As more homeowners enter foreclosure, the fees charged by loan service companies during the process are coming under increased legal scrutiny. Last year the total late fees generated by Countrywide Financial Corp. was $285 million – a 20 percent rise from the previous year, accounting for almost 7.5 percent of its revenues.

Rhonda Winnecour is a court official who monitors consumer bankruptcies in a Pittsburgh bankruptcy court. As the court’s chapter 13 trustee, she takes payments from homeowners trying to save their homes in bankruptcy. She then forwards the payments to the mortgage companies. One such mortgage company happens to be Countrywide.

Ms. Winnecour, in a motions, alleged that Countrywide destroyed, lost, or misplaced $515,000 in checks made by homeowners trying to save their home. She further alleged that after destroying, loosing, or misplacing the checks, Countrywide added improper charges to the homeowner’s debt in many cases – nearly 300. Countrywide threatened the integrity of the bankruptcy process by dishonoring its obligation as a creditor to provide a truthful and accurate account of the funds it has received. Countrywide acknowledged errors in handling some debts, but it had denied any systematic effort to thwart bankruptcy protections to collect money.

Countrywide cut a deal with Ms. Winnecour and $325,000 to settle allegations. Countrywide agreed to reconcile its records with the trustee’s (Ms. Winnecour) in regards to the amounts owed them by the borrowers in the case. If the figures aren’t in agreement, Countrywide can either change its figures to agree with the trustee’s or show reason why the trustee’s numbers are inaccurate. In one of the cases, Countrywide overcharged a homeowner couple for escrow to cover property taxes and insurance. Countrywide agreed to nullify the money it claimed the couple owed them as well as waive future escrow requirements and pay their attorney’s fees.

On August 11, the settlement terms came up for approval before U.S. Bankruptcy Court Judge Thomas Agresti. The settlement is now being challenged by the Justice Department. According to the Justice Department, the settlement’s non-disparagement clause may impede, impair, or otherwise chill witness testimony in the government’s ongoing investigation of Countrywide. Under the settlement, Ms. Winnecour could not in any manner directly or indirectly disparage Countrywide, and she had to ensure that her employees did not criticize Countrywide. According to the Justice Department, this is nothing but an attempt to silence a critic, and the settlement posed a threat to the government’s attempt to rein in Countrywide’s allegedly abusive tactics with consumers and with the courts. The challenge by the Justice Department has resulted in Judge Agresti authorizing a probe of Countrywide’s mortgage processing system by the United States trustee.

With the challenge by the Justice Department, the government hopes to send out a tough message to companies like Countrywide who have time and again used abusive tactics against helpless borrowers and got away with it using their clout.