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Fairbanks Capital settlement illustrates intent of FTC and HUD to crack down on unfair or deceptive servicing practices

The Federal Trade Commission in November announced settlements with Fairbanks Capital Holding Corp., its wholly-owned subsidiary Fairbanks Capital Corp., and their founder and former chief executive officer. These settlements required defendants to pay approximately $40 million in redress to consumers, and included injunctive relief against future violations. The settlement arose out of a complaint filed by the FTC in federal district court charging the defendants with engaging in a variety of unfair, deceptive, and illegal practices in the servicing of subprime mortgage loans. According to the FTC, the defendants, among other things:

Violated the FTC Act by:

• failing to post consumers' mortgage payments in a timely manner, and then charging consumers late fees or additional interest for failing to make their payments "on time;"
• charging consumers for force-placing casualty insurance on their loans when insurance was already in place;
• assessing improper or unwarranted fees that were not authorized either by the loan documents or applicable law; and
• misrepresenting the amounts consumers owed.

Violated the Fair Debt Collection Practices Act in connection with collecting loans that were in default when the defendants obtained them by:

• falsely representing the character, amount, or legal status of consumers' debts;
• communicating or threatening to communicate credit information which was known or which should have been known to be false;
• using false representations or deceptive means to collect or attempt to collect a debt;
• collecting amounts not authorized by the agreement or permitted by law; and
• failing to validate debts.

Violated the Fair Credit Reporting Act by:

• furnishing information about consumers' payment status to consumer reporting agencies when they knew or consciously avoided knowing that the information was inaccurate; and
• not reporting consumer disputes of reported information to the consumer reporting agencies.

Violated RESPA by:

• failing to timely respond to borrowers' requests for information about the servicing of their loans and escrow accounts; and
• failing to make timely payments of escrow funds for insurance and taxes. In addition to requiring the payment of the amounts set forth above, the settlements also imposed new restrictions on Fairbanks' business practices, including (among other things):
• requiring Fairbanks to accept partial payments from most consumers and to apply most consumers' mortgage payments first to interest and principal (services almost never are willing to accept partial payments from borrowers, so this could be a very significant requirement);
• prohibiting Fairbanks from force placing insurance when it knows the consumer has insurance or fails to take reasonable actions to determine whether the consumer has insurance;
• requiring Fairbanks, prior to force placing insurance, to mail, at no cost to the consumer, at least two written notices to the consumer providing clear and conspicuous notice of the procedures by which the consumer may demonstrate that the consumer already has insurance coverage and provide at least thirty calendar days from the mailing (by first-class mail) of the first notice and twenty calendar days from the mailing (by certified mail) of the second notice (which cannot be mailed until the first thirty-day period has expired) for the consumer to demonstrate coverage; and
• notwithstanding applicable state law, prohibiting the defendants from taking any action toward foreclosure unless they have reviewed the consumer's loan records to verify that the consumer failed to make three full monthly payments, confirmed that the consumer has not been the subject of any illegal practices, and investigated and resolved any consumer disputes.

While it appears that the actions of the defendants were particularly egregious, this settlement nevertheless indicates a new emphasis being placed on loan servicing issues in lending enforcement actions. Since it is conceivable that the FTC and HUD might consider some or all of the restrictions upon the defendants' business practices as a standard for establishing best practices, loan services might now wish to consider reviewing their policies and practices to ascertain whether they are in compliance with applicable law and whether and to what extent they may wish to consider adopting some or all of the requirements to which Fairbanks is now subject.

Anyone wishing to further discuss these issues or to obtain a copy of the settlement summarized above may contact

David Sands at (213) 617-5536 or Sherwin Root at (213) 617-5465.

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