[Senate Hearing 111-916] [From the U.S. Government Publishing Office] S. Hrg. 111-916 MANDATORY MEDIATION PROGRAMS: CAN BANKRUPTCY COURTS HELP END THE FORECLOSURE CRISIS? ======================================================================= HEARING before the SUBCOMMITTEE ON ADMINISTRATIVE OVERSIGHT AND THE COURTS of the COMMITTEE ON THE JUDICIARY UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS SECOND SESSION __________ OCTOBER 28, 2010 __________ Serial No. J-111-113 __________ Printed for the use of the Committee on the Judiciary U.S. GOVERNMENT PRINTING OFFICE 65-122 WASHINGTON : 2011 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office, http://bookstore.gpo.gov. For more information, contact the GPO Customer Contact Center, U.S. Government Printing Office. Phone 202�09512�091800, or 866�09512�091800 (toll-free). E-mail, [email protected]. COMMITTEE ON THE JUDICIARY PATRICK J. LEAHY, Vermont, Chairman HERB KOHL, Wisconsin JEFF SESSIONS, Alabama DIANNE FEINSTEIN, California ORRIN G. HATCH, Utah RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa CHARLES E. SCHUMER, New York JON KYL, Arizona RICHARD J. DURBIN, Illinois LINDSEY GRAHAM, South Carolina BENJAMIN L. CARDIN, Maryland JOHN CORNYN, Texas SHELDON WHITEHOUSE, Rhode Island TOM COBURN, Oklahoma AMY KLOBUCHAR, Minnesota EDWARD E. KAUFMAN, Delaware ARLEN SPECTER, Pennsylvania AL FRANKEN, Minnesota Bruce A. Cohen, Chief Counsel and Staff Director Matthew S. Miner, Republican Chief Counsel ------ Subcommittee on Administrative Oversight and the Courts SHELDON WHITEHOUSE, Rhode Island, Chairman DIANNE FEINSTEIN, California JEFF SESSIONS, Alabama RUSSELL D. FEINGOLD, Wisconsin CHARLES E. GRASSLEY, Iowa CHARLES E. SCHUMER, New York JON KYL, Arizona BENJAMIN L. CARDIN, Maryland LINDSEY GRAHAM, South Carolina EDWARD E. KAUFMAN, Delaware Stephen C. N. Lilley, Democratic Chief Counsel Matthew S. Miner, Republican Chief Counsel C O N T E N T S ---------- STATEMENTS OF COMMITTEE MEMBERS Page Leahy, Hon. Patrick J., a U.S. Senator from the State of Vermont, prepared statement............................................. 71 Whitehouse, Hon. Sheldon, a U.S. Senator from the State of Rhode Island......................................................... 1 prepared statement........................................... 118 WITNESSES Britt, Larry G., Homeowner, Riverside, Rhode Island.............. 5 Cardullo, Robert E., Homeowner, Johnston, Rhode Island........... 3 Glenn, Judge Martin, U.S. Bankruptcy Judge, Southern District of New York....................................................... 13 Lefebvre, Christopher M., Attorney, Pawtucket, Rhode Island...... 21 Rao, John, Attorney, National Consumer Law Center, Boston, Massachusetts.................................................. 17 Reed, Hon. Jack, a U.S. Senator from Rhode Island................ 9 SUBMISSIONS FOR THE RECORD American Bankers Association, Washington, DC, statement.......... 31 Britt, Larry G., Homeowner, Riverside, Rhode Island, statement... 35 Cardullo, Robert E., Homeowner, Johnston, Rhode Island, statement 39 Glenn, Judge Martin, U.S. Bankruptcy Judge, Southern District of New York, statement............................................ 41 Godfrey, Richard, Executive Director, RhodeIsland Housing, Providence, Rhode Island, statement............................ 69 Lefebvre, Christopher M., Attorney, Pawtucket, Rhode Island, statement...................................................... 73 Morris, Cecilia G., Judge, U.S. Bankruptcy Court, Southern District of New York, statement................................ 75 Rao, John, Attorney, National Consumer Law Center, Boston, Massachusetts, statement....................................... 83 Weatherford, Laurie K., Chapter 13 Standing Trustee, U.S. Bankruptcy Court, Middle District of Florida, Orlando Division, Winter Park, Florida........................................... 103 MANDATORY MEDIATION PROGRAMS: CAN BANKRUPTCY COURTS HELP END THE FORECLOSURE CRISIS? ---------- THURSDAY, OCTOBER 28, 2010 U.S. Senate, Subcommittee on Administrative Oversight and the Courts, Committee on the Judiciary, Washington, DC. The Subcommittee met, pursuant to notice, at 9:02 a.m., at Rhode Island Housing, 44 Washington Street, Providence, Rhode Island, Hon. Sheldon Whitehouse, Chairman of the Subcommittee, presiding. Present: Senator Whitehouse. Also present: Senator Reed. OPENING STATEMENT OF HON. SHELDON WHITEHOUSE, A U.S. SENATOR FROM THE STATE OF RHODE ISLAND Chairman Whitehouse. All right. I will call the hearing to order. And before we get to it, let me thank Rhode Island Housing, Richard Godfrey and his wonderful team, for hosting this official field hearing of the U.S. Senate Judiciary Subcommittee on Administrative Oversight and the Courts, a panel which I have the privilege of chairing. I would also like to welcome all the Rhode Island Housing staffers and the other housing advocates who have joined us here today. And there are two elected officials here who I particularly want to recognize: Senator Harold Metts and Councilman Luis Aponte. I appreciate very much their interest in this. It is a significant issue in their communities, and it is to their credit that they have taken the trouble to come and listen to this hearing. Last summer, I convened a hearing actually in this very room to examine the foreclosure crisis in Rhode Island and to discuss a proposal to give bankruptcy court judges the power to reduce the principal on primary residence mortgages, the way they can on essentially every other loan, including loans on vacation homes or cars or boats. This has long appeared to be the most efficient and least costly way to keep families in their homes, but the large banks, of course, have fought against it with their full lobbying might, and we have been unable to overcome the big-bank-generated filibusters in the Senate. Over the year since our hearing on bankruptcy modifications, the foreclosure crisis has not relented in Rhode Island or across the Nation. The administration's Home Affordable Modification Program, while well intentioned, has not succeeded in producing enough modifications to stem the tide of foreclosures. We have known for some time that the large loan servicers play all sorts of games to slow down and derail the modification process, and earlier this month we learned that they are playing fast and loose with the foreclosure process and documents themselves. A process that may leave a family homeless has been now relegated to ``foreclosure mills'' and ``robo-signers.'' Forget a modification. Many of these servicers are not even providing a human being to confirm that the foreclosure is warranted and the documents are in order. How did it come to this? As a result of the securitization of home mortgages, the relationship between the homeowner and the lender was fractured, and the foreclosure process and system became dysfunctional. Decisions that make no economic sense overall get made because the fracturing has created perverse incentives within the system, because it is virtually impossible for a homeowner to find a human with authority to resolve their problem, and from sheer remorseless bureaucratic inertia. Ann Sabbagh is here, a realtor who has shared the suffering of numerous clients, and when she came to visit me about this problem, she memorably put the question that she hears so often this way: ``Why is it that the bank wants to foreclose on my home, throw me out, and sell it to someone who will pay less than I am willing and able to pay right now? '' Until we answer that question, we have a continuing problem ahead of us. I have called on Fannie Mae, Freddie Mac, and the Federal Reserve to use their powers to institute a national foreclosure moratorium. I believe we should freeze foreclosures until the loan servicers can demonstrate that they have new systems in place to properly evaluate homeowners for modifications and, if modification is not financially possible, to provide homeowners with an orderly, humane, and logical foreclosure process. That would seem to be a minimum standard. I hope that my colleagues in Washington will consider this when we return after the midterm elections. This Subcommittee has jurisdiction over the courts, and today we will examine whether the court-supervised mediations add common sense to an out-of-control foreclosure process and perhaps help families stay in their homes. The bankruptcy court here in Rhode Island under Judge Votolato is one of only a handful of bankruptcy courts nationwide that offer pre-trial foreclosure mediation. Today we will hear from Judge Martin Glenn of the bankruptcy court in the Southern District of New York, one of the creators of the first such mediation program, and John Rao and Chris Lefebvre, two attorneys familiar with the Rhode Island program. For families in Rhode Island and across the country snarled in the foreclosure nightmare, it is vital that we find a way to address this growing crisis. Today's hearing will help us determine whether bankruptcy mediation programs can serve that purpose and whether Federal legislation might be useful in replicating the Rhode Island and New York programs nationwide. Before I conclude my opening remarks, I want to acknowledge the hard work of my senior Senator, Jack Reed, in preserving and creating affordable housing in Rhode Island and across the country. It is a privilege for me to work alongside such a champion of accessible housing and fair mortgage practices-- something everyone here at Rhode Island Housing knows very well. Senator Reed plans to make a statement later in the hearing, and when he arrives, with the indulgence of the witnesses, I will stop their testimony and allow the Senator to make his statement. I am now privileged to introduce our distinguished panel of witnesses. Robert Cardullo is the father of three young children and a homeowner from Johnston, Rhode Island. Mr. Cardullo will tell the story of his efforts to receive a mortgage modification, an ongoing process which began in February of 2009. Larry Britt is a teacher and homeowner from Riverside, Rhode Island. He will discuss his struggles over the past 19 months in getting a mortgage modification from his loan servicer. Judge Martin Glenn has been a bankruptcy judge in the Southern District of New York since 2006. Prior to his appointment to the bench, Judge Glenn practiced law at the national firm of O'Melveny & Myers in Los Angles and New York. He has a Bachelor of Science from Cornell University and a Juris Doctor from Rutgers Law School. John Rao of Newport is an attorney with the National Consumer Law Center in Boston, where he focuses on consumer credit and bankruptcy issues. The National Consumer Law Center performs research and trains attorneys who serve low-income consumers. Mr. Rao was appointed by Chief Justice Roberts to serve on the Federal Judicial Conference Advisory Committee on Bankruptcy Rules. Mr. Rao earned his degrees from Boston University and the University of California Hastings College of Law. Chris Lefebvre practices family, bankruptcy, and consumer protection law in Pawtucket, Rhode Island, and is a member of the debtor/creditor Committee of the Rhode Island Bar Association. Mr. Lefebvre has a B.S. from Boston College and a Juris Doctor from Suffolk University Law School. I am delighted to have this panel with us, and I turn the hearing over to you, Mr. Cardullo. Please proceed. STATEMENT OF ROBERT E. CARDULLO, HOMEOWNER, JOHNSTON, RHODE ISLAND Mr. Cardullo. Good morning. Senator Whitehouse, thank you for inviting me here today to tell my story. My name is Rob Cardullo, and I have three young children. Sophie is 8 years, Georgiana is 5 years, and Andrew is two-and- a-half. I have been employed by Taco Bell for the last 12 years, and I am currently