It Pays to Foreclose, Class Claims

PHOENIX (CN) - Despite pocketing $25 billion from the Troubled Asset Relief Program to help homeowners avoid foreclosure, Bank of America refuses to help its customers out because it makes money by turning them away, a class action claims in Federal Court. "Fees that Bank of America charges borrowers that are in default constitute a significant source of revenue to the servicer," the class claims.

Though BofA gets $1,000 for each Home Affordable Modification Program loan modification, it's more profitable to "avoid modification and to continue to keep a mortgage in a state of default or distress and to push loans toward foreclosure," according to the complaint.

Bank of America refuses to use the government funding for its intended purpose, and forces foreclosures, because modifying mortgage loans would bring it lower monthly service fees, and "(f)ees that Bank of America charges borrowers that are in default constitute a significant source of revenue to the servicer," the class claims.

According to the U.S. Treasury, Bank of America has more than 1 million mortgages that qualify for modifications, but BofA has granted only 12,761 permanent modifications, the complaint states - "just over 1 percent of the eligible pool."

Also, the lender's "right to recover expenses from an investor in a loan modification, rather than a foreclosure, is often less clear and less generous," the complaint adds.

The homebuyers say that Bank of America has to pay for "additional staffing, physical infrastructure, and expenses such as property valuation, credit reports and financing costs" when granting loan modifications.

Bank of America counts on the fees it charges borrowers in default as "a significant source of revenue," the homeowners claim. And the bank adds late fees and "process management fees" to loans to increase the unpaid balance and monthly service fee, the class claims.

The complaint cites an October 2009 report from Diane Thompson with the National Consumer Law Center: "Why Servicers Foreclose When They Should Modify and Other Puzzles of Servicer Behavior."

According to the 33-page federal complaint:

"Economic factors that discourage Bank of America from meeting its contractual obligations under HAMP by facilitating loan modifications include the following:

"Bank of America may be required to repurchase loans from the investor in order to permanently modify the loan. This presents a substantial cost and loss of revenue that can be avoided by keeping the loan in a state of temporary modification or lingering default.

"The monthly service fee that Bank of America, as the servicer collects as to each loan it services in a pool of loans, is calculated as a fixed percentage of the unpaid principal balance of the loans in the pool. Consequently, modifying a loan to reduce the principal balance results in a lower monthly fee to the servicer.

"Fees that Bank of America charges borrowers that are in default constitute a significant source of revenue to the servicer. Aside from income Bank of America directly receives, late fees and 'process management fees' are often added to the principal loan amount thereby increasing the unpaid balance in a pool of loans and increasing the amount of the servicer's monthly service fee.

"Entering into a permanent modification will often delay a servicer's ability to recover advances it is required to make to investors of the unpaid principal and interest payment of a non-performing loan. The servicer's right to recover expenses from an investor in a loan modification, rather than a foreclosure, is often less clear and less generous."

The class alleges consumer fraud and breach of contract. It wants Bank of America ordered to offer permanent modifications to class members, and ordered to institute "appropriate training of their employees ... regarding their duties under HAMP."

The class is represented by Robert Carey with Hagens Berman Sobol Shapiro in Phoenix and Steve Berman with Hagens Berman in Seattle.

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