Risk Management in Mortgage Loan Servicing and Collection

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It has become increasingly evident that federal and state regulatory and law enforcement agencies, including the Federal Trade Commission, as well as the federal and state bank regulatory agencies, rating agencies, investors, class action lawyers and the media, are focusing on "predatory lending" servicing and collection issues. This scrutiny is likely to increase in the wake of the settlement announced in November 2003 between the FTC and Fairbanks Capital Corporation. The Fairbanks settlement - the first ever between the FTC and a major loan servicer - followed by one year the public announcement by senior officials at the FTC of a new focus on servicing and collections. This article addresses the following key areas of heightened regulatory scrutiny and litigation risk in connection with servicing and collections, including those specifically identified by the Associate Director of the FTC Division of Financial Practices and covered in the Fairbanks settlement: (i) collection tactics; (ii) fees; (iii) payment processing; (iv) force-placed insurance; (v) credit bureau reporting; and (vi) foreclosure process. The article then discusses a recommended approach to risk analysis, including a review of policies and procedures and loan files as well as employee interviews.

This article was co-authored with Andrew L. Sandler, Anand S. Raman and David B. Leland and appeared in the Review of Banking and Financial Services, Volume 20, No. 5, and is reprinted with permission.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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