By Peg Brickley
From The Wall Street Journal Online

A federal judge has authorized an in-depth probe of Countrywide Financial Corp.’s mortgage-processing systems by bankruptcy investigators hunting for evidence that the big mortgage lender has systematically abused borrowers.

The decision is a victory for the Justice Department’s federal bankruptcy monitors in a closely watched test of their authority. It is believed to be the first written analysis confirming the monitors’ power to investigate alleged abuse of borrowers since the start of the housing and subprime-mortgage crises, which have set off a deluge of bankruptcy filings in the past year.

Countrywide had argued that the Justice Department’s office of the U.S. Trustee had no authority to investigate its practices. “Countrywide is beginning a full review of the court’s decision and does not have any further comment at this time,” spokesman Rick Simon said Wednesday.

Judge Thomas Agresti of the U.S. Bankruptcy Court in Pittsburgh said in a ruling Tuesday that the trustee’s office had demonstrated “a common thread of potential wrongdoing” in several bankruptcy cases involving Countrywide.

The office had asserted it needed to look into allegations that Countrywide chronically mishandled mortgage payments, pumped up bills with improper fees and ignored court orders in dealings with financially troubled consumers.

Countrywide, the nation’s biggest mortgage lender by volume, has acknowledged some errors. But it has denied that mistreatment of homeowners is a built-in feature of its mortgage-processing backroom systems.

Mr. Agresti is presiding over nearly 300 cases in the U.S. Bankruptcy Court in Pittsburgh that involve allegations of misconduct by Countrywide. The Calabasas, Calif., company faces similar accusations from the Justice Department and private borrowers in courts nationwide.

If the investigation were authorized, Countrywide argued, credit-card companies, auto-finance agencies and other lenders could also find themselves targets of a probe. Mr. Agresti said a widespread investigation of all types of lenders is a “scenario that will likely never occur.”

Recent court filings indicate the U.S. Trustee and Countrywide are in talks about resolving some of their disputes. Neither the company nor the Justice Department would comment.