules; you did your own review a few months ago. Today you're announcing an outside review. I would have -- I think any good company practice would have had an outside review from the get-go. And again, each one you seem to have to be pushed and prodded and moved along to take little steps in the right direction.
Can you give me the reasoning why -- can you tell me -- do you think a year ago Countrywide was doing everything perfectly right, or, in retrospect, were there things that they could have done better?
MR. BAILEY: I think the error rates were low. I think that the error rates we're quoting would be pretty close to what they were a year ago. We were doing lots of reviews a year ago. We're doing more reviews, in trying to --
SEN. SCHUMER: I didn't ask that. I said overall. You're now adapting best practices. Does that mean your practices weren't good six months ago?
MR. BAILEY: No, I don't think that's true.
SEN. SCHUMER: They were good.
MR. BAILEY: I think they were good six months ago.
SEN. SCHUMER: Okay, let me ask you this: How many -- were there samples used, or did you go over all the data in these last three reviews you did?
MR. BAILEY: Two different types -- some of them do the whole population of recent filings, other ones did samples.
SEN. SCHUMER: Okay. And what does it mean, mistakes were made? In other words, if a fee was supposed to be charged -- and I might think and Ms. Miller might think and Professor Porter might think and Ms. Atchley might think that those fees were over -- shouldn't have been imposed at all or were much too high. But if the fee charged was the fee proposed -- I take it that wasn't considered one of the 1 percent; that wasn't a mistake?
MR. BAILEY: It would be a mistake to charge a fee that was either illegal or over the --
SEN. SCHUMER: I didn't say illegal. I said a fee that we think shouldn't have been offered. In other words, how do you define mistake? You just said everything they did a year ago was just fine, so the only type of mistake is -- it said they were supposed to charge them $20 and they charged them $200. That would be a mistake. But if the actual $20 were charged, that would not be a mistake -- right?
MR. BAILEY: If it was a legitimate and appropriate fee, that's right.
SEN. SCHUMER: And your version of what is a legitimate and appropriate fee is changing, the company's version is changing, by the very basis that you're adopting these best practices today, and it will change your practice of what you did previously.
MR. BAILEY: Not the view of an error wouldn't change --
SEN. SCHUMER: In other --
MR. BAILEY: -- the effort to try to prevent an error.
SEN. SCHUMER: So, in other words, these best practices were being followed all along?
MR. BAILEY: No, that's not what I said.
SEN. SCHUMER: Well, I don't quite get what you're saying, sir. I'm asking you -- first you tell me everything was fine a year ago, then you're telling me that you're adapting best practices today, then you're telling me what you did a year ago doesn't meet those best practices. Are the best practices an improvement?
MR. BAILEY: I think they'll be an improvement in the whole industry, yeah.
SEN. SCHUMER: I didn't ask that. I said for Countrywide --
MR. BAILEY: Yeah.
SEN. SCHUMER: -- which has been the leader.
MR. BAILEY: I think --
SEN. SCHUMER: So you've improved on what you're doing, but everything was fine a year ago.
MR. BAILEY: I think that any error that resulted in unnecessary fees --
SEN. SCHUMER: I'm not talking about errors. There's a difference. You, very cleverly I think, defined this as a mistake. Mistake is a flexible word. Mistake usually means there was a numerical error or something like that. I would say, charging someone in bankruptcy an extra fee for, say, Xeroxing -- I'd say that's wrong. But you wouldn't qualify that as a mistake, right?
MR. BAILEY: We don't have any fees. I know you didn't mean --
SEN. SCHUMER: I understand. If you did -- what's a fee that you did charge? What's a fee that you charged Ms. Atchley?
MR. BAILEY: A fee to process a motion for relief.
SEN. SCHUMER: Okay. Do you think that's still correct to do?
MR. BAILEY: Yes.
SEN. SCHUMER: Okay. So you don't think that's a mistake.
Does that conform with best practices, Professor Porter?
MS. PORTER: It would be appropriate to charge a fee for a motion provided that the fee actually represented the honest amount that Countrywide was charged by the attorney -- not a flat fee that was negotiated with fee-sharing or --
SEN. SCHUMER: Did you charge a flat fee, ever?
MR. BAILEY: We charge what the attorneys bill us.
SEN. SCHUMER: No, that's not -- she said that's not appropriate.
MS. PORTER: They charge -- most servicers, not just Countrywide, almost all servicers use flat-fee arrangements for things like motions for relief from stay.
MR. BAILEY: This is a great example of what we would like to see is a central group establish what's the right fee for a motion for relief, everybody charge the same thing. We would love that.
