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Bankruptcy Judges, Justice Dept. Rip Mortgage Companies

"Systemic abuse." "Extraordinary incompetence." "Reckless."  In a growing body of legal cases, judges and the Justice Department are breaking from legal jargon to starkly chastise mortgage companies. 

As mortgage delinquencies rise, more and more homeowners are learning the central role that mortgage servicers play in their lives. The legal cases show that role can be distressing. Judges have found that major mortgages servicers regularly mess up basic accounting, improperly credit payments and charge unwarranted fees. They’ve "not done a very good job of keeping the records," said Judge Samuel Bufford of California.

Mortgage servicers — typically either bank subsidiaries or independent companies — handle the day-to-day work with homeowners, ranging from collecting monthly payments to determining when to modify or foreclose. Problems with servicing often, but not always, occur once homeowners start having trouble making payments.

Complaints to the government about mortgage servicers have soared in recent years. They’verisen from 31 percent of the complaints that the Department of Housing and Urban Development received in 2006 to 78 percent in 2008, according to HUD spokesman Lemar Wooley.

Problems Exposed in Bankruptcies

Many homeowners in bankruptcy have legal representation and must settle claims with servicers. As a result, the process has revealed and documented a slew of servicer problems.

In many rulings, judges have shown frustration and even outrage. They’ve ruled that servicers have attempted to collect unjustified fees, charged homeowners for unnecessary insurance, failed to properly credit homeowners’ payments and failed to provide evidence to back up fee requests. In most cases, judges demand that servicers fix the problems and unwind the unjustified fees; sometimes, judges award damages and attorneys’ fees.  In one extraordinary case, a judge issued $750,000 in emotional and punitive damages. (We’ve compiled five sample cases and rulings for you to see here.)

The Moffits with their grandchildren. Take the case of Donald and Phyllis Moffitt of Arkansas.  In June 2008, bankruptcy Judge Audrey Evans issued a restraining order against America’s Servicing Company, a division of Wells Fargo, saying it  must stop attempting to collect payments that the Moffitts did not owe.  In a 41-page ruling (PDF), the judge wrote:

"The evidence supports the premise that ASC’s servicing procedures, as exemplified by the Moffitts’ account, are not organized to assure accuracy and accountability. … ASC misapplied these payments, failed to record the correct information even though Mrs. Moffitt constantly called and talked to ASC’s agents, failed to follow her written instructions, failed to communicate with the Moffitts, sent mortgage statements that were incomprehensible and frightening, began collection calls, and engaged in a litany of mismanagement of the Moffitts’ loan."

Wells Fargo did not respond to a call for comment.

A 2007 study looked at a majority of Chapter 13 bankruptcy filings in 2006 and found that in 70 percent of the cases studied, mortgage companies claimed homeowners owed an average of $6,309 more on their loans than homeowners believed.

Problems with servicing are not limited to families filing for bankruptcy, Katherine Porter, an author of the study and an associate professor at the University of Iowa’s law school, testified before Congress last year. She said servicers commonly foreclose when they do not have the legal right to do so, impose unwarranted or illegal fees, and miscalculate how much families owe.

In several instances, judges have taken broad action to address persistent problems with a servicer. This May, Judge Elizabeth Magner in Louisiana said her review of multiple cases involving Ocwen Loan Servicing had shown the servicer regularly acted in "bad faith." The judge said Ocwen had charged improper fees and attempted to collect bankruptcy-related fees after the court closed a case. In one of the cases, Ocwen took 10 months to provide a full accounting of fees.

The judge wrote that Ocwen’s "systematic abuse" required more than monetary sanctions, which had not stopped the behavior in the past, so Magner issued an order (PDF) forcing Ocwen to follow specific accounting procedures.  (We’ve noted before that Ocwen’s servicing procedures have raised eyebrows in the past).  Ocwen’s general counsel, Paul Koches, said the company disagrees with the ruling and is pursuing an appeal in U.S. District Court.

Justice Department Takes Action

The Justice Department’s United States Trustee Program is a watchdog over the bankruptcy process. Its 21 regional offices oversee more than 1,300 private trustees who mediate between debtors and creditors in individual bankruptcy cases.

The Trustee Program’s annual report said combating servicer abuse (PDF) was a top priority last year. The program initiated 68 actions (PDF) against what it calls "systemic abuse" by mortgage servicers, including 25 large servicers such as Countrywide, HSBC and JPMorgan Chase, according to public documents (PDF) and speeches (PDF).  The Trustee Program has sued Countrywide in at least six states.

