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Devil is in the Details

Devil is in the Details

Fairbanks Capital settles servicing case with FTC, HUD

November 13, 2003

By TIM MEREDITH

The Federal Trade Commission (FTC) and the Department of Housing and Urban Development have filed a proposed settlement in their case against Fairbanks Capital for alleged unfair servicing practices in connection with subprime mortgage borrowers.

The settlement calls for Fairbanks and its founder and former CEO, Thomas D. Basmajian, to pay $40 million and $400,000, respectively, to compensate individual borrowers who paid improper amounts and suffered from improper servicing practices. Somewhere around 500,000 consumers are eligible to participate in the settlement. The average payout per consumer would be around $88. The US District Court for the District Court of Massachusetts must approve the proposed settlement.

The settlement also prohibits Fairbanks from engaging in certain specific behaviors in the future. The enforcement agencies often employ settlement agreements to establish new duties and performance standards for an industry without having to follow the sometimes arduous task of proposing new regulations. In this case, the settlement is expected to become the framework for the government’s view of “best practices” for subprime mortgage loan servicers. Most of the allegations in the complaint are based on violations of the FTC’s unfair practices rule in Section 5 of the FTC Act. As a result, the complaint is a hot house of ideas for any state attorney general or class action counsel who wants to bring a claim under a state UDAP statute.

This settlements affects many servicing practices, including the types of fees that may be charged, forced place insurance practices, how to book payments, how to resolve billing errors, and the content of monthly statements and collections letters. If you are a subprime loan servicer, you will have to consider the practices listed below and decide whether your own practices offer equal or greater protections to your consumer borrowers. If your practices fall short of the level of consumer protection afforded by those below, you may become a target for unwanted attention. For better or worse, the practices listed in the settlement are likely to become the measure for “best practices” in the subprime servicing industry.

The settlement will change the way servicers assess late fees, property inspection fees, broker price opinions, reinstatement fees, fees for legal services and any other fees that a servicer may charge.

Fairbanks may only assess a fee under the following circumstances. First, the fee must be a reasonable reimbursement for some service actually performed. Second, the consumer must have a reasonable opportunity to know that the fee will be charged. For example, a fee may be charged if applicable law expressly authorizes the fee and the fee is not prohibited under the loan documents. If the fee is not expressly authorized under the law, Fairbanks may charge the fee if it is set out in the loan documents. Finally, Fairbanks may assess a fee for a specific service requested by a consumer if the fee is assessed after Fairbanks provides a clear and conspicuous disclosure of the fee to the consumer and the consumer provides explicit authorization to purchase the service and pay the fee. No one may collect a fee that is prohibited by applicable law.

Certain fees are expressly limited or prohibited by the agreement. These include:

  • FHA Loan Fees. If the loan is an FHA loan, Fairbanks may not charge any fee prohibited under FHA requirements.

  • Demand Letters/Collection Letters. Fairbanks may not charge fees for preparing demand letters or any other collection letters or notices.

  • Property Inspection Fees. Fairbanks may only charge property inspection fees if:
    • The consumer’s loan payment is more than 45 days late; and

    • The inspections are limited to the initial inspection and to additional inspections during the period of continued delinquency not more frequent than every 30 calendar days.

      Even then, Fairbanks must have been unable to contact the consumer for the previous 30 calendar days or determined that the mortgaged property is vacant. A “property inspection fee” includes a fee to inspect the property securing a loan to determine the property’s physical condition and occupancy status.

  • Broker Price Opinions. Fairbanks may charge for a broker’s price opinion only if:
    • The consumer’s loan payment has not been received within 63 calendar days of the due date; and

    • The broker’s price opinions are limited to the initial broker’s price opinion and to additional broker’s price opinions during the period of continued delinquency not more frequent than every six months.

      A “broker price opinion” is an estimate of the probable sale price of the property securing a loan.

  • Attorneys’ Fees. Fairbanks may impose reasonable attorneys’ fees only if:
    • The fees are necessary to process a foreclosure sale of the property or are otherwise permitted fees under the general rule on fees;

    • A law firm has in fact performed the services; and

    • A law firm has charged Fairbanks for the services.

  • Late fee. The Order prohibits pyramiding late fees and assessing late fees after acceleration.
    • Fairbanks may not “pyramid” late fees (assessing or collecting a late fee on a monthly payment, which is otherwise a full payment for the applicable period and is paid on or before its due date or within an applicable grace period, when the only delinquency is attributable to late fee assessed on earlier monthly payments.

    • Fairbanks may not assess or collect any late fee or similar delinquency charge once it accelerates a loan.

The Complaint alleges that Fairbanks routinely purchased force place insurance when it knew or should have known that the borrower already had adequate coverage. Then it added the premiums (which were significantly higher than retail insurance premiums) to the loan amount, accrued interest on the increased principal, and apparently declared the borrower in default if the borrower could not make a payment amount increased to amortize the additional principal.

The agreement changes these practices. Under the settlement, Fairbanks must complete the following steps before assessing a force placed insurance premium.

  • Notice to the Consumer. Fairbanks must mail, at no cost to the consumer, at least two written notices to the consumer. The notices must clearly and conspicuously disclose what the consumer must do to establish that she already has adequate insurance coverage. The notices must identify a drop-dead date for the consumer to respond. That date must be at least 30 calendar days from the date the first notice is mailed and at least 20 calendar days from the date the second notice is mailed. The timing rules are not all that clear. The agreement states that the second notice may not be mailed until 30 days after the first. So, apparently, you mail the first notice, wait 30 days, and then mail the second notice, giving the consumer an additional 20 days to make good on showing you evidence of insurance before you can force place. The first notice must be sent by first class mail. The second notice must be sent by certified mail.

