Fieldstone Mortgage Co., a failed subprime mortgage lender, won bankruptcy court permission to destroy loan documents with confidential consumer data after reaching settlements with the states and banks that fought the move.
Judge James F. Schneider of the U.S. Bankruptcy Court in Baltimore on Monday signed off on the company's request to destroy about 40,000 boxes of documents related to loans it sold or mortgage applications that were rejected, withdrawn or left incomplete. Fieldstone stopped making new loans last August.
The lender said it could no longer afford the $48,000 monthly cost of storing the documents, which contain such confidential financial information as social security numbers, tax returns and bank statements for "hundreds of thousands of consumers."
The states of Georgia, Illinois, Maryland, New Hampshire, New Jersey and Washington as well as U.S. Bank, N.A. and Wells Fargo Bank, N.A. had previously objected to Fieldstone's request.
The states argued that destroying the documents would violate federal and state laws requiring the documents' retention for regulatory purposes.
The documents are also used in consumer disputes. The states argued that given the collapse of the subprime market, rising foreclosure rates and investigations into predatory lending practices, it's in the best interest of Fieldstone and its consumers to retain the documents.
"When the mortgage markets are crumbling due to a wide variety of negligent and/or culpable acts and, in response, mortgage and bankruptcy scams are proliferating, it is not the time to simply destroy highly relevant records," said the state of New Hampshire in court filings. "Destruction of these documents, should further litigation turn out to implicate them and require their production, could result in the debtor being found to have engaged in spoliation of evidence."
Fieldstone's settlement with the states requires the lender to retain its computer servers containing electronic images of all hard copies for loans that were funded since Jan. 1, 2004.
The requirement will hold in accordance with the time that each state law mandates, which varies. For example, New Hampshire law requires mortgage lenders to maintain records for three years, while Washington law specifies 25 months.
U.S. Bank and Wells Fargo said that Fieldstone's proposal lacked procedures to ensure that original documents wouldn't be included among those destroyed, including those owned by Fieldstone's parent company, Credit-Based Asset Servicing and Securitization LLC.
To alleviate U.S. Bank's concerns, Fieldstone will retain certain loan files for 18 months. Regarding the files owned by C-Bass, Fieldstone won't destroy them and will provide the banks and C-Bass with access to the files.
Fieldstone, based in Columbia, Md., originated and sold about $5.5 billion worth of mortgage loans during 2006> It was brought down by a declining housing industry, rising foreclosures and an inability to access credit markets. The lender filed for Chapter 11 protection on Nov. 23.
