Big banks accused of ‘systematic fraud’ in New York foreclosure auctions

For years, Barbara Small fought to hold onto her house in Flatbush, Brooklyn, after it fell into foreclosure. On the day it finally went up for auction, she sobbed on the train ride to the Supreme Court building in Downtown Brooklyn. The outcome would mean forfeiting her nest egg. She wasn’t required to attend the sale but she was determined to show up anyway.

She had purchased the narrow, three-story brick home on Linden Boulevard in 2005 with her father, a former transit worker who’d emigrated from Barbados via London in the 1970s. The house was a place for him to live out his retirement as well as an investment for Small and her children once she retired from the U.S. Postal Service.

Fourteen years later, her father was dead and she had lost the property after a series of financial setbacks, including a tenant who stopped paying rent. In her case, the mortgage was owned by a group of investors in a trust that was managed by the Bank of New York Mellon. The loan servicer was a company named Shellpoint.

A group of strangers lined up at the courthouse to bid on the building. Like most homes in foreclosure auctions, it sold in just a few minutes. The price: a little more than $1.3 million. A court-appointed referee named Jeffrey Dinowitz — who is also an influential state assemblymember from the Bronx — calculated what the lender was owed. After creditors and attorneys took their cut, Small said she was left with around $100,000, a fraction of the property’s true market value.

“ My dad tried to help me create a legacy for myself and my kids and now I have nothing really to give them,” Small said in an interview. “Generational wealth, it’s not for me.”

But Small, 67, could have been entitled to even more money. The attorney representing BNY Mellon as the trustee and the mortgage servicer had used a disputed method for tabulating interest — one that contradicts the court system’s own guidance for referees — increasing the amount they took from her by tens of thousands of dollars.

The calculation, which applied interest to a higher overall amount than Small’s existing loan, benefited the mortgage’s investors but was also a potential violation of state law.

Gothamist and New York Focus conducted an independent analysis of state court records. It shows that the method has been used in thousands of foreclosure cases like Small’s. Collectively, the result has either deprived New Yorkers of millions of dollars in additional money when they lose their homes, or burdened them with higher levels of debt. Small’s attorney Mark Anderson has sued a group of lenders and their law firms, accusing them of “systematic fraud and theft” to boost profits at the expense of former homeowners.

Attorneys for the lenders and the law firms say the court system permits their calculation method. And court-appointed referees have signed off on the math.

The findings reveal widespread inconsistencies in how lenders and their lawyers determine interest — and point to a lack of oversight provided by the state’s court system and the attorneys, like Dinowitz, who are appointed by judges to serve as referees.

Those referees are responsible for ensuring that foreclosure sales are conducted fairly. But in interviews, six referees said they did not receive formal training before handling hundreds of thousands of dollars in real estate transactions, nor were they required to. And court records show they routinely approve figures submitted by lenders’ attorneys, even when they use the contested formula.

Legal records show Dinowitz was served with a subpoena in SmalI’s lawsuit in June. In an October phone interview, he said he was unaware that the calculation method is in dispute. He said he checked the bank’s math in Small’s case as well as in others, but that he did not question the lender’s underlying numbers. He added that payments to affected former homeowners should be “revised” if the individuals were stripped of money they should have received.

“If something in any point in the process was incorrect and worked to the disadvantage of the defendant, then it should be fixed,” Dinowitz said. “Anybody who's a defendant in a foreclosure case obviously has financial issues and nothing should be done to make it worse for them.”

A spokesperson from the state’s Office of Court Administration declined to answer questions about what the correct method for calculating interest should be, citing Anderson’s ongoing litigation.

The agency “remains focused on continued improvement in the foreclosure system in New York State,” said Office of Court Administration spokesperson Al Baker.

When he was briefed on the findings, state Sen. Zellnor Myrie, a Brooklyn Democrat serving on the judiciary and consumer protection committees, called on the court system to impose consistent standards for all foreclosure auction sales.

