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Former LPS Employees Allege 30% to 78% Error Rate in Borrower Mortgage Records, Contradicting Banker/Regulator Cover-Up

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One investor said that every time he looked at corporate misconduct, “No matter how bad you think it is, it’s always worse”. Lender Processing Services is proving to be a classic illustration.

The City of St. Clair Shores Employees’ Retirement System is the lead plaintiff in a class action lawsuit against Lender LPS that was amended and expanded yesterday. The suit is against the company and its three top officers, charing them with violations of Federal securities laws with the intent of inflating the company’s revenues and stock price.

City of St. Clair Shores Employees’ Retirement System v. LPS et al. Amended Complaint May 18, 2011

Even though the filing is very long, the first third, which provides detailed descriptions of LPS’s purported misconduct, makes for gripping reading even for those who have been on this beat a while. Later on, it cites various media sources to track increasing public recognition of what LPS was up to, and NC is quoted at some length.

The filing relies heavily on affidavits by 17 confidential witnesses, all former LPS employees, some of them supervisory level. It is thus able to allege that bad practices were widespread and clearly designed and driven by top management.

The document goes through a detailed account of firm’s use of robosigners, surrogate signers (aka forgers) and its document fabrication service, DocX. While this may seem to be old hat, some of the details are nevertheless intriguing (management at least bothered to try to select forgers based on their ability to make signatures that resembled the original; anyone who questioned whether this activity was proper was fired within a week). More important, this lawsuit does serious damage to the claims of bank defenders (the latest being Karl Rove in the Wall Street Journal) that foreclosure abuses were merely about cutting corners and everyone who was foreclosed on deserved it. But as we’ll see shortly, the underlying records were often corrupted, thus calling into question whether the foreclosure actions really were correct. Remember, LPS’s reach is wide. 14 of the 15 biggest loan servicers are its clients and every one of the 50 biggest banks use some of its services.

Moreover, the suit also repeats the charge made in other suits, that the LPS business model was built on the illegal sharing of legal fees, and goes even further, alleging that LPS exercises so much control over its “network” attorneys that it was engaged in the unauthorized practice of law.

But the new and more troubling material is the mess LPS has made of bank records. LPS employees were given password controlled access to borrower payment records and could and did alter those accounts. These passwords were routinely and widely shared, in contravention of good practice. And since everything at LPS was organized around maximizing throughput rather than doing anything correctly, the errors were widespread:

LPS employees were rewarded for their speed, and this resulted in the violation of security protocols and significant and pervasive errors in the default services that they were providing (e.g., the application of mortgage payments to incorrect accounts). Even when these problems were discovered by the Company’s internal auditors, LPS swept them under the rug. Indeed, LPS knowingly concealed errors in files from clients, network attorneys, and courts to keep clients happy and to ensure that a finger could not be pointed at LPS.

Now consider the question of the integrity of borrower records. Because LPS was so casual about password control, a large number of employees could and did:

….access mortgage records of borrowers and alter them by changing entries, reversing transactions, adding transactions, and moving funds in and out of suspense accounts.

And the company was not terribly concerned about accuracy:

There was a huge volume of ledgers that had to be created and problems in loan files that had to be researched and unraveled by CW [Confidential Witness] 16 and his colleagues. These problems included, among others, missing payments, misapplied payments from other loan files, and payments that should have been attributed to other loans…

CW16 stated that they were “only allowed to look at an issue for two minutes, or five minutes tops.” His supervisors and managers did not want CW16 and his fellow employees to spend time on any loan unless it was incredibly complex. However, they frequently could not finish it within five minutes. According to CW16 “a lot of people didn’t understand the financial side and just winged it.”

CW16 estimated that 20% of the motions for relief of stay (a filing to allow the bank to foreclose even though the borrower is in a Chapter 13 bankruptcy) were incorrect. This is markedly above the 10% level mentioned by the US Trustee in a Gretchen Morgenson article last weekend (although his comment could be read to allow for even higher rates).

