The Consumer Financial Protection Bureau and twenty two states have sued Aquan Financial, a mortgage servicer that performs tasks like collecting mortgage payments on behalf of the banks that actually lend the money, among other things. The CFPV says that Aquan routinely mishandled millions of mortgage accounts, and that the software Aquan uses to manage mortgages is deeply flawed, adding errors regularly to borrowers accounts. Aquan disputes the allegations and
has called the lawsuit politically motivated. But this isn't the first time that it's been in hot water with the CFPV, and it's facing some very serious lawsuits right now. With us to talk about the litigation against Aquan is Robert Hockett, a professor at Cornell University Law School. Bob explained to us exactly what the CFPV says that Aquin did wrong here. Sure, sure, So it's great to be with you. Thanks for having
me on again. Essentially, if you go back to one thing I might help listeners as if they remember back at the so called robosigning scandals where a lot of banks were getting in trouble for supposedly UH filling out or filling dot filling out documents kind of fraudulently in order to begin to foreclose on homes which UH mortgages
were sort of getting laid on their payments. One of the reasons that was alleged for that was that basically they were just such a big upswing in foreclosures in the wake of the crisis that the banks simply couldn't handle it. They simply couldn't keep up with all of the servicing requirements that they had to keep up with, so a lot of the banks began to unload a lot of these servicing rights to affirm like Aquan and Aquin purported to be a specialist at handling this kind
of stuff. They supposedly have the right software, the right techniques, so they could kind of do all of this stuff in the right way on the up and up. They could kind of manage each particular mortgage account well and take in the payments. They could do readjusting of a monthly payments if necessary. Um, they could basically handle it all in a much more efficient way. Was to claim.
What the CFPB and what twenty two states are saying is that Aquin has proved no better at this than the banks were said to be doing back in the idea is first of all, but the software that they're using is not capable of tracking all of the various functions that have to be tracked in servicing these many many loans. UH. They're claiming that auqwin is failing to record payments that mortgagers are actually making on some of
these loans. They're saying that auqwin is failing to make various tax payments and other sorts of payments that have to be made out of the escrow accounts associated with particular mortgages, and that in consequence, UM something like one
and a half million homeowners have been harmed already. So a number of states UH states have sued as as you know as a CFBVS sued, and a bunch of states have also issued seas and asists orders, essentially saying that aukwin has to stop UH taking on any more servicing business until it can sort of prove or sort of get under wraps the business that is currently claiming
to be handling Bob. The Consumer Financial Protection Bureau said that Aquin allegedly foreclosed illegally on at least to thousand homeowners. Don't they have to go through a court proceeding and prove some facts before they can foreclose illegally and don't have to verify whether the debt was valid. They do. But but here's the different states have different degrees of friction. You might say that they put up in the way
if it would be forecloser. In some states it's a lot easier and faster for to foreclose than in others.
What's more, if Akwin, for example, UM was sort of proving that it had the right to foreclose by producing certain documents that might have been you know, robosigned, if I can use that word again, that you know, basically referring to what the banks were accused of around seven years ago UM, and then some of those foreclosures could definitely be suspect, even though uh Ackwin sort of complied with the sort of the letter of the law, or
appears to have complied with the letter of the law. Bob, you know, this isn't the first time the CFPB has got after Akwin and went after them in two thousan over what sound very similar kinds of allegations of mismanagement of accounts. How is it that this didn't get cleared up when not when the CFPB went after them the first time? Well, I mean that that is uh, the sixty four thousand dollar question, right. I mean, one would have thought that Awkwin would have been put on notice
ben uh, and that they would have gotten their act together. Um. I think there are a couple of possible explanations. They're sort of good faith, I mean, there are sort of charitable explanation and possible I'm sorry, there are some possible explanations that are sort of charitable and others that are less.
So let's start with the charitable. The charitable explanation might be that they said that, yeah, we'll get our act together, we'll sort of get back on the straight arrow, will, we'll fix these problems, uh, And that they really tried, um, but that they underestimated the magnitude of the problem and
so didn't succeed in sort of fully handling it. Another possibility is that they were in fact acting to correct the problems of the CFPB notified them about, but that in the meanwhile they kept taking on additional servicing rights so that the full portfolio and that they were dealing with continued to grow. And so even the improvements that they made in might not have suffice given the fact that the original basis of those problems was itself growing. Right.
I mean, one thing we have to remember is that the number of mortgages that they've been servicing, the full portfolio I think, grew by something like a factor of eight eightfold from what to now or two thousand nine until now. So it's a very rapid growth rate in
their portfolio of mortgages to handle. So even if they were which is again four years ago, even if they were beginning to get there their house in order, so to speak, it might have been that that was not enough because the problem was in effect growing very rapidly even as they were trying to get a handle on it, as it had developed up Bob. So, the CFPB, the state of Florida, and twenty one other state agencies are suing them or resuring cease and decease desist orders against
the company. Yeah, it has said it will vigorously defend itself. What is its defense? I really, I frankly can't imagine what it could be. I really can't. I'm very I mean, I'm surprised by this particular attitude. I would have thought that they would have been exhibiting some kind of contrition um, some sort of plea to the effect that, well, you know, please, you know, work with us here where we really are trying.