Countrywide, now owned by Bank of America, is the largest participant in the federal Making Home Affordable program to modify troubled mortgages. A recent analysis by the Associated Press found that at least 30 of the 38 mortgage companies that have signed up for the program have been sued over their servicing practices.

In response to one U.S. trustee’s suit in Ohio, Judge Marilyn Shea-Stonum ruled in May (PDF) that Countrywide had charged fees with "no factual basis" and wrote: "Countrywide’s system is reckless. It appears to me designed to allow each actor in the process to act with indifference to the truth, and to rely solely on the limited information made available at each step. … [The errors in this case] evidence Countrywide’s disregard for diligence and accuracy."

The judge is currently determining monetary and other sanctions.  Countrywide spokeswoman Shirley Norton said, "We are reviewing the ruling and considering our options."

Private trustees have sued servicers as well. Debra Miller, a private trustee in Indiana, has been active in litigation where servicers haven’t complied with federal regulations. Typically, she said, private trustees try to obtain settlements that are more about changing practices than monetary compensation.  "Our job is to force mortgage companies to improve their systems," she said.

Both the Justice Department and private trustees have stepped in to fill what they see as a regulatory void covering mortgage servicers, according to Andrea Celli, a private trustee in upstate New York.

Future Oversight Under Debate

Currently, a hodgepodge of agencies oversees mortgage servicing. HUD, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, the Federal Trade Commission and the Federal Reserve all have partial authority.

Concern over mortgage servicing was part of the early discussions about the proposed new Consumer Financial Protection Agency, according to Eric Stein, the Treasury Department’s deputy assistant secretary for consumer protection.  The CFPA, as proposed by the Obama administration, would be the primary watchdog for servicer abuses.

Servicers are resisting the new consumer agency. Paul Leonard, a lobbyist for the Financial Services Roundtable, said his organization’s members believe that there should be better coordination among regulators and that existing agencies can handle the responsibility.

Tara Twomey, a lecturer at Standford Law School who co-authored the large study of bankruptcy cases, says that more regulation would help, but it would only be a "Band-Aid."  "The more fundamental problem is one of market structure," she said. "Borrowers don’t get to choose their servicer."


Homeowners Servicer Key findings From the Judge’s Opinion

Jacalyn Nosek in Massachusetts


Found overall failure to properly and timely credit Nosek’s payments


Forced Ameriquest to pay $250,000 in emotional distress damages and $500,000 in punitive damages

In the Mar. 6, 2007 order:

- “The Court was outraged by Ameriquest’s actions and found that its failure to maintain accurate accounts exacerbated Nosek’s emotional distress.”


- “As for punitive damages, the Court finds that Ameriquest’s accounting practices are wholly unacceptable for a national mortgage lender.”

Donald and Phyllis Moffitt in Arkansas

America’s Servicing Company (a division of Wells Fargo)

Issued a temporary restraining order stopping ASC from trying to collect undue fees and to send only regular, accurate mortgage statements

In the June 18, 2008 opinion:

- “The evidence supports the premise that ASC’s servicing procedures, as exemplified by the Moffitt’s account, are not organized to assure accuracy and accountability.”

Debra Hight in Texas

Wells Fargo

Found Wells Fargo did not provide evidence to justify the $675 in attorney’s fees for a foreclosure that never went through


Found Wells Fargo claimed $779 in escrow fees for unpaid property taxes that it did not prove it actually paid.

In the Aug. 13, 2008 opinion:

- “Wells Fargo has not set forth any evidence that it actually paid the Property Taxes. In contrast, testimony was adduced indicating that… the Property Taxes had not been paid.”

David Collins in Texas

America’s Servicing Company (a division of Wells Fargo)

Judge Marvin Isgur grouped together 10 cases that all included America’s Servicing Company and found that in six cases, ASC charged fees it could not justify, and in two cases, the attorney for ASC intentionally filed inaccurate fee requests.

In the June 8, 2009 opinion:

- “The Court will not authorize payment for conduct that intentionally misled the court.”

Cory and Regina McKain in Louisiana


Judge Elizabeth Magner imposed new accounting procedures after finding Ocwen tried to collect fees it was not owed in one out of every six cases involving Ocwen before the court.

In the May 1, 2009 order:

- “The Court does not believe Ocwen has taken the steps necessary or appropriate to eliminate or correct its pattern of error.”

- “The Court finds that this practice is in bad faith and required greater regulation of Ocwen’s behavior to curtail further abuse of the bankruptcy system.”

Karen Weise

Karen Weise was an intern at ProPublica and a recipient of the Mark Felt Scholarship for Investigative Reporting at UC Berkeley's Graduate School of Journalism.

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