Mortgage Servicing Kickbacks?

Mortgage servicing, a business about which most people were once blissfully ignorant, is increasingly getting less-than-good press. The latest sighting comes from Katie Porter at Credit Slips, who tells of pending litigation against Fidelity National, a big, behind-the-scenes player in the servicing game.

Effectively, Fidelity was taking extra compensation that was unseen by bankruptcy judges because they were called “attorney’s fees” or suchlike, when in fact a big chunk of those charges went not to the attorney-subcontractors as reported, but to Fidelity. Porter doesn’t explain why the subterfuge made sense for Fidelity; presumably, they though the judges might nix the charges, but the amounts are so small that (at least to a layperson like me) it’s surprising that they might be contested. In other words, being caught cutting corners wouldn’t seem to be worth the payofff, but Fidelity clearly though it was. And the day of reckoning is upon them.

From Credit Slips:

Last week, a class action lawsuit (Harris v. Fidelity National) was filed against Fidelity National Information Services, a huge player in the billion dollar world of mortgage servicing. “What? I’ve never heard of them,” you say. Fidelity is the company that provides default servicing to most of the large residential mortgage servicers. Their role is a shadowy one; unless you’ve delved deeply into how consumer mortgages are serviced, you probably weren’t aware of their existence–much less how they may be driving up costs for consumers. Foreclosure petitions, proofs of claims, and bankruptcy court motions never bear Fidelity’s name (instead they are signed by the regular servicers or by local counsel retained by the servicers.) But despite its invisibility, Fidelity is almost always part of the action in foreclosures or bankruptcy cases.

The lawsuit alleges that Fidelity receives illegal kickbacks from attorneys who work under contract with them. The exhibits to the class action are clear. Fidelity bills its clients–the servicers–for certain fees– for example, $100 to review a bankruptcy plan. The servicer includes those fees as due and owing on bankruptcy proofs of claims, many of which appear only as “attorneys fees” or “postpetition charges.” However, Fidelity requires attorneys to let it “retain” $50 of that $100. Fidelty characterizes these as “admin fees” paid by the attorney to Fidelity. The big problem with this practice is that bankruptcy law requires full disclosure of where the debtor’s money is going. If the service is getting the debtor to pay these fees, the bankruptcy court should be approving those charges and who is going to receive the debtor’s money. At least, that’s how the class action has framed the legal issues in the case.