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.
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.