The real mortgage compliance risk isn’t noncompliance

Lenders know they can’t afford to be out of compliance with any of the new rules coming out of Washington or their state legislatures. I’ve been watching them work hard with technology and compliance partners, as well as internal trainers and managers to guarantee compliance. I’ve been very impressed with how well our industry has adapted to a flood of new regulatory pressure in a very short period of time. Too bad that won’t save every compliant lender from the high cost that comes from appearing to be out of compliance. I came upon this line of reasoning when I saw some interesting video footage on the Internet the other day. Some law firm in Florida leaked some legal depositions to one of those Robo-Blogging websites that throws up anything they can to convince people that the U.S. mortgage lending industry doesn’t have the right to foreclose on people who don’t pay back their loans. By putting a company’s employees (not executives, just hard-working folks from the back office) under oath and on video camera, they captured some footage that goes a long way toward making perfectly legal, long-standing industry practices look a bit shady. It’s a crazy world we’re living in. I’ll admit that I enjoyed the film Erin Brokovich, and not just because Julia Roberts was in it. I liked Michael Clayton and thought it was great that Paul Newman’s character could overcome the bottle and save the day in The Verdict. There’s something romantic about an attorney that will sacrifice everything to do what is right for a powerless victim. In their best light, lawyers are the closest things we have to white knights, donning their armor, shield and lance to charge up the courthouse steps to fight for justice. At least that’s how it is in Hollywood. In Florida, it’s a little different. Florida is one of the top 5 hardest-hit states when it comes to borrowers in default. It’s also a top-5 state for mortgage fraud, which is no coincidence. Now, it’s one of the nation’s leading states for aggressive attorneys doing anything they can to get borrowers in default to pay them fees to challenge mortgages going through the foreclosure process. These attorneys must know their chances of drawing another judge crazy enough to invalidate a mortgage because of a procedural practice are slim to none, to say nothing of getting enough borrowers to qualify as a class. But these unethical attorneys also know that if you signed a note for $492,000 for a piece of property and you haven’t made a mortgage payment in a year or longer, you probably have some cash around that could line an attorney’s pocket while he delays the foreclosure for a while. This takes frivolous legal action to a new level, but it also constitutes an additional layer of risk for mortgage lenders, servicers and investors. Just because you didn’t break the law doesn’t protect you from some attorney who can find a client willing to pay them to say you did. I don’t know where the national bar association is on this. I don’t know why people aren’t exposing these attorneys to ethics reviews or legal action. But I do know this: our industry is likely to have to get a bit more aggressive on the legal side if we hope to prevent any attorney with a website, a few robo-bloggers and a marketing budget from tossing monkey wrenches into the systems we need to move our business—and, by extension, the entire country—into recovery. Perhaps it’s too easy to just blame the attorneys again. I mean, as a nation, we’ve pretty much given up on blaming ambulance chasers for the high price of health care, not that we all know that the high cost of insurance protection against legal action is a major reason our health care costs so much. Will the cost of a home mortgage have to rise to cover additional insurance protection from attorneys who are willing to dig through cases of documentation in an effort to find anything that suggests that a particular borrower (one of thousands the lender serves every month) wasn’t treated like the only person who had ever received a mortgage? Could anyone but the nation’s top 5 lenders even afford such insurance? I have a number of friends who happen to have degrees in law. Some even practice, so I can’t subscribe to the mentality that all lawyers must be disposed of in order to have a world that makes sense. But if the bulk of this column’s readers honestly believe that’s the only solution, I’ll sneak my friends out of the country and go with the majority rule. Hey, this is a Democracy, after all. Rick Grant is veteran journalist covering mortgage technology and the financial industry. Follow him on Twitter: @NYRickGrant