“What we are seeing in these instances is, at best, an inconsistency in the application of law and at worst, people in more powerful positions taking advantage of vulnerable homeowners,” Myrie said in an interview.

A contested calculation

The math is subtle and complicated. It begins with how debt is calculated after a home is sold at auction. In Small’s case, a state foreclosure judge had ruled that she owed nearly $852,000 in interest, legal costs, fees and the amount still left on her mortgage.

It’s what’s known as a judgment amount.

After a home is sold at a foreclosure auction, a lender’s law firm can legally apply additional interest to cover the period of time from when the judgment amount was tallied to when a judge approved it. The process can take months or even years if a homeowner attempts to stop a foreclosure or as a result of court system backlogs.

Court records show BNY Mellon’s attorneys used the judgment amount in Small’s case to calculate the additional interest she owed and Dinowitz, as referee, then approved the figures in a final report.

But using the $852,000 judgment amount to tally extra interest contradicts the New York court system’s guidance for referees in mortgage foreclosures and, according to Anderson and other attorneys, is prohibited by New York law, which bars lenders from adding interest on interest.

Instead, the court system’s own forms instruct the referee to use a method that relies on a simpler, lower figure: the balance of a homeowner’s original loan. And a panel of appellate judges upheld that interpretation of New York law in 2015.

The principal balance on Small’s loan was $520,000. In the end, the difference between the two interest calculations cost her $24,000.

Anderson began looking into other cases and concluded that more than a dozen law firms representing major banks, servicers and smaller lenders in New York foreclosures are routinely inflating the amount of interest owed on properties. He argues that the calculation method increases profits for banks and investors while shorting those who’ve lost their homes. Earlier this year, he sued five of the law firms and a group of lenders in federal court on behalf of Small and other former homeowners.

“It's taking people at the worst time in their life and just making it worse,” Anderson said. “We're talking about thousands and thousands of foreclosure auctions.”

The analysis by Gothamist and New York Focus found that, out of more than 7,400 foreclosure reports drafted since 2013 by 14 law firms that frequently represent lenders, over 95% used the method that increases interest costs. In more than 400 instances, former homeowners were paid less money from an auction sale because the disputed method was used.

The difference between the two calculations can be significant. In one Nassau County case, a family received over $80,000 less than it would have had the unpaid principal balance been used to determine how much interest was owed after a 2023 auction sale. In two other auctions that same year, a former homeowner in Suffolk County was deprived of nearly $90,000, and a Brooklyn homeowner missed out on almost $115,000 after interest was calculated. The former owners are not part of the lawsuits and did not respond to questions when contacted by Gothamist and New York Focus.

Attorneys for BNY Mellon and Shellpoint, the mortgage servicing company involved in Small’s case, declined to discuss how the companies calculate interest in foreclosure cases. Brett Messinger, an attorney representing the bank’s law firm, LOGS Legal, formerly known as Shapiro, DiCaro and Barak, also declined to comment. In responses to lawsuits filed by Small and other former homeowners, the law firm and others have argued that the state court system approves their method. But a review of foreclosure filings shows some of the 14 law firms have begun using the lower principal balance to calculate interest since Anderson filed his lawsuits in the spring.

A calculation method in widespread use

New York’s foreclosure process has a long history of scandal and disorder.

In the wake of the 2008 mortgage crisis, the state’s largest foreclosure law firm admitted to federal prosecutors that it had submitted phony documents to speed through hundreds of cases.

In 2013, then-state Sen. John Sampson was arrested and charged with embezzling more than $400,000 earmarked for foreclosed homeowners while serving as a court-appointed referee. An investigation by WNYC that year found sitting lawmakers received hundreds of commissions to handle foreclosure auctions. And an ensuing report from the state comptroller’s office found referees misreported the amount of money owed to homeowners in nine out of 10 Brooklyn auction sales the investigators reviewed.

