When confirming a Chapter 13 plan in the bankruptcy court in Rochester, Judge John C. Ninfo II emphasizes to every debtor the need to maintain accurate records of mortgage payments made after the case is filed ('post-petition.) Standing Trustee George M. Reiber also emphasizes this record-keeping requirement, and provides all Chapter 13 debtors with the 'yellow folder', a file pre-printed on the cover with spaces to note down every post-petition payment.
A recent decision from the Bankruptcy Court for the Eastern District of Louisiana underscores the importance of that record-keeping. Judge Elizabeth W. Magner has sanction a mortgage servicing company for misrepresenting the debtor's post-petition payments and 'robo-signing' of court affidavits:
In re Wilson, ED La. Ch. 13 bk #07-11862, decision April 7, 2011. The decision is available at no charge on the Pacer docket of the case. See also New York Times: "Homework Regulators Aren't Doing"' Article April 16, 2011; author: Gretchen Morgenson. Se also Reuters April 13, 2011, article by Scot Paltrow.
The debtors in the case filed Chapter 13 September 29, 2007. They were in default with their mortgage bank, Option One. The bank filed a motion in bankruptcy court asking for permission to start a foreclosure ("lift stay motion") in January 2008, which was replaced by a second lift stay motion in March of 2008. Option One said the debtors were four months behind in post-petition payments. The debtor contended, correctly as it turned out, to be current.
Luckily for the debtors, they had good records of their payments, which were made by Western Union wire transfers, money orders mailed by certified mail, and payments hand-delivered to the bank's attorneys. Beyond denying the lift stay motion, the court investigated how it was that the bank failed to keep track of these payments, and how they came to file an affidavit, signed by an 'Assistant Secretary' of Option One, swearing that the payments were behind. The Office of the United States Trustee, a division of the Justice Department which, among other things, investigates creditor abuse, intervened and assisted in the investigation. Three contentious, litigious years later, the court sanctioned LPS.
Who? LPS is Lender Processing Service, a company which manages the collection process for mortgage banks when a homeowner is in default. LPS acts as the middleman between the bank and the attorneys, in this case between Option One and their bankruptcy attorneys, the Boles Law Firm. All communication between Option One and the attorneys went through LPS. When the bank's records indicated post-petition payments were more than 60 days behind, it referred the matter to LPS, which engaged Boles for the lift stay motion. When the bank received post-petition mortgage payments after the lift-stay referral, it informed LPS, which informed Boles, which replied to LPS to have those payments forwarded to the attorneys, which passed this message on to the bank etc. etc. etc.
After discussing in its April 7 opinion exactly how the post-petition mortgage tracking got screwed up (when did the bank know about the payments, what they did, who they informed), the court focused on an important legal issue: how did Option One come to file an affidavit with the court, in support of the lift stay motion, sworn to by its Assistant Secretary, Dory Goebel, notarized and witnessed, stating the account was in default? Didn't Option One Assistant Secretary Goebel review the payment records and the correspondence between the bank, LPS and the attorneys, and notice the discrepancies?
Well, it turns out that Assistant Secretary Goebel was actually an employee of LPS, not Option One, one of thirty LPS employees who were designated by Option One as officers of the bank, but officers for the limited purpose of signing these affidavits, and nothing else. Ms. Goebels would review and sign 30 affidavits in two hours every day. She would consult a computer screen to verify that Option One indicated the account was delinquent, check the number of missing payments the computer screen said, and sign the affidavit. She would not review any payment history, or any communications between LPS and the bank, or LPS and the attorneys, concerning the account. She assumed that if the attorneys drafted it, the facts in the affidavit must be correct. And, oh by the way, the affidavits were actually notarized later, out of her sight, and witnessed later still. "In short, the affidavit was nothing other than a farce and hardly the evidence required to support relief." (Decision, page 25.)
The court noted that bankruptcy courts regularly rely on the default affidavits executed by mortgage banks as proof of default. This is an enormous convenience to banks, and avoids holding evidentiary hearings on arrearages. As the Louisiana court stated in this opinion, courts often presume that default affidavits are more credible than information provided by debtors. By empowering clerks of outside servicing agencies to pretend to be knowledgeable bank officers, banks threaten the basis for this reliance.
Or, as Judge Magner put it: "In this case the Lender and LPS cloaked Ms. Goebels with a title that implied knowledge and gravity. LPS could have identified Ms. Goebels as a document execution clerk but it didn't. The reason is evident. LPS wanted to perpetrate the illusion that she Option One's employee and a person with personal and detailed knowledge of the loan. Neither was the case." (Decision, pg. 25.)