By Tom Adams, an attorney and former monoline executive
Back in 2003, Fairbanks Capital billed itself as the largest servicer of subprime mortgages. It was also a stand alone servicer, in that it was not in the business of lending.
In a high profile case within the mortgage industry, the Federal Trade Commission brought an action against Fairbanks for violating the FTC Act, the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, and the Real Estate Settlement Procedures Act (RESPA) . Fairbanks was accused of a host of improper servicing activities that will sound remarkably familiar to anyone following the foreclosure and servicing issues in today’s mortgage markets. Among the transgressions, Fairbanks was alleged to have:
-failed to post payments in a timely manner, resulting in additional late fees or interest,
-charging for forced place insurance,
-assessed improper fees, such as for attorneys, service, appraisals, FedEx,
-misrepresented the amounts owed by borrowers,
-submitted misleading or false information to credit reporting agencies,
-failed to report disputed charges to credit reporting agencies,
-failed to respond to borrowers written requests for information or investigation into charges, and
-failed to make timely payments of escrow funds for insurance and taxes.
The FTC intended the settlement with Fairbanks to provide guidance for the mortgage servicing industry for the boundaries of acceptable business practices for the treatment of borrowers, deadbeat or otherwise. The case introduced the notion of “predatory servicing” to an industry that had been previously more familiar with the notion of predatory lending. Following the settlement, mortgage servicers developed best practices based on the deal terms and, for a few years, it appeared that servicers generally followed them.
Roughly eight years later, the state Attorneys General are working on a settlement that covers remarkably similar ground as the Fairbanks settlement. In 2003, Fairbanks was enjoined from various activities, and the settlement terms included:
-requiring the servicer to accept partial payments,
-requiring the servicer to apply borrowers payments first to interest and principal (ie a provision against fee pyramiding),
-prohibiting forced place insurance when the borrower already has insurance,
-prohibiting unauthorized fees to be charged to the borrowers, including continuing to charge late fees after foreclosure has been commenced,
-requiring the servicer to acknowledge, investigate and resolve consumer disputes in a timely manner,
-requiring the servicer to provide timely billing including itemization of fees charged,
-prohibiting the servicer from initiating foreclosure unless they’ve confirmed the borrower’s delinquency and no disputes remain outstanding,
-prohibiting the servicer from piling on late fees,
-prohibiting the servicer from enforcing certain forbearance agreements,
-prohibiting the servicer from violating the Fair Debt Collection Practices Act, Fair Credit Reporting Act and RESPA,
-requiring the servicer to correct wrongly classified accounts and credit reports, and
-requiring the servicer to audit and monitor its practices to ensure compliance with the settlement
In addition, the servicer was fined $40 million, which was used to establish a fund for harmed borrowers, and Fairbanks’ CEO and founder was fined $400,000 (and he was fired from the company).
Despite the tough regulatory enforcement action taken by the FTC back in 2003, many of the same “predatory servicing” practices have made a comeback. How likely are they to return again after the settlement put together by the attorneys general, which is less punitive than the FTC were in 2003, goes through?