[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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