December 30, 2009

The Lack of Evidentiary Foundations Fosters Fraud

Filed under: Bankruptcy,Mortgage – The expanding market for that buying, selling and securitization of consumer debts has resulted in a serious problem regarding the “quality and admissibility” of the computer data that is being tendered to the United States Bankruptcy Courts to prove the nature and extent of consumer debt obligations. The same thing can be said with respect to the quality of the evidence that is being offered by Mortgage Servicers with respect to the nature and extent of the mortgage obligations of homeowners in bankruptcy cases. The analysis of these records by the attorneys for the debtors and by the Court has tended to overlook the underlying evidentiary foundations necessary to authenticate the same in order to create admissible and competent evidence. Also, since none of these records are generated in the normal course of business of an entity other than the proponent of the evidence in court, the business record foundation has also been either ignored or overlooked by the litigants and the courts. These are all important concepts in a consumer bankruptcy practice since the evidence presented in a proof of claim and in support of motion for relief from stay normally consist exclusively of “electronic evidence.”

In order to introduce electronic records into evidence, the witness for the moving party must be able to establish all of the evidentiary foundations.

Fed. R. Evid. 104. The Judge acts as gatekeeper on the preliminary questions regarding the admissibility of evidence if a Federal Proceeding. The basic elements for the introduction of business records under the hearsay exception for records of regularly conducted activity all apply to records maintained electronically. American Express v Vee Vinhnee, 336 B.R. 437 (B.A.P. 9th Cir. 2005). See also In re Lee, 2009 WO 1917010 (Bankr. C.D. Cal. 2009)(court found witness not “competent to testify regarding the accuracy of the payment records and denied admission of this evidence).

Generally, such records must be:

1. Made at or near the time by, or from information transmitted by, a person with knowledge;

2. Made pursuant to regular practices of the business activity;

3. Kept in the course of regularly conducted business activity; and

4. The source, method, or circumstances of preparation must not indicate a lack of trustworthiness.

See Fed. R. Evid. 803(6) and United States v Catabran, 836 F.2d 453, 457 (9th Cir. 1988).

These elements must either be established by the testimony of the custodian or other qualified witness or must meet prescribed certification requirements. Fed. R. Evid. 803(6). Such records, however, will not be admitted unless the court is also persuaded by their proponent that they are authentic. Ordinarily, because the business records foundation commonly covers these elements, the authenticity analysis is merged into the business record analysis without a proper focus on the elemental foundation questions.  See 5 Weinstein 900.06[2][a]. The primary authenticity issue in the context of business records is on what has, or may have, happened to the record in the interval between when it was placed in the computer data file and the time of the hearing. In other words, the record being proffered must be shown to continue to be an accurate representation of the record that originally was created.

Authenticating a paperless electronic record, in principle, poses the same issue as for a paper record, the only difference being the format in which the record is maintained: one must demonstrate that the record has been retrieved from the file, be it paper or electronic, and is the same as the record that was originally placed into the file. Fed. R. Evid. 901(a). Footnote 5 to this Rule provides that “the requirement of authentication or identification as a condition precedent to admissibility is satisfied by evidence sufficient to support a finding that the matter in question is what its proponent claims.”

Hence, the focus is not on the circumstances of the creation of the record, but rather on the circumstances of the preservation of the record during the time it is in the computer data base so as to assure that the document being proffered is the same as the document that originally was created. 

In the case of a paper record, the inquiry is into the procedures under which the file is maintained, including custody, access, and procedures for assuring that the records in the files are not tampered with. The foundation is well understood and usually is easily established. See Edward J. Imwinkelried, Evidentiary Foundations 4.03[a] (5th ed. 2002); 5 Weinstein 900.07[1][b][i].

The paperless electronic record involves a difference in the format of the record that presents more complicated variations on the authentication problem than the paper records. Ultimately, however, it all boils down to the same question of assurance that the record is what it purports to be.

The logical questions extend beyond the identification of the particular computer equipment and programs used. The entity’s policies and procedures for the use of the equipment, database, and programs are important. How access to the pertinent database is controlled and, separately, how access to the specific program is controlled is all important questions. How changes in the database are logged or recorded, as well as the structure and implementation of backup systems and audit procedures for assuring the continuing integrity of the database, are pertinent to the question of whether records have been changed since their creation.

There is really little mystery to all of these rules. All of these questions are recognizable as analogous to similar questions that may be asked regarding paper files: policy and procedures for access and for making corrections, as well as the risk of tampering. But the increasing complexity of ever-developing computer technology necessitates a more precise focus on the problem.

Some of these computer-related questions are becoming more important as the technology advances.  For example, digital technology makes it easier to alter text of documents that have been scanned into a database, thereby increasing the importance of audit procedures designed to assure the continuing integrity of the records. See George L. Paul, The “Authenticity Crisis” in Real Evidence, 15 PRAC. Litigator No. 6, at 45-49 (2004). This adds as extra dimension to consideration of whether the computer was “regularly tested” for errors. See 5 Weinstein 901.11[2] (2005).

