The mortgage foreclosure and robo-signing mess keeps getting messier. And the giant banks that have been caught up in the crisis have plenty of company, including Lender Processing Services and its subsidiary LPS, which plays a huge role in foreclosure process now in high gear across the U.S. LPS describes itself as the nation's "number one provider of mortgage processing services, settlement services and default solutions," working with all the top-50 banks in the country.
To provide its "default solutions," LPS maintains a nationwide network of attorneys who do enormous volumes of foreclosure work. The core of the service LPS provides is a software application that enables its attorneys to communicate with LPS and with LPS's financial institution clients. Documents are uploaded, and sometimes created, in the system and then distributed for signing, often as it turns out, by robo-signers. LPS makes money from its default services work primarily via the various fees it charges attorneys it refers cases -- far more so than from the fees it charges its bank/mortgage servicer clients.
Two class actions challenge LPS's get-paid-by-the-lawyers business model. That's made investors wary about LPS's stock, which took big tumbles on Oct. 4 and 5, and closed more than 5% lower on Oct. 8 at $26.39. To reassure investors, LPS issued an Oct. 4 press release and held an Oct. 6 conference call, a Bloomberg transcript of which I've reviewed. One finding upon reviewing those public statements in the context of court records and other evidence is that LPS's claims appear to go pretty far beyond the available record. Requests to get comment from LPS have not been answered.
First a look at the two major class actions, in Mississippi and Kentucky, that have been filed against LPS and local law firms LPS refers business to. While LPS had net income of $276 million in 2009, as the website Naked Capitalism discusses, the money at stake in the suits is enormous, potentially billions of dollars in attorney's fees. The Mississippi class action also targets a similar firm, Prommis Solutions, while the Kentucky class action focuses on LPS. The suits go to the heart of LPS's and Prommis's business models. In addition to the fee structure complaint, the respective suits charge LPS and Prommis with the unauthorized practice of law. And despite LPS's bold public statements that the suits pose little threat, an attorney who represented the plaintiff in a similar class action in 2008 strongly disagrees, disputing the way the company has characterized that prior suit.
At issue is the way money flows between the law firms and LPS/Prommis. Specifically, does the LPS/Prommis business model constitute illegal fee-sharing and/or kickbacks? Sharing legal fees with nonlawyers is illegal, and the neither LPS nor Prommis are law firms. If plaintiffs win either case, it's hard to see how the companies can continue in their present form.
Not to worry, LPS executives said on an Oct. 6 conference call with analysts. The firm had faced a similar suit in Texas, the "Harris case," and came out clean. Here are some specific quotes from Jeffrey S. Carbiener, president and CEO of LPS, according to the final transcript published by Bloomberg:
"These allegations were already successfully defended in the 2008 Harris case in Texas. In that case, it was clearly demonstrated that the allegations of fee splitting were meritless, and the action was voluntarily dismissed by the plaintiffs."
"As ruled in the 2008 Harris matter, I am confident that once the courts in these cases are presented with all the facts, the default management services provided by LPS will once again found to be legal, ethical and reasonable in all respects."
"...that's why the plaintiffs backed off and voluntarily dismissed the case. They knew they had no case."
Why the Plaintiffs Dismissed Their Case
These statements at least partially conflict with the public court records in the Harris case: The only ruling on the substance of the Harris plaintiffs' allegations largely went in their favor. The bankruptcy judge -- the case started in bankruptcy court -- allowed three of the five claims to go forward.
After the Bankruptcy Court's decision, the District Court decided, as is its right, to oversee the remainder of the suit. After various procedural steps, the plaintiffs did indeed voluntarily dismiss their suit. Carbiener had that right. But not because the suit had no merit, at least according to Johnie Patterson, the lead attorney for the plaintiffs and the person who asked the court to dismiss the case. Says Patterson:
"I filed the motion to dismiss for procedural reasons only. As a matter of attorney-client privilege, I cannot explain further. However I believed then, and do now, that we had a strong case. To the extent the new lawsuits involve similar allegations, and involve contract terms like the ones in the "Network Agreement" appended to our complaint, I'd guess they have a strong case, too."
