“The effective use of the DSA’s [Default Services Agreements] between LPS Default and the national mortgage servicers resulted in LPS Default having under its control and concurrent access, the vast majority of the multibillion dollar default services fee market in the entire country. This effectively put LPS Default in the position of Mephistopheles to its “Network [Law] Firms” role of Faust.” –
[Class Action Complaint: Marie Harris, A/K/A Susan Marie Rhodes, Debtor, Plaintiff, vs. Ben-Ezra & Katz P.A., Lender Processing Services, Inc., LPS Default Solutions, Inc., Defendants. In The United States Bankruptcy Court for the Northern District of Florida, Pensacola Division, Bankruptcy Case No. 08-30376 LMK.]
It can’t be helped. Ever since I began digging into the foreclosure mess, and the more I have viewed the lender-lawyer relationships, I feel that some of my brethren have made a pact with the devil, in much the same way Faust did with Mephistopheles. The metaphor is inescapable. Many lawyers and law firms across the country have joined forces with Big Banks and Big Servicers, to cash in on the foreclosure crisis. And what is slightly remarkable is that they continue to do so, even though they have read the scathing court opinions, lambasting these industries and their attorneys, for fraudulent practices.
An interesting fact is that those foreclosure mill firms that have crossed over to the Dark Side, are not your big, long time, and reputable law firms with flourishing creditor practices. However, one must suspect that LPS and other default servicing companies, may have approached them at one time. I suspect one of their in-house “Quality Assurance” partners took a look, said “Thanks but no thanks” and slammed the door. So what explains why some small, rather nondescript, law firms, now have suddenly acquired high volume foreclosure and bankruptcy practices? For one possible answer, read on.
Last week I wrote a post about a recent shellacking given by Federal Bankruptcy Judge Magner to LPS and its attorneys in In Re: Wilson. In that case, the bankrupts had been forced to endure two unsuccessful motions filed by LPS attorneys – acting on behalf of Option One Mortgage Corporation – claiming that they had defaulted by failing to make the scheduled payments under their court-confirmed plan. Upon closer examination it turns out that LPS’s high-tech servicing platform, “MSP,” was no better at record keeping than the humans who operated it. As a part of her opinion, which awarded sanctions against LPS, the judge was clearly disgusted by the fact that the lender, whose primarily responsibility it was to know what was happening with the loan, had totally abdicated this responsibility to LPS.
In Harris, we may now have the answer. It appears that LPS does not charge its own bank and servicer clients for providing default management services by its foreclosure subsidiary, LPS Default. It’s free! After going to great lengths in describing the scheme, plaintiff’s counsel in Harris declared: “As one would logically expect, the national mortgage servicers leapt at the chance to dump all their problem loans on LPS Default for free.”
Perhaps most importantly, the Harris complaint gives us insight into why the default servicing industry is rife with fraudulent documents, fraudulent signings, fraudulent notarizations, and fraud on the entire court system. It is the need for speed. LPS’s entire business model is based upon turning the legal side of the foreclosure and bankruptcy process into a fast-track business system that sacrifices accuracy and ethics for speed. It is for this singular reason, we have had the robo-signing scandal and abuses such as those described in Wilson. [The LPS approach is not dissimilar to the half-baked scheme devised at the shallow end of the MERS think tank – but I digress. PCQ]
While all that we have at this moment is a class action complaint – no answer responding to the charges has been filed in court – the plaintiff’s allegations of fraud on the court system carry a ring of truth, based upon the legal rulings in other cases that have preceded the filing of this complaint. I am specifically referring to In Re: Wilson, mentioned above, since it was in that case that Judge Magner identified the LPS software system “MSP,” as the culprit that Option One, and it’s LPS-selected attorneys, relied upon in bringing the Motion for Relief From Stay filed in the bankrupts’ Chapter 13 Plan. As discussed in her opinion, the actual bank or bank/servicer, Option One, had entered into an agreement with LPS to exercise almost absolute control over all default servicing decisions on its loans. And the lawyers acting ostensibly for Option One, were actually hand-picked by LPS.
According to the complaint’s allegations in Harris, it now becomes clear as to the source of funding that supports LPS’s business model that is based upon an offer of “free” services:
- The lender turns over all default servicing and litigation to LPS for free;
- LPS hires its own foreclosure mill attorneys at pre-agreed rates in exchange for the promise of huge volume;
- LPS bills these lawyers for “administrative charges” in each matter;
- The lawyers recover these charges through the bankruptcy court and foreclosure proceedings.
