May 24, 2011

Leahy, Whitehouse, Blumenthal Introduce Bill To Fight Creditor Fraud In Bankruptcy Courts

WASHINGTON – Senators Patrick Leahy (D-Vt.), Sheldon Whitehouse (D-R.I), and Richard Blumenthal (D-Conn.) introduced the Fighting Fraud in Bankruptcy Act Tuesday to strengthen the tools available to U.S. bankruptcy trustees to protect American homeowners from creditor fraud in bankruptcy court. 

The Executive Office of the U.S. Bankruptcy Trustee (EOUST) was established within the Department of Justice in 1978 to protect the integrity of the federal bankruptcy system.  The EOUST has recently reviewed thousands of proofs of claim filed by mortgage servicers, and discovered an error rate more than ten times the rate asserted by some in the mortgage servicing industry.  In response to increased efforts by the EOUST to hold mortgage services accountable in the bankruptcy process, mortgage servicers have been challenging the legal authority of the trustee and bankruptcy court to take steps to obtain additional documentation or provide sanctions for defective or fraudulent filings.  The Fighting Fraud in Bankruptcy Act will bolster the EOUST’s ability to fight creditor fraud and protect homeowners in the bankruptcy process, while preventing needless litigation over its authority to do so.

“The Fighting Fraud in Bankruptcy Act is another step forward in the Judiciary Committee’s important efforts to protect American citizens from fraud,” said Leahy.  “As Congress looks at ways to mitigate the foreclosure crisis to reduce its impact on homeowners and the economy, I hope all Senators can agree that the foreclosure process for Americans should be a fair one and one in which there is accountability for fraud or other misconduct.  And I hope we can all agree that the integrity of our judicial system is something worth protecting.”

“It’s inexcusable when big banks hit homeowners with bogus mortgage fees and improper foreclosures,” said Whitehouse.  “This bill will help ensure that Rhode Islanders who fall on hard times have access to a fair bankruptcy process and a chance at a fresh start.”

“Homeowners facing foreclosure, including military personnel serving our country far from their homes, are entitled to full legal protection from fraud and misconduct,” said Blumenthal. “This commonsense proposal simply strengthens existing authority for holding creditors accountable for abuses. It will deter needless litigation that is currently wasting resources, clogging the bankruptcy courts, and slowing our economic recovery.”

The Fighting Fraud in Bankruptcy Act includes four key provisions.  The legislation will:

  • Clarify that U.S. trustee has a duty to take action to remedy creditor abuse of the bankruptcy process;
  • Permit the bankruptcy court, either on its own or in response to a motion from the trustee, to correct or sanction misconduct and fraud committed by creditors in the bankruptcy process;
  • Empower the trustee to establish audit procedures to ensure that creditors are complying with the law;
  • Require a mortgage lender to certify under penalty of perjury that a foreclosure proceeding against active duty members of the military who are deployed is in compliance with the Servicemembers Civil Relief Act (SCRA).  The SCRA protects active duty military personnel by requiring a stable, manageable interest rate for military homeowners on active duty, and staying foreclosure actions during their deployment.

The Judiciary Committee has held several hearings in recent years regarding the foreclosure crisis.  Earlier this year, the Committee considered and reported to the full Senate the Limiting Investor and Homeowner Loss in Foreclosure Act  to authorize bankruptcy courts to establish loss mitigation programs to avoid foreclosures.

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