Everyone blames the current economic crisis on two primary factors: First, they say, deregulation allowed greedy lenders to take unfair advantage of innocent consumers. Second, they say, greedy consumers were taking unfair advantage of innocent lenders who then found themselves with worthless portfolios when those unscrupulous homeowners decided not to pay back all the money they'd stolen.
Things are a little more complicated than that, though. A
lot more complicated than that, actually. The system that the United States has set up for borrowing and lending money to buy homes, and then for servicing and regulating those loans, and then for enforcing the terms of the loans, is amazingly complex.
Amazingly.How
amazingly complex is it? I'll tell you: it's so amazingly complex that lenders have now set up systems to
decomplicate things when they have to go to court to enforce their notes; and, it's so amazingly complex that lenders can do things that are blatantly illegal and then argue that they didn't do anything wrong at all and mislead courts about what they're doing and almost get away with it. And, it's so amazingly complex that homeowners, lawyers, and federal judges have to use every resource at their disposal
simply to figure out what the lender is doing.Any consideration of the current economic crisis, any consideration of how to address foreclosures, any consideration of who is "wrong" and who is "right" in any aspect of the current mess needs to begin with considering
The Strange, Alarming, Sad, and Ultimately Wonderful Case of Dorothy Chase Stewart. And, if you own a home or want to someday,
you need to read this. Because it could happen to you.
Let's begin at the beginning.
In 1999, Dorothy Chase Stewart got a loan from a company called "Norwest Mortgage." The loan was secured by a mortgage against her house. Ms. Stewart ran into financial troubles -- of an unclear nature -- and filed bankruptcy. She actually filed bankruptcy
three times. Her husband filed in 2002, and she filed in 2004, both without the help of a lawyer. In each of those situations, her case was dismissed because the payments required to be made by a debtor were not made.
(Chapter 13 Bankruptcies typically require that a debtor make payments to a "bankruptcy trustee." The trustee then uses those payments to pay off some or all creditors for a period of time. So it's not true that filing bankruptcy means walking away from your debts.)
Dorothy filed for bankruptcy protection again on June 12, 2007. By that time, her mortgage was held by "Lehmann Brothers" and was being "serviced" by Wells Fargo.
That means that Dorothy owed the payments to Lehmann Brothers, but that Wells Fargo would be the company that would send notices, collect the payments, apply them to the loan, and keep an account of the administration of the loan.
In a bankruptcy case such as Dorothy's, creditors file a "proof of claim," a legal pleading that tells the bankruptcy court how much money the creditor feels it is owed by the debtor; the amount to be listed is the amount owed prior to the filing of a bankruptcy petition. Wells Fargo, as the servicer, filed a proof of claim in Dorothy's case saying they were owed $33,641.80. They filed that "proof of claim" on July 12, 2007. So Wells Fargo, which is charged by contract with administering Dorothy's loan, told a bankruptcy court on July 12, 2007, that Dorothy had owed Lehmann $33,641.80 as of the date she filed bankruptcy.
On August 20, 2007, Wells Fargo "amended" (changed) its claim to add in two additional payments it said it was owed, increasing that to about $35,000.
Of that $35,000 or so, only about $25,000 was for actual past-due payments. Over $7,000 was for attorney's fees and "other... charges." There was also a request, in there, for $776 in "late charges," fees Wells Fargo wanted to assess Dorothy for making late payments before the bankruptcy.
That's where the dispute arose. Dorothy, when her lawyer received the "proof of claim" asking for $35,000 -- of which about $8000 was "late charges," "attorney's fees" and "Other... charges," objected to paying that amount. That set into motion a process that bankruptcy courts use to determine how much a debtor might have to pay a creditor: After Dorothy objected, Wells Fargo submitted additional proof of the amounts it claimed to be owed. It itemized things out, it included invoices, it had affidavits (sworn statements) attesting to how much it was owed.
And yet, Dorothy
still objected to paying those amounts. She objected,
in part, because Wells Fargo still hadn't put all the information in that it might have, and she objected, in part, because Wells Fargo wasn't supposed to get all that money.