On its surface – which is where I suspect LPS hoped all scrutiny would end – one might argue that there is nothing wrong with foreclosure mill lawyers charging for their work and simply paying LPS for its non-legal services as well. So long as these are distinct services – one legal and the other non-legal; and so long as legal fees are not being “split” with non-lawyers, e.g. for the referral of business. So, perhaps there is really nothing wrong here.
However, plaintiff’s complaint alleges several facts in support of the claim that this really is an illegal fee sharing arrangement. Here is a more detailed listing of allegations made in Harris, against LPS and one of its Florida foreclosure mill law firms, Ben-Ezra & Katz, P.A.:
- LPS’s Default Servicing Agreement (the “DSA”) entered into with its servicer/clients, requires that LPS select the law firm from its “Network”;
- In order to be in LPS’s legal Network, the law firm must sign a Network Agreement with LPS;
- The Network Agreement sets forth the services (described as a “technology fee” and an “administrative support fee”) that LPS will provide to the law firm and the fee schedule the firm is to pay for those services;
- The administrative fee is to be paid by the law firm “at the time of the referral” from LPS;
- In order to be in the Network, the LPS’s servicer/client must sign a Local Counsel Agreement (the “LCA”) directly with the law firm;
- An addendum to the DSA provides that LPS is to provide various “legal services” to the servicer, including foreclosures, bankruptcies, and other default services;
- The DSA contains a confidentiality provision prohibiting the servicer or LPS from disclosing the DSA to third parties;
- Exhibits to the Network Agreements between its captive foreclosure mill firms and LPS, make it clear that the fees LPS charged to the law firms are for services not that it is providing to the lawyers – but to its lender/servicers or loan investors;
- When the prevailing attorney fees and cost, such as those for relief from stay, are awarded against the bankruptcy estate, thanks to the confidentiality provision of the DSA, the court is never informed that a portion of those fees are shared with LPS;
- At substantially the same time the foreclosure mill firms bill their legal fees, LPS bills the firms for its “administrative services.”
Random Thoughts. The complaint in Harris alleges that LPS has at least 200 foreclosure mill law firms in its legal Network. Is there any reason to believe there are LPS Network lawyers operating in Oregon? Do I believe that the foreclosure mill firms in our own legal backyard belong to the LPS Network?
Yes, and yes. Here’s why: Oregon permits nonjudicial trust deed foreclosures, which comprise the vast majority of all residential foreclosures in our state. It is true that in Oregon, lawyers are not the only people permitted to perform nonjudicial foreclosures. For example, foreclosures may be – and usually are – conducted by Oregon licensed escrow and title companies. However, there is at least one major foreclosure operation, licensed as an Oregon escrow company (although it does not appear to provide conventional escrow services as defined by statute) that is affiliated with a foreclosure mill law firm, and is in charge of handling trust deed foreclosures in Oregon.
Here is what I have seen in Oregon:
- Upon loan origination, the trust deed was registered with MERS;
- Upon default, a form is created by a law firm, entitled “Appointment of Successor Trustee”;
- The form appoints that same law firm as the new Successor Trustee in charge of handling the trust deed foreclosure;
- The form is locally uploaded through a proprietary software platform, and then downloaded by someone in Dakota County, Minnesota;
- The Appointment document is signed by a “Vice President” of MERS in Dakota County, Minnesota;
- The signature of the MERS “Vice President” is ostensibly witnessed by a notary also in Dakota County, Minnesota;
- Then the original “wet ink” document is overnighted back to the law firm that is responsible for recording it in the county where the foreclosure is to take place;
- Thereupon, an Oregon-licensed attorney for the law firm, acting as the newly appointed Successor Trustee, prosecutes the foreclosure.
What does this have to do with LPS? Well, for starters, LPS has one of its major default servicing centers located in Dakota County, Minnesota. A quick check on the Internet confirms that Dakota County, Minnesota (along with Broward County, Florida) is/are ground zero for the robo-signing scandal. Secondly, a Google search discloses that the individual whose signature appears on the Appointment of Successor Trustee as the MERS “Vice President,” is an employee of LPS.
Ergo, there is a reasonable inference that this northwest law firm is a part of the LPS Network and that it obtains its foreclosure business through LPS’s Network. This is not to say it has engaged in any illegal fee splitting, or anything else improper. But who knows? According to legend, Mephistopheles was a persistent fellow….Posted in Foreclosure, Market Conditions, Miscellany, Real Estate/Distressed, Servicers, Trust Deeds | Tagged Bankruptcy, Banks, Distressed Transactions, Lawyers, Market Conditions, Real Estate, Trust Deeds