running their Johnston restaurant. In December of 2008, I discovered that my wife of 9-1/2 years was no longer interested in being married to me, and because of that fact and other details that have come up, I decided to bring a divorce action against my wife. The circumstances surrounding the divorce are such that the judge ruled in my favor, giving me the right to retain my home and the residence for my children. However, in order for me to continue to meet my mortgage payments on my salary alone, it was necessary for me to ask for a loan modification through my bank, which is Chase. Since February of 2009, I have been negotiating with Chase, sending them updates on my financial situation monthly. Rhode Island Housing also assisted me in this endeavor, for which I am very grateful. In September of 2009, after being put on hold when I tried to reach the individuals handling my application and after repeated submissions of documents, Chase informed me that they were denying my request based on the fact that I had too much liquid assets. The liquid assets they were referring to were the savings account of $2,200 and my 401(k) plan of $14,000. Evidently they expected me to apply my $2,200 to pay my mortgage, leaving me with nothing--leaving me with nothing at all in case of any kind of emergency. Evidently they expected me to borrow against my 401(k) to pay my mortgage. This, however, would have been impossible for me to do--even if I wanted to--as the terms of my 401(k) stipulate that I must be in a state of foreclosure in order to borrow against my retirement funds. And if that was possible and I did have to borrow it, once the money ran out, would I still have my house? And then I have a loan to pay against my 401(k) plan after that. On the advice of Rhode Island Housing and my attorney, I resubmitted all of my materials and began the process all over again. Following several months of frustrating negotiations with Chase, going through reams of paper, and shedding many tears, they finally in May 2010 approved me for a loan modification with a reduction of my mortgage payment from $3,000 a month to $1,986 a month. The agreement was that I pay the reduced amount for 4 months, and after the fourth payment, the loan modification became permanent. But this is just the beginning of my story. In August of 2010, 1 week before my fourth payment, I received a letter from Lenders Business Process Servicers, saying that Chase had sold my mortgage to them and that they were going to foreclose on my house because I was behind in my payments. When I explained to them that I was in a loan modification agreement with Chase, LBPS told me that they would not honor the loan modification, that they had bought over 9,000 loans, and they could not focus on just one. I should point here that the loan modification was government-backed by Fannie Mae and that these banks are not honoring them. LBPS said that if I wanted to be considered for a loan modification, I would have to begin the process all over again with them. I, therefore, have gone ahead and re-filed all of my documents with LBPS again. Yet they still continue to harass me and, as recently as last week, threatened to foreclose on me and bring legal action against me. I have contacted my lawyer, and again I am contemplating whether to bring legal action against LBPS. The recent financial crisis has had an impact on my own finances, and many individuals, too. Yet in the 4 years I have owned my house, I have never missed or been late with a mortgage payment. The divorce has added a further strain on my finances, making it absolutely necessary for me to have a loan modification in order for me to meet my mortgage payments and any other bills in a timely manner. I do not want to end up in foreclosure or go bankrupt. Is this what I am facing? I have heard all this reassurance for more than a year that I am going to get stimulus money to help me get my loan modification in place. I am not asking for a handout--just a loan modification to enable me to keep my house. I am going to continue with my quest for a loan modification, but based on my experience with Chase and now a repeat of the same frustration with LBPS, my hopes are diminished, and I am not optimistic about the outcome. If LBPS denies my application for a loan modification, I will have no option but to foreclose or short-sell my house or face bankruptcy, all of which I would like to avoid. I cannot understand why Chase--I am sorry--or LBPS would not want to help someone out who has never missed a mortgage payment. It seems that they would rather take the house than work out a reasonable payment plan with me. I would like to point out that through all of this I have complied with everything, every requirement on schedule, time after time again, and yet the documents are never-ending. I have turned to Senator Whitehouse from the beginning of this loan modification nightmare for his assistance, and if it was not for the support from his office, I would be fighting this battle alone. Thank you very much for listening, and I am happy to answer any questions. [The prepared statement of Mr. Cardullo appears as a submission for the record.] Chairman Whitehouse. Thank you very much, Mr. Cardullo. I think what we might do is allow Mr. Britt to testify and then maybe ask a few questions of the two of you as consumers, and then move on to the other witnesses who are in different parts of the process. So, Mr. Britt, would you proceed with your testimony? STATEMENT OF LARRY G. BRITT, HOMEOWNER, RIVERSIDE, RHODE ISLAND Mr. Britt. Sure. Thank you, Senator Whitehouse, for initiating this important hearing. I would also like to thank Rhode Island Housing as well for hosting the hearing and providing support through my 19-month ordeal with Bank of America's mortgage modification process. My name is Larry Britt, and I have owned my home in Riverside, Rhode Island, since 2003. I bought my home as a permanent residence in which to spend my final working and future retirement years. My home purchase was not an attempt to get in on the crazy real estate boom of the times. I work here in metro Providence as an adult educator, as the Senator said. Ironically, my saga began 19 months ago in this building with Linda Tavares, a very helpful Rhode Island Housing counselor. When I started the process in March of 2009, I had never been late paying any bills to any creditors--including Bank of America--and my credit score was near perfect. Since entering into a modification process with BofA, the bank has ruined my credit rating and has been a major contributor to the uncertainty about my future. My credit score has dropped 160 points as a consequence of improper credit reporting by BofA. My credit score monitoring service sends me weekly e-mail notifications of continuing negative impacts to my credit score. So far, two creditors have closed my accounts, and three have lowered my credit limits. BofA tells me that I was told my credit score would be adversely impacted, but they cannot provide me with any documentation that proves I was told of this consequence. As I have said, I am not a deadbeat. I have always paid all of my bills on time. But because of legitimate financial hardships that I have documented, I entered into BofA's mortgage modification program hoping I could avoid prospective financial problems. For the past 19 months, I have immediately replied to any of Bank of America's inquires and requests for documentation. Before entering into the BofA process, I was considered a good credit risk. Now, simply by having applied for a program that I am well qualified for, my history as someone who pays their bills has been permanently damaged. Equally, I am concerned about rescinded and denied credit that my elderly mother and other family members have suffered as a consequence of their financial relationships with me. I have a detailed chronology that you will be happy that I am going to summarize. [Laughter.] Mr. Britt. Because it is the same thing over and over again. There are four events that happen over and over again. The bank contacts you. You provide documentation. They say they do not have the documentation. You provide it again. You are approved, you are denied. It is just the same script over and over again. But the summary is it is about my interactions that I have had with Bank of America in the Treasury Department's home modification center, known as HAMP. Chairman Whitehouse. Mr. Britt, feel free to go through in the detail that you provide in your testimony because, frankly, the impact of this I think is---- Mr. Britt. OK. I am happy to do that, but I intentionally took it out. Chairman Whitehouse. The way your wrote it, your testimony is worth going through. It is really pretty shocking. Mr. Britt. OK. In March 2009, as advised by news reports, I went to Rhode Island Housing and submitted an application for mortgage modification. This allowed Rhode Island Housing to act as my agent for mortgage modification with Bank of America. At this time I was not behind on my mortgage or other debt obligations. I have already told you that I was anticipating financial problems. Next, in March 2009, as required, I met with Money Management International, an approved credit-counseling agency. This organization determined that I was managing all of my finances correctly and that my only issue was my large monthly mortgage payment and underwater mortgage. In March 2009, I provided copies of all the required documentation to Rhode Island Housing for forwarding to Bank of America. From March 2009 to October 2009, I called Rhode Island Housing biweekly to check the status of my modification. Each time I called, I was told that there was a backlog and I should wait to hear something. In October 2009, I was informed by Rhode Island Housing that Bank of America did not accept me into the loan modification program because I was not late or behind on my mortgage payments. Rhode Island Housing informed me to visit a Bank of America branch so that I could apply for a refinance of my mortgage. So a few days later, I went to a Bank of America branch and formally applied to refinance my loan. The refinance was denied that day on the phone in the branch. As I found out, the refinance step was a formality I needed to go through before I could apply for yet another mortgage modification with BofA. About a week later, I received a notice that I had been accepted into BofA's trial modification program, and I was a given a new monthly payment amount for the trial period. A few days after that, I mailed all the requested documentation to Bank of America. Then from November 2009 to May 2010, I paid Bank of America my new monthly payment on or before the due date. From October 24, 2009, to February 2010, I checked the status of my modification on a weekly basis to be sure the company had received my documentation. I was repeatedly assured that Bank of America had received all information that had been requested of me. In February 2010, I received a letter from Bank of America requesting that I mail them all of the documentation that I had already provided twice before. On that day, I FedEx'd all the required documentation again. Then from February 2010 to May 2010, I called Bank of America weekly to check the status of my modification and to be sure that the bank had all of my required documentation. Each time I was assured that all the requested documents had been received by Bank of America and that the modification was ``being reviewed.'' In April of 2010, I received a ``Notification of Default and Mortgagees Right of Foreclosure'' from Bank of America. The next day I called Bank of America, and the customer service representative told me to ignore the letter, continue paying my modified payments, and