This ever-expanding complexity of the cyberworld has prompted authors of the current version of the Manual for Complex Litigation to note that a judge should “consider the accuracy and reliability of computerized evidence” and that a “proponent of computerized evidence has the burden of laying a proper foundation by establishing its accuracy.”  Manual for Complex Litigation (Fourth), 11.446 (2004).  The Manual quotes with approval the following statement for an Article by Gregory P. Joseph,  A Simplified Approach to Computer-Generated Evidence and Animations, 43 N.Y. Sch. L. Rev. 875(1999-2000). In the Article, it is stated that in general the Federal Rules of Evidence apply to computerized data as they do to other types of evidence. “Computerized data, however, raise unique issues concerning accuracy and authenticity. Accuracy may be impaired by incomplete data entry, mistakes in output instructions, programming errors, damage and contamination of storage media, power outages, and equipment malfunctions. The integrity of data may also be compromised in the course of discovery by improper search and retrieval techniques, data conversion, or mishandling.” Manual for Complex Litigation, Id, at fn. 6.

In effect, it is becoming clearly recognized that early versions of computer foundations were too cursory, even thought the basic elements covered the ground. For example, it has been said that a qualified witness must testify as to the mode of the record preparation, that the computer is the standard acceptable type, and that business is conducted in reliance upon the accuracy of the computer in retaining and retrieving information. Barry Russell, Bankruptcy Evidence Manual P.17 (2005). These several elements, however, subsume a number of constituent elements.

Rule 901(b)(9), which is designated as an example of a satisfactory authentication, describes the appropriate authentication for results of a process or system and contemplates evidence describing the process or system used to achieve a result and demonstration that the result is accurate. Fed. R. Evid. 901(b)(9). Advisory Committee Note 7 to this Rule provides and “evidence describing a process or system used to produce a result and showing that the process or system produces an accurate result.” 

Indeed, judicial notice is commonly taken of the validity of the theory underlying computers and of their general reliability. Imwinkelried, Id., at 4.03[2]. Theory and general reliability, however, represent only part of the foundation. Professor Imwinkelried perceives electronic records as a form of scientific evidence and discerns an eleven-step foundation for the admissible of such records:

1. The business regularly uses a computer.

2. The computer is reliable.

3. The business has developed a procedure for inserting data into the computer.

4. The procedure has built-in safeguards to ensure accuracy and identify errors.

5. The business keeps the computer in a good state of repair and has regular and professional maintenance.

6. The computer system has appropriate firewalls and security features in order to eliminate the possibility of corruption or manipulation of data.

7. The witness had the computer readout certain data.

8. The witness used the proper procedures to obtain the readout including the entry of a proper user-name and password and the proper commands.

9. The computer was in proper working order at the time the witness obtained the readout.

10. The witness recognizes the exhibit as the readout.

11. The witness explains how he or she recognizes the readout.

12. If the readout contains strange symbols or terms, the witness explains the meaning of the symbols and terms for the trier of fact.

13. The business has implemented a proper computer policy and system control procedures that limit access to the data.

14. The computer system can generate reports as to when any original data was changed, modified, or deleted, including the time and date, the name of the employee taking such action, and the basis for the action.

15. The business exercises control over access to the database.

16. The software programs have been verified for accuracy and all patches, fixes, and new features have been and are uploaded on a regular basis.

17. The business has implemented regular audit procedures to assure the continuing integrity of the records.

18. The business has a regular system to backup all databases and checks the system for accuracy on a daily basis.

19. The witness has complete access to the computer system and database, is familiar with how the data is entered, stored and maintained, has personal knowledge of ally verification and security systems, and can testify that all of these matters were personally verified in connection with the evidence proffered.

20. The witness must be able to offer evidence of sufficient training, experience and expertise in these areas to offer the detailed foundation evidence required for authentication.

How should the attorney for the Debtor deal with this type of evidence? It is suggested that a Motion to Strike the Affidavit with the defective account data should be filed. This type of motion can be filed pursuant to Rule 7012 of the Bankruptcy Rules and Rule 12(e) of the Federal Rules of Civil Procedure. The motion must be filed with “20 days after service” of the Affidavit and the substantive objection is that the document is replete with data or account information that is not admissible and therefore immaterial to the issues before the Court.

With the number of affidavits and legal documents that are currently being executed by third-party providers, or by document assembly and preparation operations pursuant to “signing authorities,” it is essential that these foundation rules be enforced in every case in order to prevent the complete high-jacking of our system of justice and to prevent a total disregard for the Rules of Evidence. 

December 23, 2009

2009’s mortgage modifications pretty minor – This was supposed to be the year of loan modifications.

