The U.S. Bankruptcy Court for the Eastern District of Louisiana will sanction Lender Processing Services (LPS) after an employee at the firm was found to have improperly signed a court affidavit that put a nondefaulted borrower in line for foreclosure. Ron and LaRhonda Wilson were current on their mortgage and making payments under a court-approved Chapter 13 bankruptcy plan when Option One Mortgage Co., their mortgage servicer, attempted to foreclose in early 2008 by filing a series of motions with the court. The U.S. Trustee, a U.S. Department of Justice unit responsible for overseeing the administration of bankruptcy cases, eventually intervened in the dispute and last December asked the Louisiana court to sanction LPS for what it said was the firm’s misrepresentation of payments received, but not properly posted to the borrower’s account.
The case In September 2007, the Wilsons filed for bankruptcy when they defaulted on their mortgage, owned by Option One, now American Home Mortgage. Monthly payments were scheduled with the court to pay back what they owed, and the plan was confirmed in December 2007. But the following January, Option One filed a motion for relief from stay, alleging the Wilsons had failed to meet that plan and asking the court to allow a foreclosure to proceed. In February 2008, the borrowers contested the motion and claimed they were current on the plan. When Option One failed to prove the default the motion was dismissed, but a second motion was filed soon thereafter, alleging the Wilsons had been in default for over four months. In the second motion, Option One included an affidavit signed by Dory Goebel, who was named as an assistant secretary at Option One under a corporate resolution — a common practice in the industry in which a company gives limited authority, such as authority for signing foreclosure affidavits, to another person. Goebel was identified in the case as an LPS employee. Goebel’s affidavit affirmed the Wilsons missed monthly installments since November 2007 through February 2008, and showed the last payment was applied to the balance in October 2007. At a hearing in April 2008, however, the Wilsons showed complete receipts for payments made from October 2007 through March 2008. According to the Magner ruling, what followed was a series of hearings that saw The Boles Law Firm and LPS attempting to track down proof of the default — instead finding a mix-up involving a mortgage finance system reliant on computer technology. During a court hearing on the case in June 2008, the attorney at Boles admitted the Wilsons were, in fact, current on their loan. Technology snafus LPS provides much of the underlying technology used to manage mortgage servicing in the U.S., establishing a library of underlying loan information and data. Option One employees put their loan information into that library, and when attorneys need it to process foreclosures and other actions, they would “check out the information,” an LPS attorney told the court in August 2008. The company expanded beyond technology into providing services for clients, as well. One of the services LPS provided at the time — since discontinued years ago — was to execute affidavits of indebtedness attesting that an employee, such as Goebel in the Wilson case, had reviewed material information regarding the borrower’s loan, payment history and amount owed. “[I]t was simply one less thing that the client had to do, that we would do,” the LPS attorney said, according to court documents. “She (Goebel) would go into their system, look at what has been posted, what hasn’t been posted. And I think what happened here was just a series of miscommunications.” Goebel testified at that hearing, as well, explaining that LPS employees had no way to verify received but unposted payments. The problem in the Wilson case occurred because, although the Wilsons filed for bankruptcy in September 2007, the LPS bankruptcy workstation was not set up until two months later. So, when the Wilsons made their first October 2007 payment under the court-approved bankruptcy plan, it was not posted to the correct month — but instead to the already past-due June 2007 installment. From then on, the Wilsons were considered in default as far as the computer system was concerned. The ‘sham’ affidavit Once the Wilsons contested their alleged redefault on the mortgage in February 2008, LPS discovered the misapplied October 2007 payment entered by Option One into its system. While a manual correction fixed some of the misapplied and unapplied payments, it did not fix all of errors in the computer system — which now told Boles to consider the Wilson loan past due as of December 2007, instead of October 2007. LPS contended the Boles Law Firm knew of payments the law firm had previously been forwarded that weren’t yet posted in the computer system, noting it had “attempted on numerous occasions to remind the [Boles] Firm that it was in possession of the unposted payments.” Regardless, Judge Magner ultimately held LPS responsible for filing what she characterized as a “sham” affidavit of indebtedness with the court, based upon the misinformation in its technology system. “The affidavit is typical. It purports to be executed under oath before a notary and two (2) witnesses,” Magner said in her ruling. “It provides the name and title of the affiant and represents that the affiant has personal knowledge of the facts contained in the affidavit. In fact, it is a sham.” LPS officers executed 1,000 documents per day for Option One and other clients, and testified that each day Goebel received roughly 30 documents to sign, according to court documents. Ms. Goebel allocated two hours per day for “document execution” and she estimated in her testimony that it took her between five and 10 minutes to sign each one, reviewing the computer record of those payments posted. The judge characterized Goebel as an “earnest young woman but with no training or experience in banking or lending” for her job and title of “assistant secretary.” Goebel admitted she would have signed the affidavit, even if she knew of the unposted payments, without questioning it because her signature was requested by legal counsel at The Boles Firm. “It is evident that LPS blindly relied on counsel to account for the loan and all material representations. In short, the affidavit was nothing other than a farce and hardly the evidence required to support relief,” Magner wrote in her ruling. Magner said default affidavits were meant to be a lender’s representation to the court of the status of the loan and were accepted routinely in state and federal courts in lieu of live testimony. “They are an accommodation to the lending community based on a belief by the courts that the facts they present are virtually unassailable. The deference afforded the lending community has resulted in an abuse of trust,” Magner wrote. Enough blame to go around In a brief filed in February 2011, LPS attorneys claimed the questioning of Goebel during the August hearing “strayed outside of the protocol she followed to broad, often imprecise, questioning about what other Fidelity employees did, or should have done, as part of the relationship between and among Fidelity, Option One Mortgage Co., and the Boles Law Firm.” LPS attorneys also claimed that the Boles Law Firm knew of the unposted payments involving the Wilsons, since the firm had specifically requested payments to be forwarded to it — yet the firm then filed a motion to lift stay without mentioning those same payments. Further, LPS cited previous cases finding that “a clear and convincing standard of proof” is required for punitive sanctions. “The [U.S. Trustee] has failed to show with clear and convincing evidence that Ms. Goebel should be imputed with the knowledge of everyone at Fidelity or that Ms. Goebel intentionally sought to deceive this court,” LPS attorneys said in their final brief filed with the court prior to Magner’s ruling. Nearly every major mortgage servicer, already struggling with a foreclosure inventory too large for many to handle, has had to correct and refile improperly signed affidavits in courts across the country. Refiled affidavits totaled in the tens of thousands for some servicers, and have led to months of delays in the foreclosure process. Federal regulators and the 50 state attorneys general launched investigations and began settlement negotiations with the nation’s largest mortgage servicers in the wake of the revelations. The Office of the Comptroller of the Currency expects to release its own settlement Wednesday, while sources tell HousingWire the coalition of other federal regulators and the AGs could take months — if any such settlement is reached at all. When the initial reports of improper affidavits and other foreclosure problems first appeared last year, it became clear that no single company was alone in bowing to a push for blind efficiency. In her ruling, Magner suggests that such shortcuts were rampant across an entire industry. “The fraud perpetrated on the court, debtors and trustee would be shocking if this court had less experience concerning the conduct of mortgage servicers. One too many times, this court has been witness to the shoddy practices and sloppy accountings of the mortgage service industry,” Magner said in her ruling. “With each revelation, one hopes that the bottom of the barrel has been reached and that the industry will self correct. Sadly, this does not appear to be reality.” Write to Jon Prior. Follow him on Twitter @JonAPrior.