Dear NACBA Member:
As many of you know, NACBA has been pressuring the UST to go after mortgage Proof of Claim abuses for years now and late last Fall had a very productive conversation with the associate Attorney General about this issue. We also have been discussing this issue with Senate Judiciary staff over a lengthy period. We are pleased to report that Senate Judiciary Committee Chairman Pat Leahy (D-Vermont), along with Senators Blumenthal (D-Conn.) and Whitehouse (D-R.I.) introduced legislation on Tuesday to strengthen the tools available to U.S. bankruptcy trustees to fight creditor fraud in bankruptcy court. S. 1054, the Fighting Fraud in Bankruptcy Act, will bolster the EOUST's ability to fight creditor fraud and protect homeowners in the bankruptcy process, while preventing needless litigation over its authority to do so.
The legislation will:
• Clarify that U.S. trustee has a duty to take action to remedy creditor abuse of the bankruptcy process;
• Permit the bankruptcy court, either on its own or in response to a motion from the trustee, to correct or sanction misconduct and fraud committed by creditors in the bankruptcy process;
• Empower the trustee to establish audit procedures to ensure that creditors are complying with the law;
• Require a mortgage lender to certify under penalty of perjury that a foreclosure proceeding against active duty members of the military who are deployed is in compliance with the Servicemembers Civil Relief Act (SCRA). The SCRA protects active duty military personnel by requiring a stable, manageable interest rate for military homeowners on active duty, and staying foreclosure actions during their deployment.
The text of the legislation and Senator Leahy's statement of introduction follow.
If you are interested in receiving regular updates about the status of this legislation and would consider joining in NACBA's efforts to support the legislation, please click here.
Maureen Thompson Angie Thies-Huber
NACBA Legislative Director NACBA Field Director
Text of the Fighting Fraud in Bankruptcy Act
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Statement of Senator Patrick Leahy (D-Vt)
On the Introduction of the Fighting Fraud in Bankruptcy Act of 2011
May 24, 2011
Today I am pleased to introduce the Fighting Fraud in Bankruptcy Act of 2011. I thank Senator Whitehouse and Senator Blumenthal for joining me as cosponsors of this legislation. This bill will give the Department of Justice and the United States bankruptcy trustee important new tools to combat creditor abuses in the bankruptcy process. The Fighting Fraud in Bankruptcy Act is another step forward in the Judiciary Committee's important efforts to protect American citizens from fraud.
Since the onset of the housing market's collapse, the bankruptcy courts and the United States trustee have encountered serious problems related to foreclosure documentation submitted by mortgage lenders and servicers in the bankruptcy process. As scrutiny has been brought to bear on foreclosure-related filings by bankruptcy judges, attorneys, and the United States trustee, a pattern of negligent, reckless, or fraudulent conduct on the part of mortgage lenders and servicers has been revealed with a consistency that indicates systemic problems.
Under Attorney General Holder's leadership, the Department of Justice is making a considerable effort to ensure that mortgage lenders and servicers are playing by the rules and treating homeowners fairly and honestly. As part of its efforts to more closely scrutinize foreclosure documentation in bankruptcy cases, the United States trustee's office reviewed 10,000 proofs of claim filed by mortgage servicers. What was found was far more serious than what mortgage servicing industry officials have been asserting. For example, in testimony before the Senate Judiciary Committee in 2008, an industry executive stated that the rate of loan servicing errors in bankruptcy cases adverse to a homeowner was "less than one percent."
In its review, however, the trustee found an error rate based upon blatant, obvious errors more than ten times greater than what was testified to before the Judiciary Committee. And these errors are not harmless. In some cases, they were wildly inaccurate statements of what a homeowner owed to the lender, in others, the claims contained unsupported junk fees that servicers had piled on yet for which they provided no documentation. If left unchallenged, the result would be that a homeowner not only loses a home, but is cheated on what he or she owes on that home. Americans in foreclosure, and the trustee as guardian of the system are right to demand accuracy and truthfulness from creditors' representations in court.
Unfortunately, the major players in the mortgage industry are showing little interest in addressing these problems head-on. Instead, when faced with the trustee's scrutiny of their claims, some major mortgage servicers have resorted to engaging in litigation challenging the authority of the United States trustee to look behind their claims and provide sanctions where warranted. The United States trustees in districts around the country are now facing hundreds of challenges to their authority to effectively police the system. It is a great disappointment to see some of the very same banking entities that have benefited so much from congressional action and taxpayer funded assistance put up so much resistance to simple demands for accuracy and truthfulness in their representations to the court and those whose homes they are seeking to repossess.
There should be no disagreement that someone who is in default on their mortgage obligations may be rightfully foreclosed upon so that a home may be resold. This is important to our economic recovery. What is entirely unacceptable is for homeowners on the precipice of losing their homes to be mistreated by their lenders-whether through unsupported fees, willfully inaccurate or negligent accounting, or a lack of supporting documentation. This conduct only adds to the pain and hardship so many are experiencing.
In 2010, over one million Americans lost their homes to foreclosure. This year, housing industry analysts expect the problem to get worse. The magnitude of this problem, and its effect on American families, is difficult to comprehend. As this crisis continues to deepen, the incentives for lenders and servicers to cut corners, inflate profits, rush foreclosures, and hide from their misconduct will only increase.
The legislation I introduce today is about ensuring fair treatment for homeowners, preventing a fraud on the bankruptcy courts, and holding wrongdoers accountable. When Congress created the United States trustee program in 1978, it described the trustee's role as the "watchdog" of the bankruptcy system, and vested the trustee's office with the power to investigate fraud in the process. This legislation will support and strengthen this important role so that all participants in the bankruptcy system conduct themselves in accordance with the law.
My legislation will do four things. First, it clarifies the United States trustee's inherent power and duty to police all corners of the bankruptcy system. Second, it provides the trustee and the courts with remedies to correct and sanction misconduct and fraud committed by creditors in the bankruptcy process. Third, the legislation empowers the trustee to establish a system of audits to ensure that creditors are complying with the law. These provisions taken together will help make certain that debtors and creditors are held to the same standard in the bankruptcy process.
Finally, the legislation addresses a particularly offensive form of mortgage servicer misconduct against men and women serving in our military. The Servicemembers Civil Relief Act (SCRA) protects active duty military personnel by requiring a stable, manageable interest rate for military homeowners on active duty, and by staying foreclosure actions during their deployment. A Government Accountability Office report released this month found that among just two of 14 major mortgage servicing organizations that provided data to Federal regulators, 50 foreclosure actions were carried out in violation of the SCRA.
In response to this finding, and to bolster the SCRA's protections for the men and women serving in the military, this legislation would require a mortgage lender seeking relief from the automatic stay to certify under penalty of perjury that the foreclosure was in compliance with the SCRA.
As Congress looks at ways to mitigate the foreclosure crisis to reduce its impact on homeowners and the economy, I hope all Senators can agree that the foreclosure process for Americans should be a fair one and one in which there is accountability for fraud or other misconduct. And I hope we can all agree that the integrity of our judicial system is something worth protecting.
I ask for unanimous consent that a copy of the bill be placed in the Record.