MS. PORTER: The right fee is what it cost the attorney in time and money to file the motion.
SEN. SCHUMER: Did you in the past always charge what it cost the attorney, or did you add something on so Countrywide made some money?
MR. BAILEY: No, never.
SEN. SCHUMER: Never?
MR. BAILEY: There's no add-on so Countrywide can make money on these -- on a motion for relief.
SEN. SCHUMER: Okay, so the fee that you charged was only the cost of doing it --
MR. BAILEY: From the attorney.
SEN. SCHUMER: From the attorney.
MR. BAILEY: Yes.
SEN. SCHUMER: Okay. And were there ever any kinds of arrangements where the attorney got something back for using -- that gave you something back for using them?
MR. BAILEY: No.
SEN. SCHUMER: Never. Okay, so there is no -- the fee never benefited Countrywide at all?
MR. BAILEY: That's right.
SEN. SCHUMER: How did you choose the attorney?
MR. BAILEY: Well, there's attorneys within the different states and you look to people that have good practice. We keep scorecards on these attorneys. If they fail to perform, we'll take action against them. So it's an evolving process.
SEN. SCHUMER: Professor Porter and Ms. Miller, from your familiarity with some of the things that Countrywide did, did they meet the best practices all the time, most of the time?
MS. MILLER: No, Your Honor -- or no, sir.
SEN. SCHUMER: They didn't? And give an example.
MS. MILLER: Within the last few months we had a case where again we paid the mortgage payment each time -- it was Countrywide.
We went to verify the mortgage at the end of the bankruptcy only to be told that they had not completed the RESPA escrow analysis and they were demanding an additional $3,000 in order to have that mortgage be current.
SEN. SCHUMER: Mr. Bailey, did your company do that?
MR. BAILEY: There's no doubt that we have gone through a period of confusion with escrow analysis. We have errors where we did not send escrow analysis when we should have.
SEN. SCHUMER: Was that a mistake, or was that just something that you routinely did?
MR. BAILEY: That's a mistake.
SEN. SCHUMER: Why is that a mistake? Did somebody in Countrywide violate your rules, or that was within the rules of Countrywide?
MR. BAILEY: Both.
SEN. SCHUMER: Okay. The former, if it was within the rules, it's not a mistake. It's a bad policy. That's not how your audit defined mistake. You know that.
MR. BAILEY: I'm not trying to be clever with this. Again, the whole idea is trying to get an external group to come in and audit these practices --
SEN. SCHUMER: As of today, as of the date of this hearing, you announced an external group, right?
MR. BAILEY: But it will go back --
SEN. SCHUMER: Until then it was always an internal group, right --
MR. BAILEY: The review --
SEN. SCHUMER: -- with no outside --
MR. BAILEY: The review's going to go back three years. We're not trying to say that whatever was past --
SEN. SCHUMER: Are you going to make that public?
MR. BAILEY: Yeah.
SEN. SCHUMER: And are you going to hire an accredited auditing firm?
MR. BAILEY: Yes. And the second part was we're going to have an ombudsman --
SEN. SCHUMER: By the way, are you willing --
MR. BAILEY: -- so people can turn to them to get reimbursed.
SEN. SCHUMER: Are you willing to make these internal reviews public, these three?
MR. BAILEY: You know, I don't know the answer to that question.
SEN. SCHUMER: Why wouldn't you?
MR. BAILEY: I wouldn't be the one to decide that.
SEN. SCHUMER: Okay, could you get us -- we'll send a letter to Mr. Sambol and Mr. Mozilo asking to make them public. Do you think they should be made public?
MR. BAILEY: I think what's best is to set the rules of the external audit so that everybody can agree.
SEN. SCHUMER: No, but I didn't ask you that question.
MR. BAILEY: I don't know the answer to the question.
SEN. SCHUMER: Okay, let me ask you this: 1 percent would be about 650 mortgages, right? Yet the trustee in Pittsburgh -- I mean in western Pennsylvania alone is looking at 300 Countrywide cases.
MR. BAILEY: It's 293. That's a good question --
SEN. SCHUMER: Excuse me.
MR. BAILEY: No, it's a good question because it all centers around the idea of what's an error and what's not an error. They're looking at those for a specific reason. We're working with them to sort through what's right and what's wrong. They've taken an interest in 10 of them, not -- the review of 293 they've sorted down to 10 they want to look at, and we're cooperating with them to see if they believe there were improper actions or errors or fees or anything else related to that. So it's not 293 --
SEN. SCHUMER: Ms. Miller and Professor Porter -- and this is just a general question -- does it seem credible to you that the mortgage -- in 99 out of 100 mortgages that Countrywide serviced, that they did everything okay?