We're doing our best. But but the problem is that the thing has you know, that the portfolio has grown so rapidly that even as we are making improvements, were still having trouble keeping up. That would have struck me
as the right sort of tone to take. Instead by striking a defiant tone and saying, oh, this is just a CFPB sort of getting out of control, I think it's an amazingly stupid strategy to tell you the truth, because when you've got half of the states of the Union making the same claim, trying to scapegoat the CFPV just isn't gonna it's it's not gonna fly right. Nobody's
gonna buy that. Nobody's gonna find that convincing. With half the states in the Union are alleging the same uh, that the same wrongs uh and and acting in the same way as the CFPV, I can't see what kind of defense they could possibly offer that would be consistent, at least with a defiant tone that they're striking, Bob. If you know, a lot of people probably when they get their bills from these mortgage servicing companies are kind
of surprised. You take out a mortgage with a bank and suddenly this other company who you never heard of before is obviousing your mortgage, and you can end up in a situation like we have allegedly with Aquin here. Is there something that should be done, you know, at the governmental level or otherwise or by the banks in order to avoid this kind of situation because people don't
have any control over who the mortgaging service company is. Yeah, I mean, I think that that's that's the sort of the perfect question to ask here, because in fact, what it highlights is a particular fact, and it's the fact that we haven't yet figured out how to deal with the fact that the whole country, the whole model of housing finance that we operate with in this country has
fundamentally shifted over the last tent of twenty years. Right there used to be, as we know, right the very the person that landed with the institution that lent you the money that you used to buy your house, kept the loan for the duration of the loan, and you know, I had you had a personal relation with it, You knew who they were, knew who you were, you had
a kind of a history. You could kind of work things out together if you were beginning to uh suffer financial hardships, and hence we're going to linquents on some of your payments. But as you know, in the lead up to two thousand and eight, we had a gradual shift to what's now known as the originate to distribute model, where the institution that originates loans doesn't plan to hold them. Instead, it sells the rights to collect on the loans to
other institutions. And sometimes these things can change hands multiple times, and that makes it very difficult, for one thing, for the homeowners to know who the heck they're actually dealing with, and who they actually owe something to, and who might be in fact, just trying to scam them. And it turns out that it's apparently difficult for the services themselves even to kind of keep up with things because these
things often change hands so rapidly. So the question is do we have to go back to the pre originate to distribute model basically originate to hold In other words, we want kind of maximum skin in the game again like we used to have, or is there some sort of middle ground that we can find that's between the older model on the one hand, and the currently you know, sort of just obviously unsiff stainable originate to distribute to distribute,
to distribute to distribute model, which is what's proved so so unworkable. You know. The argument in favor of the latter is it supposedly makes housing finance cheaper, right, the cost of housing finances much lower because nobody feels that. The lenders know that they can unload the loans and so they're not going to be stuck with them, and they charge less in the way of interest. But the problem, of course is we actually had sort of too much mortgage credit. It was sort of too much of a
good thing. That's why we had a housing bubble in the first place. So clearly we need something between the two extremes, at least if we don't, in fact go all the way back to the originate to hold model. Bob. Every time I see these lawsuits continuing about mortgage companies and mortgage service companies, I asked the same question of myself,
which is haven't we learned anything from the financial crisis? Yeah? Yeah, it seems like we learned something for about twenty minutes or maybe for eighteen months um, and then almost as quickly as um, things begin to kind of recover in scare quotes, the original causes of the crisis in the
first place begin to be forgotten. But you would have thought, in this particular case, given that the magnitude of the crisis first and the fact that it was so concentrated on housing finance as for another thing, that at the very least we would at least remember, right how to you know, how to do housing right, even if we, you know, are still sort of arguing about what to do about derivatives or what to do about uh financial
market utilities or repo markets or what have you. But it seems that we we've apparently haven't even figured out yet what to do about housing. And I guess you see. Another reflection of this, of course, is in Congress itself, because Congress for at least five years now has been figuring out what to do with Fannie and Freddie. Do we want to sort of restore them to what they
were before? Two We've got there's clearly gonna be more for us to have you on the air to talk about, but we're running out of time, so I want to thank Bob Hockett of Cornell Law School for being with us here today on Bloomberg Law. That's it for this edition of Bloomberg Law. Will be back tomorrow thanks to Technical director Christa Comey and producer David Sucherman. Coming up on Bloomberg Radio, Bloomberg Markets with Carol Master and Corey Johnson. Carol,
what do you got? How much money is the IBM CEO really making? We're gonna do that. Stay tuned for all of that and more here on Bloomberg Radio. This is Bloomberg