Republican Lawmaker Blasts U.S. Trustee Program Over Donation

Bankrupt homeowners are getting the bulk of a historic, $50 million settlement after the U.S. Trustee Program, the watchdog for the country’s bankruptcy courts, accused a J.P. Morgan Chase & Co. unit of filing “robo-signed” mortgage documents to courts across the country.

But as one angry Republican lawmaker pointed out at a hearing on Tuesday, some of the money “didn’t make it to the victims.”

The fine print of the settlement called for bank officials to make a $7.5 million donation to a charity run by the American Bankruptcy Institute, a nonprofit trade group with a program that warns students about the consequences of credit card abuse and poor money management.

U.S. Rep. Bob Goodlatte (R., Va.) said the mandatory donation to a third party was inappropriate and undermined Congress’s power to direct money via the appropriations process.

“Where do you come off funding them?” Rep. Goodlatte asked U.S. Trustee Program Director Cliff White at a U.S. House of Representatives judiciary subcommittee hearing.

Mr. White defended the donation, saying the bankruptcy system was “injured in a direct way” by the bank’s actions. He seemed caught off guard by the criticism of the deal, which was the single largest settlement negotiated solely by his office.

“I don’t believe we, in any way, bypassed Congress,” Mr. White said in response.

An American Bankruptcy Institute spokesman declined to comment on the hearing.

Mr. White is active within the American Bankruptcy Institute and took credit for the idea to donate money to its charity. The group is the restructuring industry’s biggest trade group for lawyers, judges, financial advisers and others. It says it is nonpartisan and doesn’t lobby members of Congress.

Tuesday’s hearing gave Mr. White the chance to tell lawmakers about his 1,100-worker agency’s accomplishments, which range from flagging potential bankruptcy fraud—it made 2,080 bankruptcy and bankruptcy-related criminal referrals during the 2014 fiscal year—to formulating guidelines meant to curb bankruptcy lawyers’ compensation. His office is investigating the way that some banks sell consumer debt in response to complaints that the practice can hurt a borrower’s credit rating after bankruptcy or pressure borrowers to pay off that debt even after it has been canceled by a judge.

The office’s accomplishments include the $50 million homeowner settlement, too. Under that deal, J.P. Morgan Chase Bank N.A. promised to make payments to more than 25,000 homeowners, including some who weren’t properly notified that their mortgage payments increased after they filed for bankruptcy protection. The payments to homeowners will come in the form of cash payments, mortgage-loan credits and loan forgiveness.

During Tuesday’s hearing, Republican lawmakers also put another Justice Department official, Benjamin C. Mizer, in the hot seat over more than $100 million in donations that were mandated in multibillion dollar settlements with banks over mislabeled mortgage securities. The settlements with J.P. Morgan, Bank of America Corp. and Citigroup Inc. followed accusations that they had misled investors about the quality of the mortgage securities they sold before the 2008 financial crisis. Under the settlements, the banks agreed to cut mortgage debt for struggling homeowners and lending to low-income home buyers.

Not everyone was up in arms over the donations. U.S. Rep. Hakeem Jeffries (D., N.Y.) said he “has yet to understand” why his colleagues were upset about them.

Write to Katy Stech at [email protected]. Follow her on Twitter at @KatyStech