that I will continue to receive these default notices during the modification process. In May of 2010, I received a letter from Bank of America stating that I had been denied a mortgage modification because all requested documentation had not been received by the bank. The next day, I called Bank of America, and I was told to disregard that letter. The customer service representative said that, according to Bank of America, ``all documentation was complete and received as of March 29, 2010.'' So this is May 2010. They are saying as of March everything was good. So last month, I started to work on filing forms with all three credit report agencies in an attempt to get my modified payments to Bank of America classified, as they appropriately should be, as modified payments rather than delinquent payments. That has been the hit to my credit report. It is these delinquent payments that brought my credit score way down. So the credit report forms encourage you to contact the creditor before you file any complaint. So I called Bank of America, and the following occurred: The representative, I asked him to review my account and confirm that I had made all the modified payments that I had agreed to. The representative told me that my mortgage was in default as of May 7, 2010, and that I had been sent a letter saying I was not eligible for the modification program because I did not provide BofA with requested documentation. He also said that I had been sent a letter requesting the documentation. I never received this letter. So I explained the past chronology that you have all had to listen to to this representative. Finally, after really getting nowhere with this representative, I asked to speak to his supervisor, and she told me that I lied, that the conversations that I told her I had had with Bank of America never occurred and that she had the phone records to prove it. However, my personal phone records would prove her wrong. Finally, the supervisor told me that she did not have time to waste on me and hung up on me. And this was not the first hang-up from Bank of America. So that is the chronology. Even more has happened, but, Senator, you asked for it. [Laughter.] Mr. Britt. Okay. Shall I continue? Chairman Whitehouse. Please. Mr. Britt. Let's see. Finally, in May 2010, I have already told you I got a denial letter from Bank of America. At that time, I contacted your office and gratefully got an immediate response from Karen Bradbury, a caseworker in the Senators Providence office. Karen's efforts resulted in a connection for me with the HAMP Solution Center. At first, my HAMP caseworker sounded like the answer to my ongoing problem. The HAMP representative told me that he would be an advocate for me with Bank of America. He told that he had learned from Bank of America that I was ``under review for the Making Home Affordable Second Look'' program. Throughout July and August 2010, I contacted the HAMP Solution Center seven times. Each time, the representative there told me that his updates directly from Bank of America said that my modification was still under review and that I had complied with all requests for documentation as well as honored my agreement to make on- time modified monthly payments. Honestly, after a few months with HAMP, I felt like they were reading from the same script as the banks. When I checked in with them, there were never any updates; there were never any outstanding bank requests for documentation from me. Yet once a month or so over this same period, I received additional requests from the bank for more documentation, a repeat of what I had sent three or four times before. So last month, as I told you, I started to work on my credit reporting, again in the chronology, and when I found out that I was in default, as I told you in the chronology, I panicked at the prospect of losing my home. So I reconnected with Linda here at Rhode Island Housing, and on October 18th, this month, Linda determined from Bank of America that I was not eligible for any modifications. On the same day, when I went home, I received a mail notification from Bank of America saying, as I understood it, that late fees, penalties, and interest were accumulating on my mortgage balance and that, regardless of my outcome with the modification program, I would be liable for these charges. On the next day, I received a modification approval from Bank of America. So I guess I should be happy, and I really am grateful to the Senator's office and to Rhode Island Housing and even the HAMP Solution Center for what I hope is a final resolution. However, given the last 19 months of misinformation, can I be sure that Bank of America's ``approval'' is for real? Does another Bank of America division have me slated for foreclosure? I cannot be sure, and the 19- month process has forced me into deeper financial trouble and a lot of emotional distress, just like my co-witness here. So I know this story is hard to follow. It is all in the written record. The bottom line is that although I have worked with Bank of America since March 2009 and the HAMP Solution Center since June 2010, I am still not really sure I will be OK. Last week, within a 2-day period, Bank of America has told me that I am both ineligible and approved for a mortgage modification. So, last, I just want to say that despite all of this, I want you to know that I have continued to pay all of my bills in full on time, and as my financial history shows, I am a guy who figures out what sacrifices I need to make in order to meet my financial obligations. I always have. So if needed, I can document anything that I have spoken about--activities, phone calls, documents. And I thank you for your time and am open to any questions that you might have. [The prepared statement of Mr. Britt appears as a submission for the record.] Chairman Whitehouse. Thank you, Mr. Britt. I said that we would break into the hearing after the homeowners had their chance to testify, and Senator Reed's timing is pretty well perfect. He came in just at this moment, so I would now like to call on him to add a few words. And then I think we may both have a few questions for Mr. Britt and Mr. Cardullo. OPENING STATEMENT OF HON. JACK REED, A U.S. SENATOR FROM THE STATE OF RHODE ISLAND Senator Reed. Well, first let me thank Senator Whitehouse for convening this hearing. The foreclosure issue is not only a drag on the economy, but as Mr. Britt indicated, and Mr. Cardullo also in his testimony, it is a source of exasperation, anxiety, anger, frustration, and much more for families trying to deal with it. And so we have an obligation, I think, not only at the national level to get the economy moving, but at the homeowner level to give people a chance to get their lives in order and move forward again. I particularly want to thank Mr. Cardullo and Mr. Britt. Listening to your testimony, Mr. Britt, and reading yours, Mr. Cardullo, no one should be forced to go through the permutations and other operations that you have had to go through. Senator Whitehouse has really been at the forefront not just in helping our constituents, but also nationally. We both have joined together supporting legislation to try to find a solution in the bankruptcy courts. I think that is an issue that we will consider again today. Just as importantly, together we have brought about $105 million here through the Neighborhood Stabilization Program and the Hardest-Hit fund. Rhode Island Housing has done a remarkable job trying to help people. But we have to do much, much more. Unless we successfully deal with this issue of foreclosure, the economy will not expand as it should, and people's lives will not return to at least close to normal. So that is our challenge. We have to think creatively. Obviously, one major benefit of this hearing, and, again, another tribute to Senator Whitehouse's insights, is to listen to people who deal with these issues on a daily basis and get the advice we need to make sound policy in Washington. I just find it--``ironic'' is too mild a term. You know, 5 years ago, you could get a mortgage in 24 hours without any paperwork, no problem finding the files, no problem getting you signed up, no problem doing anything. And now, to get it correct it is a saga of years and pain. You know, if these companies--no company in particular, but if they are that efficient in giving mortgages, I would like to see them be that efficient in making modifications when they are appropriately required by the financial situation. Thank you. Chairman Whitehouse. Thank you, Jack. One of recurring themes in your testimony and one of the recurring themes that comes out of all of our constituent work, working with those who are trapped in this bureaucratic nightmare, is the repeated requests for the same documentation. Both of you have alluded to it. Could you flesh out a little bit how many times various things have had to be produced by each of you? It is not just once or twice or three times any longer, is it? Mr. Cardullo. I was told by Chase that my bank accounts and my check stubs are only good for 30 days, and then at the 30 days, you need to start sending all your information back in again. So I have a ream, I have a stack--it is about 40 pages that I faxed in every month to Chase when I was going through the loan modification with them. Chairman Whitehouse. So you have been faxing in information 10, 12 times at this point. Mr. Cardullo. Yes, and now I am doing the same thing with LBPS all over again. Chairman Whitehouse. And are they telling you that they have lost it? Did you hear that? Mr. Cardullo. Yes. They have a 405--I think it is a 405T, which is basically all our debts that we have. They never get that. They are always missing that. That is one of the big things. And so I fax it in again, and, ``Nope, we never got it.'' I say, ``I have the records of faxing.'' ``Nope, never got it.'' Chairman Whitehouse. What are the penalties to you for failing to provide---- Mr. Cardullo. They can drop me---- Chairman Whitehouse.