MS. PORTER: No.
SEN. SCHUMER: And why do you say that, Professor Porter?
MS. PORTER: Because I've looked at the sample of their claims and I've looked at the way that servicers in general and Countrywide is representative of the industry. I've looked at their actual filings. I've looked at 1,733 claims filed by mortgage servicers, and they do not meet the best practices. They contain errors.
SEN. SCHUMER: So are you sort of surprised when Mr. Bailey says a year ago everything they were doing was just fine?
MS. PORTER: I'm not surprised, because I already knew that to be untrue.
SEN. SCHUMER: How about you, Trustee Miller?
MS. MILLER: Senator Schumer, unfortunately, with the failure of Countrywide to analyze their loans in compliance with RESPA -- actually, I'd have to ask, number one, that the audits go back through every mortgage that's current in a Chapter 13 because if it's just once within the last three years, those people who are currently going to be discharged in the next two years are going to be the ones most --
SEN. SCHUMER: Good point.
Would you be willing, Mr. Bailey, to have this external audit go back further than three years?
MR. BAILEY: I think what our approach is is that if we find, you know, any kind of errors that are beyond what we had said, we'd absolutely go back further and include more people.
SEN. SCHUMER: Well, you're going to find errors, by your own admission, of about 1 percent.
MR. BAILEY: Right.
SEN. SCHUMER: So will you be willing to go back more than three years?
MR. BAILEY: We're going to do the initial audit the way that we've laid out and we're going to look at the results.
SEN. SCHUMER: Mr. Bailey, this is the point I'm trying to make. You want us to believe it's a new company and you're going forward and you want to do everything right, but whenever you're asked something specific -- to make a document public, to go back further because there are people still before the trustee whose audits go back further than three years -- you don't answer.
And I'm sure if there are three or four articles in newspapers, or another hearing or two like this, you'll come and put out a press release saying you're doing it, aren't we great? That's not what we're looking for here.
You, in my judgment -- and it's my own judgment -- Countrywide is more responsible for the mortgage mess and the ensuing problems than almost anybody else. There's a lot of blame to go around, but you're way at the top of the list. And I've met with Mr. Mozilo and I've studied Countrywide. And I was surprised when Bank of America actually bought you, knowing what I knew about Countrywide. And I think Bank of America is a good company; I'm not casting any aspersions on them. And here today, again, you seem to me to be sort of trying to do the least possible to, quote, "get away with it," if you know what I mean.
And I know you'll find that a little harsh, but I'd feel better if you said to me you're a high-up person, you're in charge of servicing, "we're releasing these internal audits." I have no faith -- I don't think anyone would -- certainly Miss Atchley wouldn't have faith in your own internal audit. By the way, she wouldn't feel very good even if it were 1 percent if she were the 1 percent. But I doubt she is, because I think there are probably many more Mrs. Atchleys than the 1 percent. But that's the problem we face here. Why wouldn't you go back further and audit five years, or six years, since those are going to be some cases that are coming up now?
MR. BAILEY: So the question is why wouldn't we go back further?
SEN. SCHUMER: I asked you, would you be willing to go -- this was not my suggestion; it was someone who knows more about this than me, Trustee Miller, and I saw Professor Porter shaking her head, and so it seems to me to be a reasonable idea. You say you want to get to the bottom of it; you say you want to make corrections. They're saying a three-year audit trail is not good enough. And you intend, I guess, to audit every one, right, like Trustee Miller asked, every mortgage?
MR. BAILEY: I think the point is to work on the details of that audit was something that's forthcoming. If the issue is you think we're hiding something by not going back five years, we'll make it a five-year audit. It's not -- again, we're not --
SEN. SCHUMER: Is five years adequate, Ms. Miller, do you think?
MS. MILLER: Sir, perhaps any mortgage that's currently in a Chapter 13 --
SEN. SCHUMER: How about any mortgage that's current in Chapter 13, yeah?
MR. BAILEY: I don't think you mean current. Any mortgage --
MS. MILLER: Or currently in --
MR. BAILEY: -- in the process.
SEN. SCHUMER: In the process, yeah.
MS. MILLER: -- in Chapter 13.
MR. BAILEY: Again, I think we have to start with a rational sample of that five-year period and look at the results and see what --
SEN. SCHUMER: Okay.
MR. BAILEY: -- practices or extrapolations are needed.
