Lender Processing Service (LPS), is "the nation's leading provider" of "default solutions" to mortgage servicers, meaning it manages every aspect of foreclosure, whether in bankruptcy or state court. However, LPS is facing investigations and lawsuits that challenge its existence because they focus on the legality of LPS's basic business model.
It's a Louisiana bankruptcy case involving a single foreclosure that best illustrates the problems with the banks' outsourcing their mortgage default work to LPS or similar entities. During a bankruptcy, foreclosure is forbidden without the judge's permission, so LPS is frequently involved in seeking that permission.
In that Lousiana case, involving the bankruptcy of Ron and La Rhonda Wilson, LPS is facing sanctions for allegedly committing perjury during a hearing held to find out why the bank -- Option One -- twice asked the bankruptcy court for permission to foreclose when the debtors were current on their mortgage. LPS insists it did not intend to mislead the court.
A Disturbing Picture
Although the U.S. Bankruptcy Trustee, which is the party asking for the sanctions,seems to have the stronger case if you read the motions at those links, the perjury issue isn't central to my point here. In the detailed proceedings triggered by the wrongful requests to foreclose, a disturbing picture emerges of a thoroughly dysfunctional "legal" process between mortgage servicers and their LPS-network attorneys. As a result of that process -- adopted by servicers to save themselves money -- everyone else winds up paying.
Taxpayers pay because judicial resources are wasted. Everyone affected by the real estate market (pretty much everyone because of real estate's economic impact) pays because foreclosure and bankruptcy cases take longer to process. Everyone also pays because the process generates false documents. Those false documents taint the legal system and, depending on their type, can damage title to foreclosed property. Finally, foreclosed and bankrupt homeowners pay because lenders' legal fees are inflated, and worse, their homes are taken wrongfully.
In short, in their drive to maximize efficiency and minimize cost to themselves, mortgage servicers have shifted tremendous costs to everyone else. A classic case of market failure, of negative externalties.
Trying to Foreclose on a Current Loan
The Wilson case began when the couple declared bankruptcy in October, 2007. In January, 2008, Option One bank's LPS-network counsel, the Boles firm, asked the bankruptcy court to let it foreclose on the Wilsons' house, claiming that they hadn't made a mortgage payment since October. The debtors objected, saying they were current on the loan. The judge denied Option One's request.
A couple of months later, Boles tried again, this time attaching an affidavit signed in Option One's name by LPS employee Dory Goebel. The affidavit said the Wilsons were current through November, but now were delinquent for December, January, February and March. After the Wilsons detailed the payments made to prove they were still current, the judge decided to find out what was going on.
Here's what happened: The Wilsons sent the payments to Option One. Option One sent a message through LPS's computer system (LPS Desktop) to LPS, LPS messaged Boles, and Boles wrote that LPS should have the money sent to it. LPS relayed the message to Option One.
Judge ElizabethManger was baffled by this convoluted approach:
part of my concern is. . .that while Option One has the right to contact directly Counsel, and Counsel contact Option One, in fact, the policy is to go, quote-unquote, through [LPS]. . . . I'll just say for the record that I don't understand why that would be necessary if [LPS] had no ability to make decisions in the middle of this chain. Why go through them? It's just adding an additional layer.
A Boles attorney misleadingly told the court that he didn't know why he was receiving the payments from Option One. But even without misconduct on the attorney's part, the LPS approach made problems more likely.
For starters, the LPS system is heavily automated, but as everyone knows, computers are only as good as the data given them. In the Wilsons' case, their account was set up wrong in the LPS computer system, and it wasn't properly reset when the first request was denied. Classic GIGO (garbage in, garbage out).
Second, the LPS system ensures that the left hand doesn't know what the right hand is doing, making garbage more likely to go in. For example, even though LPS knew the Wilsons had sent in the checks, it had no process for telling its affidavit signer, Goebel. It's not like Goebel was unaware of the possibility: She used to run the department that deals with payments from debtors in bankruptcy and has written extensively about the LPS "Document Execution Teams and Processes."
But LPS's extremely limited affidavit "verification" procedure, which Goebel testified lasts perhaps 10 minutes, doesn't involve a routine check with that department. Nor did it include a review of the correspondence that would have revealed if any payments had come in. The verification process simply involves checking numbers against a couple of computer screens.
Truth Be Dammed
But it gets worse still. LPS admitted that: "even if Goebel had reviewed the [correspondence] and been made aware of the existence of the checks in question . . . before she signed the affidavit . . . the affidavit would have remained unchanged." The LPS process is to rely on the records on particular computer screens in Option One's system, period, truth be damned.
Based on everything that came out at the hearing, Judge Magner decided far more discovery was necessary and allowed the U.S. Trustee to take the lead on it.
After sufficient discovery, in May, 2010 the trustee asked the court to punish LPS and the Boles firm because "[LPS] and Boles materially misled this Court as to their knowledge of post-petition mortgage payments [and LPS's role generally]. LPS and Boles, of course, disagreed. Boles's opposition is interesting in that the firm mostly stressed that it had cleaned up its act rather than deny it had done wrong.
