Role of Audits in Foreclosure

The Law Offices of George Castrataro, P.A.

Monday, August 16th, 2010

Broward Daily Business Review, Copyright 2009 Incisive Media US Properties, LLC

May 5, 2009. Volume 50; Issue 101

Section: Mortgages Another Cottage Industry

Loan auditors seek errors that may delay foreclosures, Terry Sheridan, DBR.

Just as foreclosure rescue-and-loan modification companies have sprouted in the wake of the financial crisis, so too have loan auditors. It's another cottage industry that has sprung up as a result of the foreclosure crisis. For $500 to $1,000, they'll review mortgage loans for evidence of wrongdoing by lenders and title insurance companies.

Some say they also investigate mortgage fraud and loan modification firms, which state prosecutors also have targeted. But caution is warranted, and auditors who seek upfront fees for "forensic analysis" are violating state law, the state Attorney General's Office warns.

Amid growing efforts to help home owners avoid foreclosure, loan auditors are elbowing for a seat at the table. Attorneys and home owners hire the companies for $500 to $1,000 to comb through mortgage documents for questionable disclosures or improper fees that could be used to delay or prevent foreclosure. And some loan auditors say they will trace ownership of a loan note. The document is critical, because without that paper trail, a lender can't foreclose. "They are the latest cottage industry to spring up because of the housing and financial downturn," said real estate and foreclosure attorney Roy Oppenheim of Oppenheim Pilelsky in Weston.

How many auditors exist isn't certain, and the companies aren't licensed or regulated. As for their services, no one seems able to agree on how useful audits are. Oppenheim says at some time he may use an auditor. But for now, his clients don't want to spend the money. "We get hired to handle a foreclosure, not a counterclaim against a bank," he said.

On the other hand, foreclosure defense attorney Peter Ticktin of the Ticktin Law Group in Deerfield Beach said he believes fighting the banks on behalf of his clients is exactly why auditors are essential. Ticktin set up Florida Mortgage Auditing about nine months ago. Audits of loan documents in about 1,000 foreclosure cases since then have revealed problems in almost all of them, he said.

The ultimate proof that the audits are successful will come in stopping the foreclosures. That hasn't happened yet but lenders have been required to substantiate fees and the investigations have resulted in other findings. Several of the cases are being litigated and are currently in discovery. That's a sign of progress, Ticktin said. "We haven't lost yet."

But attorney George Castrataro in Wilton Manors said he has yet to find an auditing company that doesn't have what he believes is a conflict of interest by being involved with attorneys or real estate companies. So he's hired mortgage brokers to review about 20 to 30 loans so far.

Ticktin says Castrataro is "being silly." Ticktin has a liaison to the auditing firm within his offices but the actual auditors are outside the office. He says if the loan auditors worked for the bank, that would be a conflict of interest. But the loan auditors are rendering a legal service to Ticktin and giving him the legal information he needs to oppose a motion for summary judgment or otherwise pursue a case. But loan auditors who deal directly with the public are practicing law without a license, Ticktin says.

Lender Tim Frederick, president of the Mortgage Bankers Association of the GoldCoast in West Palm Beach, described loan auditing companies as a "new gimmick"that can be construed as helping people but that also capitalizes on the financial crisis.

Some auditors stretch claims of how effective they are, Oppenheim said. Some contend they track ownership of a mortgage note through the complex securitization process something a lawyer would do through court-ordered discovery. And auditors have been involved with loan modification companies that illegally charge upfront fees in attempts to prevent foreclosure, he said. Auditors fall under the definition of "foreclosure-related rescue services" and, if fees are demanded upfront, can be sued by the state under the state's Foreclosure Rescue Fraud Prevention Act.

A Florida Bar spokeswoman said loan auditing companies had not yet emerged as a concern. But the Bar has posted an ethics alert about loan modification companies, which often work with loan auditors. The alert warns lawyers that they can't provide legal services for a homeowner while working as in-house counsel for a non-lawyer company, pay referral fees to non-lawyers, divide fees with a non-lawyer or be paid by a non-lawyer for services to distressed home owners.