Anderson was well aware of that history when he encountered the contested calculation method, which lay buried in court records that receive little scrutiny.

“Even when you show this to lawyers, they have no idea, even lawyers that do this area of practice,” Anderson said in an interview. “You have no way of knowing unless you go into it.”

His scrutiny started with a woman whose mother lost her home to foreclosure in Jamaica, Queens. She had come to Anderson with questions about the sale of the home. He discovered that her lender’s attorneys had used the disputed calculation method to determine she owed nearly $4,000 after the sale. But she would have been entitled to more than $9,500 in proceeds if interest was calculated on the unpaid principal instead.

He and other attorneys at his law firm in Kew Gardens began scrutinizing more foreclosure cases and found other instances, including a preschool administrator named Yamilet Salty who lived in Brooklyn’s Cypress Hills neighborhood and was shorted more than $1,500 after losing her two-family home.

Anderson suspected the alleged miscalculations were happening at a much larger scale. In April, he filed five separate proposed class-action lawsuits in federal court against lenders, mortgage service providers and their attorneys.

"They're doing it completely wrong, to the point of it being illegal,” Anderson said.

Gothamist and New York Focus’ own analysis found that the calculation method is widespread among law firms that handle a significant number of foreclosure cases in New York.

For example, RAS Boriskin, the law firm that represented Salty’s mortgage company, used the calculation method that disadvantages homeowners to draft more than 2,000 foreclosure reports statewide since 2015, court records indicate. The firm handles a large number of foreclosures. In New York City alone, it represented lenders in nearly 20% of cases citywide last year, according to a review of more than 600 auctions involving one- and two-family homes. The homes sold at auction were mostly concentrated in Brooklyn and Queens neighborhoods where people of color make up the majority of residents.

Gothamist and New York Focus obtained a copy of an internal manual that the firm has used for handling foreclosures. It explicitly instructs employees to determine interest based on the judgment amount, which contradicts the guidance provided to court-appointed referees responsible for verifying that the calculations are accurate.

The law firm’s managing partner Sara Boriskin did not respond to questions about its practices.

At least 13 other law firms have routinely used the same contested method, according to a review of court records. And the consequences are not always clear.

While our analysis found hundreds of cases where a foreclosed homeowner would have received more money if a different calculation was used, far more people could have faced higher income tax bills as a result of the increased interest amounts.

Among 7,400 cases handled by the 14 law firms that frequently represent lenders, roughly 6,800 foreclosed homeowners still owed a debt to their lenders after the auction had been completed. The sums can be large, at times exceeding $1 million in the case of properties with large mortgages and years of unpaid interest.

Lenders typically forgive this debt, but they may also seek a tax benefit for doing so. That requires the original homeowner to report the forgiven amount as income to the IRS. If their lender increased the amount they owed using the disputed method, the homeowner may have also paid an inflated tax bill.

It is often difficult to determine who exactly is financially benefitting from the law firms’ calculations. After a mortgage is issued, an individual home loan is often packaged with thousands of others and sold in shares to investors. A spokesperson for BNY Mellon said it did not directly benefit from the increased interest that was added to Small’s debt.

In additional cases reviewed by Gothamist and New York Focus, other attorneys and referees do not use the disputed calculation method that disadvantages homeowners. The discrepancy highlights major inconsistencies in foreclosure sales throughout the state. And it shows how much a former homeowner receives or owes following a foreclosure sale is often dependent on who their lender hires to handle the case.

It can also depend on who the court appoints to oversee the foreclosure.

“Rubber-stamping the paperwork”

The confusion over how interest is calculated may be due, in part, to how the court system handles foreclosures. Rather than rely on professional court staff to oversee the foreclosure and sale process, judges can appoint politically connected referees to do the job. The result, critics of the system argue, is that foreclosure proceedings don’t always follow the court’s guidance and members of the public can lose faith in the system.

