Countrywide May Pay $108 Million in Borrower Refund Settlement

Federal Trade Commission efforts to prevent alleged fraudulent, deceptive and unfair business practices against Countrywide borrowers have resulted in one of the largest complaints of its kind in an effort to set a precedent that may help avoid similar practices in the future.

A $108 million complaint and settlement was filed in the U.S. District Court for the Central District of California against two Countrywide mortgage servicing companies that are expected to settle on FTC charges that they collected "excessive fees from cash-strapped homeowners."

While only time will tell whether FTC charges would ultimately convince a California judge on the settlement's merits, it shows how the mortgage market is changing. It is a classic case of well-intended federal intervention the FTC built with the assistance of the United States Trustee Program, the component of the Department of Justice that oversees the administration of bankruptcy cases and private trustees.

The defendants, Countrywide Home Loans Inc. and BAC Home Loans Servicing LP (formerly Countrywide Home Loans Servicing LP), are required to refunded homeowners overcharged before July 2008.

FTC's stated goal is to assist borrowers whose loans were serviced by Countrywide before it was acquired by Bank of America in July 2008. Before the acquisition in March 2008, Countrywide was ranked the top mortgage servicer in the U.S., with a balance of more than $1.4 trillion in its servicing portfolio. According to the complaint, Countrywide's loan-servicing operation deceived homeowners who defaulted on their mortgage "into paying inflated fees" that could add up to hundreds or even thousands of dollars.

It has been "hard enough" for homeowners in financial distress, said FTC chairman Jon Leibowitz, so "to have a major loan servicer like Countrywide piling on illegal and excessive fees is indefensible." In fact many of these loans originated or funded by Countrywide were "nontraditional" including some of the most problematic types including payment-option adjustable-rate mortgages, interest-only mortgages, and little or no income or asset documentation loans.

The complaint does not, however, seem to dwell on the merits of information filed by borrowers, it stresses that homeowners cannot choose their mortgage servicer. It alleges that the bank failed to protect the interests of the borrowers while at the same time it made efforts "to protect the lender's interest in the property" by ordering inspections, lawn mowing and other services when homeowners fell behind on their payments. "Rather than simply hire third-party vendors to perform the services, Countrywide created subsidiaries to hire the vendors," which created an opportunity for these subsidiaries to mark up the price of vendor services "often by 100% or more." Countrywide then charged the homeowners the marked-up fees. The mere fact that homeowners do not have the option to shop for servicers, but instead have to accept whoever performs default-related services and the cost of those services, is considered as another disadvantage that gives the upper hand to the lender. Plus, it can be costly to borrowers since according to the FTC, under most mortgage contracts, homeowners must pay for necessary default-related services. At the same time it is up to the mortgage servicer's discretion to not mark up the cost to make a profit "or charge homeowners for services that are not reasonable or appropriate to protect the mortgage holder's interest in the property."

The FTC alleges that borrowers who opted to save their homes through Chapter 13 bankruptcy proceedings also suffered because Countrywide "made false or unsupported claims to borrowers about amounts owed or the status of their loans" and failed to tell them "when new fees and escrow charges were being added." It further alleges that "Countrywide unfairly tried to collect those amounts, including in some cases via foreclosure" from borrowers who no longer were under bankruptcy court protection. The most striking allegation is that "the company's strategy was to increase profits from default-related service fees in bad economic times" earning "substantial profits" through subsidiaries that it created "solely to generate revenue."

The FTC notes that it is dealing with past problems because the defendants "continue to service millions of mortgage loans, including tens of thousands of loans involving borrowers in bankruptcy and foreclosure." So settlement terms include a requirement that "the defendants are permanently barred" from: taking advantage of borrowers who have fallen behind on their payments; making unsubstantiated representations about loan accounts; charging fees for services unauthorized by the loan instruments, the law, or the consumer; or charging fees for a default-related service "unless it is a reasonable" and for work actually performed." The settlement elaborates that if the service is provided by an affiliate, the fee must be within limits set by state law, investor guidelines and market rates, and consumers need to be informed about fees charged by these affiliates.

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