SEN. SCHUMER: And one of the things I'm thinking of doing is asking the FTC to do a review, because I think that you're -- I don't have much faith in your own -- I have less faith in your own internal audit now after hearing the answers to your questions. No one from the outside, you can't really tell me why or when it started, how deep it was, how big the sample was, won't make it public. You can hire an auditor, and the more well-known the auditor the better. I hope it will be a well-known firm that has a reputation for independence and integrity, but we still may need an FTC audit. And I guess I would certainly suggest to Bank of America that they do their own review, and they do it soon.
Let me ask you this -- based on the 1 percent mistake rate, quote, "mistakes," unquote, and given some of the problems in the past, has anyone been fired or disciplined based on the internal reviews?
MR. BAILEY: You know, I don't have the information.
SEN. SCHUMER: You don't know of any?
MR. BAILEY: I don't know that.
SEN. SCHUMER: Wouldn't you? You're in charge of this department.
MR. BAILEY: Not necessarily -- if lower-level people would have been terminated, I wouldn't necessarily know that.
SEN. SCHUMER: Mm-hmm, okay.
And let me ask you this: Will the future audit cover only bankruptcy cases, or will it cover all cases? Because there may be people who were being charged these fees, the mortgage was already signed but who are not yet in bankruptcy but are having trouble.
MR. BAILEY: I'm not sure I follow that.
SEN. SCHUMER: The audit, you know, that you said you'd do -- you said you'd do them of all cases already in bankruptcy. What about other mortgages that were issued where fees maybe are being charged post-mortgage that the mortgager wasn't aware of? They may be related to acts of foreclosure; they may be related to other issues. Could we get the audit expanded to those types of cases?
MR. BAILEY: I just -- that sounds like an extremely broad audit. I'm not sure what the --
SEN. SCHUMER: Okay. I'll write a letter. I'll put in my letter to Mr. Mozilo and Mr. Sambol, that request, and maybe we'll get an answer to that.
I have a few more questions, but I'll hand it over to Senator Sessions for a few minutes because he's been very nice. He said I could go as long as I wanted.
But before I do, could I just ask Professor Porter and then Trustee Miller to comment on Mr. Bailey's general testimony here -- just any comments you might have?
MS. PORTER: The first comment I would make is that I'll emphasize again to the committee that I'm very pleased that Mr. Bailey is going to be making some much needed and long overdue improvements, but I am concerned about the millions of families whose loans are serviced by Wells Fargo, by Ocwen, by Litton, by all the other companies that are not here today and that's why I believe we need to do something systemic.
SEN. SCHUMER: Yes.
MS. PORTER: I think Countrywide's a good place to start, but I'm concerned that without incentives the other servicers won't follow.
SEN. SCHUMER: Right. And, Professor Porter, we intended to do that, either legislatively adapt best practices, maybe go beyond the best practices, but we intend to actually do something that is required by all companies, not on a voluntary basis.
Do you have anything to say, Trustee Miller?
MS. MILLER: I also am encouraged by Mr. Bailey saying that he will implement the best practices within the next month, and we will do everything that we can with the administrative office and the courts and the U.S. trustee program and our organization to make sure they have the forms to get that done.
I appreciate that Mr. Bailey is beginning to look at the loans in bankruptcy, but I guess I just want to stress to Mr. Bailey that the loans that are going to be most at issue and the debtors that are going to be hurt the most are those that are closest to receiving their discharge.
SEN. SCHUMER: Right.
MS. MILLER: Because without the RESPA analysis, we in the bankruptcy system do not have the ability and the time to perhaps pay the taxes and insurance that were missed by those prior escrow analyses, and to not do those first, and do the current ones, I think that actually those older loans need to be done, those need to be disclosed, they need to be sent to the trustee so that we can work with the debtors, work with Countrywide to try and resolve those so that the people don't come out of the bankruptcy and immediately get an order of foreclosure from the court.
SEN. SCHUMER: What do you think of that, Mr. Bailey?
MR. BAILEY: I think that's a very good suggestion.
SEN. SCHUMER: Good, appreciate that.
Ms. Atchley, do you want to say anything here? I know you've been listening, and -- but you don't have to, only if you want to.
MS. ATCHLEY: (Off mike.)
SEN. SCHUMER: Thank you.
Senator Sessions.
BREAK IN TRANSCRIPT
SEN. SCHUMER: And I would just -- if my colleague would yield -- that's just what we intend to do -- at least just that. We may do more.
