Loan servicer gets a downgrade

Fairbanks Capital is being investigated after many complaints.

Adolfo Pesquera, San Antonio Express-News (Texas) May 9, 2003, Friday

Fairbanks Capital Corp., a major mortgage loan servicer, was downgraded this week by Moody's Investors Service because of concerns that revenues will be affected by its efforts to comply with federal investigations.

In March, Fairbanks became the target of a criminal investigation by the Department of Housing and Urban Development's office of inspector general.

Tuesday's action by Moody's, dropping Fairbanks' rating from "strong" to "below average," was the latest in a series of adversities preceded by a flood of complaints from homeowners who alleged they were wrongfully assessed thousands of dollars in fees and penalties.

In many cases, consumers said they lost their homes or were brought to the brink of foreclosure because of Fairbanks errors.

Standard & Poor's lowered Fairbanks' rating from strong to below average last week.

The S&P move caused PMI Group Inc., which owns 57 percent of Fairbanks shares, to withdraw its earnings guidance for 2003.

Fairbanks became the subject of a series of San Antonio Express-News articles last August after Bexar County residents came forward with complaints that the company initiated foreclosure proceedings based on erroneous non-payment information.

The Express-News investigation found that the company engaged in numerous questionable activities, including late fee penalties on payments that were made on time and force-placing higher cost property insurance on residents who already had current policies.

Fairbanks even penalized one resident for not keeping current with property taxes, though the client had a valid contractual agreement with the tax assessor.

The Federal Trade Commission in October publicly expressed its intention to examine the servicing segment of the non-prime industry.

In company statements, Fairbanks said it was "disappointed by and disagrees with the extent of S&P's rating change."

Fairbanks President Bill Garland further stated that the company would fully cooperate with the HUD and FTC investigations.

Fairbanks acknowledges that there have been numerous lawsuits and news reports regarding consumers citing predatory and deceptive business practices. The company alleges that in many instances, the complaints contain inaccurate or misleading information.

''We have reviewed these complaints and look forward to presenting the facts in response to the HUD and FTC reviews,'' a company statement said.

Garland said Fairbanks has initiated a review of all loans currently in foreclosure or subject to referral to foreclosure.

"As a leading servicer in the non-prime market, Fairbanks takes its responsibilities very

seriously," he said.

The Salt Lake City-based Fairbanks specializes in servicing subprime loans. Roughly a third of its 600,000-loan portfolio is more than two payments behind, Garland said.

However, hundreds of clients nationwide have alleged in numerous class action lawsuits that the "late payment" record keeping is often in error.

In a nationwide class action lawsuit filed April 17 in California, attorneys allege that Fairbanks' error-prone ways are actually "a scheme of unfair, unlawful and deceptive business practices" used to wrongfully enrich Fairbanks and PMI.

Until seven weeks ago, Fairbanks was successfully claiming in courts that its mistakes were irrelevant, thus excluding all accounts not actually in default. But the U.S. Seventh Circuit Court of Appeals ruled March 20 that mortgage servicers could not avoid federal laws regulating debt collectors because of bookkeeping errors.

By Fairbanks' logic, wrote Circuit Justice Anne Claire Williams, only debtors that were correctly put into default status could use federal protections aimed at correcting mistakes.

"This broadens the reach, no question," said Richard Sommer, a San Antonio real estate attorney and consumer advocate. "If a servicer asserts that a debt is in default, then they become subject to this act. You can't say, 'Well, we made a mistake thinking it was in default and it wasn't.'"

The opinion of the court in Chicago arrived by coincidence in the midst of a media blitz in Baltimore, where Hearst Corp.-owned WBAL-TV was airing complaints of Maryland residents with Fairbanks'-controlled accounts.

The Hearst Corp. also owns the San Antonio Express-News.

Baltimore's Community Law Center, a nonprofit agency that deals with predatory lending, responded by becoming a clearinghouse for hundreds of distressed homeowners.

Diane Cipollone, the law center's research and policy director, asked U.S. Sens. Barbara

Mikulski and Paul Sarbanes, both founders of the Baltimore City Flipping and Predatory

Lending Task Force, to seek an investigation. Mikulski asked HUD Inspector General Kenneth Donohue for a review. A nationwide HUD Hotline was opened; complaints can be made via email at hotline@hudoig.gov or at (800) 347-3735.

''What they are doing to these people is despicable, and it is absolutely wrong," Mikulski said. "And I want to urge the investigations to go forth to see if Fairbanks has done criminal acts, if they have possibly broken regulatory acts. And if that's so, I want them decertified, and I want them prosecuted, and I want redress for the victims."

Cipollone said her agency is too preoccupied with saving homes from foreclosure to initiate a national dialogue now, but hopes in time to pressure lenders to avoid using servicers that engage in predatory practices.

"I hope there will be some national discussion on what needs to be done so this doesn't happen again," Cipollone said. "That is what happened to respond to predatory lending practices. The loan servicer has apparently fallen through the cracks."