The fees that lenders and servicers can charge are governed by the contracts in place -- that note and mortgage that borrowers sign -- and by state and federal laws that may apply. So to find out if Dorothy might have to pay Wells Fargo attorney's fees, "late charges" and "other... charges," it is necessary to look first at the contract she signed.
Dorothy had borrowed, in 1999, $61,200 on a 30-year note. That's not an outrageous sum; Dorothy was not buying "too much home," it appears. She was not one of the people buying lake homes for no money down. Dorothy, in borrowing that money, agreed that she would make payments on time and agreed to pay a penalty of 5% of the amount due if she paid late. Dorothy and her lender agreed that there would be only one late charge per late payment -- so if Dorothy didn't make her January payment, for example, Wells Fargo could (on behalf of Lehmann) impose a "late charge" on the January payment. Then, if Dorothy did not make her February payment, Wells Fargo could impose a late charge on
that payment, too -- but could not impose another late charge on the January payment.
The contract said other things, too, but we'll get to those in a bit. First, we'll focus on the late charges and whether Wells Fargo was to be paid those.
The contract signed by Dorothy and her lender also described how payments were to be applied when Dorothy made them. So the contract, like all such contracts, set out how much Dorothy was to pay, and what would happen if she didn't pay on time, and what should be done with the money when she did pay.
That's where things get complicated, though. It seems so simple, but it's not. The contracts, when you know how to read them, seem very simple. And they are. It's the system set up to enforce and interpret those contracts that is complicated. And things get even
more complicated when the lenders decide to... cheat.
It gets complicated because Wells Fargo doesn't just service
Dorothy's loan. Wells Fargo, at the time of the hearing, serviced about 7.7 million different home loans. As you might guess, keeping track of 7.7 million accounts requires something more than a pad of paper and a pen, and so to help it, Wells Fargo used computer programs. Wells Fargo in fact used the most widely-used computer program available for keeping track of mortgage loans.
The computer program can do a lot of things, as we'll see -- but computer programs only do what they're told to do. They don't think about things, they don't analyze things, they don't have the power to say
Hey, wait, that doesn't seem right. Trusting a computer program is risky. And telling a computer program what to do is tricky; tell it the wrong thing and you mess things up
a lot, sometimes.
And the tendency for things to go wrong is increased when there is an
incentive to help things along, as there is in this case.
The incentive comes from the method in which servicers get paid for what they do. Lenders, of course, get paid by the borrower-- they get interest and principal repaid. But servicers don't do their servicing for free. They need to get paid, too, and so the lenders have to come up with ways to pay them.
One way servicers get paid is to impose "fees" for the things they do. That's perfectly legal --
if done correctly-- as the notes almost always provide that fees can be imposed if the lender takes action. Another way servicers get paid is to take the money they collect and invest it, collecting interest on that note.
Keep that in mind. It'll become important. But let's focus on the "fees," because that's where we began: those late fees.
The note and mortgage in Dorothy's case allowed the imposition of a late fee. They also set out how money should be applied when a payment came in. Wells Fargo used a computer program to adminster both Dorothy's loan and the 7,699,999 other loans it kept track of, and so Wells Fargo had to tell the computer program what to do with Dorothy's money when it came in.
Wells Fargo
should have told the computer program to apply Dorothy's money the way the note required it to be applied. Wells Fargo
should have said "Hey, computer system, when Dorothy pays money, put that money first to escrow items. Then, if there's any left over, apply that to interest. Then, if there's
still money left over, apply
that to principal. If you've still got some, then, pay off any fees and costs."
That's what Dorothy's note and mortgage required: When Dorothy sent money to Wells Fargo, that was the
order in which payments were to be applied: escrow, then interest, then principal, then fees and costs.
Here's a problem, though: Wells Fargo maybe doesn't want to wait to get paid and collect its fees until Dorothy has paid everything else off.