In New York City’s heavily Democratic boroughs, county political party machines play a decisive role in determining which state Supreme Court judges are elected. In turn, judges often appoint people associated with county political parties to serve as court referees, as well as other paying, court-appointed roles.

Dinowitz, for example, is a powerful Bronx assemblymember who once held such a high-ranking position within the Bronx Democratic Party that court regulators barred him from receiving further judicial appointments in 2016. As New York Focus reported earlier this year, Dinowitz quit the party position in response so that he could continue to be appointed. But he currently serves as the party secretary, helping run the annual meeting where Bronx Democrats nominate Supreme Court judges for near-certain election.

Referees are typically paid a nominal fee of $750 to manage the foreclosure process for each individual property. Dinowitz’s most recent financial disclosure form shows he earned between $5,000 and $20,000 from court appointments last year.

Anderson and other attorneys representing homeowners said many referees in foreclosure cases do little to vet the numbers provided by lenders. Law firms representing banks routinely prepare reports, mail them to the referee and tell them where to sign, according to referees who spoke with Gothamist and New York Focus.

“For many homeowners, the referee’s role seems to be rubber-stamping the paperwork,” said Alice Nicholson, a Brooklyn-based attorney who also represents homeowners facing foreclosure.

Dinowitz said he reviews the math on the forms he receives from lenders’ attorneys. But he said he was not aware that they may be using the wrong amount to calculate interest, and he said court administrators never provided training on how to process foreclosures, despite his having handled millions of dollars in property transactions over the past two decades.

“The first time I did this, another lawyer basically showed me how to do it,” he said. “I mean, how else do you learn to do things? Somebody shows you.”

Another referee, Martha Taylor, is a longtime Queens Democratic Party district leader and community board chair. She also said she checks the calculations she receives from lenders’ attorneys. “But I don't have to check further into it than that,” she said in a phone interview.

A template from the state’s Office of Court Administration explicitly instructs referees to use the lower "principal balance” to calculate interest for the period prior to a judge’s ruling. But in court filings, lenders and their attorneys have pointed to a different template issued by the same agency — this one for drafting judicial orders — that they say allows them to use the “judgment amount” to calculate interest, though its language is much less clear than the first template about which method should be used.

Cameron Macdonald, an attorney and executive director of the nonprofit Government Justice Center, said the dispute reveals the lack of transparency and inconsistencies in how millions of dollars in foreclosure sales are handled.

“The system is baffling to the public and that’s a problem,” Macdonald said.

Dinowitz said the state court system should clearly state how the interest should be determined.

“It ought to be made clear to everybody so there's no ambiguity and uncertainty. A defendant in such a case, who's obviously going through a hard time in the first place, should not be further disadvantaged by losing more money than they might,” he said.

Baker, the spokesperson for the Office of Court Administration, told Gothamist and New York Focus that the court’s template directing referees to calculate interest using “principal balance” is “consistent with the law.” But the agency would not say whether the contradictory method is incorrect.

‘Light at the end of the tunnel’

Small has deliberately avoided going anywhere near the property she lost to foreclosure in 2019. She was stunned when she recently revisited the block her father once called home.

Her old lot is now unrecognizable. The developer who acquired the narrow brick row house at auction tore it down and replaced it with a gray, seven-story, 18-unit complex that looms over the remaining prewar townhomes on either side.

Two-bedroom apartments there leased for more than $3,300 a month earlier this year, according to listing sites. The building is now worth many times what the new owner bought it for at auction, and far exceeds the amount Small received after the sale.

She said she felt like “a failure” and that she had let her father down. But the discovery that there may be more money available to her offers some comfort.

“I've been through so much,” Small said. “It is like a light at the end of a tunnel.”

Anderson isn’t just seeking to recoup the cash that he says his clients lost, he has also accused lenders and their attorneys of violating both criminal and consumer protection statutes — including the RICO Act, the Fair Debt Collection Practices Act, a state law against “unjust enrichment” and another prohibiting deceptive practices by an attorney — that he said would bring more penalties.