--the requested information? Mr. Cardullo. They can drop me from the loan modification program. Chairman Whitehouse. So as best you understand it, if you are the bank, if you are demanding unreasonable, constant, repetitive amounts of information asking for the same thing over and over again, pretending that you never received it, there is a benefit for you in doing that because if you fail at any time in providing that stuff, even if all they are doing when they get it is--if their fax machine is attached to their shredder, as Mr. Lefebvre said in his testimony, and they are just shredding it right through and not even looking at it as it comes, you make one mistake and you are out of the program. Mr. Cardullo. Correct. Chairman Whitehouse. And that is a burden of their backs from your point of view. Mr. Cardullo. Correct. Chairman Whitehouse. Did you get the feeling that they are kind of testing your resolve to see if---- Mr. Cardullo. Oh, they have tested me. [Laughter.] Mr. Cardullo. They definitely tested me. Chairman Whitehouse. Mr. Britt. Mr. Britt. I feel the same. You know, it is this--some of it is just making the issue confusing and kind of making us jump through hoops. But also, with each of--as I understand it--and I am not clear about it. I was in four different programs. Each time the new representative wanted all new documentation. And as my co-witness said, every time you start the process over, they want new--they want current documentation. The other thing about faxing is it does not fax into a shredder. At least at Bank of America, I finally found out-- because I have a home fax, and a woman claimed that--one of the reps claimed that I did not fax something. And I had a record of that day faxing from my home exactly what she wanted and of asking her, ``Are you in the office? I will fax it immediately.'' And she said, ``Yes, I am here.'' Well, when I finally confronted her with this, she told me, ``Oh, that is not the way faxes work. They go into an electronic system, and then another department electronically distributes the documents.'' Which I understand. I am all in favor of electronic documents. But, again, it is a lie and, you know, yet another delay and a way to--I do not know--just keep me jumping through hoops. Chairman Whitehouse. In the hopes that perhaps you will miss one. Mr. Britt. Yes. Chairman Whitehouse. Let me turn to Senator Reed, but let me ask you one last question. During the time that you indicated that you had your credit rating ruined by the bank, you were meeting all of the terms that they had demanded of you, not the original terms but the modification terms. Mr. Britt. Absolutely. Chairman Whitehouse. But you were in full compliance with their program, and yet it ruined your credit rating. Mr. Britt. Yes. And they were the only ones reporting negatively about me. However, other creditors, on receiving this information about me being a bad risk, immediately lowered all credit lines to whatever my balance was, and several canceled my accounts. Chairman Whitehouse. Jack. Senator Reed. Just to follow up, to both Mr. Cardullo and Mr. Britt, in the course of these numerous conversations, at any point did representatives of the banks or the servicers kind of go offline, if you will, and just sort of tell you what was really going on? Or was this--I mean, I am trying to get a sense of whether these are just colossally inefficient organizations or, as Senator Whitehouse suggests, there are somehow implicit incentives for these people to just make it so hard that you either go away or you fail. You have been at the receiving end of this, and so just any sort of sense you have in these dealings, whether it is one or the other or both. Mr. Cardullo. I just think it is more the fact that they are not organized. You start by talking to a representative. Then they send you over to loss mitigation. And then they just keep on bouncing you back and forth, and the one hand does not know what the other hand is doing. And that is just one of the biggest issues. If I had a representative who was dealing with my file and I talked to that person and that was the way it was working, I am sure that--I am being positive with this saying that there probably would not have been a different income or, you know, 8 or 10 months of not dealing with this, you know, if I was talking to a person versus a mega bank. Senator Reed. Right, a better system, yes. Mr. Britt. I would echo what Mr. Cardullo said. I would also add the reps that I worked with sounded really overworked. And I do not want to judge them. It is their tone of voice on the phone. But they certainly did not seem to care. Senator Reed. Yes. Mr. Cardullo. I would add that I have told the rep that I have gone through the loan mod, and they have said, ``That is not my problem. You owe my company money, and we will take your house.'' I said, ``OK, go ahead. I will contact my lawyer.'' Senator Reed. Yes. I mean, one of the things that we have been trying to do is to incentivize, one way to describe it, a much more proactive, much more focused can-do attitude on the service of the banks to get it done. And we have received publicly at hearings assurances that that is what they are going to do, that they are going to take charge. In fact, I would think financially in many cases--and you might reflect on this--by modifying a loan, the bank salvages something more than they would in a messy foreclosure and loss of your home. Certainly you would be able to stabilize your life. So it seems to be a win-win by modifying, yet it is just still this big machine that is rolling along and is indifferent to their own well-being as well as the customer's. I do not want to put words in your mouth, but is that something you are---- Mr. Cardullo. Yes. It is very frustrating. I mean, I do not--I want to keep my house. I want to make the payments. It is just I do not understand why they would rather have a house sitting there for whatever it is and not collecting any money on it at all and so it goes into foreclosure or a short sale or bankruptcy. It does not make any sense. But they think it is rather those are my terms, we are not taking care of the loan mod, and you signed it, get done. Mr. Britt. I feel the same way. I am willing to pay off a mortgage on a house that is valued at significantly less than my mortgage balance. I do not understand why the bank will not go for that deal. It is a win for them. If they take my house, they are going to lose significantly on the asset. Chairman Whitehouse. Well, Mr. Britt, that is a perfect segue to Judge Glenn's testimony because the program that he initiated does the simplest of all possible things, and that is, require the homeowner and the lender to sit down and look each other in the face with an authorized person for the lender and the homeowner right there and actually have a human discussion about the problem. And that I think, first of all, solves the problem that you all have experienced that you cannot find anybody with authority. You are always grasping at people who will not give you their last name, who do not have the authority, who do not have the information, that you are speaking to for the first time. And it is a nightmare, and I understand that. And then you have got the problem that very often the servicing company has an incentive, a financial incentive to foreclose, even if there is a better deal for the bank, for you the homeowner, and for the public at large. Their incentive is mismatched. It is a market failure. And the bankruptcy court has the ability to say, ``Wait a minute, that is a stupid notion,'' and push back against really dumb ideas that are propagated through the system. So, without further ado, and with much appreciation for taking the trouble to come here, Judge Glenn. STATEMENT OF HON. MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE, SOUTHERN DISTRICT OF NEW YORK Judge Glenn. Chairman Whitehouse, Senator Reed, thank you for inviting me to speak before the Subcommittee on the role that bankruptcy courts can play in helping to alleviate the mortgage foreclosure crisis. I am one of 11 bankruptcy judges in the Southern District of New York. We have nine judges in Manhattan, one in Poughkeepsie, and one in White Plains. And I will discuss the program that became effective in our court in January 2009. And I have attached to my written testimony copies of the program documents that are currently in use, and they are all available on the court's public website. I will also provide some data on the use and results of the program from its inception in January 2009. The last date we have collected information is October 21, 2010. Let me first give you some background on how the program was developed. As the national foreclosure crisis unfolded, bankruptcy courts across the country have faced substantially increased consumer bankruptcy filings, many of those filings on the eve of foreclosure sale after a borrower had seemingly exhausted consensual or State court efforts to avoid foreclosure. During 2008, after speaking with a few lawyers representing creditors--those are the lenders and loan servicers--my colleague Judge Cecilia Morris and I began exploring whether the bankruptcy court could develop a program to better address the problems of both debtors and lenders. And in adopting our loss mitigation program, we think we were the first bankruptcy court in the country to do that with a formal program to help alleviate the mortgage foreclosure crisis. And our adoption of the Loss Mitigation Program roughly coincided with U.S. Treasury's creation of the HAMP program. Changes in HAMP since it was first created have also made it easier for bankruptcy debtors to make use of HAMP. HAMP eligibility requirements still exclude many debtors from obtaining a HAMP loan modification, but increasingly, we are seeing that lenders and loan servicers are willing to consider non-HAMP modifications as well. And in our program at least, bankruptcy debtors have experienced far fewer problems with HAMP of the type experienced by Mr. Cardullo and Mr. Britt probably because of the judicial supervision that we are able to provide. After additional meetings with groups of lawyers, we drafted the program. The court then published documents for public comment. And after the comments were received, we made a few changes, and our board of judges adopted the Loss Mitigation Program, effective in January 2009. And the program applies to any individual debtor in a case filed under chapters 7, 11, 12, or 13 of the Bankruptcy Code, and it applies to any real property or cooperative apartment--we have a lot of co-ops in Manhattan--that are used as a principal residence in which the debtor holds an interest. While loan modification is one of the goals of our Loss Mitigation Program, our procedures make clear, and let me quote from it: ``Loss mitigation commonly consists of the following general types of agreements, or a combination of them: loan modification, loan refinance, forbearance, short sale, or surrender of the property in full satisfaction.'' I will end the quote there. Debtors and their lawyers have often recognized, after they finally have someone they can really negotiate with with authority, that it is unrealistic for the debtor to keep the home in their circumstances. There can still be benefits to the debtor and the lender to agree upon a short sale or surrender of the property in full satisfaction with the debt. The longer a debtor keeps an unaffordable home, the more liability the debtor continues to face for property taxes, insurance premiums, homeowner assessments, zoning violations and other things of that type. Our results to date have been modest but, nevertheless, helpful in allowing homeowners to remain in their homes and lenders to avoid additional foreclosures. Chapter 13 of the Bankruptcy Code is designed for debtors with regular income. If a debtor is unemployed and has no other source of regular income, chapter 13 is unlikely to help. And a loan modification is unlikely if a debtor has no income to make mortgage payments. Now, what are some of the results? Since the inception of the program in January of 2009, our court has received approximately 1,450 requests for loan modification. And of these, about 1,000 were filed in chapter 13 cases, 25 in chapter 11 cases, and 425 in chapter 7 cases. And approximately 1,250 orders have been entered that start the loss mitigation period when these negotiations and discussions take place. There have only 55 orders denying loss mitigation requests after the court heard and sustained objections by the lender or loan servicers. These numbers are a good indication how infrequently a loan servicer or lender objects to going into the loss mitigation period. And the objections have usually been filed in cases of serial or abusive bankruptcy filers, with little or no income and no prospects of a successful outcome. The best data we have on outcomes is for our court in Poughkeepsie. That is where Judge Morris sits. Loss mitigation requests were made in approximately 900 cases in Poughkeepsie during the period I have spoken about, and loan modifications have been approved so far in 220 cases; another 450 loan modification requests are still pending; and approximately 230 requests have been denied or withdrawn. To put that in context, in Poughkeepsie, loss mitigation was requested in about 40 percent of the chapter 13 cases that were filed in that court. Successful loan modifications have resulted in reductions in monthly mortgage payments