updated 5/6/2008 6:23:47 PM ET 2008-05-06T22:23:47

Mortgage lender Countrywide Financial Corp., which is under investigation for inflating certain borrowers’ fees, acknowledged Tuesday that it has made errors and pledged to take steps to improve its operations.

Steve Bailey, chief executive for loan administration at Countrywide, told a Senate panel that the company’s employees have made mistakes “from time to time.” He said the company will hire an outside auditor to review its actions in cases involving homeowners who have filed for bankruptcy court protection.

But he disputed accusations, made by hundreds of borrowers in Pennsylvania, Florida and other states, that the company has sought to collect inflated fees and other payments by filing inaccurate bankruptcy documents. The Justice Department is currently investigating the accusations.

“Servicers have also been accused of intentionally assessing inappropriate fees and costs to borrowers in bankruptcy,” Bailey said. “With respect to Countrywide, these allegations are simply not true.”

But Katherine Porter, a professor at the University of Iowa, testified that mortgage companies and servicers have improperly sought repayment for attorneys’ fees and other costs without fully disclosing or documenting the fees.

In some cases, companies have sought to foreclose on homes even after borrowers have discharged their debts through the Chapter 13 bankruptcy process, which allows debtors to keep their homes while working out payment plans for their debts.

“The upsetting reality is that the current bankruptcy system routinely forces borrowers to pay bloated amounts and permits mortgage servicers to misbehave without serious consequence,” she told the Senate Judiciary subcommittee on administration oversight and the courts.

Sen. Charles Schumer, D-N.Y., chairman of the panel, criticized what he called a broader “vulture mentality” in the mortgage lending industry.

“Companies have repeatedly sought to foreclose on homes where owners were current on payments, sought attorneys fees in bankruptcy court for motions that they have lost, and failed to keep even the most basic records to justify their claims in bankruptcy court,” he said.

Schumer also said that Bank of America Corp., which agreed to buy Countrywide in January for approximately $4 billion, should reconsider the deal’s price tag.

If the purchase price for Countrywide was “based in part on profits from these bad practices, Bank of America should demand a lower price, because these practices will not be allowed to continue,” he said.

Several Wall Street analysts have said Bank of America should renegotiate the deal and pay closer to $1 per share, down from the deal’s current value of $7.10 per share, due in part to Countrywide’s legal liabilities.

Clifford White, director of the Justice Department’s bankruptcy trustee program, said the department has stepped up its efforts to prosecute bankruptcy law violations.

The trustee program made 1,163 criminal referrals last year, which includes cases involving housing fraud, a 26 percent increase over the previous year, he said.

The “integrity of the bankruptcy system is compromised by creditors who file false financial information that inflates the amount of money due to them, or deprives debtors of the bankruptcy code’s protection against foreclosure,” he said.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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