Mortgage lenders abusing court system

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Mortgage lenders are abusing the bankruptcy court system by pursuing unjustified foreclosures against struggling homeowners, piling on questionable fees and misstating the amounts owed, witnesses alleged at a congressional hearing on Tuesday.

The result is a systemic breakdown that increases foreclosures, raises the number of families losing their homes and threatens the integrity of the legal system, the witnesses told the Senate Subcommittee on Administrative Oversight and the Courts.

"While bankruptcy is supposed to offer families one last chance to save their homes from foreclosure, the reality is that bankruptcy gives mortgage servicers new opportunities to engage in abusive practices," Katherine Porter, a University of Iowa law professor who has analyzed the system, testified.

Porter said her review of 1,700 recent Chapter 13 bankruptcy cases found mortgage lenders regularly disobey laws and rules as they try to collect thousands of dollars more than homeowners feel is owed.

Robin Atchley, a letter carrier from Georgia, said Countrywide Financial (Quote: cfc), the nation's largest home lender, twice asked a bankruptcy judge for permission to foreclose on her home in 2006, even though "we were current on our mortgage payments."

Countrywide dropped the efforts when given proof the payments had been made. But Atchley and her husband, who sold the home last year, said Countrywide claimed the final mortgage amount owed was nearly $14,200 higher than what the company had claimed in bankruptcy court.

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"We will not stand for the continued abuse of homeowners who have worked hard and played by the rules of bankruptcy, only to have their homes and credit ratings and livelihoods threatened by misconduct," said Sen. Charles Schumer, D-N.Y., the subcommittee chairman.

Although the witnesses alleged many lenders use abusive tactics, Schumer focused on Countrywide.

He challenged testimony in which Steve Bailey, the firm's chief for loan administration, said internal reviews showed Countrywide had an error rate under 1% for bankruptcy mistakes that went against a borrower.

Saying Countrywide is "at the top of the list" of firms responsible for the national mortgage crisis, Schumer said Bank of America should "think even harder" about whether to complete its plan to buy the mortgage giant.

Bailey said Countrywide would hire an auditor to review selected Countrywide loans for accuracy in bankruptcy proceedings. He said the firm would also form an ombudsman's office to resolve disputes during bankruptcies and adopt "best practices" drafted by an association of bankruptcy court trustees.

Copyright 2008 USA Today, a division of Gannett Co. Inc. All Rights Reserved.

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