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 yearlong investigations by federal and state authorities, it appears to add up to at least a $55-million settlement, and a strict 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 still must be approved by the agencies, would create a $40-million fund to assist consumers who were harmed by Fairbanks, and set aside another $15-million to dispose of class-action suits and to pay fines. The FTC and HUD declined immediate comment on PMI's disclosure of the long-awaited settlement.
Fairbanks, the country's largest servicer of "subprime" 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.
Some 200,000 of its 600,000 loan customers were listed by the company as 60 days delinquent or more last May, and 45,000 were in the process of foreclosure, according to a top official. Hundreds of Fairbanks customers from Maryland to California barraged legislators and regulators with complaints or filed class-action suits. Maryland's U.S. senators, Barbara Mikulski and Paul Sarbanes, called for investigations of the company's practices last spring, triggering HUD's involvement in investigations under way at the FTC.
In a class action consolidating four separate suits in California, customers of Fairbanks alleged that the company not only routinely counted on-time payments as late and imposed costly penalties, but threatened many borrowers with quick foreclosures unless they paid substantial fees. One 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 all home foreclosures on residents with Fairbanks-serviced mortgages. State 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 "force-placed" high-cost insurance coverage on customers even when they could produce documentary evidence that their policies were fully 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 May that such complaints "come with the territory" of being the No. 1 servicer of subprime mortgages in the country.
"We have litigation in this business," he said. "It's part of the business." Garland has been removed as president and a new team of executives appointed by PMI Group took over management of the company.
As a servicer, Fairbanks does not originate new mortgages to homeowners, but instead 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 prescriptive requirements for Fairbanks are not yet available, they reportedly may amount to a "best practices" servicing model not only for Fairbanks, but for other large mortgage companies in the subprime arena as well.
One reform, for example, might set specific requirements on 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 recently sold or transferred to Fairbanks by other lenders or servicers.
Other reforms could deal with mandatory "loss-mitigation" requirements, where Fairbanks would be forced to aggressively work with delinquent borrowers to cure their problems, rather than squeezing legal fees or foreclosure sales out of them.
E-mail Ken Harney at kharneywinstarmail.com.