The point isn't whether or not LPS will ultimately win or lose the new cases -- only time will tell that. But Carbiener's conference call statements seem to go pretty far beyond the available record.
Claims and Interpretations
And the Harris case comments aren't the only bold pronouncements LPS has made in recent days. It also issued a press release about its document-creating and document-signing practices. Among its claims:
LPS has not executed affidavits containing substantive borrower information. . .since September 2008. . . . These affidavits were then executed by LPS consistent with industry practice. . . . LPS had processes in place to ensure the information in the affidavits was validated and that the affidavits were signed properly.
In reference to assignments of mortgage, LPS. . .document preparation subsidiary, Docx, LLC. . .prepared assignments of mortgage for two lenders/servicers between 2008 and 2009. . . .
The document was then printed and either signed by the lender/servicer or Docx. . .Docx did not determine whether these documents were then used in a court proceeding -- those decisions were made solely by the lenders/servicers or their attorneys.
A fair translation might be: Until 2008, and in some cases until 2009, LPS signed affidavits with the "industry practice" of robo-signing without determining the truth of the documents. By signing "properly," we mean our employees had a document on file from the bank giving us the appropriate title and signing authority for the documents we signed.
"A Production Line"
This translation is supported by the company's September 2006 newsletter, in which LPS employee Dory Goebel wrote in detail the about how LPS's "Document Execution team" would get documents signed as needed for the attorneys they contracted with. Attorneys would request a document be signed and load it into LPS's software. LPS would then determine if one if its employees could sign the document, or if it had to be sent on to the bank client for signing. All documents LPS could sign were printed in Minnesota for execution. Those that had to go out to clients for signature were routed through Jacksonville, Fla. As Goebel explained:
"The Document Execution team is set up like a production line, ensuring that each document request is resolved within 24 hours. On average, the team will execute 1,000 documents per day. The Document Execution department, total[s] 18 associates. . . . The Client Document Execution team is made up of 8 associates who work to obtain signatures on all documents where [LPS] does not have authority to sign."
The graphic accompanying the article makes clear that after being sorted for signing, the documents were reviewed to "ensure that proper signing authority has been utilized, all information is filled out, and proper signature and notary is completed." However, the truth of the information in the document is not double-checked, and given the "production line" pace of operations, its seems highly unlikely that it could be.
Goebel herself has signed many LPS-executed affidavits. Or rather, Dory Goebel and people purporting to be Dory Goebel because the signatures often don't match. What is consistent across the documents is their inherently fraudulent nature. For example, one document that Dory Goebel (or someone in her name) signed on April 10, 2007, says right above the signature:
"5. The foregoing facts are of my own personal knowledge and belief, and if called upon to appear as a witness, I could, and would, testify competently thereto. I declare under penalty of perjury that to the best of my knowledge the foregoing facts are true and correct."
One Texas judge has already found a person who robo-signed documents unable to "testify competently." Incidentally, all the various types of Dory Goebel signatures are notarized, calling into question LPS's notaries.
Is the Problem Really Limited -- and Fixed?
The LPS press release also addressed the mismatched signatures:
There have also been reports in the media regarding varying signature styles on assignments of mortgage. The varying signature styles resulted from a decision made by the manager of Docx to allow an employee to sign an authorized employee's name with his or her express written consent. LPS was unaware of this practice. . . . upon learning of it, LPS immediately took remedial actions to correct all assignments of mortgage signed in this manner and provided these corrected assignments of mortgage to the two lender/servicer clients or their attorneys.
