David Biderman, a partner in Perkins Coie 's San Francisco and Los Angeles offices, focuses his practice on mass tort litigation and consumer class actions. He heads the firm's Mass Tort/Toxic Tort Defense group. He has represented a wide variety of companies in state and federal courts in California for 30 years. Biderman recently talked with DS News about the emergence of loan servicing companies and the effects of increased regulation on the industry.
Why have we seen such a significant transfer of loan servicing from traditional banks to loan servicing companies?
That is dramatically transforming the loan servicing industry. The primary reason for that is that under Basel III, the financial reforms that were enacted after the financial crisis, the value of those servicing rights to traditional banks are just not what they used to be. The banks used to be able to value those servicing rights a certain way, but their ability to value those rights has been reduced by about three quarters. It really doesn't pay for the banks to hold onto the rights to service these mortgage loans, so what they've been doing is they've been selling the servicing rights. There's been a variety of companies, like NationStar, etc. that have been formed to try and pick up these servicing rights and try to fill that vacuum. Most of these companies are formed by private equity groups of some kind, because the days when you can form a bank by yourself or form a mortgage servicing company by yourself are long gone. You need a lot of capital behind you, because obviously you're dealing with a lot of money. Typically, it's been private equity shops that have been forming these companies.
It's interesting, because that transfer has resulted in the mortgage servicing companies being much more significant in terms of mortgage servicing than traditional banks. The other thing that's happened is that some of these non-bank mortgage service companies are basically staffed with people who used to be with banks – people who used to be with Countrywide, etc. – and a lot of them are going into the origination business, too. So they're also doing loan originations. There's a lot of loan originators being formed and a lot of new mortgage servicing companies being formed.
The legal issues, from our perspective, is that these companies are also now dealing with an entirely different regulatory framework, like Dodd-Frank and the legislation that has resulted out of Dodd-Frank. That legislation has created some opportunities for potential litigation under the Fair Credit Reporting Act, or the Real Estate Settlement Procedures Act (RESPA), or the Truth In Lending Act (TILA) – you've got that whole alphabet soup. Sometimes there are issues associated with a transfer because you're transferring a lot of servicing rights quickly, and you don't want any balls dropped during the transfer. And then sometimes there are issues because some of these new companies are still developing their procedures. It's created some interesting opportunities for lawyers such as myself who defend mortgage servicing companies with claims that are brought by borrowers for some sort of regulatory violation.
What effect to you think the aggressiveness of the regulators is having on the default servicing industry?
It's a confluence of events. In my view, it's an inflection point here. CFPB was created a couple of years ago, but they're really just getting off the ground. They're exercising their ability pretty significantly. They've got a strong legal staff. They're paying their lawyers well. They're being pretty aggressive enforcing some of the regulations that have been enacted. On top of that, some of the state regulators have gotten pretty aggressive. In California, we have our own state rules providing, essentially, rights to borrowers. The other thing is, virtually all of these regulations that were enacted after Dodd-Frank, all of them provide for private rights of action. So if there's a violation under any kind of notices that are required, an individual borrower can sue. So there are a lot of technical violations for which a borrower has a right to bring a claim – notice of errors, information requests, payoff requests, those kinds of things. There can be problems, and then borrowers have a right to bring a claim.
Have you seen a lot of that?
Yes, we have. Notwithstanding the fact that interest rates are down, there's still a pretty good tail of some of those loans that were made back in the old days when the standards for lending were pretty relaxed. Because of that, there are still a fair number of borrowers who are underwater, and the servicers now have to collect by bringing a foreclosure action. The borrowers now have claims they can bring back to either halt the foreclosure or otherwise assert their rights. We have seen that. You'd think it would be trailing off, because interest rates are down and lending standards are up, so you would expect there would be fewer defaults in the future. But there are a lot of those problem loans that weren't addressed by the banks before they sold those rights off, so they're still there for the mortgage servicers.
What do you think the future holds for issues like increased regulation and devaluing of the loan servicing rights? Where do you see this in another year – do you see things the same, worse than they are now, or better than they are now?
I see it continuing at about the same pace. Some of the problem ones are going to be worked out, so that tail is going to be worked through. But at the same time, there's still enough out there and there's enough new regulation that will allow claims to be brought. They've started to relax the lending standards, and interest rates are probably going to go up. As interest rates go up, the likelihood of defaults are going to increase. So I would say it's going to be about the same.