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Bank of America Settlement -- A Sign of True Progress?

By Henry Sommer

    In my last post I noted the beginnings of some positive movement by consumer protection agencies that have been largely dormant and, in some cases like the United States Trustee program, actively anti-consumer. A few weeks ago, as Katie Porter noted in a recent post, Bank of America (BOA) reached a settlement with the Federal Trade Commission with respect to certain mortgage overcharges, including overcharges in bankruptcy, on mortgages formerly serviced by Countrywide Mortgage. The settlement requires reimbursement to consumers who were overcharged. BOA, in addition to agreeing not to lie, steal, or file documents without reviewing them, will also have to follow notice procedures similar to those that are already required or are likely to be required for all mortgage companies once new Bankruptcy Rule 3002.1 becomes effective in December, 2011. The United States Trustee (UST) Program assisted the FTC in its efforts.  This settlement is the first significant positive result of increased UST scrutiny of mortgage lenders, although the extent of the UST?s participation is not known.

    While it is nice to finally see some action by the United States trustees and other regulators on this issue, after well over a decade of complaints by consumer attorneys chapter 13 trustees, and many bankruptcy judges, the settlement raises more questions than it answers. The settlement agreement is very vague on what will be refunded beyond charges that were marked up by the mortgage company from the amounts it actually paid to third party providers. Will it also cover unnecessary charges, such as repeated property inspections when debtors are paying into chapter 13 plans, or attorneys? fees to obtain stay relief in chapter 7 cases where the stay will end automatically when the case is closed (often around the same time the relief order is granted)? BOA reserved the right to continue to assess charges permitted by its mortgages, and will undoubtedly continue to argue that all its charges are permitted, just as it has always done.

    And how is anyone going to find the victims, many of whom have lost their homes due to the overcharges?  Will they receive any compensation for the tremendous hardships caused by losing their homes? Will consumers have to find out about the settlement and submit claims? How was the settlement figure of $108 million calculated? Maybe there are answers to these questions, but they are not in the settlement. Whether the tens (perhaps hundreds) of thousands of consumers who were harmed can actually access the settlement will be the ultimate test of whether it is more than a headline-grabbing press release and source of funds for FTC ?informational? efforts..

    Even more importantly, what systemic changes will be made to solve the basic problem of mortgage overcharges going forward? It has been apparent for almost twenty years that a basic problem is the refusal of mortgage servicers to create software that reflects the payment scheme of mortgage cures in chapter 13 plans. The settlement does not require any changes other than the adoption of a ?data integrity program,? whatever that means.  Because we know that mortgage proofs of claim and motions for stay relief are regularly inaccurate (far more often than debtors? schedules), the National Association of Consumer Bankruptcy Attorneys (NACBA) has been requesting for some time that the United States trustees institute systematic audits of these documents. However, no such systemic scrutiny appears to be happening, either for BOA or for all the other mortgage servicers who engage in the same types of practices. This settlement, at best, addresses only the tip of the iceberg.

    The courts continue to be inhospitable to class relief on this issue, as demonstrated by the recent Wilborn decision of the Fifth Circuit, which reversed class certification in a challenge to mortgage overcharges. Appellate courts still don't seem to understand that it will take major sanctions to get the mortgage servicers to spend the money to make major changes in their business methods, as shown by the recent Nosek decision of the First Circuit that reduced somewhat meaningful sanctions to a slap on the wrist. Otherwise, occasional small penalties will simply be a cost of doing business.  The recent Supreme Court decision in Rent-A-Center v. Jackson, again permitting the use of mandatory arbitration clauses to keep claims out of the court system, also shows us how far we need to go in the courts.

    The fact that the mortgage overcharge scandal has gone on for so long (I had my first case arising from systemic overcharges almost 20 years ago) is a prime example of the lack of consumer protection enforcement in recent years. Whether agencies like the FTC and UST take strong action to finally rectify it will be a prime test of whether they have truly turned the corner, and whether the recent settlement was more than a public relations ploy that will not change the underlying practices.

P.S. Incidentally, it just so happens that NACBA's Fall Bankruptcy Workshop will include an intensive one and a half day program, led by Max Gardner, Tara Twomey and others, on litigating against mortgage servicing abuses. Information will soon be available at www.nacba.org

Full post as published by Credit Slips on July 02, 2010 (boomark / email).