The statement is implausible. How, exactly, did LPS identify all the assignments of mortgage with bogus signatures? Did it track the practice as it was happening? If so, it becomes less clear that LPS was unaware of how documents were being signed. In any case, even if LPS corrected all such assignments and redistributed them, that doesn't correct documents that had already been submitted to courts. Given the time pressure to complete foreclosures, it's hard to imagine most or all of the documents with mismatched signatures were not submitted to courts.
Beyond that, it's not just assignments of mortgage that are problematic. I've seen Dory Goebel signatures on three other types of sworn court filings. In considering LPS's assertions about how limited its robo-signing problem is, and how it has essentially resolved it already, remember that Goebel is just one of LPS's robo-signers, and that her department was signing 1,000 documents/day.
Like Lucy and Ethel
Despite its explanation of the multiple signatures per name, the press release doesn't get at why it happened. O. Max Gardner, a consumer bankruptcy attorney in North Carolina, provides this colorful explanation:
"Do you remember thatI Love Lucy episode where Lucy and Ethel have jobs at a factory and they have to take chocolates off a conveyor belt and wrap them before putting them in boxes, and the candy just keeps coming faster and faster, and they just can't keep up, and well, chaos ensues. It's like that. The volume of these documents is just overwhelming, and you know, one of the signers needs to take a break, or is out sick or something, and the conveyor belt doesn't stop. Someone has to keep signing."
Given Goebel's description of the document execution process as a "production line," Gardner's analogy seems particularly apt.
Regarding the press release's claim that the multiple signature problem was limited to "two lender/servicer clients," in the 10 "Dory Goebel" documents I've reviewed, she signed on behalf of Franklin Credit Management, Fremont Investment and Loan, Homecomings Financial, IndyMac Bank, Washington Mutual Bank and Wells Fargo Bank, with titles ranging from "Default Services Jr. Officer " to "AVP," which presumably means assistant vice president.
A Frustrated Judge
During the Oct. 6 conference call, LPS tried to distance itself from the attorneys filing the robo-signed documents by emphasizing that its bank/servicer clients really select and work with the attorneys, and that LPS is essentially an administrative assistant go-between. But, as Gardner explained, LPS manages the attorneys; the bank/servicer clients don't.
A detailed description of how LPS, its software, the attorneys and the bank clients interact is laid out in an April 15, 2009, opinion by Diane Weiss Sigmund, U.S. Bankruptcy Court Judge for the Eastern District of Pennsylvania.
Judge Sigmund was frustrated by the problematic filings that resulted from the way the system worked -- for example, the wrong note and incorrect debt data were filed with the court -- and found that as the system currently operated, the attorneys had little ability to communicate with the banks that were ostensibly their clients. Instead, the lawyers dealt with LPS and its software system. One of the sanctions Judge Sigmund ultimately ordered was for the bank client involved -- HSBC -- to communicate with its LPS attorneys and tell them how to get in touch directly with HSBC when necessary.
Color-Coding Attorneys' Performance
LPS's management of the attorneys in its network is perhaps best expressed by the way it rates the performance of those attorneys. The key metric is the speed with which the attorneys perform various tasks that the LPS software tracks. It uses a "3/3/3 rule": The attorneys have three minutes (or hours, depending on who you talk to) to open an email sending them a referral, three days to make the first filing and 30 days to complete the foreclosure. Exact deadlines vary by jurisdiction. For example, if foreclosure involves a judicial proceeding, the timeline is longer.
Nonetheless, LPS's software carefully tracks how fast each attorney meets the various milestones in its system, and it gives the law firm an "Attorney Performance Rating" of green, yellow or red, depending on how well the timeline is met. If a firm stays in the red long enough, for example, 90 days, it won't get any more referrals from LPS. Most of the communications from attorneys in the LPS system, Gardner notes, are requests to lengthen the timeline for a particular milestone given the developments in the case, so the firm's APR won't be damaged.
Given all of the above, it's hard to see how LPS's investor-reassuring statements can be taken at face value. Although perhaps that's not surprising, given that many of the documents it has overseen can't be, either.