Big federal settlement serves as lesson to predatory lenders

Nation's Housing

November 02, 2003|By KENNETH HARNEY

WHEN HUNDREDS of customers of a giant mortgage company tell financial regulators that they are being systematically abused on their home loan accounts, what's the end result?

In the case of Fairbanks Capital Corp. - the focus of year-long investigations by federal and state authorities - it appears to add up to at least a $55 million settlement and a regimen of more customer-friendly business practices.

Last month, Utah-based Fairbanks' corporate parent, PMI Group Inc., disclosed to shareholders that it had reached a preliminary agreement with the Federal Trade Commission and the Department of Housing and Urban Development to settle allegations of predatory servicing practices against some of its nearly 600,000 loan clients nationwide.

According to PMI Group, the agreement, which requires the agencies' approval, would create a $40 million fund to assist consumers who were harmed by Fairbanks and set aside $15 million to dispose of class action suits and pay fines. The FTC and HUD declined to comment on PMI's disclosure of the long-awaited settlement.

Fairbanks, the country's largest servicer of "sub-prime" home mortgages extended to homeowners with blemished credit, was accused of unfairly levying late fees on borrowers who made payments on time, mishandling escrow account disbursements and pushing customers into foreclosures.

Between 200,000 and 600,000 loan customers were listed by the company as 60 days delinquent or more in May, and 45,000 were in foreclosures, according to a top official.

Hundreds of Fairbanks customers from Maryland to California have barraged legislators and regulators with complaints or filed class action suits in recent months. Maryland's U.S. senators, Democrats Barbara A. Mikulski and Paul S. Sarbanes, called for investigations of the company's practices in the spring, triggering HUD's involvement in FTC investigations.

In a class action consolidating four suits in California, customers of Fairbanks alleged that the company not only routinely counted on-time payments as late and imposed costly penalties, but also threatened many borrowers with quick foreclosures unless they paid substantial fees.

Plaintiff Connie Whitson of San Diego said she had to pay $3,543.76 to Fairbanks, including attorneys' fees, late fees and other charges, after the company failed to credit her monthly payments properly. Similar allegations were made in courts across the country, according to attorneys.

In West Virginia, a state court imposed a moratorium on home foreclosures on residents with Fairbanks-serviced mortgages. Financial regulators reportedly investigated the company in Florida, Illinois, Utah, Georgia, Texas, Michigan and Pennsylvania.

Many plaintiffs in court actions alleged that Fairbanks routinely claimed it had no record of borrowers' hazard insurance policies and that it "force-placed" high-cost insurance coverage on customers even when they could produce documentary evidence that their policies were paid-up and active.

Class action attorneys said Fairbanks' servicing practices amounted to an illegal, default-manufacturing "scheme designed to generate extra revenue" for the company and its majority stockholder, PMI Group.

Fairbanks executives initially dismissed the allegations as having little merit. Bill Garland, a former president of the company, said in an interview in May that such complaints "come with the territory" of being the top servicer of sub-prime mortgages in the country.

"We have litigation in this business," he said. "It's part of the business." Garland subsequently was removed as president, and a new team of top executives appointed by PMI Group took over management of the company.

As a servicer, Fairbanks does not originate mortgages to homeowners. Instead, it acquires them from other lenders. Servicing involves administering borrowers' escrow accounts, monthly payment record-keeping and disbursement of funds to the owners of the mortgages. In Fairbanks' case, many of the owners of the loans were bond market trusts assembled by Wall Street investment bankers.

Though details of the proposed settlement's requirements for Fairbanks are not available, sources say the requirements could amount to a "best practices" servicing model for Fairbanks and other large mortgage companies in the sub-prime arena.

One reform might specify how Fairbanks - and, by implication, other servicers - should handle newly acquired customer accounts. Many of the complaints against the company involved borrowers whose mortgage servicing had been sold or transferred to Fairbanks recently by other lenders or servicers.

Other reforms could deal with mandatory "loss-mitigation" requirements that would force Fairbanks to work aggressively with delinquent borrowers to remedy their problems rather than squeeze legal fees - or foreclosure sales - out of them.

Ken Harney's e-mail address is kharney@winstarmail.com.

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