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November 28, 2007

Foreclosures by Lender Investigated

By GRETCHEN MORGENSON

The federal agency monitoring the bankruptcy courts has subpoenaed Countrywide Financial, the nation’s largest mortgage lender and loan servicer, to determine whether the company’s conduct in two foreclosures in southern Florida represented abuses of the bankruptcy system.

The subpoenas for Countrywide documents were issued in late October by the United States Trustee after the agency announced an effort to move against mortgage servicing companies that file false and inaccurate claims in foreclosure cases. The inquiries into Countrywide by the trustee’s office, a division of the Justice Department, come as foreclosures are increasing across the country.

The ways that lenders and loan servicers deal with troubled borrowers are also coming under increased scrutiny by judges. In recent weeks, three federal judges in Ohio have dismissed 73 foreclosure cases brought by lenders and loan servicers against borrowers because the companies failed to show proof that they owned the notes underlying the properties they were trying to seize.

In Florida, one of the trustee’s inquiries involves Manuel Del Castillo and Maria E. Pena, Miami borrowers who filed for protection last May under Chapter 13 of the bankruptcy code. In July, Countrywide Home Loans filed a claim, saying that the borrowers owed almost $279,000 on their loan.

Included in the figure, court documents show, was an $11,924 advance Countrywide said it had made to an escrow account before the borrowers filed for bankruptcy as well as an insufficient- funds fee of almost $683.

In the second case, the trustee has asked for documents relating to Countrywide’s claim for almost $101,000 against William and Joyce Chadwick, borrowers in Boca Raton, who filed for Chapter 13 protection in October 2005. Included in that figure was $2,400 in overdue mortgage payments.

The borrowers in both cases objected to Countrywide’s claims of what was owed. In court documents, the Del Castillos argued that Countrywide had not provided an itemized list of the charges, while the Chadwicks contended that their mortgage payments were current.

Countrywide failed to appear at hearings on both borrowers’ objections, and judges ordered the fees stricken from the claims.

The United States Trustee took an interest in both matters after Countrywide did not respond to the borrowers’ objections.

In court documents, the trustee said that it intended to examine the procedures Countrywide used to determine that it had a valid claim to the properties and that it had correctly calculated the amounts it said the borrowers owed. The trustee’s office asked Countrywide to produce a copy of the notes and mortgages, a payment history on both loans and the correspondence it had with the borrowers.

Countrywide objected to the trustee’s examination and subpoenas in both cases, saying that they were overly broad and exceeded the office’s powers. But the bankruptcy judge hearing the Del Castillo case ruled against Countrywide last week and the examination will go forward. A hearing on the Chadwick case is scheduled for Dec. 3.

A spokeswoman for the United States Trustee’s office in Washington declined to comment further. A Countrywide spokesman said the company did not comment on pending litigation, but added that it had intended to appear at the hearings and was investigating why its outside counsel did not do so.

Questionable or nonitemized charges levied on imperiled borrowers by lenders and loan servicers are an industrywide problem, consumer advocates contend. A recent study of more than 1,700 foreclosure cases by Katherine M. Porter, an associate professor of law at the University of Iowa, showed that questionable fees had been added to almost half of the loans she examined.

In a case involving Wells Fargo and a Louisiana borrower, for example, the court found that the bank assessed improper fees and charges that added more than $24,000 to a loan, some 12 percent more than the court said was actually owed.

In another case, Ms. Porter found that a lender had claimed that the borrower owed more than $1 million but that an examination of the loan history showed the true balance to be $60,000.

William J. Brennan Jr., director of the Home Defense Program of the Atlanta Legal Aid Society, said dubious fees were common among the cases he sees.

“Since there has been so little response from the federal regulators in terms of addressing mortgage lending abuses, including adding post-petition bankruptcy fees to borrowers’ loans, it is refreshing and gratifying to see that the U.S. Trustee is taking an interest in this,” Mr. Brennan said. “We see so many instances where our clients have filed Chapter 13 bankruptcies, and property inspections, broker price opinions, late fees will appear. Those fees are improper and illegal and should be credited back to the homeowners.”