A few weeks ago, one of the largest settlements involving the Federal Trade Commission (FTC) has resulted in $108 million being set aside for homeowners ripped-off by the mortgage giant, now a part of Bank of America.

Two-year probe into Countrywide abuses

The U.S. Trustee Program (USTP), a unit within the Justice Department, worked closely with the FTC in the two-year effort “to carry out parallel investigations relating to Countrywide’s improper conduct in servicing home loans,” according to a June 7 department press release. The USTP is charged with ensuring the efficiency and integrity of the federal bankruptcy system except for the six judicial districts in Alabama and North Carolina.

The investigation into Countrywide’s abusive practices apparently stemmed from federal bankruptcy officials’ interest in the case of a couple in Cherokee County, Georgia. Anyone who has tried to deal with an abusive lender or mortgage note servicer will recognize at least some of the scam-bully tactics that Countrywide employed to pound John and Robin Atchley, he a utility lineman and she a postal worker–until they gave up and sold the home even though they were under protection of a Chapter 13 bankruptcy filing.

Shameless, systemic bully tactics

That didn’t stop Countrywide, though–company officials lied to the bankruptcy court, then conjured up bogus escrow fees, and even levied more charges after the Atchleys had come up $2,000 just make the sale of the house go through.

To be sure, Countrywide didn’t start or stop with the Atchleys; the company got in trouble in courts around the country, including USTP complaints in Ohio and Florida, plus court sanctions in Pennsylvania, Texas and North Carolina.

One couple’s testimony

But what got the attention of federal officials was the Atchleys’ testimony before a Congressional committee.

According to a June 7 piece in The Atlanta Journal-Constitution, “The Atchley case got the attention of federal bankruptcy officials and later the Federal Trade Commission. Robin Atchley testified two years ago before a Senate committee.

“[FTC Chairman Jon] Leibowitz said the FTC listened to Atchley’s testimony and responded.

“ ‘Today the FTC is delivering a message of our own,’  he said. ‘Follow the law or face the consequences.’ ”

The problem is, even the FTC comes across as less than forthright. In beating its drum about the settlement, the agency seems to be overlooking basic math: the $108 million settlement is intended address abuses heaped on about 200,000 homeowners. If evenly applied, in round number that comes out to $540 per household.

In their case alone, the Atchleys figure Countrywide beat them out of more than $15,000.

FTC should not crow too loudly

At least one columnist gets this angle, too. Michelle Singletary writes “The Color of Money” for The Washington Post. Here’s her lede from the June 10 column: “It’s an all-too-familiar Washington story. Officials call a news conference to pat themselves on the back for righting a wrong they shouldn’t have allowed in the first place.

“Meanwhile, the hapless victims are left to ponder what might have been had those officials been more vigilant.”

Singletary also lists some examples of the kinds of made-up fees and inflated charges that Countrywide routinely inflicted.

“The FTC says Countrywide charged excessive fees for services such as property inspections, inflated the amount owed when borrowers filed for bankruptcy protection, and didn’t tell people when new fees or charges were being added to their loans.

“Some homeowners, for example, were charged as much as $2,500 for trustee fees, even though the going rate for such a service was in the range of $600. ‘Just mowing a lawn could result in a $300 bill to a homeowner,’ FTC Chairman Jon Leibowitz said.”

Countrywide not alone

And as a post at BNET.com points out with this headline, “Countrywide’s Foreclosure Scam: It’s Not the Only Lender Ripping Off Homeowners.” Indeed, this point should be in a memo tomorrow, on the desk of every US Representative and Senator: “Bank of America’s (BAC) move to settle federal charges that its Countrywide unit gouged homeowners facing foreclosure should mark the beginning, not the end, of a full-blown government crackdown on mortgage lenders. That’s because the practices Countrywide is accused of — which range from raising the cost of property inspections, to lying to borrowers about how much they owed, to charging $300 to mow the lawn — are endemic among loan servicers.”

