Another B&C Lawsuit Coming?(loan fees)

With rumors spreading that class-action attorneys are targeting another subprime servicer, it is certainly time for servicers to make sure their fee structure does not provide an incentive to push homeowners into delinquency.

The central allegations in the Fairbanks Capital Corp. and Ocwen Federal Bank FSB cases is that subprime servicers have a financial incentive to post monthly payments late so that they can charge late fees and profit from the delinquent status of the loans, according to Brian Brooks, a partner at O'Melveny & Myers.

To counter these allegations, "you have to do the math," he said. Servicers need to determine how much money they make on performing loans (including cash flows associated with loans) compared to nonperforming loans.

The plaintiff's attorneys pay experts to show that a servicer's net income on delinquent loans is 50 basis points higher than performing loans, Mr. Brooks told a subprime lending conference sponsored by the Mortgage Bankers Association. According to the plaintiff's theory, that 50 bp is a "clear financial incentive for you to manage loans into delinquency," he said.

Another factor plaintiff's attorneys are looking for is high delinquency rates, which could signal the servicer is not posting monthly payments in a timely fashion.

Servicers need to develop models, based on the credit qualify of their loans, to determine if their delinquency rates are excessive or absolutely predictable.

"Before the first lawsuit comes in, it would behoove you to figure out whether your delinquency rates are about what you predict or whether something is going on," he said.