If you think this is bad, the level of errors in borrower files is worse:

According to CW16, on top of the 20% of files with phantom referrals, approximately another 35% of files had some problems in them. Those problems varied, and included among others, an ARM that had improperly adjusted up, a failure to properly account for a borrower’s principal and interest payments, and a failure to properly attribute payments between pre-petition and post-petition that led the banks to try to collect pre-petition obligations they were not permitted to pursue.

Note that the nature of these errors is serious, and from what we’ve seen in various lawsuits and in the press, the numbers are often large, and that’s consistent with the US Trustee’s findings.

Another employee thought the error rate was even higher:

Not only did the Company reward speed over accuracy, it also required employees to hide LPS’ errors no matter what the ramifications. According to CW2, who was responsible for auditing bankruptcy files and determining whether LPS had done its job correctly or incorrectly, the attitude at LPS was that LPS “was not paid to audit files in bankruptcy.” This was the excuse used internally to justify performing only a minimal effort and ignoring conflicting information or errors in files.

Moreover, CW2 explained that when LPS did an audit and discovered that LPS had made a mistake that led an LPS servicer client to present false information to a court, LPS would not let its employees “point the finger at LPS.” Indeed, CW2 explained that there was a known and openly discussed policy during his entire employment at LPS of “not fully disclosing what is known, what is being done and what they are finding.” These details were not disclosed to clients, borrowers or the courts. This policy was openly discussed during department meetings

CW2 explained that the end result of these practices is a “three-year time bomb” waiting to explode. Indeed, he explained that problems existed in many LPS loans, and he “knows there are mistakes now” that are still being concealed from clients and courts. He stated that: “out of 100 files, I guarantee 78 are incorrect.” The errors ranged from adversary proceeding violations, incorrect agreed orders, missing payments not accounted for, and escrow issues such as clients escrowing on non-escrow loans. As a result of these errors, CW2 explained that LPS was “messing with people’s homes.” Indeed, CW2 explained that “people were doing everything they are legally required to do but losing their homes anyway because of errors.” When this former employee explained to his supervisors that LPS’ errors were putting borrowers at risk of incorrectly losing their homes, the response was “[d]on’t worry about that, it is not our department.

It’s easy to become jaded over banking industry abuses, but stop a second and consider what this means. To improve its profit margins, the company at the heart of the mortgage servicing industry ran roughshod over everything it touched, including the accuracy of borrower records. And we have bank regulators like the industry lapdog the Office of the Comptroller of the Currency (which John Carney correctly calls “the worst banking regulator in the world” and Simon Johnson says should be abolished) continuing to defend the garbage in, garbage-out process of its recent servicer abuse whitewash Foreclosure Task Force. As we’ve pointed out repeatedly, it failed to do any verification of the accuracy of the servicers’ records, when evidence of servicer fee abuses (pyramiding fees, junk fees) plus LPS-created problems (such as the failure to remove certain types of charges that are impermissible in bankruptcies) means the largely clean bill of health given by the officialdom is utterly bogus.

The banks and the regulators desperately need to maintain what increasingly looks like a fiction: that all foreclosures are warranted. Because banks process large volumes of checks and credit cards with a high degree of accuracy, they get the benefit of the doubt as far as how they keep other accounts. So it’s easy for the industry to assert that they are ever and always right. And even allowing for a considerable amount of bank errors, it is no doubt also true that the majority of foreclosures are probably warranted. Many people have suffered income losses so large that they are hopelessly under water. But borrower defense attorneys have long alleged that a high percentage of the cases they represent are servicer driven foreclosures, and the LPS and US Trustee revelations make these claims seem far more credible than they might have a few months ago.

It’s deeply offensive when we have officials like the acting Comptroller of the Currency John Walsh provide cover for this deep-seated corruption as he did in a speech yesterday:

Fortunately, we found relatively few cases in which a foreclosure should not have proceeded: although a small number of borrowers were entitled to protection because of a modification in process, bankruptcy filing, or military status, all foreclosed borrowers in the sample were seriously delinquent. And while the sample was small, I don’t expect to see much change in those proportions.Our mortgage metrics project, which captures loan-level data on 63 percent of all first-lien mortgages in the country, found that 94 percent of borrowers foreclosed upon in 2010 were at least six months past due on their payments.

