[Congressional Record Volume 157, Number 72 (Tuesday, May 24, 2011)]
[Senate]
[Pages S3276-S3278]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEAHY (for himself, Mr. Blumenthal, and Mr. Whitehouse):
  S. 1054. A bill to address remedies in bankruptcy for negligent, 
reckless, or fraudulent assertion of claim; to the Committee on the 
Judiciary.
  Mr. LEAHY. Mr. President, today I am pleased to introduce the 
Fighting Fraud in Bankruptcy Act of 2011. I thank Senator Whitehouse 
and Senator Blumenthal for joining me as cosponsors of this 
legislation. This bill will give the Department of Justice and the 
United States bankruptcy trustee important new tools to combat creditor 
abuses in the bankruptcy process. The Fighting Fraud in Bankruptcy Act 
is another step forward in the Judiciary Committee's important efforts 
to protect American citizens from fraud.
  Since the onset of the housing market's collapse, the bankruptcy 
courts and the United States trustee have encountered serious problems 
related to foreclosure documentation submitted by mortgage lenders and 
servicers in the bankruptcy process. As scrutiny has been brought to 
bear on foreclosure-related filings by bankruptcy judges, attorneys, 
and the United States trustee, a pattern of negligent, reckless, or 
fraudulent conduct on the part of mortgage lenders and servicers has 
been revealed with a consistency that indicates systemic problems.
  Under Attorney General Holder's leadership, the Department of Justice 
is making a considerable effort to ensure that mortgage lenders and 
servicers are playing by the rules and treating homeowners fairly and 
honestly. As part of its efforts to more closely scrutinize foreclosure 
documentation in bankruptcy cases, the United States trustee's office 
reviewed 10,000 proofs of claim filed by mortgage servicers. What was 
found was far more serious than what mortgage servicing industry 
officials have been asserting. For example, in testimony before the 
Senate Judiciary Committee in 2008, an industry executive stated that 
the rate of loan servicing errors in bankruptcy cases adverse to a 
homeowner was ``less than one percent.''
  In its review, however, the trustee found an error rate based upon 
blatant,

[[Page S3277]]

obvious errors more than ten times greater than what was testified to 
before the Judiciary Committee. And these errors are not harmless. In 
some cases, they were wildly inaccurate statements of what a homeowner 
owed to the lender, in others, the claims contained unsupported junk 
fees that servicers had piled on, yet for which they provided no 
documentation. If left unchallenged, the result would be that a 
homeowner not only loses a home, but is cheated on what he or she owes 
on that home. Americans in foreclosure, and the trustee as guardian of 
the system are right to demand accuracy and truthfulness from 
creditors' representations in court.
  Unfortunately, the major players in the mortgage industry are showing 
little interest in addressing these problems head-on. Instead, when 
faced with the trustee's scrutiny of their claims, some major mortgage 
servicers have resorted to engaging in litigation challenging the 
authority of the United States trustee to look behind their claims and 
provide sanctions where warranted. The United States trustees in 
districts around the country are now facing hundreds of challenges to 
their authority to effectively police the system. It is a great 
disappointment to see some of the very same banking entities that have 
benefited so much from congressional action and taxpayer funded 
assistance put up so much resistance to simple demands for accuracy and 
truthfulness in their representations to the court and those whose 
homes they are seeking to repossess.
  The unfortunate reality is that lenders in many cases will continue 
to exercise their legal right to foreclose, rather than work with the 
homeowner to modify a loan. What is entirely unacceptable is for 
homeowners on the precipice of losing their homes to be mistreated by 
their lenders--whether through unsupported fees, willfully inaccurate 
or negligent accounting, or a lack of supporting documentation. This 
conduct only adds to the pain and hardship so many are experiencing.
  In 2010, over one million Americans lost their homes to foreclosure. 
This year, housing industry analysts expect the problem to get worse. 
The magnitude of this problem, and its effect on American families, is 
difficult to comprehend. As this crisis continues to deepen, the 
incentives for lenders and servicers to cut corners, inflate profits, 
rush foreclosures, and hide from their misconduct will only increase.
  The legislation I introduce today is about ensuring fair treatment 
for homeowners, preventing a fraud on the bankruptcy courts, and 
holding wrongdoers accountable. When Congress created the United States 
trustee program in 1978, it described the trustee's role as the 
``watchdog'' of the bankruptcy system, and vested the trustee's office 
with the power to investigate fraud in the process. This legislation 
will support and strengthen this important role so that all 
participants in the bankruptcy system conduct themselves in accordance 
with the law.
  My legislation will do four things. First, it clarifies the United 
States trustee's inherent power and duty to police all corners of the 
bankruptcy system. Second, it provides the trustee and the courts with 
remedies to correct and sanction misconduct and fraud committed by 
creditors in the bankruptcy process. Third, the legislation empowers 
the trustee to establish a system of audits to ensure that creditors 
are complying with the law. These provisions taken together will help 
make certain that debtors and creditors are held to the same standard 
in the bankruptcy process.
  Finally, the legislation addresses a particularly offensive form of 
mortgage servicer misconduct against men and women serving in our 
military. The Servicemembers Civil Relief Act (SCRA) protects active 
duty military personnel by requiring a stable, manageable interest rate 
for military homeowners on active duty, and by staying foreclosure 
actions during their deployment. A Government Accountability Office 
report released this month found that among just two of 14 major 
mortgage servicing organizations that provided data to Federal 
regulators, 50 foreclosure actions were carried out in violation of the 
SCRA.
  In response to this finding, and to bolster the SCRA's protections 
for the men and women serving in the military, this legislation would 
require a mortgage lender seeking relief from the automatic stay to 
certify under penalty of perjury that the foreclosure was in compliance 
with the SCRA.
  As Congress looks at ways to mitigate the foreclosure crisis to 
reduce its impact on homeowners and the economy, I hope all Senators 
can agree that the foreclosure process for Americans should be a fair 
one and one in which there is accountability for fraud or other 
misconduct. And I hope we can all agree that the integrity of our 
judicial system is something worth protecting.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                S. 1054

