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The charges billed to borrowers in foreclosure range from posting a legal notice in a newspaper to preparing documents to recording a foreclosure at a county recorder's office. The concern is that vendors are overbilling borrowers and servicers are not properly monitoring the vendors.
"The servicers will be held accountable for not having audited or not managing the expenses better," says Tim Rood, a partner at consulting firm the Collingwood Group. "These enforcement actions are just getting started."
Banks typically outsource the processing of foreclosures to local attorneys, foreclosure trustees and a host of vendors, including property preservation companies.
Regulators have a strong interest in cracking down on vendors' billing practices because most mortgages are guaranteed or insured by Fannie Mae, Freddie Mac and the Federal Housing Administration. In most cases, the borrower has defaulted on the loan and exited the home, so it's the government agencies—and therefore, taxpayers—that are on the hook for the foreclosure costs.
For servicers that have already filed claims to be reimbursed for foreclosure expenses, the government can assess "treble damages" for violating the False Claims Act. Such fines and penalties could potentially be "onerous," says Rood.
The CFPB issued an industry bulletin in April warning banks and nonbanks that they will be held accountable and could face fines for the actions of third-party service providers. Examiners want proof that vendors are not overcharging consumers and that fees reflect the true costs of a service.
"In servicing, you have attorneys that pass the cost on to the servicer, who passes the costs on to the borrower or investor without any due diligence of whether that's the true cost of the service," says Christopher Sicuranza, a managing director of financial services at the consulting firm Navigant. "Banks need to understand what costs are being passed on to the consumer and whether those costs are reasonable and permissible."
The CFPB declined to comment on whether it plans to subpoena mortgage servicers. Other regulators, though, have already started cracking down.
PNC Financial Services Group disclosed on Aug. 8 that it had received a subpoena from the U.S. attorney for the Southern District of New York for "claims for foreclosure expenses that are incurred in connection with the foreclosure of loans insured or guaranteed by FHA, Fannie Mae or Freddie Mac." PNC did not disclose when it received the subpoena but said it is cooperating with the investigation, which is in its early stages. The company declined to comment further.
Also, insurer MetLife disclosed on Aug. 7 that its affiliate MetLife Bank received a subpoena in May from the Department of Justice "requiring production of documents related to…payment of certain foreclosure-related expenses to law firms and business entities affiliated with the law firms."
New York-based MetLife said in the filing "it is possible that various state or federal regulatory and law enforcement authorities may seek monetary penalties from MetLife Bank related to foreclosure practices." The company declined further comment.
In Colorado, foreclosure billings have reached a crisis point. Colorado Attorney General John Suthers has alleged that some law firms have charged homeowners six times the market rate to post legal notices of foreclosure. The state launched an investigation into law firms that either own or have a financial interest in vendors that bill for foreclosure notices and filings.
A separate investigation by the Denver Post last week found that some foreclosure attorneys charged borrowers twice the amount to post a legal notice of foreclosure and in some cases charge even when the notices were not posted at all.
At this point, the Colorado investigation is only targeting law firms, but it is conceivable that it could eventually ensnare banks and other servicers.
"There are any number of circumstances where banks could be held responsible for attorney foreclosure practices," says Richard Gottlieb, a partner at BuckleySandler.
"The risk of outsourcing has increased substantially," adds Sicuranza. "Many of these functions are outsourced traditionally because it was cheaper to do so and the banks didn't have the expertise in their organization. What regulators have focused on is the interaction with the customer. Banks need to implement a risk-based approach to provide oversight of vendors."