In May 2011, U.S. senators Patrick Leahy, Sheldon Whitehouse and Richard Blumenthal proposed legislation that would give U.S. bankruptcy trustees more authority to protect homeowners going through the bankruptcy process from mortgage fraud. The Fighting Fraud in Bankruptcy Act (FFBA) would give trustees more tools to fight mortgage fraud without needing to go to court to do so. It is important for people to understand the need that gave rise to the proposed law as well as the main requirements the FFBA would institute.
Need for the Legislation
Part of the duties of a U.S. bankruptcy trustee is to review proofs of claim that mortgage lenders file in bankruptcy cases to make sure that the lenders actually do own the debt to which they are making a claim. In the reviews of such claims that the Executive Office of the U.S. Bankruptcy Trustee has completed in recent years, the Office has found an error rate in the documentation of almost 10 times that those in the mortgage industry cite.
When trustees have requested additional documentation of the claim to the debt, many lenders have responded with legal action challenging the right of trustees to do so. Additionally, lenders have questioned the right of the bankruptcy court to issue sanctions to those lenders whose claims were defective or fraudulent.
Key Provision of the FFBA
The FFBA has four main components to address the issues that bankruptcy trustees have been facing. The FFBA would:
- Make explicit that bankruptcy trustees have the right and duty to act to prevent abuse by creditors in the bankruptcy process
- Give the bankruptcy court the authority to impose sanctions on creditors who abuse the bankruptcy process, either on the court's own volition or in response to a motion by the bankruptcy trustee
- Give bankruptcy trustees the power to institute audit procedures to ensure that creditors are obeying the law
- Require mortgage lenders to certify under oath that any foreclosure proceedings that lenders carry out against active duty military members meet the standards of the Servicemembers Civil Relief Act, which requires that lenders stay foreclosure proceedings until a military member's deployment is over
The bill's sponsors hope to eliminate litigation over the rights and duties of the trustees and bankruptcy court by stating plainly that trustees and courts may demand that lenders accurately document their claims to debts and sanction those who fail to do so or who try to commit fraud on the court.
Those who are considering bankruptcy and facing foreclosure on their homes have enough difficulties without lenders engaging in fraudulent behavior to try to steal people's homes. The FFBA would give trustees and the courts more tools to stop fraud and abuse. The assistance of an attorney during the bankruptcy process can also reduce the chances that a lender will be able to take advantage of a borrower. If you are facing home foreclosure, do not hesitate to contact an experienced attorney who can discuss your options with you.
