A Long History of Red Flags on Mortgage Servicers
David CallahanIf you learn anything from following regulatory failures that hurt consumers it is this: Most of these failures have happened before and alarm bells have been sounded, only to be ignored. Such is the case with mortgage servicing abuses, which have emerged in recent months as a major focus on state and federal investigations.
In 1989, when mortgage servicing was still a relatively new industry, the General Accounting Office undertook the first-ever government study of mortgage servicers. The findings of the report won't be surprising to anyone who has been following the news in the past year: Mortgage servicers tended to cut corners to boost profits.
The report was requested by Congressman John LaFalce of New York, responding to over 1,000 complaints filed about mortgage servicers by nearly 600 consumers. The list of grievances aired by these consumers was long and unnerving. As the GAO documented (you can read the report below), the shenanigans by mortgage servicers included: chronic mishandling of escrow accounts; failing to provide notification that loans were sold to other servicers, resulting in late penalties and other problems; and failing to respond to inquiries by homeowners.
The GAO also noted that regulatory agencies didn't have a way of tracking problems by mortgage servicers.
Not much seems to have been done as a result of the report, but in 1993, this issue resurfaced in Congress amid ongoing consumer complaints, particularly around escrow problems. But again little action resulted. As a press report at the time stated:
The banking committees on both sides of Capitol Hill stepped up efforts recently to protect homeowners and home buyers from improper practices by lenders. But they were confronted quickly by industry representatives saying, in effect, let's not be hasty. Representatives of mortgage bankers, banks and other lenders urged the two panels to proceed slowly lest they increase the cost of mortgages or, in some cases, choke off credit.
This, of course, was long the standard defense of the lending industry against regulation: let's not kill the American Dream of homeownership.
The issue re-emerged in 2003, well before the crash, when the federal government sued a large mortgage servicer, Fairbanks Capital, for abusive practices. As reported by the FTC in its press release about the settlement,
The FTC alleges that, in servicing loans, Fairbanks frequently:
- failed to post consumers’ mortgage payments in a timely and proper manner, and then charged consumers late fees or additional interest for failing to make their payments “on time”;
- charged consumers for placing casualty insurance on their loans when insurance was already in place;
- assessed and collected improper or unwarranted fees, such as late fees, delinquency fees, attorneys’ fees, and other fees; and
- misrepresented the amounts consumers owed.
As a result of the settlement, the Salt Lake City-based company set up a $40 million fund to compensate thousands of customers. And the FTC released a new brochure to help consumers understand their rights when it came to loan servicers.
A brochure. That's nice.
What the government didn't do is take a tougher regulatory stance toward mortgage servicers. That didn't even happen after Fannie Mae's own internal investigatino revealed abusive servicing practices. (See post below)
And here's a news report from 2007, by the Times' Gretchen Morgenson, again well before the current foreclosure fraud scandal erupted:
The ways that lenders and loan servicers deal with troubled borrowers are also coming under increased scrutiny by judges. In recent weeks, three federal judges in Ohio have dismissed 73 foreclosure cases brought by lenders and loan servicers against borrowers because the companies failed to show proof that they owned the notes underlying the properties they were trying to seize. . . .
A recent study of more than 1,700 foreclosure cases by Katherine M. Porter, an associate professor of law at the University of Iowa, showed that questionable fees had been added to almost half of the loans she examined.
In a case involving Wells Fargo and a Louisiana borrower, for example, the court found that the bank assessed improper fees and charges that added more than $24,000 to a loan, some 12 percent more than the court said was actually owed.
In another case, Ms. Porter found that a lender had claimed that the borrower owed more than $1 million but that an examination of the loan history showed the true balance to be $60,000.
William J. Brennan Jr., director of the Home Defense Program of the Atlanta Legal Aid Society, said dubious fees were common among the cases he sees.
Katherine Porter's study on abusive servicing practices is now considered a seminal early study in this area. And it was hardly a secret. The New York Times ran a story about Porter and her research in November 2007. “Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” Porter told the paper.
Alas, that didn't happen in 2007.
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