Help from your Enemies?

Over the past three years, litigation related to the servicing of subprime mortgage loans has cost participants in that industry close to $1 billion, according to one of the consumer advocates who was instrumental in bringing scrutiny to Fairbanks Capital's servicing practices. While you might expect Craig Kenney to be a pariah to the mortgage industry, his counsel is actually being sought by some people in the industry these days, including rating agencies, Wall Street companies and servicers.

That's because nobody wants to find themselves in the position that Fairbanks and other subprime loan servicers found themselves in. Today, a premium is being placed on keeping borrowers, even those that are delinquent or in default on their home loan, content. Part of the objective is to resolve disputes before they mushroom into potential litigation.

The root of the subprime lending industry's problem was customer complaints. Fairbanks deserves kudos not only for addressing the material problems that regulators and consumer advocates found with its collection practices, but also for designing new policies and procedures designed to address consumer complaints fairly and quickly. Sure, it probably costs Fairbanks more to manage customer service than it did before, but the reforms made by Fairbanks also minimize the risk that the company will attract the kind of unwanted attention from regulators and class-action attorneys in the future.

Fairbanks, like many other servicers, has not done it alone. Recently, Fairbanks announced that it was working with the National Community Rei-nvestment Coalition to review how responsible servicing practices benefit both consumers and investors who hold bonds backed by subprime loans. Fairbanks has decided that it's better to work with potential consumer advocates than to become their adversaries. Increasingly, those investors are taking a close look at their potential liability related to the servicing of their loans. While bondholders have largely been shielded from the impact of litigation against subprime servicers, many state and local predatory lending laws have attempted to pierce this protection. And many industry observers expect that bondholders may eventually find themselves facing liability.

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