It’s easy not to find anything if you don’t verify underlying processes and check for data integrity. And if you think it’s been hard for the banks to wean themselves of robo-signing, imagine what it will take them to fix this mess. It should be no surprise that bigger and better PR is their preferred remedy (I’m told Karl Rove does nothing unless he is paid).

If these allegations are proven to be accurate, this misconduct ought to be criminal. And I’m afraid, like so much of the damage banks have done to citizens and communities, this too will prove not to be.

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38 comments

  1. DownSouth

    Yves said: “….the largely clean bill of health given by the officialdom is utterly bogus.”

    Law enforcement and criminal prosecution in the United States are completely out of control.

    Legally speaking, enforcement officers and prosecutors in the U.S. are given immunity. This means they have no accountability. They operate with impunity.

    If some method cannot be crafted to reign in rogue law enforcement in the U.S. and once again make it accountable to the people, then the U.S. is just one small step away from becoming Mexico.

    Perhaps no one put it better than Amitai Etzioni writing in The Moral Dimension:

    If those whose duty it is to set and to enforce the rules of the game are out to maximize their own profits a-la-Public Choice, there is no hope for the system.

    1. Sundog

      Yep. Nonfeasance and impunity don’t make for a pretty picture. I’ve said more than once in comments here that the best comparison cases for the U.S. are Mexico and Russia.

  2. moslof

    This certainly contains food for thought.
    How do we know that mortgages that are current are not tampered with? Every mortgage I have paid off through a sale involved a payment to the bank that was larger than I expected.
    Why don’t US government funded pension funds for employees and contractors participate in clawback legal actions like the one above?
    Do politically favored bank clients have their loan balances tampered with in reverse to reward them?

  3. Bob

    Does anyone know whether the major banks use LPS in connection with credit card defaults?

    1. Matt

      The bad debt collection business is where many fraudulent practices were perfected so that LPS could get a running start. Primary of these is that whether the target actually owes a debt or does owe a debt out of the statutes of limitations is to be ignored. “Debt” is bought from the banks with no validating information nor accurate accounting of previous payments. The collectors prefer to change amount owed and make it all up themselves anyway.
      The authorities have been turning a blind eye to these guys and the only arrests seem to be when the owners turn to child pornography.

    2. Paul Tioxon

      ATTORNEY GENERAL LORI SWANSON CHARGES ONE OF NATION’S LARGEST “DEBT BUYERS” WITH DEFRAUDING MINNESOTA COURTS AND CITIZENS BY FILING “ROBO-SIGNED” AFFIDAVITS

      Minnesota Attorney General Lori Swanson today in a legal filing accused one of the nation’s largest “debt buyers” of defrauding Minnesota courts and citizens by filing false and deceptive “robo-signed” affidavits—generated at its offices in St. Cloud, Minnesota—to collect on old consumer debts that it purchased from credit card companies and others for about three cents on the dollar.

      The debt buyer—Midland Funding, LLC and its administrative arm, Midland Credit Management, Inc. (collectively Midland)—has purchased $54.7 billion in old consumer debt from credit card companies and other companies. In 2009, it filed 245,000 lawsuits against individual citizens nationwide, and it has filed over 15,000 lawsuits against citizens in Minnesota courts since 2008. Midland pays for its debt acquisitions with hundreds of millions in financing from some of the nation’s largest banks, including several that sell old debt to it.

      http://www.ag.state.mn.us/

  4. Bravo

    Given the well earned lack of credibility of servicer records, perhaps judges should start requiring an accounting professional to certify the accuracy of servicer records put forth by the plaintiffs before proceeding to foreclose? While servicer record-keeping is certainly a huge issue, that issue can and should be addressed by the judges. But what about lack of standing/chain of title issues? A different story in deed. The Karl Rover piece comes across as a cheap political shot to now blame the Obama administration for putting forth a bank friendly settlement proposal that was clearly the brainchild of the banking industry in the first place and went nowhere, thanks to the likes of Yves and others. Yves and Karl Rove on the same side of the issue? With failure of their original plan now imminent, better to to now blame the “other side” for putting forth the ridiculous plan and attempt to return the focus of the national conversation to manageable issues like robosigning and servicer records, rather than focusing on the key issues that could encourage meaningful principal modifications that have the potential to turn the economy on Main Street around.

