Acting Comptroller Testifies; CFO of Lender Processing Services Buys

| About: Lender Processing (LPS)

On Thursday, the stock market was rallying, but Lender Processing Services (NYSE:LPS) was selling off on high volume. At its lowest point, within an hour of trading, LPS was down 7.5% on heavy volume. The stock recovered the rest of the day to close down 3.5%. It turns out that LPS was mentioned during testimony from the Acting Comptroller of the Currency, John Walsh, with the House Subcommittee on Housing and Community Opportunity of the Committee on Financial Services. The offending statement was very simple (emphasis mine):

The OCC is heading an on-site interagency examination of the Mortgage Electronic Registration System, or MERS, in coordination with the Federal Reserve, the FDIC, and Federal Housing Finance Agency, and we are participating in an examination led by the Federal Reserve of Lender Processing Services, Inc., which provides third-party foreclosure services to banks.

Where we find errors or deficiencies, we are directing banks to take immediate corrective action, and we have an array of enforcement actions and penalties that we will not hesitate to impose if warranted. These can include civil money penalties, removals from banking, and criminal referrals. We expect to complete our examinations by mid to late December. By the end of January, we hope to have our analysis of the exams completed to determine what additional supervisory or enforcement actions may be needed.

LPS already mentioned on-going investigations during its earnings report at the end of October, but it is understandable for investors and traders to get spooked when a company is singled out for mention as a part of such a weighty Congressional hearing. However, while this was going on, Lender Processing Services’ CFO, Thomas Schilling, spent $149,250 of his own money to buy stock at $29.85/share. It is probably no accident that LPS bottomed shortly after that. This purchase, combined with the market’s reaction to it, has me tilting ever closer to considering LPS a contrarian buy. For now, I am still holding one of those infamous March puts. Year-to-date, LPS is down 24% although it is UP 12.7% since reporting earnings at the end of October.

Walsh was present to explain the OCC’s role in supervising national banks and in particular mortgage servicing operations, its efforts to reduce delinquencies after modifications, and its plans for investigating allegations of fraud and breakdowns in the process. Here is a key quote from the oral statement:

The OCC reviews a bank’s foreclosure governance process to determine if it has appropriate policies, procedures, and internal controls to ensure the accuracy of information relied upon in the foreclosure process and compliance with federal and state laws. We expect banks to test these processes through periodic internal audits and their on-going quality control function.

Examiners generally do not directly test standard business processes or practices such as the validity of signed contracts or the processes used to notarize documents, absent red flags that indicate systemic flaws in those business processes. Unfortunately, neither internal quality control tests, internal audits, nor data from our consumer call center suggested foreclosure document processing was an area of systemic concern.

The written testimony starts with the following description of the current state and understanding of the problem in processing foreclosures:

To date, four large national bank servicers have publicly acknowledged procedural deficiencies in their foreclosure processes. The lapses that have been reported represent a serious operational breakdown in foreclosure governance and controls that we expect national banks to maintain. These lapses are unacceptable, and we are taking aggressive actions to hold national banks accountable, and to get these problems fixed.

As soon as the problems at Ally Bank came to light, we directed the largest national bank mortgage servicers under our supervision to review their operations, to take corrective action to remedy identified problems, and to strengthen their foreclosure governance to prevent reoccurrences. At the same time, we initiated plans for intensive, on-site examinations of the eight largest national bank mortgage servicers. Through these examinations we are independently testing the adequacy of governance over their foreclosure processes to ensure foreclosures are completed in accordance with applicable legal requirements and that affidavits and claims are accurate.

As part of our examinations we also are reviewing samples of individual loan files where foreclosures have either been initiated or completed to test the validity of bank self-assessments and corrective actions, and to determine whether troubled borrowers were considered for loss mitigation alternatives such as loan modifications prior to foreclosure.
Our examinations are still on-going.

The rest of the written testimony is a great read for anyone interested in following the technical details of the current problems with processing foreclosures.

Be careful out there.

Disclosure: Long LPS put