We’ve discussed Lender Processing Services, which serves as an outsourcer to the mortgage servicing industry, primarily via a software platform, as well as other companies with similar business models.
One of LPS’s major activities is acting as a middleman in the foreclosure process, reportedly hiring and firing foreclosure mills in the name of servicers. LPS is under fire in two national class action lawsuits for alleged impermissible fee splitting with foreclosure firms. A recent story in Reuters confirmed details we supplied in late October as to how LPS works with foreclosure mills, in particular, the very tight control it exercises over them.
Fannie Mae issued a directive today which effectively eliminates the payment of certain types of fees to firms like LPS. In LPS’s Default Services Group, which accounts for nearly half the firm’s revenues. Per (hat tip Lisa Epstein):
Attorneys and trustees assigned a Fannie Mae mortgage loan can no longer be charged any technology or electronic invoice submission fees by the servicer or a third-party vendor used by the servicer effective Feb. 1, 2011.
Fannie Mae made the announcement Monday. On Sept. 1, Fannie limited the amount vendors could charge attorneys for technology and invoicing fees to $25 per loan and $10 for submitting electronic invoices. It also prohibited any servicer from requiring or encouraging attorneys to use specified vendors.
But for any referral on or after Feb. 1, “attorneys and trustees handling Fannie Mae mortgages loans may no longer directly or indirectly be charged any technology or electronic invoice submission fees by the servicer or any outsourcing companies or third-party vendors utilized by the servicer,” according to the announcement…
But for foreclosure or bankruptcy referrals on or after that same date, Fannie said it would reimburse servicers for those technology and electronic invoice submission fees up to the limit set in September….
Servicers are prohibited from entering into an arrangement with any outsourcing company in which it receives a benefit, such as lower charges, for referring a foreclosure matter on a Fannie Mae loan to a particular attorney or trustee.
“Outsourcing companies or third party vendors must not be permitted to directly or indirectly select (or influence the selection of) the attorneys and trustees to be used on Fannie Mae mortgage loans,” according to the announcement.
Notice that this change is more in the line of adding insult to injury; the bigger hit to LPS and its brethren was the earlier reduction of technology fees to $25, when thy had been charging considerably more. We described the fee structure :
To illustrate the degree of control LPS exercises over its network: we have been told by an LPS insider that the software that LPS uses to coordinate with all law firms in its network, LPS Desktop, incorporates a scoring system called 3/3/30. When LPS sends a referral on a foreclosure, the referee is expected to respond in three minutes. When it accepts the referral, it is auto debited (ACH or credit card). In three days, it is expected to have filed the first motion required in pursing the case, and it is expected to have resolved the case in 30 days. Firms are graded according to their ability to meet these time parameters in a green/yellow/red system. Firms that get a red grade are given a certain amount of time to improve their results or they are kicked out of the network.
The cases describe the many fees between LPS and the network law firms. The terms of standard agreements provide for the payment of $150 at the time of referral (the first 3 in the 3/3/30 standard above). Network firms allegedly pay other fees as various milestones are reached, and these are couched as fees for technology, administrative review, document execution, and other legitimate-sounding services. We’ve also been told separately by LPS insiders that LPS and network law firms split the fee for the motion for relief of stay in bankruptcy court, as well as the fee on a small filing called a proof of claim.
The other interesting part is the statement of intent, that the outsourced vendors are not to exercise influence over attorney selection. Query how that can take place, given that a big part of LPS’s selling proposition is that it makes sure certain deadlines are met, and its method of assuring compliance is the threat of redirecting business. Another insider, a recent attorney in a foreclosure mill, sent a redacted copy of an LPS scorecard with this comment:
Just as some background, I would receive these every day and my entire job revolved around making sure the APR (attorney performance review) remained in the green (if it fell to yellow or heaven forbid the red I would have to explain to my boss how I would get it back into green etc.). The reason it had to stay in the green was because the better the score the more files the firm would receive from the different clients and as a result my bosses would make more money.
This development suggests that Fannie is taking the allegations in the two class actions lawsuits and the various media reports seriously. It also begs the question as to why servicers have not followed suit (the answer, in part, is that they are more dependent on LPS than the GSEs are). By any right, they should be every bit as concerned about the issue of improper fee splitting and influence, as well as the possibility that LPS and other outsourcers using a similar business model ares using their position as the de facto overseer of foreclosure attorneys to direct business to its other units, such as its REO services business (which organizes property management services on foreclosed homes).
Microsoft is the case example of how someone who “owns” an important technology platform can leverage it to get an advantage in selling other servicers. Technology outsourcers to servicers have monopolies, at least in certain products and geographies, sometimes across the servicer’s business, putting them in a particularly powerful position. It isn’t hard to see how problematic that role is, particularly in light of the other questions surrounding these companies.