Senate Group Holds Hearing On Bankruptcy Handling Among Lenders

Steve Bailey, chief executive for loan administration of Countrywide Financial Corp., testifies before a Senate panel. The mortgage lender is being investigated over allegations that it improperly inflated borrowers' fees. (Alex Wong, Getty Images / May 6, 2008)

Mortgage lender Countrywide Financial Corp., which is under investigation on allegations that it inflated certain borrowers' fees, acknowledged Tuesday that it had made errors and pledged to take steps to improve its operations.

Steve Bailey, chief executive of loan administration at Calabasas-based Countrywide, told a Senate panel that the company's loan officers had made mistakes "from time to time." He said Countrywide would hire an outside auditor to review its actions involving homeowners who had filed for Bankruptcy Court protection.

But he disputed accusations, made by hundreds of borrowers in Pennsylvania, Florida and other states, that the company sought to collect inflated fees and other payments by filing inaccurate bankruptcy documents. The Justice Department is investigating the accusations.

"Servicers have also been accused of intentionally assessing inappropriate fees and costs to borrowers in bankruptcy," Bailey said. "With respect to Countrywide, these allegations are simply not true."

But Katherine Porter, a professor at the University of Iowa, testified that mortgage companies and servicers have improperly sought repayment for attorneys' fees and other costs without fully disclosing or documenting the fees.

In some cases, companies have sought to foreclose on homes even after borrowers have discharged their debts through the Chapter 13 bankruptcy process, which allows debtors to keep their homes while working out payment plans for their debts.

"The upsetting reality is that the current bankruptcy system routinely forces borrowers to pay bloated amounts and permits mortgage servicers to misbehave without serious consequence," Porter told the Senate Judiciary subcommittee on administrative oversight and the courts.

Sen. Charles E. Schumer (D-N.Y.), chairman of the panel, criticized what he called a broader "vulture mentality" in the mortgage industry.

"Companies have repeatedly sought to foreclose on homes where owners were current on payments, sought attorneys' fees in bankruptcy court for motions that they have lost and failed to keep even the most basic records to justify their claims in bankruptcy court," he said.

Clifford White, director of the Justice Department's bankruptcy trustee program, said the department had stepped up its efforts to prosecute such violations.

The trustee program made 1,163 criminal referrals last year, which include cases involving housing fraud, a 26% increase over the previous year, White said.