Citing this page at MortgageLoan.com, the post lists these as chief  among “senseless practices” that are “cited by industry observers, or complained about by consumers”:

1. Charging fees for services not performed, or fines not actually due. Sometimes, lenders make extra cash by charging imaginary fees that are totally unwarranted. Mortgage documents and mathematical calculations can be complicated, so many consumers are unable to figure out when they’re being bilked. At the mercy of mortgage companies, they often overpay, even while facing foreclosure and bankruptcy.
2. Overstating the balance owed on a home loan. University research into recent foreclosure data found that almost half of the loans analyzed in the study included inflated balances or vague, unspecified charges. In more than 90 percent of the cases, homeowners disagreed with mortgage company calculations, believing that they were both inaccurate and too high.
3. Accumulating various fees or charges that are intentionally erroneous. Most of the fees mentioned in the study were relatively small, but they added up to gigantic amounts of extra profit for those companies who collect them. If a lender has, for example, 200,000 customers across the U.S. and overcharges each of them by $100, it adds up to additional revenue of $20 million-for basically doing nothing.
4. Failing to follow basic industry regulations. Investigators have found that some mortgage lenders are so negligent or sloppy, they don’t even comply with the most fundamental rules and regulations. A lender is required, for example, to show documented proof that they’re the actual mortgage holder before attempting to collect payments from a homeowner. But some companies don’t even verify this essential information.

Settlement bars further abuses

However, despite the relatively small monetary settlement, the consent order also bars Bank of America (who bought Countrywide after the investigations had begun and who conceded no guilt in the settlement) from using such tactics in the future. Again, from Singletary: “The settlement also requires that the Countrywide loan-servicing operation make significant changes in handling bankruptcy cases. For example, the servicer must send borrowers in Chapter 13 bankruptcy proceedings a monthly notice with information about what amounts are owed. The servicer also has to come up with a program that ensures the accuracy of loan information filed in those Chapter 13 cases.”

That is a good thing, necessary to restore confidence in power of the protection of a bankruptcy filing.

Two federal Web sites

Furthermore, the government has created two Web sites, one intended to help keep Countrywide victims informed, and another, says the USTP “for information on reporting mortgage and other financial fraud, as well as valuable tips on protecting themselves against mortgage and financial scams.”

If these measure do indeed help consumers going forward…well, let’s Singletary sign us out, first quoting Robin Atchley:

” ‘I’m hopeful the settlement will help other families avoid the nightmare we went through and save their homes,’  Atchley said.

“When Atchley’s words come true, then that’ll be something to crow about.”

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The bankruptcy reform act of 2005 increased the complexity of the law, but if you are overwhelmed by debt, filing for bankruptcy protection may be your most pragmatic alternative. If you are facing foreclosure of your home (sometimes referred to as your “primary residence,” as opposed to a second home, or “vacation home”), bankruptcy protection may be your best route to saving the home. If you are struggling with medical bills, you may be in a special category for setting debt aside, and if you have problems with credit-card debt, you should be aware that some of those laws have changed recently, too. Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. For bankruptcy basics, please see:

Principles of bankruptcy

Basics of bankruptcy

Introduction to Chapter 7

Introduction to Chapter 13

Editor’s Note, to readers or consumers in Texas (and other states) who may be affected: In August, Texas Attorney Greg Abbott took legal action against an Addison, TX-based company called Debt Relief USA. Please see the end of this report for important information regarding an extended deadline that is pending.

Using various search engines to research terms such “personal bankruptcy” can often result in hits for firms promising help with “debt relief.”

We’ve covered this before, but some recent posts turning up in news searches makes us think it’s worthwhile to repeat.

First, legitimate companies do exist that offer “debt relief” or similar counseling services.

Authorities list potential scam signals

However, authorities from various federal and state agencies have issued repeated warnings about firms who make big promises but really do nothing–except maybe get you in even worse trouble.

For instance, under the heading “Protect Yourself,” the Federal Trade Commission lists several warning signs.

“Be wary of credit counseling organizations that:

• charge high up-front or monthly fees for enrolling in credit counseling or a DMP.
• pressure you to make “voluntary contributions,” another name for fees.
• won’t send you free information about the services they provide without requiring you to provide personal financial information, such as credit card account numbers, and balances.
• try to enroll you in a DMP without spending time reviewing your financial situation.
  offer to enroll you in a DMP without teaching you budgeting and money management skills.
• demand that you make payments into a DMP before your creditors have accepted you into the program.