    1. bill

      Any professional accountant looking at bank records could easily be bought off by the bank. Any court apponted accountant could also be bought off. We need a government that would force banks to make their operations transparent to the consumer. We need judges who will protect citizens from bank cartel abuses.

      You speak of the Obama administration and the banking industry as if they are separate institutions. All evidence indicates that the obama administration resides somewhere inside the cartels intestine.

  5. ambrit

    Friends;
    When the accumulated weight of all this corruption finally cascades into the banking sector in an avalanche of doom, wouldn’t it be a good idea for some of the interested parties to have a plan for implementing a Bank (Mortgage) Holiday? It would have to be implemented pretty quickly because, from what we now know, the process could well be supersonic. (What the H___ was that?)

  6. Gaius Gracchus

    If I had any faith in government regulators and administrators, I would call for nationalization of the mortgage industry. But since the enablers are in Washington and are controlled by Wall Street, it will take someone with real strength to control the corruption. Unfortunately, that is not coming any time soon.

  7. Siggy

    I find it intriguing that what is being presented as a suit for the redress of asserted tortious acts actually describes what appear to me to be criminal acts of fraud.

    Can this lawsuit be considered a criminal referral? Or, should the judge who hears this case be the party that makes the referral to the AG?

    Taken in toto, it’s clear we have a pandemic of fraud; yet we have no prosecutions. I wonder why?

    1. Francois T

      We have no prosecutions when it comes to the powerful (sex cases are a different animal) in finance. So, when fruad is discovered, nothing happens.

      And nothing happens because, we, the hoi polloi, are deeply stupid. We prefer one party over the other, reality be damned, instead of credibly threatened individuals in power proven to be detrimental for the common good with forceful removal at the next election.

      If one tend to vote Democrass, will he move to remove ben Nelson or Mary Landrieu? If he vote Reichpugnicrat, Will he/she move to obliterate a certifiable idiot like Paul Ryan?

    2. anon48

      “I find it intriguing that what is being presented as a suit for the redress of asserted tortious acts actually describes what appear to me to be criminal acts of fraud.”

      Yves resolved how this came to be when she said
      “…It’s easy not to find anything if you don’t verify underlying processes and check for data integrity…If these allegations are proven to be accurate, this misconduct ought to be criminal…”

      The implication- someone has to start to do the front line blocking and tackling, similar to what’s happening with the lawsuit. Address the actions of the front line employees who, at the very least enabled, but more likely participated directly in the illegal conduct. The regulators need to not just seek the assistance of the low level LPS employees but actually try to nail them(Just because its one’s job does not justify what they did to other people).

      Nail as many of the minions as possible. Force them to make the perp walk and just before they get led before the judge ask them “How did your immediate supervisor participate in this scheme?” After a certain amount of investigating there should be enough evidence to move upstairs to the next level of management. Then repeat the process. It may take longer – but when you eventually reach the very top, it will be more of a slam dunk.

      IMO any reasonable chance for justice will require a significant number of auditors, investigators and other enforcement personnel on the ground. If regulators don’t start to take this approach it’s almost certain there will be no chance for a just resolution.

      1. Sundog

        I’m no expert but RICO (racketeering and corrupt organization) laws and enforcement practices have been around for quite a while. Witness protection and plea bargaining can create incentives.

        You’re right that more personnel are required. My understanding is that the cost of deploying one U.S. soldier or marine for one year to Afghanistan is around a million dollars.

        Michael O’Hanlon, a defense analyst at the Brookings Institution, says… “We are at a point where it’s unbelievably costing us close to a million dollars, in additional costs — above and beyond salaries and the equipment that’s already in the inventory — per soldier or Marine per year.”
        http://www.npr.org/templates/story/story.php?storyId=114294746

        My own perspective is that super-empowered small groups and individuals (of whatever persuasion and more likely in Karachi or Hamburg than rural Central Asia) are a real threat that will only increase as time passes. Even so, their significance pales in comparison to the existential threat posed by various actors who wittingly or not are undermining the legitimacy of government in the U.S.

