Congress Investigates Mortgage Servicer Fraud in Bankruptcy
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Congress Investigating Mortgage Servicer Fraud in Bankruptcy

August 24, 2011


Senate Judiciary Committee Chairman Patrick Leahy (D – Vt.) has launched an inquiry into certain policies and practices currently in place that affect how foreclosures are handled in bankruptcy court, according to the National Association of Consumer Bankruptcy Attorneys (NACBA).

Leahy has reportedly mailed letters to 11 of the largest mortgage servicers in the country, but has not revealed the identity of those groups, a move the senator apparently hopes will give them a chance to respond thoroughly to his questions. The letters allegedly include queries about what steps mortgage servicers are currently taking to make sure homeowners are getting fair, honest, and consistent treatment in foreclosure cases.

Senator Leahy's interest was apparently piqued when the director of the Executive Office for the United States Trustee (EOUST) released a report indicating that gross errors in bankruptcy court proofs of claim were more widespread than previously thought. Proof of claim is required when a creditor wishes to foreclose on a property in bankruptcy; it is essentially a piece of paper proving that the creditor has a legitimate claim to the property.

Specific proof of ownership of mortgage debt is required for foreclosure proceedings to be legal. The recent practice of bundling and selling mortgage-backed securities, which became wildly popular during the housing bubble, has often made ownership of a mortgage by a single entity difficult to prove.

In some cases, bankruptcy lawyers have successfully argued that, because a mortgage lender could not provide proof of claim on a mortgage, it could not foreclose on the property.

Leahy and his ally, Senator Richard Blumenthal (D – Conn.) have called the current system of mortgage servicing "broken" and have called for action to improve it. The two senators are co-sponsoring a piece of legislation (introduced in May), the Fighting Fraud in Bankruptcy Act, that would provide bankruptcy trustees with more tools to combat fraud on the part of creditors (including mortgage lenders and servicers) in bankruptcy cases.

The investigation is still in its earliest stages; if any significant changes to the Bankruptcy Code result, they may not take effect for several years.

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