The federal government has just spelled out a new national code of behavior for the country's mortgage servicing industry. The code is embedded in two federal agencies' massive $40 million-plus settlement with Fairbanks Capital Corp., the largest U.S. servicer of subprime, or credit-impaired, home loans.

Fairbanks -- under investigation for the past year by the Federal Trade Commission and the U.S. Department of Housing and Urban Development for alleged predatory servicing practices -- signed the settlement without admitting wrongdoing on any charges. Its founder and former CEO, Thomas Basmajian, agreed to pay $400,000 and still faces possible criminal charges.

Basmajian and Fairbanks also face civil class action litigation that is expected to result in at least $15 million in payouts, plus individual lawsuits by customers. Fairbanks has upwards of 500,000 loan servicing customers, of which as many as 250,000 may qualify for monetary relief from the $40 million victims fund.

The new code of servicing behavior -- clearly intended by the government to prohibit predatory practices by the industry as a whole -- includes the following:

First, Fairbanks (and by implication all others) must follow detailed requirements designed to properly credit on-time mortgage payments by homeowners. Thousands of consumers complained to state and federal regulators that Fairbanks routinely counted their on-time payments as late, then imposed late fees, refused partial payments where disputes were involved, and reported borrowers as delinquent to the national credit bureaus.

Second, mortgage servicers such as Fairbanks cannot "force place" high-cost hazard insurance policies on homeowners who already have valid coverage. Customers alleged that Fairbanks ignored their documentary evidence of existing insurance coverage and force-placed policies on its own at triple or higher the existing cost. The force-placed premiums were supposed to be paid for out of customers' escrow accounts, thereby raising monthly mortgage payments and leading to new delinquencies.

Third, mortgage companies cannot impose fees on borrowers for services not specifically sanctioned in loan documents. For example, customers complained that Fairbanks charged them for items such as "demand letters," collection letters, property inspections and other "services" related to their bogus delinquencies.

Other requirements in the new federal code of conduct include prohibitions against:

Published: November 24, 2003

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consumer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.