SEN. SESSIONS: But I think we do need to listen to the courts and the experience of the litigation and what becomes realistic and effective, but I absolutely think that if this is going to remain confused, that Country (sic) would benefit by clarity so he can be held accountable -- Countrywide can -- when it's absolutely clear. If there's some split of authority in claiming some fee and he's got a court somewhere that says he can claim it, it's hard to accuse him of abuse of process for claiming that fee.
I would note, Ms. Miller, that just looking at the bankruptcy filings, in 2003 there were a total of 1.6 million; 2007, even with an increase, it was 850,000. So I would just suggest that bankruptcy trustees have fewer cases, and we expect you guys to be alert. And the judges have got fewer cases, and we need to be giving attention to these matters.
And I thank you for highlighting it, Senator Schumer. This is a federal court. We have set the basic rules for it. If there are imperfections in the rules we've passed so we need to go further, let's do so.
But let's remember, Professor Porter, that, you know, you said it shifts the burden to the creditor, but really, when you go to court and you're asking to wipe out hundreds of thousands of dollars in debt so you don't have to pay it, you've got burdens, too. These are not hopeless, helpless people. They've got a lawyer, and the lawyer's supposed to be filing this and making sure that their clients' interests are protected, and that they should not allow a claim to go forward if they don't see the note and don't have proof of the debt.
MS. PORTER: And I think some clarification of the rules and the law will motivate debtors' attorneys to do their jobs properly.
SEN. SESSIONS: Okay.
SEN. SCHUMER: Well, I look forward to working with you, Senator Sessions, on that.
I want to thank our panel. I think they've moved us in a very good direction.
I want to thank you, Ms. Atchley. You may be in part responsible for some laws being adopted that would prevent other people from having to go through what you did.
And I want to thank everybody -- and I know, Mr. Bailey, this isn't an easy hearing for you, so I appreciate your being here as well.
The panel is dismissed.
MS. MILLER: Thank you.
SEN. SCHUMER: Okay, our next -- we have a second witness (sic), and that is Trustee Cliff White.
Mr. White, we're running late because of the votes.
First, let me introduce you. Clifford White III is director of the Executive Office of the United States Trustee -- for United States Trustees. He oversees the operation of the U.S. trustees offices nationwide. He's a former AUSA -- assistant U.S. attorney -- and deputy attorney general with Justice.
And Mr. White, I asked Senator Sessions -- neither of us have questions of you. We've been running late. Your entire statement is going to be read into the record. We knew you couldn't sit on the first panel because of the ongoing litigation, so I think I'm just going to thank you, and we may submit some written questions.
Senator Sessions, go right ahead.
SEN. SESSIONS: I'd like to thank Mr. White. The trustee does have a serious responsibility and was created for the purpose of trying to provide -- ensuring integrity in the system; isn't that right, Mr. White?
And you all have filed, what, 74,000 enforcement claims and have stepped up on this Countrywide manner, and I appreciate that.
Do you think there's any ambiguity -- the one question I would ask you -- about a proof of claim being covered by the sanctions amendment that we discussed, or --
MR. WHITE: There are clearly sanctions that can be attached to filing an inaccurate proof of claim.
Now, much of the information that you've gotten in the previous panel is very helpful and valid with regard to different practices and availability of sanctions and so forth, but when you pull it all back, what we're looking at -- certainly with the U.S. trustees focused on the litigation that I described in the testimony -- is when inaccurate information is being filed by a creditor -- inaccurate information which can be harmful to the debtor, it can be harmful to the creditor, and it certainly is harmful to the integrity of the system.
And we have forcefully argued that we have the authority to bring those cases, and we believe the court has authority to forcefully impose sanctions to remedy those abuses, so we think we've had some success. We're continuing despite vigorous challenges made against us by certain mortgage services. We're going to continue down this road and we think we'll continue to have some success.
SEN. SCHUMER: Mr. White, you have our backing to do that, and I think you're doing a good job there, and we appreciate your testimony.
MR. WHITE: Thank you very much.
SEN. SCHUMER: And before I conclude, I'd like to do a few things: ask unanimous consent to enter into the record a statement by Senator Grassley, a hard copy of Professor Porter's study entitled "Misbehavior and Mistake in Bankruptcy Mortgage Claims," hard copies of the slides used during Professor Porter's testimony, and a series of newspaper reports documenting the scope of the problem behind today's hearing.
With that, I want to thank the entire panel. I want to thank everybody for being here. This is going to start us off on a very serious road. I'm also going to leave the record open for one week so that we can submit written questions of you, Mr. White, or of any of our previous panelists.
Thank you, and I thank Senator Sessions for his interest and his, as usual, erudition in matters such as these.
The hearing is dismissed. (Sounds gavel.)
Source