        Ask an American Indian in 1900 about the rule of law in this country. Ask anyone ID’ed as “negro” in 1950 about the rule of law in this country. Ask anyone in Tahrir Square in March 2011 about corruption and the rule of law.

        They’ll all reply that “rule of law would be a good idea.” Cheers to Yves for illuminating how rule of law is being undermined in this country.

  8. Francois T

    “It’s deeply offensive when we have officials like the acting Comptroller of the Currency John Walsh provide cover for this deep-seated corruption as he did in a speech yesterday”

    The Nocera’s article on the OCC yesterday was the proverbial straw that broke the camel’s back. The back was already strained to the breaking point with everything Yves had published too.

    So, I wrote to both PA senators to inform them in no uncertain terms that either they move to reign in the OCC, or the next election could be painful. I made it clear that Pennsylvanians were as smart as Egyptians when it comes to social media networking. It only take ONE spark to make banksters’ coddling a big electoral issue. People are more than fed up, don’t ya know?

  9. hmm

    right right they tampered with all these mortgages that were current and the voiceless innocent homeowners just lost their homes without notice.. evil corporate america at it again

    1. lambert strether

      Smarter trolls, please. The Chinese have shown us the way on this: The current business model of choice for paid trolls is no longer dumping one-liners into comment threads, but integrating talking points developed by public relations specialists into the discourse. No doubt we will see that elsewhere on this thread….

      1. leapfrog

        lol on the smarter trolls. I wish Yves would do a story on the propaganda units at the big bankster’s organizations. I’ve read somewhere that B of A has a whole department dedictated to damage control. I did enjoy her article on the astroturfing awhile back.

        I’m re-reading ‘The Stand’ right now. When I saw the troll post, my first inclination was to scream, “Weasels in the corn!”

    2. Old Man Moses

      As someone who has worked in these environments and seen how these processes and systems and designed, executed and incentivized, I find the idea that exactly that kind of behavior to be very possible.

      It is not just these environments either. You should take a look at health care. I’ve done projects for some of the largest health care organizations in the country. The processes, systems and incentives surrounding the classifying of diagnosis, tests, drugs and billing are notoriously sloppy and for some strange reason that I just cannot fathom, always seem to slant toward the most costly codes.

      1. Sales Analyst

        I completely agree. While working for AT&T I found the level of egregious errors in billing records to be astounding. The corporate attitude always seemed to be more interested in volume not accuracy. Couple that with the rush to replace full-time workers with contract employees, and the system becomes hopelessly FUBAR-ed.

      2. Sundog

        Cheers for mentioning the health care connection. As not so many have observed, if the U.S. paid OECD average rates for health care we’d have zero budget deficit. Dean Baker kills on this issue.

    3. F. Beard

      evil corporate america at it again hmmm

      Please stop smearing all corporations. Only banks are by definition evil since they are essentially legal counterfeiters.

    4. youniquelikeme

      Hmmmm… that comment smacks of pure ignorance, which means you haven’t been reading here or staying up to date on the issues.

      The paperwork used to foreclose was issued fraudulently… former employees say 78% of mortgage files were/are incorrect …. so comment on that please.

      That you can’t comment on the actual blog, but rather paint all the homeowners with a bad brush means you probably are a banker troll.

  10. lambert strether

    Ya know, I can screw up my account all on my own without any help from third parties.

    * * *

    This means, to me, that banks dealing with boring stuff like home mortgages, home improvement loans, auto loans, and student loans really should be regulated public utilities. Officers who are handling the public’s money should be directly accountable to the public, since “the market” has clearly failed.

    1. Sundog

      Narrow banking that would offer widows and orphans a reasonable shot at socially responsible investing? Obviously your hatred for America knows no limits.

      Better we employ our wealth in a productive and purposeful manner: speculate on gold.

  11. Blurtman

    So you are an investment bank that owns a mortgage servicing company. You are an investment bank that also invests in CDS. Want to drive the value of your short? Well, who better to help than your mortgage servicer subsidiary?

