Legal Risk a Top Issue

Fairbanks Capital, staggering from months of criticism in the press and a lengthy, expensive federal investigation, has reached a settlement with regulators and may well be on the road to recovery. Though the company's portfolio has been shrinking, it is still in business and gaining some traction with rating agencies and consumer groups.

But the toll the criticism of the firm's former customer service, collection practices and fee policies has taken on the firm is not small. And at the recent MBA National Mortgage Servicing Conference in San Diego, it was clear that lenders are spending a lot of time looking at their policies and procedures to make sure they don't find themselves facing the same torrent of criticism that Fairbanks encountered.

On the bright side, federal regulators claim they are not trolling the waters looking to expand their scrutiny of servicers practices on a wide scale. But they also made it clear that they will respond to the complaints of consumers and consumer advocates, many of them lawyers skilled at finding discrepancies between loan servicing practices and the requirements of loan documents or state law.

But one thing is clear from conversations with regulators and servicers. Most investigations of loan servicing practices begin with consumer complaints about customer service.

Their calls were not returned promptly. They couldn't understand fees on their mortgage bill. They don't know why foreclosure proceedings were started. In most cases, before they called a lawyer, consumer group or regulatory agency with their complaint, the consumer tried to reach some sort of understanding with their lender. And in most cases, whatever communication they had with the lender ended in disappointment that sparked the call to an advocate or lawyer.

There is a lesson to be learned from all of this. Everyone knows that lenders need to review loan servicing policies and procedures with an attorney to make sure they are not running afoul of the law or loan documents. But that may not be enough to insulate a lender from allegations. In most settlements, remember, the accused does not admit any wrongdoing. The first step toward avoiding the headaches associated with litigation is to train customer service and collection counselors about how to handle calls respectfully and resolve complaints as quickly and fairly as possible.

Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.mortgageservicingnews.com