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Henry Sommer on Mortgage Overcharges and the Need for Reform

By Brian Wolfman

If you do bankruptcy work or help people deal with predatory mortgage lending, you should read bankruptcy law expert and consumer advocate Henry Sommer's post over at Credit Slips on unlawful mortgage overcharges. He explains that the overcharges themselves can be so large as to throw people into foreclosure. He also discusses the recent Federal Trade Commission settlement with Bank of America on overcharges for mortgages formerly serviced by Countrywide Financial and asks a series of questions about that settlement in an attempt to discern whether it will get at the problem.

The problem he described struck me as serious, so I wrote to Henry asking for more detail on exactly the kind of overcharges he was referring to (his blog entry mentioned charges for trumped up or unnecessary property inspections, but I wanted to know what else he meant), the magnitude of the charges, and the specific reforms he proposed.

Here's Henry's terrific answer (given within a few minutes of having received my question):

The overcharges range from property inspections to unnecessary broker price opinions to forced placed insurance to improper late charges, "bankruptcy monitoring fees," attorney's fees to file a proof of claim (which should be a ministerial task, but for the servicers' accounting deficiencies), all of which in turn lead to unfounded motions that add attorney's fees. There is often double-counting of escrow deficiencies (including them in the arrears and also adjusting current payments to add them in). In chapter 7 [bankruptcy] cases, mortgage servicers file motions for relief from an automatic stay that will end shortly as a matter of course, in order to churn more attorney's fees. (The attorney's fees have their own dimension of abuse - often the work is subcontracted by large national firms to local counsel who are paid less than the fee being charged to the debtor.) Many cases involve thousands of dollars in improper charges. What often happens in these cases is that debtors complete their chapter 13 plans, thinking they have cured their mortgage defaults, and then receive a foreclosure notice soon afterward saying they are several payments behind. The proposed Bankruptcy Rule 3002.1 is an attempt to deal with this problem, at least by providing notice and an opportunity to contest the charges during the bankruptcy case. (There have also been bills in Congress to address this, but they have not really progressed yet, except for section 524(i) of the Code, enacted in 2005.)

Judge Elizabeth Magner in New Orleans has written some great opinions about this. She has done the painstaking work to unravel some of these accounts. In Jones v. Wells Fargo Home Mortg. (In re Jones), 366 B.R. 584 (Bankr. E.D. La. 2007), aff'd Wells Fargo v. Jones, 391 B.R. 577, she found $24,450 in illegal fees and interest and explained the accounting well. This case included a property inspection charge for September 2005, when access to the property was impossible because of Hurricane Katrina.

You can find many more cases in my book, Consumer Bankruptcy Law and Practice, sections 11.6.1.3.3.5, 12.11nn.521-23, and 14.4.3.4 (9th edition).

Full post as published by CL&P Blog on July 02, 2010 (boomark / email).