in the range of $100 a month to $1,000 a month. I have heard of some larger amounts than that. And in a few cases, substantial principal reductions resulted. Judge Morris recently had one with a $120,000 principal reduction. You know, for a debtor living at the edge of financial collapse, reductions in monthly mortgage payments in this range can mean the difference between remaining in a family home, with children enrolled in local schools and neighborhood stability maintained, or having your life totally disrupted in searching for new housing and schools, assuming they can be found with the money available to a debtor. Anecdotally, over the last 6 months, my colleagues and I have seen increased willingness by lenders and loan servicers favorably to consider loan modifications. I think they are beginning to understand that there is a benefit for the lender economically if they modify the loan and keep somebody in their house. Now, let me emphasize a few other points. Each loss mitigation party must have a person with full settlement authority present during the mitigation session. This has been one of the keys to the success of our program. And while our procedures also provide that a debtor creditor or the bankruptcy court can order an independent mediator, that has only come up a few times. What we hear from lawyers is: Once we have somebody to negotiate who has authority, must have authority, we do not need a mediator; we just need somebody to sit down and talk with with authority to make a modification. Generally speaking, the granting of a loss mitigation request does slow down case administration. And in chapter 13 cases, confirmation of cases is usually delayed until after loss mitigation and any trial period has been concluded. And a debtor's ability to confirm a chapter 13 plan often depends on the ability to negotiate a loan modification. But I think an important point is a successful loan modification will also affect the amount of disposable income that a debtor has available to pay other creditors. So unsecured creditors benefit as well when a loan modification is reached. So the time it takes to do that really can benefit everybody. The judges of our court have concluded that the delays in administering cases in which loss mitigation has been ordered are justified by the clarity that loss mitigation can bring, whether the result is a modification, a short sale, a surrender, or no change at all. And while cases remain open and active on the court's docket for a longer time, that usually does not expand the work of the judge. Finally, I am aware that a very similar loss mitigation program was adopted by the bankruptcy court in Rhode Island. In fact, Judge Votolato came to one of our meetings with lawyers in Poughkeepsie when we were reviewing results of our own program. The issues raised in the challenge will have to be decided by the Federal courts in Rhode Island. However, I want to emphasize that our judges considered our authority to adopt our loss mitigation program before it became effective in January 2009. It was the view of our judges then and now that our unquestioned authority to adopt mediation programs and procedures--that have long been in place in our court and courts all across the country--applies equally to our loss mitigation program which is modeled on our district's mediation program. We do require that the parties negotiate loss mitigation in good faith, as we do in any mediation. But that does not compel a procedure or result contrary to any provision of the Bankruptcy Code. Chairman Whitehouse, Senator Reed, I would be happy to answer any questions you have. Thank you for the opportunity to appear before the Subcommittee. [The prepared statement of Judge Glenn appears as a submission for the record.] Chairman Whitehouse. Thank you very much, Judge Glenn. I think what I would like to do is actually ask a question or two now before we go on to the attorneys. This business of securitizing mortgages had a cascade of foreseeable effects that were not really planned for. One of them is a lot of outside interests in the loan between the servicing company and the homeowner. So even though you have the servicing company in the room with authority and the homeowner, there is still sort of a shadow over that proceeding that is cast by investors who could be in foreign countries, who could be anywhere, who may feel that they have a claim as a result of the inadequate effort by the servicer to defend their financial interests. It strikes me that there is a pretty powerful value to finality at that point. Could you just describe briefly what happened when all this is concluded? Do we end up with an order that is final and binding on everybody, including other investors, so that everybody's affairs are settled and the servicer can go forward knowing that they are not going to face a lawsuit in the future over having settled the case? Judge Glenn. The conclusion of a successful loan modification in our court usually results in two documents: one is a written agreement generally between the loan servicer and the borrower, and then an order of the court approving it. When we first were designing the program, we heard from many lawyers that, because of securitization, the loan servicers argued that they did not have the authority to enter into a loan modification. One of the things we have discovered since then is that typically the loan servicers take the position that they do have the authority to negotiate a loan modification if it is in the context of a court process. Those who say they cannot do it outside of a court process voluntarily say, yes, if we are in a court process, as in bankruptcy, we can do it. So as the program has evolved, we really have not had a lot of pushback where loan servicers say, ``We cannot do this because there are investors whom we cannot identify.'' Chairman Whitehouse. Thank you. Senator Reed. Senator Reed. Just a quick question, Your Honor. In this workout, I would presume that on a future sale of the property the mortgage lender could benefit. That is one of the terms you can write into the agreement; i.e., if there is a reduction of principal and then 5 years from now it is sold and there is a profit, is that something you do? Judge Glenn. We have not seen any agreements where in a loan modification the lender or loan servicer has provided for shared appreciation. Certainly in discussions we have heard that, in discussions about the issues about cramdown, whether a legislative solution should include some provision that if there is a reduction in principal, there can be a recapture of some of it in the future. So the loan modifications we have been seeing, there have only been a handful that have included reductions in principal. But so far those have not included shared appreciation. Senator Reed. Thank you, Your Honor. Thank you, Mr. Chairman. Chairman Whitehouse. Mr. Rao, we will have you and Mr. Lefebvre now give your testimony, and we will ask you questions as a pair and as a panel. STATEMENT OF JOHN RAO, ATTORNEY, NATIONAL CONSUMER LAW CENTER, BOSTON, MASSACHUSETTS Mr. Rao. Chairman Whitehouse, thank you for holding this hearing and for inviting me, and, Senator Reed, thank you for participating in the hearing. When I was asked to testify last year at a hearing held by you, Senator Whitehouse, I began my testimony by saying that the Nation is in the worst foreclosure crisis since the Great Depression. Sadly, very little has changed over the past year. The recordkeeping that has been going on in terms of the numbers of loans in this Nation and homeowners who are in foreclosure or seriously delinquent that are recorded by the Mortgage Bankers Association continues to be record numbers. They have never had numbers like this since they began recording them. There are very credible estimates that as many as 13 million homeowners will be in a foreclosure by the end of the year 2014 from the beginning of the crisis. The problem is even worse here in Rhode Island than in many other states. Close to 10 percent of Rhode Island homeowners are seriously delinquent, which puts Rhode Island at the highest level of the New England States, an unfortunate recognition we have received, but helpful, nonetheless, is that Rhode Island is one of the 10 States in the Nation that is receiving the hardest-hit funds which Rhode Island Housing is administering. So how has the Federal Government responded to date to this crisis? The primary program which has been initiated is the HAMP program. This is a program whose primary goal is to provide loan modifications to homeowners who are in default or are in threat of being in default. And the record so far has been not substantial enough to meet the need. So far, as of the report from last month, less than 500,000 homeowners have received permanent modifications. Treasury had projected by this time that it would have been over a million, so it is lagging far behind. And the most recent report is interesting because the number of modifications started in September is actually declining, which is not a good sign. The other most recent development, and a very sad development, is what I like to refer to as the ``HAMP aftermath,'' which is an even larger number of homeowners, close to 700,000 homeowners nationwide, have been put on trial modifications, like Mr. Britt, where they start a trial program, and then they have been canceled from that trial program and not put on permanent modifications. Essentially they are worse off. They now have this huge arrearage on their mortgage that they need to catch up on. Their credit reports have been seriously dinged, like Mr. Britt, making it very difficult for them to refinance if they could. And then foreclosure begins again. And that situation is likely to get worse. The other real sort of problem is that there has not been an enforcement mechanism that Treasury has put in place to try to get the servicers to administer the program in a way that it should, and all the problems we have heard about. The HAMP Solution Center has really--Mr. Britt's experience is not unusual. It has been ineffective in providing that enforcement mechanism that is so needed. So our discussion today is whether the bankruptcy courts can have a role in this to try to actually provide in some ways an enforcement mechanism for these loss mitigation programs to work. So I would like to briefly talk about a few ways in which I think the bankruptcy court mediation programs can be ideally suited to address that concern. The first issue--and we have heard so much of it today--is sort of breaking through this bureaucratic barrier. There is the nightmare of the homeowner, as both Mr. Britt and Mr. Cardullo have experienced, of submitting documents repeatedly and getting nowhere. The advantage of a formal court mediation program or loss mitigation program is, as Judge Glenn mentioned, that the servicer needs to designate someone who will be there to have--a designated person for the exchange of documents. And, most importantly, there is an order that is entered that sets time deadlines for that exchange of information to occur, and really critical, if it does not happen, there is someone to go to to try to enforce it. There is the ability for the homeowner, through counsel especially, to approach a judge with a motion and say, Listen, the order has not been complied with, the exchange of information has not occurred. The second item is the issue of just negotiating in good faith. An essential element of any program like this is that both parties have to negotiate in good faith. Judge Glenn mentioned that the servicer needs to designate someone with full settlement authority and the possibility that a mediator can be important. I have to say that this is critically