FTC Considers Best Practices?

The Federal Trade Commission will issue "a very significant consent decree" before year-end that establishes a best-practices standard for servicers of subprime loans, according to one industry attorney.

"Loan servicing is becoming a principal focus of fair lending enforcement," Skadden Arps attorney Andrew Sandler told a fair lending conference sponsored by the Consumer Bankers Association. He also pointed out that class-action lawsuits against servicers are increasing.

"In very short order, there are going to be best practices out there," Mr. Sandler said, and servicers better make sure they are "living up" to those standards.

In August, the head of FTC's financial practices division Joel Winston spoke at an American Bar Association conference, which Mr. Sandler attended.

The FTC official outlined 10 areas of servicing that raise concerns at the agency, including timely posting of payments, force-placed insurance and aggressive foreclosures.

Recently, Ameriquest Mortgage announced that it was updating its own "best Practices" for loan servicing as a result of discussions with community groups, perhaps offering a clue as to what issues might be addressed in the government's proposed standards.

(see related story, page 2).

Mr. Sandler told the CBA conference last week that servicers have problems with force-placed insurance because most subprime loans do not have escrow accounts.

Subprime borrowers really need escrows, because they are going to have problems paying the taxes and property insurance on their own.

If the servicer has to use principal and interest payments to pay for the insurance, it can result in late fees and the loan can even get kicked into foreclosure. "It can really be a mess," Mr. Sandler said.

He recommended that subprime lenders get escrows whenever possible "because it prevents equity stripping, asset-based lending" and other kinds of predatory practices.

Mr. Sandler did not indicate the target of FTC's consent decree, but it is well known that Fairbanks Capital Corp., Salt Lake City, is the subject of an FTC investigation into servicing abuses.

A spokeswoman for the subprime servicing company declined to comment on the settlement talks with the FTC.

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