Another signal may be when a company advises you to quit paying your creditors–and pay them instead. For example, from the Minnesota attorney general’s Web site: “Debt settlement/negotiation companies promise you quick results to get out of debt. They typically tell you to stop paying your bills altogether and instead save the monthly payments you are making in a savings account. Once you have sufficient funds, the company will supposedly contact your creditors to negotiate a lump-sum payoff of your debt.

Debt settlement/negotiation companies often promise you that they can cut your bills in half or more.”

“Some organizations, such as the Consumer Federation of American, warn consumers not to use debt settlement/negotiation companies. Consumers have told the Attorney General’s Office that debt settlement/negotiation companies have made serious misrepresentations to them that left the consumers far worse off then when they started.

“If you follow the advice of a debt settlement/negotiation company to stop paying your bills, you will likely incur late fees, pay interest-upon-interest, and fall further into default. This may ruin your credit, and some of your creditors may even file lawsuits against you or garnish your wages and/or bank account.”

Recent Attorneys General suits

More recent than the Texas attorney general’s action in the DebtRelief USA bankruptcy, Illinois AG Lisa Madigan filed suit on Feb. 10 against four companies, alleging not only “deceptive practices” but also “excessive fees,” according to Mathew Hathaway in the St. Louis Post-Dispatch.

“The suits allege that the debt-settlement companies violated the Illinois Consumer Fraud and Deceptive Business Practices Act by lying to consumers about the services they provided and failing to disclose the negative impact their work would have on customers’ credit ratings.

” ‘These companies are unfairly luring financially strapped consumers with misleading claims that they can effectively eliminate consumers’ debt,’  Madigan said in a prepared statement. ‘The reality is that, after enrolling in a debt settlement program, consumers too often find themselves in even worse financial straits.’ ”

Even more recently a new law came into play on Feb. 19, when Minnesota AG “Lori Swanson filed lawsuits Thursday against six debt settlement companies, alleging they violated a state law passed last August that requires them to be licensed in Minnesota and cap the fees they can charge. The law generally caps the origination fee paid by the consumer at between $200 and $500. Monthly fees are capped at between $50 and $75,” according to consumeraffairs.com.

“Swanson alleges the six companies overcharged consumers by hundreds or thousands of dollars. The lawsuits–the first filed under the new law–seek injunctive relief, civil penalties against the firms and restitution to victims for the fees they paid.

” ‘What is really unfortunate about these practices is that the consumers who hire companies like these are trying to do the right thing. They know they have financial trouble,’ Swanson said in a statement. ‘They’re trying to hire an advocate to be on their side and help them manage a bad situation. Only rather than get help, they get exploited.’ ”

The 10 companies named as defendants in both states were listed as operating from four states: Arizona, California, Florida and Texas. For a list of the companies named in the Illinois suit and links for following up on complaints, see the press release on the Illinois attorney general’s site. For more about the Minnesota case, see that office’s PR concerning the suit.

‘Bar date’ extended in Texas bankruptcy action

In Texas, consumers who were trapped when DebtRelief USA (aka “No Debt USA”) filed bankruptcy and who have not yet filed a claim have only a few more days to join the proceedings. In a motion of the Bankruptcy Court of the Northern District of Texas, the extended “bar date” (see the first entry under “Claim”) was set for 60 days after the motion was filed on Jan. 5.

However, judging from a Sept. 9 letter to “former or current customers” of Debt Relief USA, Abott is not optimistic about recovering the money of shafted customers: “The Texas Attorney General is working with the Chapter 7 Trustee to ask the Bankruptcy Court to refund your “set-aside” funds to you as fully as possible.”

But, “[b]ecause of the limited funds in the estate, it is unlikely that you will receive a refund of any fees that were paid to the company.Because of the limited funds in the bankruptcy estate, it is unlikely that you will receive a refund of any fees that you paid to the company.

“In the event additional funds are found or recovered, however, further refunds to current and former customers may be made.”

The letter contains contact info for follow-up inquiries.

Also, please be aware that another site uses “Debt Relief USA” in its title, but we know of no legal connection with the Addison-based DebtRelief USA (”No Debt USA”); the company operating debtreliefusa.org may be a New Jersey company, according to this whois registration.