Here's another problem: Wells Fargo maybe has a bit of an incentive to apply payments differently.
I don't
know if they did it on purpose, or if it was an accident. What I do know is that payments were not applied by Wells Fargo as required by the note and mortgage.
Dorothy first missed a payment on her loan in December, 2000 -- so just a little while after she took out her loan, she missed a payment. When her payment was not received by December 15, 2000, Dorothy's account was (via computer) assessed a late charge of $27.71.
Wells Fargo did not tell Dorothy that it had done that. It assessed a $27.71 late charge and never told Dorothy about that charge.
Is that a big deal?
Maybe. Let's see what happened.
Wells Fargo, which didn't bother telling Dorothy about the $27 late charge it imposed, sent Dorothy an "acceleration letter" on January 3, 2001. Wells Fargo never produced this letter, so it's not clear what it said -- but an acceleration letter is typically a letter from a lender telling a borrower, more or less,
Hey, you've defaulted, now you owe us the entire amount of your note or we're going to foreclose. Or it warns that the lender could do that; almost every home loan includes a provision that if you miss a required payment, the lender can "accelerate" the note -- meaning they don't have to wait 30 years for you to pay in full; they can demand you pay in full
now.So Wells Fargo opted not to tell Dorothy it was imposing a $27 fee, and instead (apparently) warned her that she might have to pay the full amount due or be foreclosed.
Dorothy then made her January, 2001 payment. She paid $654.11 -- the regular amount due -- on January 12, 2001.
According to the
note, the legally-binding contract between Dorothy and her lender, that $654.11 was to be applied to "escrow," then interest,
then principal,
then late fees. Dorothy didn't escrow, so the
note required that Dorothy's money be applied to accrued interest, then to the outstanding principal, and if anything was left over, it could be applied to late fees.
Wells Fargo, though, applied some of the payment to the December installment, and then applied
some of the payment to a December late fee -- the one it had not told Dorothy that she owed. That left it with a little money left over, $72.29.
The
contract required that the $72.29 be applied to escrow, interest, principal, or fees.
But Wells Fargo instead put that $72.29 into a "suspense account."
You may never have heard of a suspense account. I didn't, until I began doing this type of law.
A "suspense account" is an account a servicer uses to hold any money that they don't know what else to do with. When a servicer gets money paid on a loan that doesn't match the amounts it believes it should be getting, that money sometimes goes into a "suspense account," instead of onto the loan.
So if you're paying your mortgage and you over pay by, say, $10, your $10 might go into a "suspense account."
But wait:
doesn't the note and mortgage say what to do with that money?You'd think so. You'd certainly think so. The note and mortgage, for example, in almost every single case, allow a borrower to "prepay" the loan (with or without a penalty)-- and they say what should be done with
every payment received. So if I owe money to a lender, like Lehmann, and I can
prepay the loan, I should be allowed to send in extra money, or money that doesn't match the exact amount owed, and have that applied as required by the note.
Shouldn't I?I
should. But that conflicts with two other realities: reality one -- that computers do most of this nowadays, and reality two-- that servicers want to be paid and have incentives to
not apply the money. Those incentives include the fact that it's more complicated to tell the computer what to do with weird amounts of money that don't quite match (and complicated = expensive, remember) and those incentives include that the "suspense account" generates interest that is used to pay the servicer.
So Wells Fargo did
not apply the $72.29 to Dorothy's interest, as the note required, or her principal. It put that $72.29 into a suspense account and began to draw interest on it.
Before you say
well, that's only $72.29, what's the big deal? remember that Wells Fargo didn't have just
Dorothy's loan. It had 7,699,999 others.
Let's say that 1 in 1,000 people had $72.29 held in a suspense account. Heck, let's say 1 in 10,000 people had $72.29 in a suspense account. If only 1 in every 10,000 of the loans Wells Fargo was servicing at the time had $72.29 in a suspense account, that means 769 people had $72.29 in their "suspense account." That's $55,663.20 held in an account paying Wells Fargo. Just from that
what's the big deal? amount.
