Misbehavior and Mistake in Bankruptcy Mortgage Claims: Some Caveats Regarding the Porter Study

• Publication year: 2022

45 Creighton L. Rev. 361. MISBEHAVIOR AND MISTAKE IN BANKRUPTCY MORTGAGE CLAIMS: SOME CAVEATS REGARDING THE PORTER STUDY

MISBEHAVIOR AND MISTAKE IN BANKRUPTCY MORTGAGE CLAIMS: SOME CAVEATS REGARDING THE PORTER STUDY

Gregory Scott CRESPI(fn*)

ABSTRACT

This Article reviews the comprehensive empirical study of the bankruptcy mortgage foreclosure process conducted by Professor Katherine Porter and subsequently published in 2008 in the Texas Law Review. The results of her study, which analyzed 1,768 proof of claim submissions filed in a sample of 1,733 Chapter 7 bankruptcy proceedings, strongly suggest that there is a pervasive failure on the part of mortgage creditors to meet all of the formal documentation requirements for filing such bankruptcy claims. This documentation failure arguably impedes many mortgage debtors or bankruptcy trustees from reviewing these claims for their accuracy.

Porter's conclusion that the itemization statements included in even formally complete proof of claim filings are often confusing enough to prevent debtors and trustees from meaningfully evaluating their accuracy, however, is less well grounded. in addition, her data does not unambiguously support her conclusion that there is likely widespread and cumulatively significant overcharging of mortgage debtors being facilitated by these proof of claim documentation deficiencies. These data results are also consistent with more benign explanations of the pervasive discrepancies she identifies between creditors' and debtors' perceptions of the amounts owing. Porter's recommendations for reforms in the bankruptcy mortgage foreclosure process consequently cannot be properly assessed without further research establishing the extent of such creditor abuse.

I. INTRODUCTION

In 2008 Professor Katherine Porter published in the Texas Law Review a comprehensive empirical article regarding mortgage claims filed in Chapter 13 bankruptcy proceedings.(fn1) That article was made widely available to researchers on the Social Science Research Network electronic library several months prior to publication in the Texas Law Review.(fn2) Her work has influenced the public debate regarding the need for mortgage lending and foreclosure reform.(fn3) While her findings are interesting and suggestive of the need for reforms, there are, however, limits to the conclusions that can be drawn as to the extent of mortgage servicer abuse of mortgage debtors. Moreover, while Porter is a careful scholar who candidly recognizes the various limitations of her analysis, there are indications that some people will misuse her work by overlooking those limitations in an attempt to use her study to justify calls for increased regulation of mortgage servicers.(fn4)

In this Article, I will point out some of the limitations of Porter's study and offer my thoughts on what one can fairly conclude from her findings as to the extent of mortgage servicer abuse. For the purposes of this Article, I will make a few simplifying assumptions. First, I will assume Porter's underlying assertions as to the formal requirements of mortgage foreclosure law and bankruptcy law are correct. In particular, I will assume her assertion is correct that under Federal Rules of Bankruptcy Procedure Section 3001 ("Section 3001 mortgage creditors who wish to receive a distribution from the bankruptcy estate must submit a proof of claim, which includes an itemized statement of the principle loan amount and any fees and charges imposed thereon, a copy of the underlying promissory note, and a copy of the mortgage agreement. In addition, I have not independently verified Porter's underlying empirical data. I have reviewed only the summary statistics, discussions of data collection procedures, and statistical methodology presented in her article. I will assume that her research was conducted in good faith and that the statistics she presents regarding the incompleteness of proof of claim filings and the discrepancies between debtor and creditor calculations of the amounts owed are accurate with regard to the sample of proof of claim submissions she has considered. My focus instead will be on whether these sample statistics, assuming that they are accurately calculated from her data, provide sufficient support to justify any conclusions as to the extent of mortgage servicer abuse.