  • Proof of Insurance. Fairbanks must accept any reasonable form of confirmation that the consumer can produce as proof of insurance. This includes verbal confirmation of the existing insurance policy number along with the identity of the insurance company or agent.

  • Refunds. Fairbanks must refund all force placed insurance premiums paid during the overlapping coverage period and any related fees charged to the consumer’s account during the overlapping coverage period within 15 days of receipt of confirmation of a consumer’s existing insurance coverage.

  • Limitations on Default/Acceleration. Fairbanks may not place a loan in default, assess late fees, or initiate foreclosure proceedings solely due to the consumer’s nonpayment of insurance premiums. It may add any legitimate forced place insurance premiums to the loan principal and charge interest on the additional balance so long as the loan documents and applicable law permit it to do so.

The settlement establishes a very rigorous response time, including new recordkeeping requirements, for a servicer to respond to a borrower dispute over some servicing-related issue. Note that these timelines are shorter than the statutory timeframes currently set out in Section 6 of RESPA.

  • Acknowledging the Dispute. Fairbanks must acknowledge receipt of the customer’s complaint, within 20 calendar days after receiving it. If the complaint is received orally, and Fairbanks resolves the issue before the 20 days are up, it does not need to issue the written acknowledgment so long as it maintains written or electronic records of how the dispute was resolved. The records must be held for at least three years.

  • Investigation. Fairbanks must complete an investigation of the dispute within 60 calendar days. If it uses reasonable procedures but is unable to meet the 60-day time limit, it may use an additional 30 calendar days to complete the investigation so long as it notifies the borrower in writing that it will take the additional time.

  • Resolution. Fairbanks must notify the borrower promptly and in writing of the results of the investigation. If the complaint is received orally, and it maintains written or electronic records of how the dispute was resolved, then Fairbanks may respond orally.

  • Sit On Your Hands. Fairbanks may not take any legal or other action to collect the disputed amount and any related charges until the dispute has been investigated and the consumer has been informed of the results of the investigation.

  • Protect the Credit Rating. Fairbanks may not threaten the consumer’s credit rating or report the consumer as delinquent based on the disputed amount until the consumer’s dispute has been investigated and the consumer has been informed of the results of the investigation.

The Order establishes the following payment handling procedures.

  • Posting Payments. Fairbanks must post each payment and apply it against interest and principal due, before crediting taxes, insurance or fees, as of the date it is received. If it accepts payments in a lockbox, that means as of the day the payment is received at the lockbox. Note that loans based on Uniform Instrument Documents with a revision date before March 1999 are exempt from these requirements.

  • Posting Partial Payments. Fairbanks must accept any partial payment under the same terms. Note that this requirement does not apply to loans that have been referred to foreclosure.

  • Misrepresentation. Fairbanks may not misrepresent any of the following:
    • Any amount owed by the consumer.
    • That any fee is allowed under the loan instruments, permitted by law, or imposed for services actually rendered, if that is not the case.
    • The amount, nature, or terms of any fee or other condition or requirement of any loan.
  • Escrow Disbursements. Fairbanks must make all necessary disbursements of escrow funds for insurance, taxes and other charges with respect to the property in a timely manner.

Unless the loan is in bankruptcy or subject to forbearance agreements, Fairbanks must deliver a monthly billing statement at least 12 calendar days before the payment due date. The statement must be free of charge and include the following information:

  • The total amount due.

  • The unpaid principal balance.

  • The monthly payment due as of the next due date and the due date.

  • If there are change(s) in the monthly payment amount and/or other amounts due, you must explain the reason for the change(s), except that, when using a coupon book, you may notify consumers of any such change(s) by a separate clear and conspicuous notice sent by first-class mail to the consumer at least 12 calendar days before the payment due date.

  • A complete itemization of each and every fee assessed during the statement period.

  • The telephone number and address for the consumer to use if she disputes any of the information provided.

Fairbanks agreed to comply with the Fair Credit Reporting Act as a whole, but the agreement highlights certain specific responsibilities. Specifically, Fairbanks agreed:

  • Not to furnish information to a consumer reporting agency if it knows or consciously avoids knowing that the information is inaccurate.

  • To notify the consumer reporting agencies promptly when it determines that information it previously reported to the consumer reporting agency about any consumer is not complete or accurate, and to provide the agency with any necessary corrections additional information necessary to make the information provided to the agency complete and accurate.

  • Not to thereafter furnish to the agency any of the old incomplete or inaccurate information.

  • To report accounts as “disputed” to consumer reporting agencies, when consumers dispute accounts either in writing, orally, or by electronic means.

Fairbanks is prohibited from taking any action toward foreclosure unless it has:

  • Reviewed any records pertaining to the consumer’s loan to verify that the consumer has failed to make three full monthly payments.

  • Confirmed that the consumer has not been subject to any of the acts or practices prohibited by the settlement agreement, the loan instruments, or law, or if such acts or practices have occurred, that they have been corrected; and

  • Investigated any disputes by the consumer and informed the consumer of the results of the investigation.

Fairbanks must maintain records sufficient to document the steps taken to investigate and conclude each dispute.

Fairbanks is barred from enforcing any clause in any forbearance agreement, entered into by Fairbanks Capital Corp. and any consumer between January 1, 1999 and the date the agreement is approved, that required the consumer to:

  • Acknowledge his/her lack of claims or defenses;

  • Waive access to court; or

  • Otherwise waive or release any rights or claims.

The old forbearance agreements are otherwise enforceable.


Tim Meredith is a founding partner at the law firm of Hudson Cook, LLP, which maintains a national consumer financial services practice and advises industry clients on multi-state and federal regulatory issues. Tim is also the publisher of BasisPoints, a monthly update on how to comply with laws affecting the mortgage industry.

 

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