    1. readerOfTeaLeaves

      Ding!
      And I offer as supporting evidence:

      More important, this lawsuit does serious damage to the claims of bank defenders (the latest being Karl Rove in the Wall Street Journal) that foreclosure abuses were merely about cutting corners and everyone who was foreclosed on deserved it. But as we’ll see shortly, the underlying records were often corrupted, thus calling into question whether the foreclosure actions really were correct. Remember, LPS’s reach is wide. 14 of the 15 biggest loan servicers are its clients and every one of the 50 biggest banks use some of its services.

      Moreover, the suit also repeats the charge made in other suits, that the LPS business model was built on the illegal sharing of legal fees…

      But the new and more troubling material is the mess LPS has made of bank records. LPS employees were given password controlled access to borrower payment records and could and did alter those accounts. These passwords were routinely and widely shared, in contravention of good practice.

      This appears to be designed for ‘plausible deniability,’ in order to make the fraud untraceable.

      1. readerOfTeaLeaves

        IMVHO, Karl Rove is another ‘tell’: the housing developers and realtors gave the GOP a great deal of money in the 1990s and 2000s. Rove would have been involved in the political shakedown of the realtor, mortgage broker, mortgage banker, housing developer network. (In the mid-2000s, even I heard a few builders grousing about the extent of the GOP ‘campaign donation shakedown’, so it does not surprise me at all to see Rove’s linkage to this story.)

        It is also interesting to note that early in his ‘career’, after dropping out of college, Rove made a living off databases, used to solicit GOP campaign donations. This is not the first time that Rove’s name has popped up related to stories involving degraded, overwritten, or deleted computer files (see also: Missing White House Emails).

      2. jules

        And, if I remember correctly LPS is a FNF spin off. Fidelity National is one of the largest title and escrow companies in the nation.

        1. Yves Smith Post author

          Correct. And it was spun out shortly after the US Trustee started sniffing about. Coincidence? Sure looks like an effort to shield FNF from liability.

          1. jules

            Yves, probably not a coincidence!

            William Foley was CEO of FNF and Forbes listed him as 4th highest paid CEO in 2006 at $180 million.

            One of the earlier posts on this thread wondered if LPS was in the credit card default business. It appears that one of the other FNF companies (FIS) might be and one could assume it is being ‘managed’ in a similiar style.

            http://www.bizjournals.com/jacksonville/stories/2007/06/11/focus8.html

            “Foley said he is working on a handful of FIS acquisitions of companies that specialize in credit card processing and electronic transfers.” – June 2007

  12. Shanikka Jackson

    My home was forclosed on by LPS & WAMU/JP Morgan Chase…they told me I had no ownership interest in my home and I was joint tenant with my husband on the loan…they robo stamped documents, even after I sent them and the bank the correct deed, they brushed it under the rug and stole my home. I’ve had a case open with the OCC since April, 2009 and hope JUSTICE is served to these loan processing services and big banks, its sick how they get away with robbing so many people, I know I am not alone in this nightmare!!! I’m a former RE Funder (SDCCU) RE Underwriter (World Savings/Wachovia) Originator (Aegis Lending) and Home Ownership/Crisis Counselor (Operation HOPE).

  13. Ted

    To be sure, LSI, an appraisal management company owned by LPS hired compromised and inept appraisers at reduced fees (no independent appraisers would work for them) to inflate values all over the country – similar to the WAMU and EAppraiseit fraud uncovered by Cuomo that had over 200,000 fraudulently inflated valuations all over the country from early 2006 to 2008. Eappraiseit admitted this in a deposition. All it takes is one fraudlently inflated appraisal to raise values in a neighborhood – and Eappraiseit did over 200k!! That one AMC alone could have inflated home values all across the country and it’s my belief these appraisal management companies were the cause of the meltdown through fraudulent inflated valuations.

    The crazy thing is, although they’re known fraud perps, the government and the GSE’s have rewarded them by policy that all retail loans going through the GSE’s must go through these bank owned AMC’s !! The AMC’s have a monopoly on the appraisal market now and fraud is on the rise. Competition with independent appraisers that don’t need AMC’s was stopped by this policy and the banks are now free to control values, again.

    I really wish the AMC’s role in inflated values so that the investment banks could prosper were investigated for their role in the meltdown. This LPS/LSI investigation is a start.

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