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Fighting Fraud in Bankruptcy 
     Act of 2011''.

     SEC. 2. REMEDIES FOR NEGLIGENT, RECKLESS, OR FRAUDULENT 
                   ASSERTION OF CLAIM.

       Chapter 1 of title 11, United States Code, is amended by 
     adding at the end the following:

     ``Sec. 113. Remedies for negligent, reckless, or fraudulent 
       assertion of claim

       ``(a) In this section--
       ``(1) a person `asserts a claim' by, without limitation, 
     preparing, signing, filing, submitting, or later advocating a 
     proof of claim under section 501 of this title, a motion 
     seeking relief from the stay imposed under section 362 of 
     this title, or other paper, representing to the court that a 
     claim is owed or that it is owed in a specific amount;
       ``(2) a person who assists another person in asserting a 
     claim shall also be deemed to have asserted the claim, 
     including--
       ``(A) any officer, director, employee, or agent of the 
     person asserting a claim; and
       ``(B) any attorney, accountant, or other professional 
     person who is employed by or is assisting the person 
     asserting a claim; and
       ``(3) the term `relief' means, without limitation, and in 
     addition to any legal, equitable, monetary or injunctive 
     relief otherwise available under any provision of this title 
     or other provision of law, or under a court's inherent 
     powers--
       ``(A) an order or judgment imposing upon a person in one or 
     more cases, wherever situated, in which the person has 
     asserted a claim or claims in violation of subsection (b) a 
     civil penalty of not more than $5,000 for each such claim;
       ``(B) an order or judgment requiring a person in one or 
     more cases, wherever situated, in which the person has 
     asserted a claim or claims in violation of subsection (b), to 
     pay actual damages to an injured debtor, or trustee; and
       ``(C) an order or judgment imposing upon a person in one or 
     more cases, wherever situated, in which the person has 
     asserted, or could assert, a claim or claims in violation of 
     subsection (b) of this section, other prospective or 
     retrospective relief, including but not limited to 
     declaratory relief, injunctive relief, or an auditing 
     requirement.
       ``(b) Notwithstanding any other provision of Federal or 
     State law, and in addition to any other remedy provided under 
     Federal or State law, if a court, on its own motion or on the 
     motion of the United States trustee (or bankruptcy 
     administrator, if any), finds, based upon a preponderance of 
     the evidence, that a person has, through negligence, 
     recklessness, or fraud, improperly asserted a claim in any 
     case under chapter 7 or chapter 13 of this title before the 
     court, the court may--
       ``(1) enter relief against the person in the case before 
     the court; and
       ``(2) enter relief against the person in any other case 
     under chapter 7 or chapter 13 that is pending or might 
     thereafter be filed under this title, wherever situated, to 
     the extent the court deems it necessary--
       ``(A) to rectify the person's negligent, reckless, or 
     fraudulent assertion of a claim; or
       ``(B) to prevent the person from asserting any negligent, 
     reckless, or fraudulent claim.
       ``(c)(1) Civil penalties imposed under this section in 
     judicial districts served by United States trustees shall be 
     paid to the United States trustees, who shall deposit an 
     amount equal to such fines in the United States Trustee Fund.
       ``(2) Civil penalties imposed under this section in 
     judicial districts served by bankruptcy administrators shall 
     be deposited as offsetting receipts to the fund established 
     under section 1931 of title 28, and shall remain available 
     until expended to reimburse any appropriation for the amount 
     paid out of such appropriation for expenses of the operation 
     and maintenance of the courts of the United States.''.

     SEC. 3. DUTY OF THE UNITED STATES TRUSTEE TO ADDRESS CLAIMS.