A trial on the trustee's request was held on Dec. 1. The arguments are now over, and it's up to the judge to rule on sanctions. Whatever her decision, however, the key thing here is what the case reveals about the consequences of the banks' outsourcing model.
As a direct result of the bizarrely inefficient communication structure and the travesty of a "verification" procedure, Boles filed two motions it shouldn't have, both asking to foreclose on a mortgage that was current. (As later came out, the motions were also wrong because they sought permission to foreclose for Option One instead of for the Option One securitized trust that owned the mortgage.)
Each time the Wilsons and their attorney had to respond, and the court had to hold a hearing. Not only did the debtors' attorney spend more time and thus have to charge them more, but the work Boles did -- which LPS billed it for and for which Boles surely billed Option One -- would normally be charged, ultimately, to the debtors. Of course, once the judge decided to figure out what was happening, even more attorney time and judicial resources were spent.
The Wilsons' case isn't the first time LPS's business model has produced false documents. At the first investigative hearing Judge Magner held, Goebel wasn't present because she was in Ohio testifying about a different problematic affidavit she signed. Similarly, in weighing sanctions, Judge Magner has taken judicial notice of a New York bankruptcy case, In re Fagan.
In Fagan, a 2007 decision, Judge Adlai Hardin was irate because the bank submitted and resubmitted requests for permission to foreclose when the debtor was current -- including one with a false Goebel affidavit. And it was just one of several then-recent cases involving false certifications by creditors seeking to foreclose on current bankrupt debtors:
[Requests to foreclose] may be routine and inconsequential to secured creditors and their counsel. But to a debtor and his or her family, such a motion and the consequent loss of the family home may be devastating. Most creditors and counsel are conscientious. But some are callous by design or inadvertence, as exemplified by this motion and two others presented to the Court the same week. The danger here is that a debtor who does not have an attorney or the resources of intellect or spirit to defend against a baseless motion may lose his/her home despite being current on post-petition mortgage and plan payments.
Fagan involved a different creditor and a different law firm than those involved in the Wilson case. Still another bank and law firm were involved in a Pennsylvania case, In re Taylor. In Taylor, Judge Diane Weiss Sigmund had to deal with numerous incorrect motions and miscommunications because of the LPS business model, prompting her to comment that the request for permission to foreclose was "a textbook example of why the [LPS] procedures used by HSBC and its counsel in the name of minimizing collection costs is so problematic."
That request for permission to foreclose was also based on missed payments that weren't missed; they had been sent by HSBC to its counsel, albeit the sheriff's sale department instead of the bankruptcy department. Judge Sigmund was upset by how the payments were handled, calling them "circumstances that are life altering to debtors."
A Big Savings -- at a Huge Cost
Why do banks use LPS given that its methods result in false affidavits with meaningful frequency -- false regarding the amounts owed and the entity they're owed to, as well as false by being signed by people without personal knowledge? The answer: LPS is free to the banks (LPS charges the lawyers). Surely, using LPS saves the banks a lot of money.
Being free has given LPS more than half the market, but it doesn't have the whole market. While I don't have any information about other companies' performance, ads like this one for Orion Financial Group don't inspire confidence. I mean, look at the way the stick figures are signing the documents.
Judge Weiss had sympathy for the banks' cost-saving priority, but noted that when debtors contest the LPS filings, problems show:
It seems reasonable that a mortgage lender should be able to avail itself of economic and expeditious means of collecting defaulted loans through the use of technology and delegation of tasks to lower cost labor. In many cases, the motions are granted by default, [because the debtors just can't pay.] However, where, as here, the debtor contests the [request for permission to foreclose], the flaws in this automated process become apparent. At this juncture, an attorney must cease processing files and act like a lawyer. That means she must become personally engaged, conferring with the client directly and abandoning her reliance on computer screens as expressions of her client's will. This did not happen in this case until the Court became involved."
While all the cases I've discussed are bankruptcy cases, the same problems happen in foreclosure cases managed by LPS. Indeed, since judges aren't involved in many foreclosures, and fewer homeowners are represented in those cases, the problems are, if anything, worse.
Time for Change
Consumer bankruptcy Attorney O. Max Gardner III put it this way:
"The Wilson case succinctly documents the fundamental problems with the outsourcing of mortgage default legal work to non-lawyers such as LPS Default Solutions. LPS has created a thousand times more problems than they have solved. It is time to eliminate the middleman from mortgage work and assign the job to real lawyers who are more concerned about the accuracy and quality of their work than about meeting arbitrary timelines and benchmarks imposed by non-lawyers."
Despite the ever-increasing number of cases where the banks' cut-rate processes are shown to produce false documents and support foreclosing on loans that are current, the banks continue to be treated with undue deference in many arenas: courtrooms, Congress, even, perhaps, the Iowa Attorney General's office.
It's time for that to stop. The banks' embrace of "default solution" vendors is just one example of a tactic that helps banks' bottom line while hurting everyone else.
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