Another B&C Lawsuit Coming?
With rumors spreading that class-action attorneys are targeting another subprime servicer, it is certainly time for servicers to make sure their fee structure does not provide an incentive to push homeowners into delinquency.
The central allegations in the Fairbanks Capital Corp. and Ocwen Federal Bank FSB cases is that subprime servicers have a financial incentive to post monthly payments late so that they can charge late fees and profit from the delinquent status of the loans, according to Brian Brooks, a partner at O'Melveny & Myers.
To counter these allegations, "you have to do the math," he said. Servicers need to determine how much money they make on performing loans (including cash flows associated with loans) compared to nonperforming loans.
The plaintiff's attorneys pay experts to show that a servicer's net income on delinquent loans is 50 basis points higher than performing loans, Mr. Brooks told a subprime lending conference sponsored by the Mortgage Bankers Association. According to the plaintiff's theory, that 50 bp is a "clear financial incentive for you to manage loans into delinquency," he said.
Another factor plaintiff's attorneys are looking for is high delinquency rates, which could signal the servicer is not posting monthly payments in a timely fashion.
Servicers need to develop models, based on the credit qualify of their loans, to determine if their delinquency rates are excessive or absolutely predictable.
"Before the first lawsuit comes in, it would behoove you to figure out whether your delinquency rates are about what you predict or whether something is going on," he said.
In the Fairbanks case, the Federal Trade Commission charged the Salt Lake City servicer with systematically posting payments late and piling on appraisal and attorney fees.
In settling with the Federal Trade Commission and class-action attorneys, Fairbanks agreed to pay $55 million in consumer redress and fines. The subprime servicer also agreed to revamp its servicing procedures and customer service standards.
Mr. Brooks represented Fairbanks and he is currently representing Ocwen FSB, West Palm Beach, Fla., which is facing several class-action lawsuits.
Like the Fairbanks case, the plaintiffs allege Ocwen is not posting monthly mortgage payment properly, charging inappropriate late fees and prematurely referring accounts to collections as part of a scheme to generate fee income. Ocwen denies the charges.
In his talk at the MBA conference, Mr. Brooks said he would not discuss the Ocwen case. But he noted that there are rumors going around that another servicing firm is about to be sued.
He said servicers need automated systems to make sure that payments are posted promptly. And they need to keep tabs of why payments are posted late.
In addition, these automated systems should be able to reverse-out charges for late payments if the payments are posted late because of missing information or processing errors.
Mr. Brooks noted that the servicing industry is moving toward a compensation system that no longer encourages fee-based profit.
"There is this notion that servicers simply shouldn't be making money from any source other than their deal flow with their investors. There are some companies that are already there," he said.
These companies say they don't charge fees, except for attorney fees in a foreclosure. They price everything into the original deal with the investors, he said.
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