Two Countrywide mortgage servicing companies will pay $108 million to settle FTC claims that they charged excessive fees to cash-strapped homeowners who were fighting to keep their houses. The $108 million verdicts are one of the largest in an FTC action, as well as the largest in a mortgage servicing action. It will be used to compensate homeowners who were overcharged by Countrywide before its acquisition by Bank of America in July 2008.
“Life is difficult enough for homeowners who are behind on their mortgage payments. “It is inexcusable for a major loan servicer like Countrywide to slap on illegal and unreasonable fees,” said FTC Chairman Jon Leibowitz. “As a result of our deal, homeowners will be reimbursed,” says the company.
According to the FTC’s complaint, Countrywide’s loan-servicing business duped homeowners who were behind on their mortgage payments into paying inflated fees that may total hundreds or even thousands of dollars. According to the complaint, many of the homeowners had taken out Countrywide’s lending arm’s subprime or “nontraditional” mortgages, such as payment option adjustable-rate mortgages, interest-only mortgages, and loans with little or no income or asset documentation.
Mortgage servicers are in charge of managing homeowners’ mortgage loans on a day-to-day basis, including collecting and crediting monthly loan payments. Homeowners do not have the option of choosing their mortgage servicer. Countrywide was the biggest mortgage servicer in the United States in March 2008, before being acquired by Bank of America, with a servicing portfolio worth more than $1.4 trillion.
According to the FTC complaint, when homeowners fell behind on their payments and defaulted on their loans, Countrywide required property inspections, lawn mowing, and other services to safeguard the lender’s interest in the property. Rather than hiring third-party contractors to provide the services, Countrywide established subsidiaries to do so. The subsidiaries marked up the price of the services charged by the vendors – often by 100% or more – and Countrywide subsequently passed the mark-up fees on to the homeowners. In tough economic times, the company’s aim, according to the suit, was to increase profits from default-related service costs. As a result, even as the mortgage market crashed and more homeowners fell behind on their payments, Countrywide profited handsomely by funneling default-related services through businesses it founded exclusively for the purpose of generating revenue.
According to the FTC, homeowners are required to pay for necessary default-related services under most mortgage contracts, but mortgage servicers may not mark up the cost to make a profit or charge homeowners for services that are not reasonable or appropriate to protect the mortgage holder’s interest in the property. Homeowners have no say in who conducts default-related services or how much they cost, and they don’t have the option to shop for them.
Furthermore, the complaint alleges that Countrywide made misleading or unsupported representations to borrowers about amounts owing or the status of their loans while servicing loans for homeowners trying to save their homes in Chapter 13 bankruptcy proceedings. In addition, when new fees and escrow costs were applied to borrowers’ loan accounts, Countrywide failed to notify them. The FTC claims that after the bankruptcy case was ended and the borrowers were no longer protected by the bankruptcy court, Countrywide tried to collect those funds in an unfair manner, including through foreclosure in certain cases.
Two mortgage servicers are named as defendants in the FTC’s complaint and settlement order: Countrywide Home Loans, Inc. and BAC Home Loans Servicing LP, formerly doing business as Countrywide Home Loans Servicing LP. Countrywide will pay $108 million as part of the settlement, which will be repaid to homeowners who were overcharged by Countrywide before July 2008.
Furthermore, the settlement agreement forbids Countrywide from exploiting borrowers who are behind on their payments. The defendants continue to service millions of mortgage loans, including tens of thousands of loans involving customers who have filed for bankruptcy or are facing foreclosure. The defendants are permanently forbidden from:
Making misleading or unsubstantiated statements about loan accounts, such as amounts outstanding, in the course of loan servicing.
Charging any cost for a service unless the loan instruments, the law, or the consumer expressly approve it for a specific service requested by the customer.
Charging any fee for a default-related service unless it is a fair fee charged by a third party for work that has been completed. The fee must be within state law, investor requirements, and market rates if the service is given by a defendant’s affiliate. Defendants must have their affiliates’ fees reviewed annually by an impartial market analyst to ensure that they are not excessive.
Countrywide must also inform customers if it plans to engage affiliates for default-related services and if so, give a fee schedule detailing the amounts charged by the affiliates.
Countrywide must also make significant adjustments to its bankruptcy servicing processes as part of the agreement. Countrywide, for example, is required to give Chapter 13 bankruptcy borrowers a monthly notification detailing their debts, including any fees collected over the previous month. The defendants must also create a data integrity procedure to verify that the data they use to service Chapter 13 loans is accurate and comprehensive.
The United States Trustee Program, a division of the Department of Justice that controls the administration of bankruptcy proceedings and private trustees, was instrumental in bringing this prosecution. The FTC’s ongoing efforts to assist consumers who have been harmed by the economic slump are exemplified by this action.
The Commission voted 5-0 to give staff permission to file the complaint and reach a settlement. The action and settlement were brought in the Central District of California in the United States District Court.
The Federal Trade Commission is a member of the Financial Fraud Enforcement Task Force, which is an interagency group. Visit www.stopfraud.gov for additional information on the Task Force.
NOTE: The Commission files a complaint when it has “reason to believe” that the law has been or is being broken, and a proceeding appears to be in the public interest to the Commission. The complaint does not state or imply that the defendants have committed a legal violation. Stipulated court orders are only for settlement purposes and do not imply that the defendants have admitted to breaking the law. When signed by the judge, stipulated orders have full legal force.
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