With great fanfare early in the year, the Obama administration unrolled a plan to spur banks to help troubled homeowners avert foreclosure by reducing their monthly payments.

But at year end, the plan is widely considered a bust.

Borrowers complain of months of begging and endless phone-tree loops. Banks complain of borrowers who don’t submit documentation and don’t return calls.

The net results have been paltry: Just 31,382 borrowers nationwide had received permanent loan mods as of Nov. 30 under the Home Affordable Modification Program (HAMP), the Treasury Department reported. Meanwhile, First American CoreLogic says that 1.7 million homes are likely to be lost to foreclosure next year.

“HAMP is turning out to be something of a disaster,” said Lisa Sitkin, an attorney at Housing & Economic Rights Advocates in Oakland, who works with many struggling borrowers. “There are delays and lost steps at every turn. The bureaucratic requirements are endlessly frustrating.”

Richard Leong of Daly City is a case in point. He and wife Rachel Lim have owned their Daly City home since 2000. But after he lost his biotech job, they fell behind on payments. He contacted the loan servicer, JPMorgan Chase, a year ago to request a loan modification, and says he calls the bank at least once a week.

“I’ve been calling them so many times; each person gave me different answers,” he said. “All my savings and 401(k) are gone; right now I’m totally drained of money.”

Chase confirmed that Leong has been trying to get a loan modification since November 2008, but said it was stymied because there was no household income.

“Under HAMP, there needs to be some type of income to qualify for a modification,” said Chase spokesman Gary Kishner. “If there is no income, there is no way to sustain anything.”

Lim eventually got a job in Sacramento, but Kishner said Chase still hasn’t received proof of the income.

Stalemates common

That kind of stalemate appears to be typical – along with the increasing prevalence of mortgage problems due to unemployment.

So what’s the answer? Here are some ideas that various stakeholders and observers have suggested.

— Options for unemployed borrowers. Foreclosures aren’t just about subprime loans anymore. This year, many borrowers with prime loans fell behind because of job loss.

“The second wave of foreclosures is related to the terrible unemployment figures,” said the Rev. Lucy Kolin, a pastor at Oakland’s Resurrection Lutheran Church. She’s part of an interfaith coalition called the PICO National Network that went to Washington this month to urge legislators to address this group. “There is no program set up to deal with homeowners who are unemployed.”

PICO suggests expanding HAMP with an approach to specifically address unemployed homeowners, modeled on a Pennsylvania plan called Homeowners Emergency Mortgage Assistance.

“It would get the homeowners payment down to 31 percent of the monthly income for two or three years or until they regain employment,” she said. “It would not be a grant, but a loan. Treasury would pay the servicer at the end of 24 or 36 months for the lost payments; that amount would become a loan to the homeowners.” For people with no income, payments would be suspended.

— Principal write-downs. More than a quarter of mortgage holders owe more than their home is worth. Even if those people get loan modifications, they’re stuck paying off homes that could be underwater for years. That’s why many consumer advocates think banks should be compelled to reduce the amount of debt owed on underwater homes. A provision to let Bankruptcy Court judges do just that seems unlikely to pass Congress, after several failures.

“You want homeowners to be in a position where they can start to build equity and wealth,” said Paul Leonard, director of the California office at the Center for Responsible Lending in Oakland. “The problem with affordability-only modification is that it essentially makes homeowners renters for the foreseeable future and locks them into their homes so they can’t move elsewhere for better jobs.”

He suggests working out a way to make principal reductions part of the existing program, triggered only for properties that have experienced a certain level of price decline.

— Rent back foreclosed homes. Dean Baker, co-director of the Center for Economic and Policy Research in Washington, suggest giving former homeowners the right to rent their home after foreclosure. This year, Fannie Mae started offering the rent-back option to people who sign over their homes as a deed in lieu of foreclosure, which is less harmful to a borrower’s credit.

Incentive to deal

Baker sees the approach as a big stick to motivate lenders to play let’s make a deal.

“If you give people the right to rent, it changes the logic from the lender’s standpoint and makes foreclosure less attractive,” he said. “Many lenders of their own volition will decide to work on loan modifications – otherwise they could be stuck with a renter for five to 10 years. It would shift the balance of power hugely in favor of the homeowner.”

— More government pressure. Loan mods are voluntary. Banks get incentive payments for completing them, but it’s ultimately up to them whether a foreclosure will be cheaper. Starting this month, the Treasury Department is sending three-person “SWAT teams” to the eight largest loan servicers to keep tabs on how they’re handling loan mods. The banks will have to submit progress reports two times a day. And Treasury will publish lists of lenders that are falling short.

— More industry involvement. Christopher George, president of CMG Mortgage in San Ramon, says that trade groups, such as the California Mortgage Bankers Association, where he is the secretary, could get together to pitch in.

