Yet another way borrowers are getting screwed: Inside the long-lasting disaster of American loan serviving

Nearly a decade after the financial crisis, why are so many of the people responsible for loans so bad at it?

Published May 3, 2016 11:59AM (EDT)

  (<a href=''>hxdbzxy</a> via <a href=''>Shutterstock</a>/Salon)
(hxdbzxy via Shutterstock/Salon)

It shouldn’t be terribly difficult to accept a monthly loan payment from a homeowner or a student borrower, and to manage day-to-day operations on the loan. This is the job function of a servicer, a company that handles loans on behalf of the ultimate owner, funneling payments through the system and deciding how to manage defaults.

Why this has become the most impossible business in America doesn’t make a lot of sense. But with evidence mounting up, we should acknowledge that servicers either don’t know what they’re doing or can’t turn a profit on their operations without doing so at the expense of their customers. And we must start thinking about alternatives to the current servicing model, which appears to be hopelessly broken.

Consider this: Ten years after the beginning of the national foreclosure crisis, which overwhelmed servicers with waves of defaulted payments, large mortgage servicer Ocwen just got hit with sanctions for violating the National Mortgage Settlement, which it agreed to in 2013. At the time, Ocwen was accused of “violating consumer financial laws at every stage of the mortgage servicing process,” according to the Consumer Financial Protection Bureau. So they settled for $127 million in cash to wrongfully foreclosed homeowners and $2 billion in consumer relief credits.

The settlement included a number of metrics, outlining basic standards of servicing that Ocwen had to follow. But the oversight monitor of the National Mortgage Settlement, Joseph Smith, announced that Ocwen failed one metric, involving how they informed borrowers that they did not qualify for a loan modification. Ocwen did not explain why they denied the modification request, show the evidence that led to their decision, and offer a timeline for how borrowers could appeal the ruling.

If that sounds pretty standard, that’s because it is. These rules have been in place for years, to make sure borrowers get a fair shot to stay in their homes. But Ocwen failed this metric all the way back in 2014, and has still not gotten into compliance. As a result, Smith barred Ocwen from foreclosing on 17,496 homeowners that could have been affected by this failure, until they get the information to which they’re entitled.

It’s only the latest in a series of dodgy activities for Ocwen. The company has been accused of sending homeowners small checks that upon cashing automatically enroll them in expensive insurance plans; being ignorant of state consumer protection laws in California; backdating letters to borrowers so they couldn’t challenge their loan modification denials because they received the letter the same day the appeal was due; stalled transactions with homeowners to collect additional late fees; and so on. The conduct was so pervasive that New York’s former head of the Department of Financial Services, Benjamin Lawsky, forced Ocwen’s CEO William Erbey to leave the company in an enforcement action. Yet the non-compliance continues.

Ocwen responded to the foreclosure freeze by saying they have fixed the problem and await the oversight monitor’s approval. But the bigger question is: Why does the government allow Ocwen to stay in business amid years of violations?

In the case of student loan servicers, the situation is even worse. Since most student loans are issued by the Education Department, servicers work on behalf of the federal government, which has always baffled me. We have an entire agency that is adept at taking payments from individuals: it’s called the Internal Revenue Service. Why are we subcontracting that function for student loans to private companies?

This question gets even harder to answer once you realize that these student loan servicers rip off their customers. Twenty-nine attorneys general just accused Navient, one of the biggest servicers, with multiple violations, including steering students on the brink of default into payment plans that grow their amounts owed, rather than government “income-based repayment” plans that would have prevented such increases. Customer service representatives for Navient didn’t know basic information about income-based repayment, and were told to rush borrowers off the phone rather than enrolling them in the government payment options.

This is the latest in a long line of accusations for student loan servicers. It’s gotten so bad that the Obama Administration periodically creates programs to communicate with borrowers directly and go around the servicers, who they keep paying with lucrative contracts. Just last week, the Administration announced an initiative to enroll more borrowers in income-based repayment. It includes an entirely new, mobile-friendly website to easily navigate borrowers to their best repayment option in five simple steps.

If that website is effectively doing student loan servicers’ job for them, why are we paying student loan servicers? What value do they provide, when the government has to intentionally circumvent them to make sure borrowers get the information they need? All this does is cover for the corruption of the servicers.

And this is not a new trend, but simply a more sophisticated version of a previous end run that the Obama Administration announced in 2014. Student loan servicers have been recognized as terrible by the government for at least two years, and yet they maintain their contracts; in fact, they’ve even gotten bigger. Maybe the new website will finally threaten the contracts. The Treasury Department has run a pilot program on direct government payments for student loans, without the servicer middlemen, for a while. But for now, student loan servicers still cash in despite their rotten performance.

The common thread in these stories is the inability of loan servicers to legally carry out their jobs. Loan servicers are “high-touch” businesses, requiring lots of customer service personnel. Their compensation structure makes it difficult for them to fulfill their mission and make money, unless they use troubled borrowers as a profit center, charging them fees and blocking them from affordable options.

In cases where the government outsources payment collection to servicers, that business should go in-house. In the case of mortgage servicers working for private interests, perhaps new compensation rules that shift the incentives for servicers to profit off homeowners would help.

Whatever the case, something in the servicing model is definitively broken, and an economic downturn that triggers another wave of defaults will reveal it, to the detriment of countless homeowners. We can do nothing until that happens, or act now to ensure that companies that take monthly payments have the ability to actually do the job.

By David Dayen

David Dayen is a journalist who writes about economics and finance. He is the author of "Chain of Title: How Three Ordinary Americans Uncovered Wall Street’s Great Foreclosure Fraud," winner of the Studs and Ida Terkel Prize, and coauthor of the book "Fat Cat: The Steve Mnuchin Story." He is an investigative fellow with In These Times and contributes to the Intercept, the New Republic and the Los Angeles Times. His work has also appeared in the Nation, the American Prospect, Vice, the Huffington Post and more. He has been a guest on MSNBC, CNN, Bloomberg, Al Jazeera, CNBC, NPR and Pacifica Radio. He lives in Los Angeles.

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College Loans Debt Foreclosure Crisis Mortgage Crisis The Financial Crisis