In March, state Attorney General Bill McCollum sued Lincoln Lending Services in Miami-Dade Circuit Court for violations of the law. According to the lawsuit, Lincoln Lending allegedly charged $2,700 for a forensic analysis to determine errors or fraud in customers' original mortgage or closing documents. The company would charge a second fee of $999 to modify loans.

Loan auditors are "definitely a subject on our radar screen," said Sandi Copes, McCollum's spokeswoman in Tallahassee. A call to Lincoln Lending was not returned.

And for good reason, said loan auditor Steve Dibert, president of MFI-Miami and MFI-Mod Squad in Boynton Beach. "I have about 50 competitors in Florida but that's like comparing a Ferrari to a Ford Pinto," he said. "A lot of these [auditing] firms want to mass produce so they use automated [software] systems that are about 70 percent accurate."

At US Lender Audit in Tampa, business development director Shawn Aaron said auditors seeking quick business growth are promoting the use of the software programs. The programs may flag problems based on lending laws that didn't exist when a loan was made, Aaron said. "You can hire a layman to punch in 'yes' and 'no' and some numbers. And in 20 minutes, they spit out a report," he said. It's critical that auditors also know the source of documents given them to analyze, he said. A home owner's loan paperwork won't be as complete as the lender's. And even a lender's documents must be examined to ensure they've complied with a lawyer's discovery request and that everything is legible. "If you're getting faxed copies that are illegible, that's not a real interpretation of what the lender or servicer has on file," Aaron said.

Getting documents from lenders is at the heart of MFI-Miami's work. Since January, Dibert has launched investigations involving Wachovia, Hudson City Savings Bank in New York and more than a dozen loan modification companies. In the Wachovia news release, Dibert said the bank tried to block MFI's fraud investigations and refuses to provide home owners with copies of their loan closing documents. Many of the loans Dibert is analyzing were done as adjustable-rate mortgages that Wachovia acquired when it purchased World Savings Bank.  A Wachovia spokeswoman said the bank would have no comment about MFI's allegations.

But audits alone aren't likely to stop foreclosures, Oppenheim said. "One out of 20 times you have a situation where an audit is appropriate," he said. "And if [owners] haven't made payments, they haven't made payments."

Nicki Struthers of Bradenton, one of Dibert's first customers, said she waited too long and the audit was of no help. Though Dibert found several loan violations that included a double charge for an appraisal, Struthers hesitated to pay for an attorney. When she finally consulted one, there was little that could be done. In January, Struthers lost her house in foreclosure. "In my position, the audit didn't do a lot for me," she said. "But if I hadn't waited until the final hour, that would have been a big hammer to swing at a lender."

That hammer depends on more than timing, said foreclosure attorney Castrataro, who recently opened a law office in Wilton Manors after leaving the Legal Aid Service of Broward County. If an owner's attorney can present a professional loan audit during mediation, it can convince a lender "how bad a [loan] they have and how bad it'll be if they proceed with the foreclosure," Castrataro said. Too often borrowers pay for an audit before seeking legal advice, he said. "They come in with these audits … and believe this is the Holy Grail that will save them. We sit them down and tell them the case is still pretty bad maybe because they have insufficient income or they even contributed to providing fraudulent documents," Castrataro said. "And sometimes the audits are appropriate as part of a well-planned litigation strategy, not just to get information on their loan."

With no sign of an abatement in mortgage fraud or foreclosures, companies that bill themselves as loan detectives have begun marketing a forensic analysis of mortgages. Their intent is to find fraud or improper handling of the loan in an effort to delay or stop foreclosures.

Here's what you should know about them:

The state does not license or regulate the companies.

No upfront fees can be charged to help prevent foreclosures.

Some firms operate in conjunction with loan modification companies and have been

prosecuted for seeking payment first.

Terry Sheridan can be reached at (954) 468-2614.