important for the majority of States in this country like Rhode Island which are non-judicial foreclosure States. In Rhode Island, like over 30 or more States in this country, there is no judge overseeing the foreclosure process. So there really is no one to turn to if the modification program or process breaks down. If it is incorporated into a court system, there is that ability to be in front of a judge and try to get some compliance. The other issue that is of a benefit for these programs is what I would like to basically say is just providing due process. One of the huge problems with the HAMP program is that homeowners are denied permanent modifications and they are not told why. Even though Treasury has now imposed requirements that they provide more information for the reason for denial, still many homeowners are given a simple denial letter with basically no information. And the formal programs within a court system have that ability to both require, as both Rhode Island and the New York programs do, an exchange of information about the reasons why there would be a denial and, importantly, to be able to see a judge if that is not provided. Another issue is that these programs, especially in bankruptcy, can provide protection from foreclosure while the process is going on. Mr. Britt's example is a perfect example of one unit within the servicing shop not talking to the other unit. The loss mitigation folks are processing the applications, and the foreclosure department is processing the foreclosure, and they often do not talk to each other. And so the homeowner gets a letter saying they have been approved for a temporary modification, and the foreclosure department is sending a letter saying there is going to be a foreclosure sale in a month. And one is saying ignore that letter. There have been a number of cases nationwide where while this process is going on, the home actually has been sold at a foreclosure sale. There have been cases where homeowners have had their homes sold on 1 day, and then the next day or a week later, they get a letter saying they have been approved for a modification. The advantage of a program within a bankruptcy court system is that the automatic stay that is issued as soon as the case begins protects the homeowner and no foreclosure proceedings proceed at that point. Everything grinds to a halt. And that is a very helpful provision. Three other quick things. We are hearing a lot in the press today--and Senator Whitehouse mentioned the issue of the false affidavits being filed in these foreclosure processes, robo- signers. Bankruptcy courts have been dealing with this for years. They have been imposing sanctions where these kinds of things have been discovered in these cases. They know how to deal with it. And they also--and part of this issue of the false affidavits is trying to find out, for example, who the real owner of the mortgage is. And Senator Whitehouse asked the question about, you know, who has authority really to enter into a binding modification. Again, the bankruptcy court would be well suited to be able to root out and to determine that issue through the court proceedings as to who the true mortgage holder is. Two final points. Second mortgages continue to be a huge problem. Treasury indicates that at least as many as 50 percent of homeowners who are at risk of foreclosure have more than one mortgage. They have a second mortgage on the property. These modification programs--the HAMP program has been hampered by that problem. You know, there is a reluctance of one servicer who is dealing with the first mortgage to enter into a mortgage modification if the second mortgage holder will not agree to do something with their mortgage. Bankruptcy is perfectly suited for this. It is a process that deals with all of the mortgages on the property. And, in fact, in a chapter 13 proceeding, if that mortgage, like many of them are in Rhode Island, is completely under-secured, completely underwater, that can be treated differently and more favorably for the consumer and helpful to avoid foreclosure. The final point is so many homeowners who are in foreclosure right now get modifications, even by Treasury's own statistics; that many who get permanent modifications, when you look at their total debt picture, all of their other debts-- their credit card debts, their medical bills, that back-end debt-to-income ratio, as it is referred to--they still after entering into a permanent modification have a 63-percent back- end DTI. This means that it is going to be very hard for them to succeed with that modification because they have got this other debt burden that they are dealing with. Bankruptcy, again, is perfectly suited for dealing with that. It deals with the whole picture for the homeowner, and they can resolve all of their debts at one time. The recommendations, Senator Whitehouse, that I would like to make are two. One is that the Executive Office of the United States Trustee's Office which administers the bankruptcy court system really ought to be playing a more active role in promoting these programs like that in New York and Rhode Island, and we would hope that they would do that. There are a lot of steps that they could take to try to---- Chairman Whitehouse. We are pursuing that discussion. Mr. Rao. Thank you, Senator Whitehouse. The second and final point is, while I agree with Judge Glenn that the authority for the bankruptcy courts to set up these programs is very clear--at least I think the authority exists currently in the law--nevertheless, there is reluctance, I think, on the part of some judges in other courts who may not feel that that authority is rock solid. And one possibility would be a clarifying amendment to Section 105 of the Bankruptcy Code that would just explicitly say that these kind of loss mitigation programs are within the court's authority. Chairman Whitehouse. It is our hope that we could generate such a provision on a bipartisan basis. In the Judiciary Committee we are exploring that. Mr. Rao. Thank you, Senator Whitehouse. That concludes my remarks. [The prepared statement of Mr. Rao appears as a submission for the record.] Chairman Whitehouse. Thank you. Attorney Lefebvre. STATEMENT OF CHRISTOPHER M. LEFEBVRE, ATTORNEY, PAWTUCKET, RHODE ISLAND Mr. Lefebvre. Good morning. Thank you, Senator Whitehouse and Senator Reed, for inviting me. I am not really the academic. I am the practitioner. I have been practicing consumer law for 23 years. I can tell you, if I had to describe what it is like in the trenches, it can be best described as a ``circus'' as it pertains to loan modifications. The system is not working. When I listened to these two gentlemen tell their story, for a moment I had to look closely. I thought they were the clients that I saw Monday, Tuesday, last month, and for the last 2 years. Their stories are typical of Rhode Islanders, this merry-go-round of--you know, I think I was quoted as suggesting that there was a fax to the shredder. Maybe it is not really a shredder. Maybe it is to the bucket next to the shredder. I am not quite sure. But the whole process is broken. It is not working. And it is very frustrating. The good news, though, the positive thing is that thankfully the Rhode Island bankruptcy court adopted a program similar to the program in New York, and I can tell you that it is working. There are homeowners in the State of Rhode Island who would be homeless today, no doubt in my mind, if it was not for the program that has been in effect for the past year in the Rhode Island bankruptcy court. The program is practical, it brings parties together, and it is effective. And I think the main reason we eliminate all of these problems is because we have judicial oversight. It is amazing. I often chuckle when I am in court when a lender will say, ``Well, we did not get this package,'' and the debtor's lawyer will say, ``We did send it.'' It is amazing when the judge says, ``Gee, we will have a hearing next Tuesday. Why don't you have someone from Bank of America come to 380 Westminster Street, and we will have a hearing and find out what is going on.'' Within an hour, the package has been found. A half-hour thereafter, the modification has been approved. So judicial oversight is the key. It works. It does work. It is not a perfect system. There are many people who simply cannot qualify. But it is amazing when a Federal judge sets deadlines, you know, the recalcitrance of one or two parties-- the borrower and the lender--it disappears. And scheduling hearings and requiring parties--servicers, investors, the person with authority--to have to travel to Rhode Island stimulates and moves the loan modification process. We have had excellent results in the program. We have had many interest rate reductions. We have had terms extended, payments lowered. In many of these chapter 13 cases, as a result of the lower mortgage payment, unsecured creditors are getting a better dividend. So I would think the unsecured creditor body--Visa, MasterCard--should be supportive of all of these programs. It would put more money in their pocket in the chapter 13 arena. The one thing the program does not do--does not do--is we are not seeing any principal reduction, and I know, Senator Whitehouse, trying to get that bill introduced about giving the bankruptcy courts the ability to cram down mortgages, I think if that ever did happen, those bankruptcy courts that have loss mitigation would see their success rates just grow exponentially because, still, people are emerging--as John Rao mentioned, they are getting a loan mod, but still many of them have homes that are grossly underwater, and that burden is sometimes counterproductive, and I think emotionally may affect the long-term success. You know, yes, you get a loan modification. Yes, the payment is lower. But you also know that you have a house that is worth $120,000 that you owe $350,000 on. I think based on experience and meeting with people that can have a negative effect on the long-term success. But the program is great in Rhode Island. It is working and we are seeing real positive results. Thank you. [The prepared statement of Mr. Lefebvre appears as a submission for the record.] Chairman Whitehouse. Thank you very much. First of all, Senator Reed during his comments mentioned the hardest-hit program, and I am hoping that that will be helpful for some folks. I know that Richard Godfrey and the Rhode Island Housing team is working very hard to get that up and operating and helping. I just want to point out that when the first five States were designated for that program and Rhode Island was not on them, what I can only politely describe as a very high and energetic level of activity was generated out of Senator Reed's office and mine that was heard throughout Washington--Treasury, White House, everywhere. And very shortly a second tranche was allowed, and Rhode Island was in that; and then a second back-up on that was allowed, and more money is now coming to Rhode Island. And although, I think, we were equally vociferous, Senator Reed's status as the senior Senator, Senator Reed's status on the Banking Committee, which has a lot to do with housing, made us a particularly convincing team on that subject. So I want to give Jack great credit for the success of that. Let me ask Mr. Cardullo and Mr. Britt a question. Mr. Cardullo, you have been going through this process for a little over a year at this point. In the course of that year, how many times do you believe you were talking to a person who had some authority to negotiate with you and conclude an agreement? Mr. Cardullo. I will let you know when I get one. [Laughter.] Chairman Whitehouse. Zero so far. Mr. Cardullo. Yes. Chairman Whitehouse. Mr. Britt, it has been 19 months plus for