September 10, 2008
Bear Stearns, the Wall Street investment bank rescued from bankruptcy
by the Federal Reserve earlier this year, has agreed to pay $28
million to settle Federal Trade Commission charges that it engaged in
unlawful practices in servicing consumers' home mortgage loans.
Stearns, along with affiliate EMC Mortgage, allegedly misrepresented the amounts borrowers owed, charged unauthorized fees, such as late fees, property inspection fees, and loan modification fees, and engaged in unlawful and abusive collection practices.
Under the proposed settlement they will stop the alleged illegal practices and institute a data integrity program to ensure the accuracy and completeness of consumers' loan information.
"Like other companies that send a bill, mortgage servicers must make sure that the amount they say is due really is the amount due," said Lydia B. Parnes, Director of the FTC's Bureau of Consumer Protection. "Consumers have the right to expect accuracy from the company that collects their mortgage payments."
According to the FTC's complaint, Bear Stearns and EMC have played a prominent role in the secondary market for residential mortgage loans. During the explosive growth of the mortgage industry in recent years, they acquired and securitized loans at a rapid pace, but they allegedly paid inadequate attention to the integrity of consumers' loan information and to sound servicing practices.
As a result, in servicing consumers' loans, they neglected to obtain timely and accurate information on consumers' loans, made inaccurate claims to consumers, and engaged in unlawful collection and servicing practices. These practices occurred prior to JP Morgan Chase & Co.'s acquisition of Bear Stearns, which became effective on May 30, 2008.
EMC is the mortgage servicer for many of the loans Bear Stearns and EMC acquired. Many of these loans are subprime or "Alt-A" (less than prime) loans, including nontraditional mortgages such as pay option adjustable rate mortgages ("pick-a-payment" loans), interest-only mortgages, negative amortization loans, and loans made with little or no income or asset documentation.
EMC's loan servicing portfolio has grown significantly in recent years; as of September 2007, it serviced more than 475,000 mortgage loans with a total unpaid balance of about $80 billion.
The proposed settlement requires Bear Stearns and EMC to pay $28 million to redress consumers who have been injured by the illegal practices alleged in the complaint.
In addition, the settlement prohibits them from future law violations and imposes new restrictions and requirements on their business practices. Specifically, the settlement:
• Bars the defendants from misrepresenting amounts due and any other loan terms;
• Requires them to possess and rely upon competent and reliable evidence to support claims made to consumers about their loans;
• Bars them from charging unauthorized fees, and places specific limits on property inspection fees even if they are authorized by the contract;
• Prohibits them from initiating a foreclosure action, or charging any foreclosure fees, unless they have reviewed all available records to verify that the consumer is in material default, confirmed that the defendants have not subjected the consumer to any illegal practices, and investigated and resolved any consumer disputes.
The Commission has brought 23 actions in the past decade alleging deceptive or unfair practices by mortgage brokers, lenders, and servicers.
