An unpublished decision attacks the IT Systems used by the mortgage and servicing industries to administer loans, and sanctions the creditor for the errors, miscalculations, and nonsensical actions of those systems. In a forty-nine-page decision, Judge Magner of the Louisiana Bankruptcy Court, Eastern Division, painstakingly describes the computer software packages used by Wells Fargo Home Mortgage, Inc., and how those systems manage and administer loans. The decision in the case, In re: Dorothy Chase Stewart, 07-11113, was made upon debtor’s objection to Wells Fargo’s proof of claim, specifically to the Inspection Fees, Appraisal Fees, NSF Check Charges, Other Charges, Pre-Petition Attorney Fees and Costs, and Escrow Advances.
The decision dissects each of the challenged charges, and this article will allow the decision to speak for itself on the details. To summarize, the court found numerous errors in the escrow calculations. Property taxes were added to the escrow account when the debtor was exempt from the tax. Late fees snowballed as a result of improper assessment of escrow charges. The available BPOs that were charged to the account showed many appraisals on houses other than the debtor’s. The numerous inspections done while the debtor was in Chapter 13 and living in the home were found unnecessary. Unsubstantiated legal fees were included - the court noted invoices from firms that provided legal services were not sufficient evidence of payment of those fees. Finally, the creditor was unable to provide supporting documentation for many of the other costs and fees.
The court found that Wells Fargo had imposed abusive and unwarranted fees and charges. The debtor was awarded damages of $10,000 and attorneys fees of over $12,000. The court reduced the proof of claim by over $10,000, and sanctioned Wells Fargo $2,500 for each of two other erroneous proofs of claims in debtor’s two prior bankruptcies. Then, the court ordered Wells Fargo to audit every claim it filed in that district over the past year, file or issue a payment history in each case, and amend its proof of claims accordingly. Needless to say, the burden on Wells Fargo is great, and it may be facing more sanctions.
The court was most concerned with the application of payments. The mortgage contract specified payments were to be applied first to outstanding escrow payments, second to accrued interest, third to principal, and last to late fees. However, payments were first applied to the many miscellaneous fees and charges, contrary to the mortgage contract. This improper application increased the fees and charges imposed over the course of the loan, as well as the default.
Throughout the decision, the court noted the lack of human logic and interaction in the administration of loans. The software design applied the payments first to fees and costs and not in the order set in the mortgage. The software systems made the calculation errors. It mindlessly kept ordering inspections and appraisals, and applying late fees. The system ran the loan process from the first default to hiring local counsel. When humans were asked to account for the computer’s actions and calculations, and provide proof of charges and payments, the computer was largely unable to deliver, and humans had a difficult time discovering and explaining the process, and producing the evidence to back up the charges on the claim.
This case reinforces similar decisions around the country and serves as another warning to the mortgage industry that it needs to adapt its proof of claims process to avoid scrutiny and monetary sanctions. The industry can no longer rely on its systems entirely in the claim process. This will require humans – the mortgage company or servicer and its attorney - to talk to one another to create a claim that can withstand an objection and protect against liability. In the end, the system used may be responsible for errors and lack of common sense, but the humans using them will take the blame and suffer the consequences.
If you have any questions on this information, please contact Ms. Monette W. Cope, Esq.
Monette is a senior associate in the Bankruptcy department of Weltman, Weinberg & Reis Co., L.P.A. in Chicago, Illinois. She can be reached at (312) 253-9614 or via e-mail at mcope@weltman.com.