On March 21, 2011, a Columbus, Georgia jury sent a very loud message to loan servicers in the form of a $21 million verdict and punitive damage award against PHH Mortgage, an affiliate of Coldwell Banker Mortgage.

David Brash, a sergeant in the United States Army, bought a home in 2007, and obtained a $161,000 mortgage loan from Coldwell Banker Mortgage.  The loan was serviced by PHH Mortgage.  Sergeant Brash had his monthly payments set on autopay out of his US Army paycheck.  (In fact, Sgt. Brash overpaid each month.) Things went along swimmingly for about a year and a half, until PHH began losing track of the payments, which then triggered the phone calls and letters telling him that he was delinquent.  A mortgage lender losing track of payments and blaming the consumer?  Say it ain’t so.  (The Complaint filed by Sgt. Brash’s lawyers in the case, David Brash v. PHH Mortgage (U.S.D.C., M.D. Georgia) case no. 4-09-CV-146 (CDL) is available for viewing here.)

Anyhow, that started a series of very patient efforts by Sgt. Brash to resolve the issue, all of which are thoroughly described in the Complaint. The servicer’s call center was outsourced to India. (No comment on that. I very seriously doubt that Sgt. Brash would have received better treatment from his fellow countrymen.)  But in an amusing instance of what’s-good-for-the-goose-is-good-for-the-gander, Sgt. Brash actually recorded the phone calls with the servicer (for quality assurance purposes right?), and the tapes of the phone calls were played to the jury. Transcripts of the calls were also admitted into evidence. I pulled the actual transcript of the phone calls from the Court’s docket, and you can review it for a good example of how to handle your own such calls. Very good evidentiary material that.

The upshot of the story? After multiple attempts to sort things out, PHH assured Sgt. Brash that things were resolved, and that the erroneously designated “late” payments had been properly credited. But then what did they do? You guessed it. They reported the false delinquencies to the Credit Cops, Equifax, TransUnion and Experian. This, in turn, caused Sgt. Brash to be denied credit. As stated in the Complaint, “Coldwell Banker Mortgage has refused to answer Plaintiff’s legitimate inquiries, and has refused to correct and straighten out Plaintiff’s account.”  (See Complaint, ¶48.)

If you’ve never seen what a $21 million judgment looks like, I’ve downloaded it from the Court’s docket, and have attached it here.  Also, check out the actual written jury verdict here.

Other than the obvious appeal of David taking on and beating up on Goliath–the sheer joy of seeing an abusive loan servicer get hit–the other appeal of this case is how meticulously Sgt. Brash documents his odyssey through this experience.  If you’re having trouble with your bank or loan servicer, read the Complaint that Charles Gower (Sgt. Brash’s lawyer) drafted, and review the list of trial exhibits. They are a roadmap for how to build and maintain a paper trail and document abusive loan servicer practices. This is the kind of evidence that wins lawsuits.

For lawyers who are keeping track, it appears that the gravamen of the legal theory was a violation of §2605 of RESPA.  (12 USC §2605.)

This is a response that I recently posted to a discussion group in LinkedIn, to the topic

Low rate of bankruptcy fraud prosecutions attracting attention, which in turn is linked to the site AssetRecoveryWatch.com.

In my observations–limited by the fact that I only swim in one small corner of the much larger nationwide pool–the Feds are focused on trying to find the next Bernie Madoff, and the private trustees are too busy looking for the low hanging fruit of easily liquidated assets to pay much attention to garden variety bankruptcy fraud. The system is overloaded, and private trustees get $60 per file, plus a portion of whatever assets they can pick off and sell. That doesn’t create much incentive to root out fraud. Proving that a debtor is a liar doesn’t pay the bills unless there is money there too. As for the UST, my observation is that they are inundated.

I represent both debtors and creditors, and in my experience, most of the fraud that I see occurs BEFORE the bankruptcy filing. The bankruptcy process is just the cat trying to fill in the hole after he does his business. If I can perpetrate a massive fraud and then file Chapter 7 before anyone catches on, then I may dodge a cannon ball or two by discharging (or appearing to discharge) claims. (This has limited efficacy, but that is s topic beyond this post.)