you now. During that time period how often do you believe you were dealing with a human being who had any authority to enter into any kind of an agreement with you? Mr. Britt. Never. Chairman Whitehouse. Not once? Mr. Britt. Not once, no. When I tried to move my way up the ladder within the organization, generally I was discouraged from doing that. I was hung up on. So I do feel the people I spoke to were not able to make decisions and were preventing me from going forward. Chairman Whitehouse. And sometimes they would not even give you their last names. Mr. Britt. Exactly. Chairman Whitehouse. You did not know who you were talking to. Mr. Britt. Yes. I have lots of first names. Chairman Whitehouse. Judge Glenn, to me one of the most compelling features of your testimony, you are here providing testimony to Congress. You are a sitting United States Federal bankruptcy judge, and you say just as plain as day that lenders increasingly recognize that they are better off economically by agreeing to a loan modification than by foreclosing on property. Why do you think it is that that fact so rarely is able to work itself through the process, outside of your court process, before they get to your court, to a loan modification? If it is in the bank's interest and if it is in Mr. Britt's and Mr. Cardullo's interest, why are those two parties of common interest not able to bring home and propose a reasonable deal? Judge Glenn. In many cases, there is the third important party, which is the loan servicer, and the economic interests of the loan servicer are not necessarily aligned with that of the owner of the loan, if you can figure out who the owner of the loan is. So that is certainly a problem. Chairman Whitehouse. And could you be a little bit more specific about that? Judge Glenn. Sure. Because of securitization of loans, typically there is a loan servicer designated early--once the loan is sold into a securitization trust, a loan servicer is designated. Frequently what happens when a debtor goes into default, most loan servicers, they are perfectly happy to take the monthly payments as long as they are regular monthly payments. But when the borrower defaults, frequently the loan servicing rights are transferred. I think whether the situation is improving or not remains to be seen, but I think at the outset, the loan servicers just were not equipped with staffing and computer systems to deal with the number of distressed loans there were. And the other major problem is the economic interests. HAMP, the Treasury program, tried to incentivize loan servicers with some payments for approving loan modifications. I am not sure that that has done it, but---- Chairman Whitehouse. It does not appear to have. Mr. Rao, what is your thought on whether that worked? Mr. Rao. I think, you know, the major problem with HAMP is that it is a voluntary program, and so Treasury, therefore, has had to structure it in a way which there are carrots provided to the servicer and no sticks. The incentives, it appears at this point, have not been sufficient enough, and I think as Judge Glenn mentions, it is not so--I do not know that the servicer itself, since they are just handling essentially the collection and payments, can really appreciate the value that the owner of the mortgage might have in modifying it, having to ensure that there is a stream of payments that are coming on the loan versus foreclosure. The servicer does not have that direct recognition of that benefit. And, in fact, it might be even actually a counter-benefit because under the agreements that they have with the owners of the mortgage, they are required to advance payments to the owners of the mortgage, to make the payments for the homeowner if the homeowner does not make them. And that is something that they do not like to do. And in some cases, it is easier for them to resolve the problem by foreclosing and to not have to incur the cost of advancing the payments to the owner of the mortgage during this period when there is a payment problem. Chairman Whitehouse. And the fee arrangements that compensate them for their servicing are often structured in a way that favors foreclosure from the point of view of just the pure fee structure that they are looking at, in addition to any obligation to pay they might have. Mr. Rao. I would not say, though, that that is true in all cases, but certainly under at least a lot of these so-called pooling and servicing agreements and the fee structures that servicers have themselves, in some cases it does appear that it can be more profitable through the servicer to just proceed with foreclosure. Chairman Whitehouse. And, Mr. Lefebvre, you see this happening. As you said, you are the practitioner; you see this day to day; you see the nightmare; you see that it does not even make sense for the lender to have this going on. And yet it goes on and on and on until finally they get to the bankruptcy court and things begin to settle out, begin to make sense. Finally there is somebody in the room, and finally there is some judicial oversight to kind of sort through some of the fabrications and some of the stonewalling. What is your practical sense of why the program in Rhode Island is being legally challenged? I believe it is being challenged by Deutsche Bank, correct? Mr. Lefebvre. Right. Probably it is being challenged by one of the servicers that is not always the most cooperative and consumer-friendly. So I am not surprised that they might want to challenge the ability of a Federal judge to interfere with their exclusive domain. In Rhode Island especially, we are a non-judicial foreclosure State, so I think for the cost of certified mail, $4.85, you can take someone's home, even if they do not even sign the letter. I mean, they have to advertise. It is a very informal process. I do not know why they are challenging it. Statistically, there are not many objections to the loss mitigation in Rhode Island. Fortunately, today there is a group from the Rhode Island bankruptcy court here who, you know, I am sure has many of the statistics. But I was looking at some of the statistics provided on the website. I think 80 percent plus of the loss mitigation requests go through unopposed. Perhaps there---- Chairman Whitehouse. And your experience, if I could just interrupt for a second. Mr. Lefebvre. Yes. Chairman Whitehouse. Your experience is similar with Judge Glenn's whose testimony was that out of 1,250 orders that have been entered, there were only 55 objections, or less than--what is that?--5 percent. For 95 percent, the banks are fine with it, they go ahead. In most cases, parties have negotiated directly without mediators. The banks do not even need a mediator once they have got somebody, a human being in the room who can break through the bureaucracy. So not only are there not objections; they do not even need mediators once they sit down with two human beings and can have a chance to make some sense. Mr. Lefebvre. And in Rhode Island, what is happening practically is there very few law firms that probably deal with 99 percent of the foreclosures. So there are five or six law firms that deal with all of the foreclosures, so what ends up happening in the bankruptcy system, they have to--the servicer has to provide a contact person. But a lot of times it is the lawyers together with the servicer, the contact, and they were able to quickly resolve the issues. I can tell you in the last year--I collect the data for my clients; the HAMP programs compile it. I scan it once, and I have never been asked to scan it again. I can tell you my clients outside of bankruptcy have proof that they have scanned it one, two, three, four, five, six, and seven times. So all that game playing stops once we get into the bankruptcy process. It is really a great, great, great program. Chairman Whitehouse. One last question, and then I will turn to Senator Reed. Have you seen in, again, your practical experience clients who have failed to jump through those hoops, to provide those documents the fifth, sixth, or seventh time, and then suffered an adverse consequence in the foreclosure process as a result of doing that when they get to you? Mr. Lefebvre. Well, absolutely. I had a gentleman last evening, Bank of America, had brought the documentation very organized with his paperwork, and he received a letter about 9 months ago telling him he had been eligible for a loan modification. And he brought in--and I personally looked at his checks and his bank statements, and he had been making every single payment for the modified payment through September. Then in the middle of September he gets a letter saying, oh, your loan modification is not going to be approved. The next day he gets a foreclosure notice. And the reason why his loan modification was denied is because he did not make the payments which I had right in front of me. That is what we deal with in the trenches. That is the frustration of this homeowner who happens to have a job, who could afford the home, and you have got the bank giving him documentation for a loan mod, telling him to make his payments, accepting his payments for 10 months. Then you have the Boston law firm sending out notices to foreclose, and the consumer comes in totally confused, has no idea what to do. Then I take over. And there are some ways outside of bankruptcy, but the most effective way to deal with competing interests is to bring it into the bankruptcy arena, a judicially supervised process, and I think it very effectively balances the rights of homeowners, consumers, and the rights of lenders to protect their collateral and get non-performing loans to be performing and keep people in their homes and keep neighborhoods still alive and vibrant. Chairman Whitehouse. Senator Reed. Senator Reed. Well, thank you. Just to the attorneys at the table, Rhode Island is a State, as you all point out, where simply you have to send a certified letter and notify the paper and then the sale, et cetera. There is no judicial intervention. Do we have any experience--and perhaps, Judge Glenn, you might--in judicially supervised foreclosure States, whether they have a better record of modifications? Or is that data that we just do not have? Or perhaps John. Mr. Rao. It is a good question, Senator Reed, and it is something that I do not think has been looked at yet. I know I actually have recently been trying to parse through the Treasury reports to see the number of permanent modifications that have been granted in States to see whether there is a correlation between a higher amount in judicial foreclosure States. Just quickly looking at them, I thought that that was the case, but I actually have not started to go through that process, and I do not know that anyone has done that. There are a number of judicial foreclosure States that have mediation programs similar to the bankruptcy programs in Rhode Island and New York. And depending upon how they are structured, they also have very good results. But not all of them are equal, as you might guess, and the ones that actually have had the best records that we have been observing at my office have been ones that have that requirement of appointing someone with full settlement authority, and Vermont, Maine, and--actually, the one example of a program in a non-judicial foreclosure State has been Nevada, and that has actually had some success. And it is a non-judicial foreclosure State. The court system in that State created a mediation program even though it is not a judicial foreclosure State. It is actually quite interesting. Senator Reed. Just a comment more than anything else. And, again, let me, before I do that, commend Senator Whitehouse because this is such an issue that is central to the families of Rhode Island and to devote the focus, and