“My recommendation is to harness the power of members in those organizations, ask them to participate on a pro bono basis to help consumers navigate the process,” he said. “You know how confusing and complicated the whole process can be.”

He suggests the trade groups collaborate on a guide for troubled homeowner and perhaps hold regional modification fairs, with lenders, lawyers and financial advisers.

— Do nothing. There’s plenty of grassroots support for an idea that could be expressed as “you made your bed, now lie in it.” Patrick Killelea, a Menlo Park programmer who maintains the popular blog, explains the rationale.

“These were all grown-ups getting themselves voluntarily into debt with the false expectation that prices would rise forever,” he said. “They did a lot of harm, because prices were driven up, so people, especially families with young children … would have to take on unreasonable debt because of bad decisions that other people made.”

Letting homes go into foreclosure would allow the market to recover much more quickly, he said. “It would drive prices down and it would be quicker,” Killelea said. “It’s like peeling a Band-Aid slowly versus ripping it off.”

Rather than prolong the agony, “Just yank the whole thing off.”

December 22, 2009

Broken Credit Not For Sale

Filed under: Credit Repair

Hi Paul,

I wanted to send you a quick note about your blog, Broken Credit.  It’s a great site and I can tell you work hard to produce high quality content.  I’m actually building up a credit repair site and I’m actively looking for other sites to buy.  Would you ever consider selling Broken Credit?  I think it would be a great platform for us and I can make a fair offer.  Let me know what you think.  Thanks!


December 21, 2009

Second Mortgage Lawsuit After Foreclosure

In the state of Florida is it legal for a debt collection agency to sue me for a second mortgage on a second home I had bought in Florida?

The home could not be sold as a short sale and was foreclosed on. Before it foreclosed the bank which held both mortgages sold off the second mortgage to a debt collection agency.

I was unable to pay them and now they have served papers on me and are suing me for the sum of the second mortgage.

I have heard in other states that they cannot do this but am unsure about in Florida.

Any help would be greatly appreciated. Thanks!

Bonnie (more…)

December 8, 2009

Tennessee Chasing After Me

I live in Tennessee and I had a Rental Property that was Foreclosed on in 2008. Wells Fargo held the original Mortgage and sold the property for less that the amount that I owned. I received a 1099-A and thought I was done with my Rental Nightmares!

I recently recieved a letter from a out of town Collection Agency stating that I owed 19K!!

I do not have the means to pay this debt, that’s why I loss the Property!

I know my credit is ruined but what else can they do to me! “You can’t squeeze blood from a turnip”…or can you???

Thanks for your advise

Scott (more…)

Kicked Out of the Financial System in 2010

Filed under: Miscellaneous – The government is running out of ways to help the economy as the US faces major issues regarding credit and employment ahead, banking analyst Meredith Whitney told CNBC.

“I think they’re out of bullets,” Whitney said in an interview during which she reinforced remarks she made last month indicating she is strongly pessimistic about the prospects for recovery.

Primary among her concerns is the lack of credit access for consumers who she said are “getting kicked out of the financial system.” She said that will be the prevailing trend in 2010.

Despite being able to borrow at near-zero percent interest, banks are not taking that money and putting it back into the marketplace. The Federal Reserve said Monday that consumer lending dropped 1.7 percent on an annualized basis in October, the ninth straight monthly decline.

With consumer spending making up about 70 percent of gross domestic product, the inability of even credit-worthy consumers being able to be able to borrow could put a severe crimp in future growth.

“What’s so frustrating is you have an administration that is arguing such a populist (ideology) and not appreciating all the unintended consequences that the consumer and small businesses have far less credit,” Whitney said.

“You’re going to get a situation where you revert from a consumer standpoint,” she added, “where those that had bank accounts for the first time, credit cards for the first time, homes for the first time get kicked out of the system and then fall prey to real predatory lenders.”

The problems taken together also will pose difficulties for investors.

“I have 100 percent conviction that the consumer is not getting any better and there’s not more liquidity,” Whitney said. “So if everything touching the consumer is going to be represented in the S&P, then the S&P is going to be under pressure.”

The solution, she said, is for the government to take proactive steps that will give consumers more money to spend.

“I don’t think you can cut taxes enough to stimulate demand,” Whitney said. “For a 2010 prediction, which is so disturbing on so many levels to have so many Americans be kicked out of the financial system and the consequences both political and economic of that, it’s a real issue. You can’t get around it. This has never happened before in this country.”

December 1, 2009

Paying Old Collection Accounts Bummer

I had a credit score of 583 and about $2300 worth of collections and negative things on my credit; 4 months ago i paid all of this off. Today i checked my credit, and it only went up 13 points to a 596. I have a mortgage that i have never been late on. Why didn’t it go up more? I need an auto loan & my bank won’t lend me the funds due to my score…! I need answers.

Jason (more…)

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