Court Levies Damages, Fees and Imposes Sanctions Against Servicers

In the case of In re Stewart, the U.S. Bankruptcy Court for the Eastern District of Louisiana held that the conduct of the debtor’s mortgagee, Wells Fargo Home Mortgage Inc., was “duplicitous and misleading,” and assessed damages of $27,350 against Wells Fargo. The court found that Wells Fargo had improperly charged the debtor for services, overcharged the debtor based on incorrect calculations of escrowed funds and submitted an adequate protection order containing undisclosed and unapproved fees. Based on a perception that these problems were systemic, the bankruptcy court also ordered Wells Fargo to audit and amend every proof of claim in cases pending in that court, and to provide a complete loan history on every account for which Wells Fargo had filed a claim. With respect to closed cases in which Wells Fargo had filed a proof of claim after March 2007, the court ordered Wells Fargo to prepare and deliver copies of an accounting to the trustee, the debtor and the debtor’s counsel.

The Facts

In 1999, Dorothy Stewart and her husband obtained a loan from Northwest Mortgage Inc. evidenced by a promissory note and secured by a mortgage on their home. In turn, Northwest entered into a contract with Wells Fargo pursuant to which Wells Fargo was to service the mortgage. The promissory note provided for, among other things, a late charge in the amount of 5 percent of the past due installment and reimbursement of up to 25 percent of the note balance for attorney fees. The mortgage provided the same reimbursement of attorney fees and allowed Wells Fargo to make reasonable inspections of the property after providing notice to the mortgagors, which notice was to include Wells Fargo’s reason for the inspection. Pursuant to the mortgage, Wells Fargo was also authorized to collect monthly the amounts estimated to cover property tax or insurance and, in the event of failure of the mortgagors to make payments, to pay all necessary costs to protect the property value and add these costs to the debt secured by the mortgage. Finally, the mortgage established an order of priority in applying payments: first to prepayment charges; next to property taxes or insurance premiums; next to accrued interest; next to accrued principal; and finally, to late charges.