a very technical focus, that you need is something that is extraordinarily commendable. So thank you for leading this effort, Sheldon. Chairman Whitehouse. Thank you. Senator Reed. But it strikes me, stepping back, that because of national policies, Federal Reserve policies, we have lowered the effective interest rates for banks dramatically, and it is reflected in current mortgage rates now. But you have borrowers who signed up 2, 3, or 4 years ago, and unless we have a corrective mechanism, one side is getting the benefit of extraordinarily low interest rates, and the other side is paying the high interest rates, relatively high interest rates of 5, 6 years ago. That strikes me as not only unfair but terribly inefficient, because the point of a lot of the macroeconomic policy has been to lower interest rates, get everybody going again, let business go out and refinance at 2 percent, not at 7 percent. And I think, again, if we can get a program like you have suggested--and I concur with the notion there has to be a referee with authority, and there have to be people participating who are empowered to cut a deal. And if you have that--and fortunately in the country we do not have to re-create this system, it exists in the bankruptcy courts--it is an efficient, effective way to do a lot of things. So, again, I think this was an extraordinarily useful hearing, and I thank Senator Whitehouse for leading the charge, not only here but, more importantly, in Washington, because when he goes back, he is going to go to the Judiciary Committee and see if we can pull together an effective response. Let me thank you also. I notice that my colleagues Harold Metts and Luis Aponte are here, who are just superbly gifted public servants. Thank you, gentlemen. Thank you, Senator Whitehouse. Chairman Whitehouse. Thank you, Senator Reed. This has been, I think, a very helpful hearing, and I want to say some particular thank you's, first to Mr. Cardullo and Mr. Britt. I think a great number of Americans have experienced the frustration of being on the phone with people who will not give you their name, will not connect you with their supervisor, do not make any sense, forward you to a different number or a new person who will not give you their last name and will not connect you with their supervisor and will not make any sense. That annoys you some more until they refer you to another person who will not give you their name and will not let you talk to their supervisor and will not make any sense. And it is just a particularly acute and painful type of frustration when it is your home that is at stake. In America, our home is our castle. We think of homeowners as--it is the value that we protect by making mortgages deductible against our income. You know, home is home. And the notion that that is at risk, particularly for people with children, because there is no harder discussion than the one you have with your younger children talking about packing up their bedrooms and clearing out. And the idea that that is what is at stake, that a father is going to have to tell his daughter, ``Sweetheart, you are not going to have your bedroom any longer. We are going to have to move. I do not know what the problem. The bank is going to take our home away.'' And then on the other end, you have got people who will not even give you somebody who has authority to negotiate with you like a grown-up human being, and instead you are dealing with, you know, Brynita, I think was the name you mentioned. Again, it is no last name, no responsibility, will not let you talk to their supervisor, hang up on you if you get frustrated, and move you to somebody else who also does not know anything. The contrast between that stake and that harm that you are at the edge of and the irresponsible, cavalier way, bureaucratic way in which it is being handled is something that is just--the fact that you have been able to come in here and testify about it as effectively as you did and as calmly as you did and as thoughtfully as you did, the fact that you were able to marshal all of this history into--you know, it took some time to sit down and sort your way through this and get it all done for us. And I just cannot tell you how much I appreciate it. It gives Senator Reed and me real leverage in Washington to be able to do this. One of the interesting things about the Senate, which is a relatively small body, is that we can come in with statistics and talk to each other until we are blue in the face. But when you sit down with a colleague and say, Look, I had a constituent who came in and this is what is happening to him, that comes through in a very, very real way. So the effort that you have undertaken to come in here and to do that is really valuable for us, and I just want you to know how very, very much I appreciate it. Judge Glenn, what you have done in your court, your leadership on this, is really remarkable. I want to commend Judge Votolato for following that lead. I am sure that he would have wanted to be here, but because Deutsche Bank decided that the best use of their resources was not to try to help homeowners but to try to sabotage this program by challenging it in court, and because it is pending in litigation, he is in a difficult position to come in and testify. So it is not for lack of interest in his program. It is not for lack of concern about Rhode Island. It is not for any other reason other than that he is on the receiving end of Deutsche Bank's lawsuit that he is not a suitable witness. And your taking the trouble to come from New York to explain it is really commendable, and I think the simple, clear message that you bring us, which is that it is actually usually in the bank's interest to get this settled, and it is as easy as getting two human beings in a room together as long as the bank's person has authority and there is a little watchfulness to make sure they are not up to nonsense, which is something that judges do every minute in every courtroom in the land, is enough, that that is basically enough. And that is a very important message because people try to complicate all of this in a lot of ways, and certainly you have seen how the banks complicate it for you. But that was a very significant message, and you delivered it very clearly and effectively, and I appreciate it. John and Chris, thank you both so much for what you do. John, you are like a laser for focusing passion through expertise at this problem, and it really is--you have been a great resource to my office, and you continue to fight very hard to try to unsnarl this mess. And you see it, as does Chris, every day in your daily practices. I do not know how you put up with it. I get upset hearing about it, and I do not do it all day every day. You do it all day every day, and it must just drive you nuts, what this is doing to your clients. So I thank you very much for your work, and I thank you very much for coming in and sharing your experience today. I will give everybody the chance to make a closing remark or observation, if they feel there is anything we have not covered. And I want to put into the record of this proceeding a statement by Chairman Leahy, the Chairman of the Senate Judiciary Committee, which I will not read the entire thing but it thanks us for holding this hearing, thanks the witnesses for being here and sharing their testimony, expresses his grave concern about the document subversion in the foreclosure process, and expresses a keen interest in pursuing real law enforcement consequences for this. Certainly if the banks were getting papers from a private homeowner that were as poorly prepared, perhaps even fraudulent, as the papers the banks themselves, or at least their robo-signers and their affidavit signers appear to be filing, they would be turning around in a heartbeat to say, ``You are a malefactor, you are a criminal, we cannot deal with you.'' And I think it is time that an equally bright spotlight was cast on them, and if law enforcement is appropriate and prosecution is appropriate, Chairman Leahy wishes very much to see that that takes place. He points out that he has written to Attorney General to ask him if he needs more help from Congress to investigate and prosecute fraud and misconduct in the foreclosure process. He also commends bankruptcy courts in several districts, including your Southern District of New York, Judge Glenn, for the loss mitigation programs that have been put in place so far and commends the work of State legislators who are beginning to try to work through this as well. So I appreciate very much the Chairman's interest. We have been in touch with him about this hearing. Because he is actually on the ballot in Vermont--very safely, I happily add-- on November 2nd, he cannot be with us today. But he is very interested in pursuing this issue in Washington with a full Judiciary Committee hearing, and we look forward to that, and I want to thank him very much for his support, and without objection, his statement will be made a part of the record. [The prepared statement of Chairman Leahy appears as a submission for the record.] Chairman Whitehouse. I will give each one of you a chance to make any last observation you may care to make, and then we will conclude the hearing. Anything to add, Mr. Cardullo? Mr. Cardullo. No. Just thank you very much for your time today. Chairman Whitehouse. Thank you very much. Mr. Britt. Thank you as well, and I just want to add that I think it is important to bring to the forefront homeowners like myself and Mr. Cardullo, because there is a perception out there that people are trying to beat the system or trying to get something for nothing. That is not our objective. You know, we are not flipping real estate and playing the system. You know, we are involved in legitimate financial hardship. We have applied for a program that seems suited for us. And yet I think the public perception is that we are looking for a handout or something. I think hearings like this help to bring people like Mr. Cardullo and myself to the forefront. Chairman Whitehouse. You are not trying to beat the system. You are getting beaten by the system. Mr. Britt. Thank you. Yes. Chairman Whitehouse. Judge Glenn. Judge Glenn. I just appreciate the opportunity to appear before the Subcommittee today and explain our program in New York. Chairman Whitehouse. I very much thank you for coming. Mr. Rao. Thank you, Senator, for holding the hearing. Mr. Lefebvre. Thank you very much for inviting me to participate today. Chairman Whitehouse. I appreciate it very much. I want to particularly thank Senator Reed for---- Senator Reed. Well, I am not on the Committee so I am sort of sitting in strictly at the courtesy of the Chairman. So thank you, Mr. Chairman. Chairman Whitehouse. All right. Under the rules of the Subcommittee, there is an additional week that the record of this hearing will remain open, and if anybody wishes to add anything to the record, all they have to do is send it to my office before that week concludes. Senator Metts was here earlier; he had to leave. Councilman Aponte is still here. Obviously, we would welcome any thoughts or comments they might care to add. Again, I open with your question that you raised when you came to my office to express the frustration of your clients. As you said the question: ``Why is it that the bank wants to take away my home and throw me out of it and sell it to someone else who will pay the bank less than I am willing and able to pay right now? '' And I think anything you would like to add or anybody else would like to add would be helpful. It will be open for a week. And with that, the gavel. Senator Reed. Thank you. Chairman Whitehouse. Thank you very much, Jack. 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