Cue the free-for-all. A federal judge in Pittsburgh ruled late Tuesday that an inquiry by the U.S. Trustee to investigate bankruptcy management practices at Countrywide Financial Corp. could proceed, opening up a wide-ranging investigation that will likely represent the first deep-dive by government regulators into servicing practices at the nation's largest lender and servicer. The Office of the U.S. Trustee, an arm of the Justice Department responsible for policing federal bankruptcty courts, will be able to interview Countrywide execs under oath and subpoena key documents from the lender as a result of the ruling. Federal bankruptcy trustees in Florida, Georgia and Ohio have already filed legal actions against the Calabasas, Calif-based lender, saying the company was abusing bankruptcy process. "Countrywide’s failure to ensure the accuracy of its claims and pleadings has resulted in an abuse of the bankruptcy process and has prejudiced, and will continue to prejudice, parties in interest in the bankruptcy cases in which Countrywide participates,” trustees said in original court filings in Florida, Georgia and Ohio during early March. Via the Associated Press' Joe Mandak:
U.S. Bankruptcy Judge Thomas Agresti said "it certainly has not been proven that Countrywide did anything wrong," but noted a bankruptcy trustee "has made a showing of a common thread of potential wrongdoing" in several cases ... Countrywide attorneys had previously argued that the subpoenas were beyond the scope of the bankruptcy trustee's powers and that the trustee's requests to interview Countrywide executives under oath amounted to an illegal "fishing expedition."
Countrywide, for its part, has admitted that mistakes were made, but has said that its software isn't wired to intentionally harm borrowers. Tanta over at Calculated Risk has written extensively -- as have I -- about how the structure of the servicing side of the industry has led to what can best be described as a unique sort of incompetence, moreso than willful and malicious intent. (I'll save my thoughts on this issue, and why I tend to think that the problems here ultimately feed back to Fannie and Freddie, for a later commentary.) A separate AP story covered the 50-page opinion penned by Judge Thomas Agresti of the U.S. Bankruptcy Court in Pittsburgh, and noted that Countrywide's attorneys had argued that allowing the investigation to proceed would have "staggering implications" for the industry, triggering a "free-for-all" by investigators. While it didn't make an effective defense, the attorneys were certainly right about one thing: this case could represent a sea-change for servicers, who now have to come to grips with the fact that a business that has long been content to operate behind the scenes is no longer free to do so.