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U.S. Trustees Increase Scrutiny of Foreclosure Cases - Part One

Following the recent foreclosure scandals, many banks halted the evictions of borrowers while reviewing their foreclosure procedures and fixing flaws in their documentation procedures. However, most of the largest banks have resumed evictions again. While they claim to have tightened up procedures, one major concern remains. Do these banks have legal standing to foreclose?

This is not a burning question for bankers. Many in the industry argue that nine times out of ten, the banks have the right to foreclose the property. Some even see challenges to this right as a ploy by borrowers' lawyers to stall the foreclosure proceedings.

However, the United States Trustee Program (USTP) is not taking these claims at face value. Rather, the USTP, which is the part of the Justice Department that oversees our country's bankruptcy courts, has been carefully scrutinizing banks' foreclosure actions against borrowers.

This heightened level of scrutiny was made evident in an Atlanta federal bankruptcy court. In two recent cases, United States trustee Donald F. Walton has questioned the actions of banks trying to foreclose on a borrower. Walton filed motions accusing the banks of not having the right to foreclose.

Both cases involve borrowers who had Chapter 13 bankruptcy plans. Once a borrower's Chapter 13 repayment plan is confirmed by the court, it results in an automatic foreclosure stay. Banks often file motions with bankruptcy courts to have the stays removed so they can foreclose.

In one case, Wells Fargo tried to foreclose on a borrower two weeks after she had her Chapter 13 bankruptcy plan confirmed by the court. However, Wells Fargo failed to provide any evidence that it was the holder of the underlying note or an agent of the note holder. Walton challenged the bank's request to remove the automatic foreclosure stay.

In a similar case, Chase Home Finance sought to have an automatic stay lifted after the court had confirmed a couple's Chapter 13 plan last year. Chase Home Finance wanted to bring a foreclosure action against the couple. However, Walton again stepped in and told the court to reject the request because Chase had failed to prove it had control of the note on the property.

In our next blog post, we will continue to discuss the increased scrutiny of the USTP and what this means for the future of foreclosures.

Source: The New York Times "Don't Just Tell Us. Show Us That You Can Foreclose," Gretchen Morgenson, 27 November 2010

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