In Re Stewart
391 B.R. 327, 2008 Bankr. LEXIS 2072, 2008 WL 2676961 (2008)
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Rule of Law:
A mortgage servicer may not enforce fees and costs against a debtor where such charges are unreasonable, not contractually authorized, miscalculated, or assessed without contractually required notice, particularly when these errors result from a systemic over-reliance on automated computer systems without adequate human oversight.
Facts:
- In 1999, Dorothy Chase Stewart and her husband obtained a home loan, later serviced by Wells Fargo, which was secured by a mortgage on their residence.
- The mortgage specified the order for applying payments (escrow, interest, principal, then late fees) and allowed for reasonable inspection fees only after providing notice and reasonable cause.
- After Stewart missed a single payment in December 2000, Wells Fargo began assessing monthly late fees and frequent property inspection fees without providing notice.
- Wells Fargo misapplied Stewart's subsequent regular payments to these unnoticed fees before principal and interest, contrary to the mortgage terms, causing her default to grow.
- Wells Fargo's automated computer systems ordered numerous property inspections without human review, resulting in 44 inspections over 79 months, many of which were for the wrong property.
- Wells Fargo force-placed insurance on the property and then repeatedly miscalculated the required escrow payments, leading to erroneously high monthly payment demands.
- Wells Fargo also charged Stewart for multiple Broker's Price Opinions (BPOs) that included undisclosed, hidden fees representing profit for Wells Fargo's own division, disguised as third-party costs.
Procedural Posture:
- Dorothy Chase Stewart ('Debtor') filed for Chapter 13 bankruptcy in the U.S. Bankruptcy Court for the Eastern District of Louisiana.
- Wells Fargo Home Mortgage, Inc. ('Wells Fargo') filed a proof of claim asserting a secured claim against the Debtor's property.
- Wells Fargo subsequently filed a first and second amended proof of claim, adjusting the amount it alleged was owed.
- The Debtor filed an Objection to Wells Fargo's second amended claim, disputing the validity and amount of various fees, costs, and charges included in the claim.
- The Bankruptcy Court conducted three evidentiary hearings to address the Debtor's Objection.
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Issue:
Are the various fees, costs, and charges assessed by a mortgage servicer against a debtor's account, often automatically by a computer system without proper notice, legally enforceable in a bankruptcy proceeding when they are found to be unreasonable, contractually unauthorized, or miscalculated?
Opinions:
Majority - Magner, Bankruptcy Judge.
No. The fees, costs, and charges assessed by Wells Fargo are largely unenforceable because they were imposed in violation of the loan agreement and principles of reasonableness. The court found Wells Fargo engaged in a corporate practice of failing to notify the Debtor of assessed fees, which is fatal to its claim for those charges. The court determined that the frequent, automatically-generated property inspections were unreasonable, performed without the contractually required notice and cause, and were often based on flawed information, indicating a lack of human oversight. Similarly, the practice of assessing a new late charge for each subsequent month that an initial default remained uncured was an unreasonable interpretation of the note, which permitted only one late charge per missed payment. The court also disallowed BPO charges that contained hidden, illegal fees for Wells Fargo and found that Wells Fargo's escrow calculations were consistently erroneous, leading to improperly inflated payment demands. Finally, the court held that Wells Fargo's application of payments to these improper fees before principal and interest directly violated the mortgage's terms. The court sanctioned Wells Fargo for these systemic failures, its abuse of rights, and for filing significantly erroneous proofs of claim in the Debtor's bankruptcy cases.
Analysis:
This case serves as a significant check on the automated practices of the mortgage servicing industry. It establishes that servicers cannot hide behind flawed computer logic to justify the imposition of unreasonable or contractually prohibited fees, especially within the context of bankruptcy. The ruling emphasizes that contractual requirements for notice and reasonableness are not mere formalities and that a failure to adhere to them can result in the disallowance of claimed fees and substantial sanctions. This precedent strengthens protections for debtors by subjecting servicers' accounting and fee-assessment practices to rigorous judicial scrutiny, holding them accountable for systemic errors that harm borrowers.