As for bankruptcy fraud–that is, fraud in the actual bankruptcy case–one needs to understand the provisions of Sections 727 and 523 of the Bankruptcy Code, two of the most important weapons. Sec 727 is for use in prosecuting fraud in the bankruptcy process itself, but is–as a practical matter–only of much use to the UST. This is because the investigation necessary to bring an action under that section is cost prohibitive to private creditors, and is almost impossible under the privacy laws. Just how much can a creditor justify spending to prove that the debtor is an all-around bad guy? As a practical matter, creditors are mostly limited to ratting out the debtor’s fraud and waiting to see if the trustee does anything.

As for the creditors, they are generally limited to non-dischargeability actions under sect 523. Creditors aren’t motivated to prove that the debtor is an all around bad guy, but in trying to get their money back. That means a non-dischargeability action under 523. But Section 523 is limited to pre-filing conduct, has some pretty steep evidentiary hurdles, and carries a risk of having to pay the debtor’s attorneys fees if the creditor loses. This keeps lots of creditors sitting on their hands.

Last, discovering fraud in the bankruptcy process itself is mostly a matter of trying to find hidden assets. Good luck if you are a private party creditor. We’ve gone so far in expanding financial privacy that it takes a small miracle to get my OWN financial information from my own bank. Now think about trying to chase a money trail created by someone who is focused on covering his tracks. Most crooks don’t hide money in easily identified and located bank accounts. Following money is very difficult and very expensive.

If you suspect fraud in a bankruptcy case in which you or a client is involved, you can got to the US Trustee‘s website and follow the procedures under the title “Report Suspected Bankruptcy Fraud.”

The following post was originally written in response to the following question posted on LinkedIn. The question appears are originally written, and has not been edited. Continue reading »

There’s an old saying: Beware of Greeks bearing gifts.  It refers to the Trojan horse that the Greek army used to trick its way into Troy during the Trojan War.  It has come to refer to situations and people that hide fraud and trickery behind a friendly and perhaps even generous demeanor.

The hottest new business in California?  One guess….  Mortgage modification.  Everyone and their brother is now opening up “mortgage modification” companies.   They appear friendly and eager to “help you save your home,” but be careful.

For instance, one I recently heard about is American Home Mortgage Servicing Company.  This company is not licensed as a real estate broker by the California Department of Real Estate. (If you want to check whether the company that is pitching you to modify your mortgage is a licensed real estate broker, use the DRE license check tool here.) Therefore, it is not a licensed “mortgage broker” and is thus not legally licensed to modify mortgages.  It is not a law firm.  It is not a non-profit credit counselor.  In fact, a little research reveals that it is nothing but a debt collector.  An unlicensed debt collector phishing for people with financial difficulties, which it refer to as “customers.”  (For reasons unknown, California doesn’t require debt collectors to be licensed any more.  It does, however, require them to comply with the California Fair Debt Collection Practices Act.)

Do what I did.  Call their toll free number.  Once you get past the language preference, the first thing on the tape is:  “American Home Mortgage Servicing Company is a debt collector and may record and/or monitor calls.”  Then, follow the various links on their website as if you are looking to modify your mortgage. You will eventually wind up on a form that you need to fill out and return to them. Do not do this. This form is designed to solicit highly confidential financial information from you which will, in all likelihood, be used against you in the event that you default on your mortgage.

There is no need to provide this information at this stage of the conversation with anyone.  (I’m a bankruptcy attorney subject to very strict rules of confidentiality.  I usually have very good reasons to request this information from clients.  Yet I never solicit this level of detail from prospective clients until they are an actual client and I have a rational and business-related reason for collecting this information.)  How do I know this isn’t a bona fide form for dealing with a mortgage modification? Look at it.  It doesn’t even ask who your lender is.  How are they going to modify a loan or provide you with advice and an opinion on the criteria required to modify the loan if they don’t know who the lender is?  (Lenders’ criteria for modification are not uniform, and a loan that one lender may modify may not qualify under another lender’s program.)