       Section 586(a) of title 28, United States Code, is 
     amended--
       (1) in paragraph (7)(C), by striking ``and'' at the end;
       (2) in paragraph (8), by striking the period at the end and 
     inserting ``; and''; and
       (3) by adding at the end the following:

[[Page S3278]]

       ``(9) when the United States trustee deems it appropriate--
       ``(A) monitor and investigate the conduct of other parties 
     in interest with respect to claims; and
       ``(B) take action that the United States trustee deems 
     necessary to prevent or remedy any negligent, reckless, or 
     fraudulent assertion of a claim, as defined in section 113(a) 
     of title 11, by exercising any of the United States trustee's 
     powers and authorities under this title and under title 11 
     respecting claims, including--
       ``(i) filing, pursuing, or commenting upon any action 
     brought under section 113 of title 11; and
       ``(ii) filing, pursuing, or commenting upon any civil 
     action, or upon any civil proceeding arising under title 11, 
     or arising in or related to a case under title 11.''.

     SEC. 4. PROCEDURES FOR THE AUDITING OF PROOFS OF CLAIM.

       (a) Title 28.--Section 586 of title 28, United States Code, 
     is amended by adding at the end the following:
       ``(g)(1) Claims Audit Procedures.--
       ``(A) The Director of the Executive Office for United 
     States Trustees shall establish audit procedures to determine 
     the accuracy, veracity, and completeness of proofs of claim 
     filed under section 501(a) of title 11, with respect to cases 
     filed under chapter 7 or 13 of title 11, in which the debtor 
     is an individual.
       ``(B) The procedures established pursuant to subparagraph 
     (A) shall--
       ``(i) establish a method of selecting appropriate qualified 
     persons to contract to perform audits;
       ``(ii) establish a method of selecting proofs of claim to 
     be audited, except that the number of audits to be performed 
     shall be within the sole discretion of the Director of the 
     Executive Office for United States Trustees; and
       ``(iii) establish procedures for providing, not less 
     frequently than annually, public information concerning the 
     aggregate results of such audits, including the percentage of 
     cases, by district, in which inaccurate, untrue, or 
     incomplete proofs of claim were filed.
       ``(2) The United States trustee for each district is 
     authorized to contract with auditors to perform audits of 
     proofs of claim designated by the United States trustee, in 
     accordance with the procedures established under paragraph 
     (1). An audit may, in the discretion of the United States 
     trustee, encompass multiple proofs of claim filed by the same 
     entity in one case or multiple cases, whether in the same 
     district or multiple districts. The United States trustees 
     from multiple regions may contract with a single auditor to 
     audit proofs of claim filed by the same entity in districts 
     within their regions.
       ``(3)(A) The report of each audit performed pursuant to 
     paragraph (2) shall be filed with the court where the case is 
     pending and transmitted to the United States trustee and to 
     any trustee serving in the case. Each such report shall 
     clearly and conspicuously specify any findings that the claim 
     asserted in the proof of claim is--
       ``(i) not valid;
       ``(ii) not owed in the amount claimed; or
       ``(iii) not supported by adequate documentation.
       ``(B) If a claims audit report identifies deficiencies in 
     the proof of claim as described in paragraph (2)(A), the 
     United States trustee shall--
       ``(i) if appropriate, report the deficient filing to the 
     United States Attorney pursuant to section 3057 of title 18; 
     and
       ``(ii) if advisable, take appropriate action, including 
     objecting to the proof of claim under section 502(b) of title 
     11, or commencing an action under section 113(b) of title 11, 
     against entities responsible for the deficiencies.''.
       (b) Title 11.--Section 502(b) of title 11, United States 
     Code, is amended--
       (1) in paragraph (8), by striking ``or'' at the end;
       (2) in paragraph (9), by striking the period at the end and 
     inserting ``; or''; and
       (3) by adding at the end the following:
       ``(10) the court finds the entity filing a proof of claim 
     that was selected for audit under section 586(g) of title 28 
     failed to make available to the auditor for inspection 
     necessary accounts, papers, documents, financial records, 
     files, or other papers, that were requested by the 
     auditor.''.

     SEC. 5. TREATMENT OF SERVICEMEMBERS IN FORECLOSURE.

       Section 362(d) of title 11, United States Code, is amended 
     by adding at the end of the undesignated matter following 
     paragraph (4) the following: ``In any case under this title 
     involving a servicemember, as defined in section 101 of the 
     Servicemembers Civil Relief Act, to whom section 303 of that 
     Act applies, no action may be taken under this subsection 
     unless the party in interest certifies, under penalty of 
     perjury, that the requirements of section 303 of the 
     Servicemembers Civil Relief Act have been met.''.

     SEC. 6. EFFECTIVE DATES.

       (a) Remedies; Duty to Address Claims.--The provisions of 
     section 113 and section 362(d) of title 11, United States 
     Code, and paragraph (9) of section 586(a) of title 28, United 
     States Code, added by this Act, shall become effective with 
     respect to all cases filed or pending under title 11, United 
     States Code, on or after the date of enactment of this Act.
       (b) Auditing of Proofs of Claim.--Section 586(g) of title 
     28, United States Code, as added by this Act, shall become 
     effective 18 months after the date of enactment of this Act 
     for all cases filed or pending on or after that date of 
     enactment, except that the Director of the Executive Office 
     for United States Trustees may, in the sole discretion of the 
     Director, establish an earlier effective date by publishing 
     notice in the Federal Register at least 2 weeks before the 
     proposed effective date.

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