Foreclosure Gate and Robo-Signing Leaves ARM Industry Vulnerable

A segment of the accounts receivables management industry was affected last month when several of the nation’s major banks halted foreclosures and the sale of foreclosed properties to look into their practices.

Delmar Financial Services in Boca Raton, Fla., which does back office accounts receivables management work for law firms specializing in foreclosures, was among them.

“Our larger clients came in and said ‘stop doing what you’re doing. Put everything on whole while we try to figure it out,’” recalled Chris Conway, Delmar’s senior vice president. “Everything is still pretty much at a standstill. Some things are continuing to go forward after everything is verified.”

Some banks, including the nation’s largest mortgage servicer, Bank of America, have resumed foreclosures. But the scandal that stems from lenders use of “robo-signers” to file thousands of affidavits swearing that they had personal knowledge of the debt owed still may have a broad impact on the ARM industry.

For starters, it has made the ARM industry more vulnerable to regulation or activists judges, experts say. If nothing else, the foreclosure scandal has given consumer attorneys ammunition for lawsuits or defenses.

“It will, in some instances, bring up affirmative defenses to prove that the debt is valid, especially if (collection attorneys) take the legal route,” Conway said.

Some industry insiders said the foreclosure mess may even impede debt buying in that space.

“I would think the types of issues being investigated would have a chilling effect on buyers of these types of loans,” said Al Brothers, CEO of Cavalry Portfolio Services, a debt buyer. “In some ways, when buying a loan you’re stepping into the banks shoes in that you’re buying a problem that might be their problem.”

On November 16, the Senate Banking Committee will hold hearings to see just how widespread the problems are with processing foreclosures. Whether or not the hearings set the stage for new regulations at the federal level, the allegations against the banks have drawn the attention of 50 state attorneys general who are investigating foreclosures in their states. Some attorneys general have admitted that they don’t expect their investigations will overturn foreclosures. But foreclosure experts say the AGs do expect to find problems with documentation.

“What you’ll likely see is major fines levied against the servicers and potentially criminal prosecution. You’re looking at a situation where someone might be found guilty of falsifying court documents,” said Rick Sharga, senior vice president at RealtyTrac, a public data base of U.S. foreclosures and bank owned property.

Sharga said the AGs are pursuing the investigations because they want to preserve the integrity of the judicial process given the questions the foreclosures raised about proper documentation and legal ownership. Now that The New York Times has reported that debt buyers also have employed robo-signers to file affidavits to collect on credit card, auto loans and other consumer debt, chances are that state AGs will turn their attention to the collection practices of debt buyers too.

In the end, the banks will be able to prove that nearly all of the homeowners facing foreclosure have defaulted on their loans and that their bank is the rightful owner of the debt. But some debt buyers may have a harder time given that much of the debt they buy has been sold several times over several years.

“The buyer should have documentation,” said Kaulkin Ginsberg Director Mark Russell. “The challenge is, not all credit issuers have an ability to give all the proper documentation when they sell a file.”

That problem becomes more significant for debt buyers and collection agencies that have to appear in court, said Mark Parsells, executive chairman of Global Debt Registry, LLC, the ARM industry’s first and only debt titling firm.

“If you can’t prove you own it and that the amount you are trying to collect on is accurate and up to date, you’re going to start losing cases and get countersued as well,” Parsells said.

Parsells says the ARM industry can avoid such problems by adopting title policies that begin with the original lender and are required each time the debt is sold.

“The concept of titling is a common sense concept. It’s done with cars. “Similarly, a person would never buy a house without a clean title,” he said.

So far, no judge has canceled a foreclosure because of faulty documentation, Sharga said. But that doesn’t mean it won’t happen.

“The (financial) industry should be concerned about the prospect of more activist judges trying to set precedent by overturning foreclosures because of these paperwork issues,” he said.