Bill to Improve U.S. Trustee’s Power To Protect Homeowners in Bankruptcy Revealed

by Elizabeth Brennon on Sep 23, 2011
Link to article: http://www.newsjunkyjournal.com/bill-to-improve-u-s-trustees-power-to-protect-homeowners-in-bankruptcy-revealed/2519663/

Just last year, more than one million Americans lost homes to foreclosure, and the foreclosure crisis is only expected to worsen. Distressed homeowners facing bankruptcy and foreclosure deserve to be treated fairly. Banks should not attempt to profit from these hard times with improper mortgage fees and other types of fraud. Apparently, however, this is exactly what may have been happening.

The United States Trustee Program and Executive Office of the U.S. Bankruptcy Trustee (EOUST) are part of the Department of Justice. The U.S. trustee oversees the administration of federal bankruptcy cases and works to protect the integrity of the system. Recently, EOUST reviewed 10,000 proofs of claim filed with bankruptcy courts by mortgagees or mortgage servicers.

Errors found in the claims included mortgage servicers charging unsubstantiated fees, overstating the amount homeowners owe on properties, and providing inadequate documentation to the bankruptcy court.

The U.S. trustee discovered that the errors in claims submitted by mortgage providers were both more serious and more frequent than the mortgage servicing industry previously asserted. Specifically, mortgage servicers claimed such errors occurred in less than one percent of bankruptcy cases. EOUST, however, discovered errors were occurring at 10 times that rate.

Although the U.S. Trustee Program attempted to combat these patterns of defective and fraudulent filings, those efforts have been slowed by legal challenges to the trustee’s power and authority to take such actions. Mortgage servicers are challenging the trustee’s ability to act on bankruptcy filers’ behalf by asking for additional documents or requesting sanctions for incorrect or fraudulent filings. Essentially mortgage servicers don’t believe the U.S. Trustee has the power to hold them accountable for their actions.

The Fighting Fraud in Bankruptcy Act

These legal challenges by mortgage servicers prompted three Senators, Patrick Leahy (D-Vt), Richard Blumenthal (D-Conn.), and Sheldon Whitehouse (D-R.I.) to sponsor legislation to strengthen and clarify the U.S. Trustee’s power to protect homeowners in the bankruptcy system from fraud. In late May the Fighting Fraud in Bankruptcy Act of 2011 (S. 1054) was introduced on the Senate floor, and the bill has now been referred to committee.

Senator Leahy explained the importance of the bill this way: “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.”

The Fighting Fraud in Bankruptcy Act has four main goals. First and foremost, it clarifies that the U.S. Trustee has the power and duty to take action when abuse of the bankruptcy process by creditors is detected.

In conjunction with this power, the Act authorizes the trustee to conduct audits and investigations to confirm creditors are acting in accordance with the law. If fraud or misconduct is detected, the Act allows the bankruptcy court to correct errors or impose sanctions for misconduct. These actions can be taken in response to a motion by the trustee, or the bankruptcy court may make its own motion.

Finally, the Act mandates that mortgage servicers certify under penalty of perjury that foreclosure actions against deployed and active duty military homeowners comply with the Servicemembers Civil Relief Act (SCRA). The SCRA serves to protect those in the military by staying foreclosure actions if they are currently deployed, and requiring manageable and stable interest rates for military servicemembers. A report by the Government Accountability Office (GAO) found that among only two of the 14 large mortgage servicing organizations that supplied data to regulators, 50 foreclosure cases violated the protections of the SCRA.

If the Fighting Fraud in Bankruptcy Act passes into law it will hopefully clarify and strengthen the U.S. Trustee Program’s power to remedy creditor abuse. This may prevent mortgage servicers from unfairly profiting from homeowners facing bankruptcy and foreclosure by submitting incorrect or fraudulent claims.

If you are overwhelmed by debt, or struggling to keep your home, contact an experienced personal bankruptcy and foreclosure attorney. A knowledgeable lawyer will work to protect your rights and advocate on your behalf throughout any bankruptcy or foreclosure proceedings.