Mod Lawsuits to Force Imaging Adoption

Dallas-With the spate of foreclosures looking to continue into the near future and beyond, more and more predatory lawsuits are emerging and borrowers are winning some simply because the servicer can't produce all the documentation associated with the loan. SigniaDocs president Tim Anderson believes this will prompt servicers to adopt full-scale imaging practices.

"With the lawsuits going on, even if you lose the paper the image is legally binding," he said. "There are two reasons why you want to image in servicing. First, you want to image anything if you want to re-engage the borrowers for a HELOC or other reason. That's new because servicers usually just retain for doc retention requirements. The requirement drove imaging adoption in servicing primarily up until now.

"Second, you might have to do a modification on that loan. How do you do that if you can't find all the paperwork? Looking back, doc custodians got in the mortgage servicing business to manage the file and servicers paid those doc custodians to access the file. This way servicers don't have to retain that paper.

"Sounds great, but with market conditions being what they are," continued Mr. Anderson, "with all the workouts, mortgage servicers are becoming de facto originators. Servicers are now looking for the note and other docs that they didn't have. Imaging in servicing today is about customer retention nowadays. Why? You have to go back in and requalify these borrowers for another loan product, which is a traditional origination function. I think this is going to make servicers image the whole file going forward."

Imaging can help loans be more legally binding, asserts Mr. Anderson. In the courtroom, if a loan is in dispute, the judge and other court officials are demanding to see all the documentation. This demand is leaving some servicers at a loss.

"They want to know who did the underwriting, why did the borrower qualify for that loan? Because servicers are being forced to defend the loan, they have to image because the whole loan has to be documented," pointed out Mr. Anderson. "You have to have the whole history of that loan. What did you initially disclose? What was in the final disclosure? What were the investor requirements? Servicers now need all this information."

The financial threat to those that can't stand by their loans is real. According to published reports, in Massachusetts attorney general Martha Coakley "reached a $10 million settlement in June with subprime lender Fremont Investment & Loan. The state will distribute $5 million to state residents with Fremont loans, and another $3 million will go foreclosure relief and homeowner education. The rest will go to the state and to cover costs.

"The California-based lender agreed to do more loan modifications and not to foreclose upon up to 2,200 loans without notifying the attorney general's office first and seeking court approval in certain circumstances."

With everyone gunning to dispute the validity of lending practices, servicers just can't be there without all the documentation associated with that loan.

"Lost records and the need to prove more will drive imaging," said Mr. Anderson. "Also, e-mortgages will be big in this area moving forward, as well. If you deal directly with the data you don't have to worry about finding the paper or even an image of the paper. The burden of proof is even greater and it will require servicers to keep more documents longer. They have to automate."

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