Bankruptcy

Servicing Kickbacks Alleged in Class Action

By Katie Porter

Last week, a class action lawsuit (Harris v. Fidelity National) was filed against Fidelity National Information Services, a huge player in the billion dollar world of mortgage servicing. "What? I've never heard of them," you say. Fidelity is the company that provides default servicing to most of the large residential mortgage servicers. Their role is a shadowy one; unless you've delved deeply into how consumer mortgages are serviced, you probably weren't aware of their existence--much less how they may be driving up costs for consumers. Foreclosure petitions, proofs of claims, and bankruptcy court motions never bear Fidelity's name (instead they are signed by the regular servicers or by local counsel retained by the servicers.) But despite its invisibility, Fidelity is almost always part of the action in foreclosures or bankruptcy cases.

The lawsuit alleges that Fidelity receives illegal kickbacks from attorneys who work under contract with them. The exhibits to the class action are clear. Fidelity bills its clients--the servicers--for certain fees-- for example, $100 to review a bankruptcy plan. The servicer includes those fees as due and owing on bankruptcy proofs of claims, many of which appear only as "attorneys fees" or "postpetition charges." However, Fidelity requires attorneys to let it "retain" $50 of that $100. Fidelty characterizes these as "admin fees" paid by the attorney to Fidelity. The big problem with this practice is that bankruptcy law requires full disclosure of where the debtor's money is going. If the service is getting the debtor to pay these fees, the bankruptcy court should be approving those charges and who is going to receive the debtor's money. At least, that's how the class action has framed the legal issues in the case.

One final note: the schedule of Fidelty's fees includes a line item for "Drafting Missing Documents." Hmmmm . . . If documents are missing, they are missing. I don't see how "drafting" can appropriately play into this. It sounds like more evidence of "recreating" mortgage servicing documents like the actions by Countrywide exposed in the In re Hill case.

Full post as published by Credit Slips on January 24, 2008 (boomark / email).