Risk of the Affiliated Vendor Engagements
BY SVIATLANA LIASHCHYNA
On May 25, 2018 the U.S. District Court for the Southern District of New York heard the oral arguments for defendants’ motions to dismiss in a case referred to as being “about banks and law firms fleecing the Fannie Mae, Freddie Mac, and FHA”[Case 1:12-cv-07199-JSR, Third Amended Complaint]. The plaintiff alleged violations of several provisions of the False Claims Act. [Violations referenced in the case relate to the following provisions of the False Claims Act: 31 U.S.C. § 3729(a)(1)(A); 31 U.S.C. § 3729(a)(1)(B); 31 U.S.C. § 3729(a)(1)(C); 31 U.S.C. § 3729(a)(1)(G).] The action was brought by the Unites States of America against over 15 mortgage servicers, as well as 2 default services law firms and their affiliated process serving and title companies. The allegations are based on improper invoicing practices implemented by the law firms; during the foreclosure process, the firms submitted to the servicers marked-up invoices from their affiliated title and process serving vendors. This resulted in Fannie Mae, Freddie Mac, and FHA providing reimbursements to the servicers based on the “false and fraudulent”[Case 1:12-cv-07199-JSR, Third Amended Complaint] foreclosure claims which included those marked-up costs. The court has not yet issued any orders in this case; however, we would like to remind firms about the applicable requirements and what practices need to be considered to ensure compliance with those requirements.
The basic requirement that is included in the Fannie Mae and Freddie Mac Servicing Guides, their Retention Agreements, and most servicer agreements states that all foreclosure costs must be “actual, reasonable, and necessary.” Any fees from law firm affiliates are limited to “customary and reasonable fees for comparable services” in the jurisdiction. Further, Fannie Mae and Freddie Mac require that the default-related processes are completed in an efficient and cost-effective manner. Fannie Mae, Freddie Mac, and FHA require that quality control programs are implemented by the servicers to effectively manage all foreclosure proceedings and default service law firms, including the efficiency of the firm’s use of third parties.
Below are suggested actions that firms can take to ensure compliance with the applicable requirements.
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