September 28, 2020

Fair Game: A Low Bid for Fixing a Big Mess

Just don’t think for a moment that this victory for prosecutors will be keeping the high and mighty of finance up at night. No, some giant financial institutions have a bigger worry — namely, how to make the foreclosure fiasco go away.

As the Rajaratnam verdict captivated many on Wall Street last week, the institutions that service about two-thirds of the mortgages in this country offered to pay $5 billion to settle allegations about robo-signing and other shady practices that quick-step troubled borrowers out of their homes.

That figure is a fraction of the $20 billion that state attorneys general had apparently floated. If regulators accept the lowball offer, perhaps that would be because they haven’t dug deep enough.

Because evidence of extensive and abusive servicing practices does in fact exist. It is piling up at the offices of the United States Trustee Program, the arm of the Justice Department that monitors the bankruptcy system. Over the past six months, the trustee has drawn material from 95 field offices covering 88 judicial districts. The findings should dispel any notion that toxic servicing practices were atypical or have done no harm.

Clifford J. White III, director of the executive office of the United States Trustee, discussed some of the findings in an interview last week. But before we recount the ugly details, it’s worth noting the immense pushback the banks have mounted against the trustee office.

Banks have repeatedly tried to thwart the program’s actions, filing lawsuits and court motions to prevent officials from compiling evidence. Never mind that part of a trustee’s job is to investigate possible improprieties in foreclosures to determine if they are poisoning the bankruptcy system.

“We have faced consistent opposition by all of the major servicers,” Mr. White said. “We are currently facing 200 motions to quash our discovery requests. We also are facing upwards of 20 appeals either in district courts or in circuit courts.”

Those pushing back include Bank of America, Citigroup, G.M.A.C., JPMorgan Chase and Wells Fargo, he said.

The banks typically make two arguments. First, they say the trustee program has no legal standing to delve into individual cases between lenders and borrowers because it is not a “party” to these disputes. Every court has rejected this claim. Nonetheless, the tactic has allowed servicers to stall trustees’ discovery requests.

In other cases, the banks agree to turn over information in specific matters of interest to the trustee program but refuse to provide details on their overall policies and procedures, which could show deep and systemic flaws.

Why are these institutions so afraid of a little sunlight?

To be sure, the nationwide investigation by the United States Trustee’s office represents an aggressive tack that big financial institutions are unaccustomed to. “The bankruptcy system provided an early warning sign of problems in mortgage servicing,” Mr. White said. “We began looking a few years ago at some of the violations of mortgage servicers, on a case-by-case basis. What’s different from the past is, if we find a facial discrepancy” — something that’s a problem on its face — “we are off the bat seeking discovery.”

When the banks have provided information, lawyers for the trustee program have often found extensive errors in amounts owed and charges levied. Needless to say, these mistakes do not typically favor the borrowers.

Mr. White declined to get specific. But the mistakes that his office has found fall into two broad categories. One involves inaccurate amounts that the banks say borrowers owe. The accuracy of these documents, which are filed with the courts, is crucial. Borrowers and bankruptcy judges overseeing their cases use them to determine payment schedules to cure defaults, for example.

Inaccuracies often arise because loan servicers fail to reflect that borrowers are in trial loan modifications, like those offered by the government, Mr. White said. As a result, though borrowers are paying the proper amounts, the servicer shows them falling behind. Then the bank moves to restart foreclosure.

Article source: http://feeds.nytimes.com/click.phdo?i=de0bf66e6f5b6f0e49cdd91e81988dce

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