Here’s the fact:  No one has authority to modify your mortgage except you and your mortgage lender.  Anyone who claims to be able to assist you in modifying your mortgage but doesn’t ask who holds that mortgage right out of the chute is probably up to something very different.  Fortunately, these people tell you: They are “debt collectors.”   I wouldn’t give them the name of my dog without a written disclosure of who they represent, what they are actually authorized to do and a written representation from them as to what exactly is going to be done with the information I provide them. I suspect that if you call them and make this demand as a precondition to your giving them any confidential financial information, they will hang up on you.

Who are these people?  Are they licensed? Are they supposed to be?  Who’s regulating these guys?

In short, no one. It’s the Wild Wild West.  The California Department of Real Estate is supposed be on it, but in practical reality, it looks more like substitute teacher day in 5th Grade, erasers flying, tongues wagging, the whole works.  And who can blame the CDRE?  They’re overwhelmed.  So it will fall on the consumer.  If you try to do this without counsel, make sure that the person you’re dealing with knows what she is doing and that you’re protected.

Here are the rules, at least regarding licensing:

First, in order to function as a “mortgage modification company” in California the company must first be licensed as a “real estate broker” by the California Department of Real Estate.  (California does not have a separate licensing category for “mortgage brokers” nor for “mortgage modifiers.”) Modifying a mortgage is essentially the functional equivalent of originating a mortgage, so the same licensing rules prevail.  (Here’s an interesting opportunity to get a fly-on-the-wall ear to brokers talking to each other about this topic.)

Next, in order to collect any fee in advance for “mortgage modification” services, the entity must be licensed by the DRE and must submit its contract for services for approval to the DRE.  So if someone tells you they’re a “mortgage modifier” and wants you to pay them for providing those services, first demand their DRE brokers’ license number and then check the DRE website to see if their contract has been approved yet by the DRE.  If it hasn’t, then tell them you’ll pay them if and when they get a result for you.

[Update:  Effective July 1, 2009, it is unlawful for a foreclosure consultant, as defined in Civil Code Section 2945.1 to engage in the foreclosure consultant business unless it has registered with the Attorney General’s Office at:  http://www.ag.ca.gov/register.php. All foreclosure consultants operating in California must post a $100,000 bond and register with Attorney General’s Office by July 1, 2009.  There is list of companies whose agreement has been approved. It’s very short. You can find it on this rather hard to find site called California Foreclosure Prevention Act.   There is also a list of companies that have not been approved by the Attorney General, although that strikes me as sort of foolish.  Given that scam artists work pretty hard to cut a low profile, its a bit like saying “raise your hand if you’re not here.”]

American Home Mortgage Servicing is not on that list.  American Home Mortgage Servicing is also not a licensed real estate broker in the State of California.  In fact, American Home Mortgage Servicing does not appear to be licensed to do anything more complicated than exist in the State of California.  And it’s a Delaware corporation so it’s not even domiciled here.  (Debt collectors no longer need to be licensed in California.)

(Here’s a link to the California Attorney General’s recent online posting about how to avoid being ripped off by foreclosure rescue scams.   And here’s another article/consumer warning by the DRE about scams offering to “cut your home payments in half.”)

There is a growing number of unscrupulous people out there right now looking to take advantage of people who are in financial extremis.  There are also tons of folks who, while maybe not slimeballs, are woefully unqualified to “modify” anything more complicated than a typo on a spelling test.

Current statistics suggest that only 5% of the people who attempt to modify their mortgages are actually succeeding right now, and of those? More than 50% re-default in the first 6 months!  I’m not going to blame all of that on slimeballs and idiots, but I can’t think of any argument that suggests that the presence of opportunistic and unscrupulous slimeballs and idiots posing as “mortgage modifiers” is helping matters.

But there are also a lot of good, qualified and experienced people who want to help, who charge a reasonable fee and who know what they’re doing.  (And I absolutely guarantee you that they don’t refer to themselves on their voicemail as “debt collectors.”) Some are mortgage brokers, some are attorneys, some are credit counselors.  None are debt collectors.   Look for non-profit credit counselors as a start.

I’m not suggesting that everyone who wants to investigate mortgage modification hire an attorney. But at least do a little homework and make sure the person or company you hire is qualified and licensed.  If they disclose that they are “debt collectors” run the other way.  Such people have nothing of value to offer you.