naked capitalism

A ruling in a Louisiana bankruptcy court case, In re Wilson, provides compelling evidence that many of the assertions made by Lender Processing Services, which both acts as the servicing platform and provider of default services for mortgage services industry, about how limited its role and hence its legal liability is, simply do not comport with reality.

In very simple terms, LPS claims that it is simply a hub, acting as a middleman of sorts between servicers, borrowers, and law firms, providing “information services” of various sorts. Some pending lawsuits, including one launched as a class action in bankruptcy (Federal) court in Mississippi, contend that LPS has been engaging in impermissible splitting of legal fees (which is subject to disgorgement) as well as charing fees that have not been disclosed to the court (a huge no-no in bankruptcy court, where every disbursement is required to be reported). The Chapter 13 bankruptcy trustee for Northern Mississippi has joined that case, both in her own name and on behalf of all Chapter 13 bankruptcy trustees as a class.

I strongly suggest you read this Louisiana decision (hat tip April Charney) in full. It provides an amusing contrast of LPS’s PR about what it does, versus a client’s account.

In Re Wilson Memorandum Opinion 07 Apr 2011

For instance, even though LPS insisted it was largely passive, the client, Option One. contended otherwise, maintaining that:

LPS takes a very large range of actions relative to clients on its own initiative, without specific servicer instructions or involvement. Some are even done by the system automatically, without human intervention.

LPS manages all “all tasks required during the administration of a loan during bankruptcy”. If counsel needs to be told to do something, LPS gives orders and involves the client only if it cannot resolve the matter on its own. That includes court filings, such as all Motions for Relief of Stay and Affidavits of Default.

Given the extent of “he said, she said,” the US Trustee, which is an arm of the Department of Justice dedicated to bankruptcy courts, offered to help and the court agreed. Eighteen months of fractious discovery followed, and as a result, the US Trustee filed motions to sanction the law firm involved in the borrower case as well as LPS.

The court not only deemed an LPS’s affidavit to be a sham and took such a dim view of that as to call into question all banks’ breezy assertions that robosigning is no big deal, it also services to confirm elements of the role LPS plays in mortgage servicing as set forth in pending litigation. We’ve long been of the view that LPS’s role in the mortgage mess is far from innocent, and the tidbits coming out over time continue to bear out our suspicions.