In her article, Porter asserts two main claims, one that is explicit and one that is more implicit, and then presents a set of recommendations as to legislative, regulatory, and advisory committee action to address the problems she identifies. She explicitly claims her study reveals a rather striking degree of non-compliance with Section 3001 requirements by mortgage creditors in bankruptcy proceedings.(fn5) She finds that many proof of claim submissions do not include a copy of the promissory note, a copy of the mortgage agreement, or an adequately detailed and transparent itemization of fees and charges. Some even fail altogether to include such an itemized statement, and some submissions evidenced more than one of these deficiencies. She argues that this non-compliance creates the potential for mortgage servicers to overcharge debtors without being held accountable for this overreaching given the difficulties that these deficient proof of claim submissions present for debtors and their attorneys and bankruptcy trustees who wish to mount effective challenges to such overcharges.(fn6) I will henceforth refer to this claim made by Porter as the "pervasive proof of claim deficiencies" argument.

Porter also implicitly suggests that the increased potential for abuse allegedly made possible by the prevalence of incomplete or otherwise deficient proof of claim submissions has actually led to widespread abuse. This abuse, she argues, justifies legislative and/or regulatory efforts to encourage or even require mortgage creditors to provide more comprehensive and transparent proof of claim submissions. More comprehensive submissions, she asserts, will deter inequitable conduct by enabling debtors and their attorneys and bankruptcy trustees to more easily recognize and contest creditor overcharges. I will henceforth refer to Porter's second and more implicit claim as the "widespread mortgage creditor abuse" argument. Porter also offers some recommendations for legislative, regulatory, and advisory committee actions to address these alleged abuses.(fn7) I will henceforth refer to these recommendations as the "Porter recommendations."

In this Article, I will assess each of her claims, focusing on whether her statistical study provides adequate support for her conclusions. I will then briefly discuss the merits of her recommendations and what further research is needed to properly evaluate them. First, however, I have summarized my overall conclusions as follows:

Porter's pervasive proof of claim deficiencies argument is reasonably persuasive. As I will discuss below, there are a number of specific criticisms that can be made of her data collection and statistical analysis methodology, and these criticisms collectively undercut, to some extent, her broad assertions about the pervasiveness of such proof of claim deficiencies in foreclosure and bankruptcy proceedings. Her conclusions as to the extent of the incompleteness of proof of claim submissions, however, are nevertheless striking and relatively robust. Even if those conclusions are appropriately discounted because of her study's various methodological shortcomings, she still presents a persuasive case for the proposition that the incompleteness of bankruptcy proof of claim submissions by mortgage creditors is widespread enough to at least create the potential for exploitation of mortgage debtors.

Porter's related arguments that even formally complete proof of claim filings often present a serious potential for abuse because of their inadequate or confusing itemization of fees and charges, however, are much more subjective, impressionistic, and lacking in solid statistical foundation. More importantly, Porter supports her argument that these proof of claim deficiencies not only create the potential for significant abuse of mortgage debtors, but are in fact facilitating a great deal of abuse, with only a very selective presentation of anecdotal cases and commentary. Her statistics that convincingly demonstrate the pervasive extent of proof of claim submission incompleteness, and that at least suggest that even formally complete submissions are often difficult to meaningfully review for accuracy, simply do not establish the extent to which such alleged abuses of debtors are actually occurring. In several places in her article Porter, to her credit, somewhat reluctantly but candidly concedes this point.

Porter's failure to establish the extent of such creditor abuse sharply undercuts her arguments for legislative and regulatory interventions to reduce proof of claim submission incompleteness and other deficiencies. It is not clear from her study how much creditor abuse is now taking place that would possibly be detected or deterred by such measures. It is, therefore, not possible to determine whether the additional administrative costs that her more stringent proof of claim requirements would impose on mortgage creditors and bankruptcy trustees would be a cost-justified means of improving the fairness of the bankruptcy process. Thus, the overall merits of her...