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Nye Lavalle
Countrywide Draws Ire of Judges
Questions About Practices
Arise in Bankruptcy Cases;
Possible Liabilities for BofA
January 14, 2008; Page A3

More federal bankruptcy judges are calling into question the business practices of Countrywide Financial Corp., as Bank of America Corp. prepares to buy the ailing mortgage lender.

According to court documents in a bankruptcy case in Houston, Countrywide didn't properly credit a borrower's payments made during bankruptcy but instead applied them to prebankruptcy debt, which isn't allowed. In the same case, involving a debtor named William Allen Parsley, Countrywide represented to the court that Mr. Parsley owed fees that turned out to be unsubstantiated and in error. These included an improper $450 fee and a $65 unsubstantiated fee.

During a hearing last month, U.S. Bankruptcy Judge Jeff Bohm chastised Countrywide and its lawyers after the company admitted making numerous errors in the case. "How many times do I have to listen to that before I conclude, 'You know, there's got to be some kind of reckoning' when I keep hearing time after time, 'we made a mistake, we made a mistake, we made a mistake, we made a mistake?'" Judge Bohm said. He is considering sanctions against the company.

Countrywide says it has incurred at least $400,000 in costs associated with the case after having its employees deposed by the U.S. Trustee Program, a division of the Justice Department that oversees the bankruptcy system. The agency has been investigating the company's handling of loan payments and court claims in cases across the country.

In Miami, Bankruptcy Judge A. Jay Cristol last month approved a U.S. trustee's requests to subpoena and depose Countrywide to obtain information about how it made mistakes in a case. Initially, the company claimed in court that the borrower would need to pay $4,800 a month for a mortgage during bankruptcy. But after the borrower objected, Countrywide said it had erred and reduced its claim to about $2,400 a month. In a hearing in December, Judge Cristol said Countrywide had been found "with its hand in the cookie jar."

Countrywide has said it was investigating what happened in the case.

Bankruptcy litigation is among a list of potential legal liabilities Bank of America may inherit from the company if the planned acquisition, announced last week, is completed. These include inquiries from the Securities and Exchange Commission and several state attorneys general, as well as shareholder lawsuits tied to Countrywide's financial decline and other class-action and individual suits brought by borrowers for alleged abuses by the company. In some cases Countrywide has denied allegations and in some it hasn't yet answered allegations; in others it has said it is cooperating with authorities.

Last week, Bank of America's chief executive, Kenneth D. Lewis, said his company had taken into consideration lawsuits and "the negative publicity that Countrywide had" in concluding that ultimately the purchase would be a good deal for shareholders. A Bank of America spokesman said yesterday the company "evaluated current and potential claims against Countrywide and that's reflected in the purchase price we agreed to pay."

A Countrywide spokesman didn't respond yesterday to requests for comment.

Katherine Porter, a bankruptcy-law professor at the University of Iowa who published an influential study on problems with claims made by mortgage companies in the bankruptcy system, said yesterday that Bank of America "needs to help Countrywide rebuild its technology" to overcome its "structural shortcomings," especially "now that judges are starting to lose confidence" in filings made by mortgage companies.

In the SEC inquiry, one area under scrutiny is whether the mortgage lender set aside the appropriate amount of reserves to cover potential losses from loans still held on the company's books, known as loan-loss reserves.

Among the areas of interest to the SEC is whether Countrywide adequately increased its loan-loss reserves to reflect slowing or delayed payments from homeowners or if the mortgage lender failed to increase the reserve to purposefully forestall taking a charge to its financial statements. The SEC is also investigating stock sales made by Countrywide founder Angelo Mozilo made through prearranged sales plans.

Countrywide on Friday said its policy is to fully cooperate with inquiries from regulators, and that "we believe we have fully complied with all rules and regulations."
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