“There's just untold number of violations here, and for reasons unexplained, they've been able to get away with it,” Anderson said.

He’s also calling for a more transparent foreclosure process.

The lenders and law firms named in his lawsuits have asked federal judges to dismiss the complaints, arguing that state judges explicitly sanctioned their methods during the course of foreclosure proceedings. They argue that New York law allows judges “discretion” over which calculation method is used.

Court records show that state Supreme Court judges have often signed orders — also drafted by the banks’ law firms — expressly stating that “judgment amount” would be used to calculate interest following the sale. Judges sign at the bottom, usually without changing the wording of the lenders’ attorneys, according to a comparison of the law firms’ draft orders and those that the judges ultimately sign.

The lenders also argue that the statute of limitations to file the lawsuits has lapsed. In New York, plaintiffs have four years to file a RICO claim and up to six years for an unjust enrichment claim.

In an October motion, BNY Mellon’s attorney Ryan DiClemente said Small “offers no explanation for why neither she nor her lawyer challenged the pre-judgment interest calculations during the foreclosure” or why she had agreed to the terms when she received the leftover money that was available after her home was auctioned.

But Anderson said the amount owed to the bank was “quietly miscast” in the referee’s report of sale and that there would be no way for Small, or other borrowers, to identify the problem or dispute it after the judgment and sale.

Changing practices

Records obtained by Gothamist and New York Focus show some lenders’ attorneys will change their calculation method when challenged.

Attorney Ravi Cattry said in an interview that she was handling her first referee assignment when attorneys from the law firm LOGS Legal — the same firm handling Small’s foreclosure — were representing Nationstar Mortgage in a separate foreclosure case. A legal assistant from the firm sent Cattry a draft report of sale to approve.

But Cattry said that when she checked the math, she found the firm was using the judgment amount to calculate interest rather than the principal balance and that the borrower owed $37,600 less than what the lender’s lawyer had claimed.

“I always want it to be correct, especially signing off on something that has my name on it,” Cattry said.

According to a chain of emails sent in June and later shared with Gothamist and New York Focus, Cattry informed the legal assistant that she believed the lender’s report was inaccurate.

The legal assistant wrote back, indicating that the law firm typically defers to the mortgage lender or loan servicer in choosing a method for calculating interest. In this instance, it was Nationstar that had chosen to use the judgment amount, according to an email from the legal assistant.

Cattry, the referee, responded with a message citing the 2015 state appellate court ruling, which explicitly states that the interest should be calculated based on a mortgage’s “unpaid principal balance.”

An attorney for the lender then responded that the firm would not oppose Cattry’s calculation. The referee’s report for the auction shows that Cattry crossed out the lender’s figures, wrote in her own calculation and submitted the corrected report to the court.

John DiCaro, vice chair of the foreclosure practice group at LOGS, did not respond to a request for comment about the email exchange and the 2015 court ruling.

The review of cases by Gothamist and New York Focus found that four law firms appear to have changed their method for calculating interest since Anderson filed his lawsuits in April.

Since 2014, attorneys with the law firm Frenkel Lambert drafted more than 1,600 post-auction reports using the judgment amount while virtually never using the principal balance of the mortgage in its formula. But in the four months after Anderson filed his lawsuit, the law firm began drafting reports that calculated interest on the lower principal balance, rather than the higher judgment amount, more than 60% of the time.

The shift has been even more pronounced for three law firms that are not defendants in Anderson’s lawsuits. Before the litigation, Roach & Lin, David A. Gallo and Associates and Greenspoon Marder had drafted hundreds of reports using the method that disadvantages homeowners. Since the lawsuits were filed, all have routinely begun drafting reports using the borrower’s principal balance.

None responded to questions about why they made the change.

Niamh McAuliffe contributed reporting.

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This story has been updated to clarify BNY Mellon’s role as trustee for the group of investors that owned Barbara Small’s mortgage.