Another Class Action Suit Filed in Federal Bankruptcy Court Against Lender Processing Services

The noose is tightening around Lender Processing Services.

Last week, various news outlets revealed that Federal banking regulators had issued consent orders against major servicers, MERS, and LPS. Kate Berry of American Banker pointed out that LPS is exposed to making payments to servicers:

In addition to the 14 biggest mortgage servicers, two of the biggest vendors to the industry received cease-and-desist orders from regulators Wednesday. One was stronger than the other.

Lender Processing Services Inc. and Merscorp Inc.’s Mortgage Electronic Registration System were both cited for “significant compliance failures” and “unsafe and unsound business practices” related to foreclosures. Regulators are requiring both companies to hire independent consultants, take remedial steps to address past failures and hire additional staff.

But only LPS, a publicly traded company in Jacksonville, Fla., that provides foreclosure-related services to banks, faces the possibility of having to reimburse servicers and borrowers if an independent review finds anyone was financially harmed by its failure to properly execute mortgage documents.

In a Securities and Exchange Commission filing, the company noted that “the order does not make any findings of fact or conclusions of wrongdoing, nor does LPS admit any fault or liability.” The filing said the agencies “have not yet concluded their assessment of whether any civil money penalties may be imposed.” LPS shares fell 3%, to $30.19 each.

This is still a limited basis for liability, but LPS appears to be on the track of death by a thousand unkind cuts.

A potentially more serious front against the embattled company are legal filings, particularly class action litigation related to allegations of prohibited legal fee sharing in Federal bankruptcy court. Note that bankruptcy court has very strict rules about the disclosure of payments and what laypeople would think of as fee padding. Thus for an attorney to say his legal fee was, say, $1000, when the amount he ultimately received was $800 because he paid $200 to a referral source would be impermissible because it would mean he exaggerated the size of his bill by $200 to cover the kickback.

The latest filing is in bankruptcy court in the Northern District of Florida, In re Harris, and involves both LPS (the parent company and its subsidiary LPS Default Solutions) and major Florida foreclosure mill Ben-Ezra & Katz. The bankruptcy clients of Ben Ezra are the group that the litigation seeks to have certified as a class. Note that the usual remedy for the sharing of impermissible legal fees is disgorgment. In addition, the suit lists ten causes of actions, of which the fee sharing is only one.

In re Harris – Northern District of Florida Bankruptcy Court Filing v. LPS, LPS Default Solutions and Ben-E…

For those who have been following this litigation closely, the allegations hew closely to those made in a Mississippi bankruptcy court filing, In re Thorne, which we discussed at length earlier (see here, here, and here). That case was joined by the Chapter 13 Bankruptcy court trustee for that district, acting on her own behalf and as a member of a class consisting of all Chapter 13 trustees in the US.

The smoking gun in both cases is that the plaintiffs have gotten hold of the agreements both between the network law firms and LPS, and LPS and the servicers. Some of the language in the agreements is damning on its face. For instance:

42. One of the standard definitions in the DSA [Default Services Agreement, a contract between LPSand the servicers] defines the term“Fidelity Network” (LPS Default is formerly known as Fidelity National Foreclosure & Bankruptcy Solutions).

43. That definition states that the servicer is required to select attorneys involved in the “Fidelity Network” at the servicer’s discretion, who are retained and managed by LPS Default to handle foreclosures “or otherwise provide services in accordance with the DSA”…..

46……“Fidelity has entered into an agreement (the “agreement”) with the servicer whereby Fidelity (LPS) has agreed to perform various legal services (emphasis supplied) for the servicer that include mortgage foreclosures, bankruptcies and other loan default services (the “services”).

This language is contrary to the way LPS has claimed the relationship between the servicers and the network firms work. It has asserted that the servicers pick the law firms and exercise control over them and LPS merely serves as an information hub. The language of the agreements and the other information presented in these filings present a starkly different picture, that of the servicers effectively delegating much of the work of overseeing the law firms to LPS and LPS in turn engaging in activities that look an awful like practicing law, with the law firms looking more like LPS’s arms and legs rather than independent parties.

This chipping away at the role of LPS is a hopeful sign. Many systematic abuses, such as the prevalent application of junk fee and fee pyramiding, appears to be hard coded in LPS’s software. The more lawyers and investigators keep pulling on this thread, the more abuses they are likely to expose.