Fairbanks Serves as Warning
Fairbanks Capital, under fire from politicians, regulators and consumer advocates, may hold some lessons for the entire mortgage lending industry.
And with servicers facing increasing scrutiny in the wake of the Fairbanks case, they are rethinking some aggressive collection practices that may have placed a premium on reducing foreclosure timeframes at the expense of customer service.
Kathleen Tillwitz, a Fitch analyst who has examined Fairbanks, said the Fairbanks issue appears to be limited to that lender now, but could turn into an industry problem.
"We've learned that customers are more legal savvy these days. They are more quick to call an attorney," she said.
As a result, everyone is re-evaluating their policies and procedures to make sure that "if a customer calls in and gets angry, it gets resolved," she said. Lenders don't want frustrated customers bringing their complaints to law offices or regulators.
Fairbanks' difficulty in servicing its customers may reflect, at least in part, a change in the company's growth strategy from acquiring smaller portfolios of loans to taking in a significant amount of new loan business on a "flow" basis without making changes to its procedures.
But the company's difficulties offer some lessons to the entire servicing industry.
And Fairbanks' practice of aggressively pursuing foreclosure once a borrower missed two payments may highlight some risks inherent in pursuing an aggressive foreclosure strategy.
Fitch analysts, in reviewing the Fairbanks case, note that servicers of subprime credit quality mortgage loans have placed a great deal of emphasis on reducing foreclosure timeframes in an effort to minimize loss severity. But if those efforts to speed up foreclosure come at the expense of customer service and make it more difficult for consumers to resolve bad loans, it is bound to anger customers.
Acknowledging this problem, Fairbanks has changed its practice of referring loans to foreclosure from day 62 in the
delinquency process, instead referring them after they are 87 days late, according to a recent Fitch report. Fairbanks has also added additional reviews before loans are referred to foreclosure.
While this may lengthen foreclosure timeframes, Fitch said that since Fairbanks was very aggressive with foreclosures in the past, the company's timeframes will remain under the Fannie Mae and Freddie Mac timelines for foreclosure.
Diane Pendley, another Fitch analyst who contributed to the Fairbanks report, said the pressure to reduce foreclosure timelines is an industrywide issue among servicers.
Companies that pursue "dual track" foreclosure and loss mitigation efforts simultaneously are potentially at risk for problems if they "have not taken the time and effort to research their processes and incorporate consumer sensitivity and if they are not addressing disputes as a priority," Ms. Pendley said in the report.
The problems at Fairbanks, previously a top-rated subprime servicer, are causing rating agencies like Fitch to make changes to their practices as well. Increasingly, rating agencies will ask servicers to include more data about customer service and management of performing loans. Issues such as escrow management and cashiering are also important aspects of a servicer's performance, she said.
"I think we have to spend more time understanding the operation - beginning with loan boarding all the way through the process. We are going to continue to look at the default side, but we will spend more time on other processes because we can see that these other processes can cause the servicer a lot of problems," Ms. Pendley wrote.
Fairbanks and other subprime servicers may additionally have to spend more time monitoring customer service calls, and perhaps even recording all calls, to better defend against claims that they could face.
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