BofA Warned to Think Twice About Countrywide

Steve Bailey, senior managing director in loan administration for Countrywide Financial, took the hot seat this afternoon at a hearing by a Senate Judiciary subcommittee probing whether misconduct by loan servicers in bankruptcy proceedings is "fueling" the foreclosure crisis.

At the outset, Senator Charles E. Schumer, Democrat of New York, suggested that Bank of America "should think ever harder about whether they want to proceed" with its planned $4.1 billion acquisition of Countrywide.

Specifically, Schumer cited evidence of Countrywide charging excessive fees and unjustly petitioning to lift automatic stays on foreclosure granted in Chapter 13 bankruptcy proceedings. "Bank of America should demand a lower price," Schumer said.

Bailey came to Capitol Hill to announce Countrywide's three-point plan to clean up its act. (Or, as the company press release called it, "further enhance the transparency, accuracy and integrity of this process.)

Countrywide said it would hire an independent auditor to review a random sample of loans in bankruptcy proceedings, establish a "bankruptcy ombudsman" for borrowers and their lawyers, and adopt "certain" best practices of the National Association of Chapter 13 Trustees.

(The association drummed up many of these practices in May 2005, but no one has paid any attention to them since then — a fact Bailey had to admit during the course of the hearing.)

Schumer, for one, was not impressed. He pressed Bailey to make public the three internal reviews the company has already conducted, one by Countrywide's auditing division.

"I wouldn't be the one to decide that," Bailey deferred. Bailey also ducked when Schumer asked him whether it was the right thing to reveal the reports from those inquiries. "I don't know the answer to that question," he said.

Countrywide has said it found errors in just 1 percent of its loans, but Schumer pointed out, with an air of incredulity, that the U.S. Trustee in Bankruptcy for the District of Western Pennsylvania alone, was examining 293 cases involving Countrywide mortgages. Bailey suggested that there are just 10 cases in Pennsylvania where the court is examining errors. "We are cooperating with them," he said.

Katherine M. Porter, a professor t the University of Iowa College of Law, told the subcommittee that in a review of thousands of mortgage-related bankruptcies, she found "dozens and dozens" of cases where lenders levied dubious or impermissible fees.

"The current bankruptcy process is malfunctioning, and the industry has had ample warning," Porter said. "Systematic reform is needed."

Porter said she has presented her findings more than two dozen times in the last six months, and every group she addresses, from the courts to creditors to the lawyers, tells her this "should be someone else's problem." She urged Congress to put the best practices rules into legislation, and Schumer said that is what it intends to do.

Jeff Sessions, Republican of Alabama, suggested that judges and lawyers were being lax under existing rules in not challenging proofs of claim and pressing for sanctions when appropriate.

"I just don't get why there isn't a hard smack given by courts to these practitioners," he said. Many law firms take these cases in bulk, added. "It's sort of a mill and they don't really care," he said.

Alas, the lawyers themselves were not represented at the hearing: Schumer said the panel invited a law firm that services loans, but it declined to testify, citing the attorney-client privilege.

by Karen Donovan