Things got worse, then, for Dorothy. Wells Fargo, which
still hadn't told Dorothy about that December late charge, had instead sent her two notices that she was delinquent on her loan (and, technically, she
was; she'd still missed a payment that had not been made up, remember.)
Because the January payment that Dorothy made was applied to December, Wells Fargo then imposed a late charge on the
January payment -- because it hadn't been made. Another $27.71 imposed, without (it seems) Wells Fargo telling Dorothy about it.
Dorothy then paid on February 12, 2001 -- again, within the time limits for her February payment. She still hadn't made up the previous payment. Again, Wells Fargo applied the payment to the
last payment, the January payment, and to the late charge that had been assessed.
Now ask yourself: If Dorothy
should have known that she was charged a late fee for December (as many of you probably said), should she
also have assumed that she was being charged a late fee for January, and February, even though
those payments were made on time?
Contracts in Wisconsin, at least, impose what's called a "duty of good faith." That's kind of an ambiguous duty, but it means that the parties have to treat each other fairly. I don't know if Louisiana (where this all took place) imposes a similar duty. But consider: Was Wells Fargo acting fairly in how it applied the payments?
Oh, and, in February 2001, Wells Fargo again had money left over after paying the January payment and late fee -- so it put that into the suspense account, too.
Go back to that math problem. If 1 in every 10,000 Wells Fargo customers had $144.58 in their suspense account, Wells Fargo has $111,326 in its account, earning interest.
Starting to see how this works? So far, Dorothy missed
one payment. Wells Fargo has then imposed $55.42 in late charges, and has $144.58 of Dorothy's money in a suspense account, from which Wells Fargo is earning interest.
This went on for a
whole year. Dorothy for the whole year of 2001 made her payments in a timely manner, and each time she did that, Wells Fargo applied the payment to the earlier month's payment, paid the earlier late fee, imposed
another late fee, and then put the remainder of the money into the suspense account. So by the end of 2001, Wells Fargo had imposed $360.22 in late fees.
And it gets
worse. (I'll be saying that a lot, as we go along.) It gets
worse because Dorothy apparently tried to fix things; in that year, she paid an
extra $400 to Wells Fargo, money that by the
note should have been applied to interest, then principal, then late fees. Instead, Wells Fargo applied that money to late fees, first, then to "Other... charges." (We'll cover that in more detail later.)
So by October, 2001, even though Dorothy had paid all of her 2001 payments
plus another $400 towards the
single payment she'd missed, Wells Fargo said she was more than $600 behind.
Then Wells Fargo began not accepting payments from Dorothy. Dorothy made payments in October and November, 2001, and both of those were returned. Wells Fargo referred the matter for foreclosure.
How much was Dorothy
actually behind when her
servicer decided to foreclose on her house?
$154.11.
Think about that, until we get to the next part. Think about a servicer -- not the
lender, the
servicer-- deciding to foreclose on a house because the borrower is behind
$154.11.And before you say
Well, she was in default-- you cold-hearted people out there will say that -- let me rephrase:
The servicer decided to foreclose even though
it was only owed $154.11, and even though
the borrower had actually paid a little extra that year and even though
the servicer had at least that much in its suspense account!Instead of writing to the borrower and saying,
Hey, Borrower, you owe us about $154.11 in addition to your regular payment. Why don't you pay that and get caught up? Wells Fargo rejected her payments and decided to foreclose on her house.
Oh, and Wells Fargo never bothered telling Dorothy about the late charges that year. It never bothered telling her about the "suspense account." It never notified her how it was applying her charges.
So let's rephrase that one more time:
The servicer decided to foreclose even though
it was only owed $154.11, and even though
the borrower had actually paid a little extra that year and even though
the servicer had at least that much in its suspense account and even though
the borrower, poor Dorothy, really had no way of knowing how much she might owe the lender at that point, because the lender had never bothered telling her.
Next: Part Two, coming up: What happened after the foreclosure, and a little more about the computers that control the world of mortgages.
