Bear Stearns and its subsidiary, EMC Mortgage, have agreed in principle to pay a multi-million dollar fine to settle Federal Trade Commission (FTC) charges that they engaged in unlawful practices while servicing consumers’ home mortgage loans. The FTC–which works for consumers to prevent fraudulent, deceptive, and unfair business practices and to provide information to help spot, stop, and avoid the–charged the two companies with misrepresenting the amounts borrowers owed, charging unauthorized fees–such as late fees, property inspection fees, and loan modification fees–and engaging in unlawful and abusive collection practices.

The proposed settlement requires Bear Stearns and EMC to pay $28 million to redress consumers who have been injured by the illegal practices alleged in the complaint. In addition, the settlement bars both companies from future violations and imposes new restrictions and requirements on their business practices. Specifically, the settlement:

1. Bars the defendants from misrepresenting amounts due and any other loan terms.
2. requires them to possess and rely upon competent and reliable evidence to support claims made to consumers about their loans.
3. Bars them from charging unauthorized fees, and places specific limits on property inspection fees even if they are authorized by the contract.
4. Prohibits them from initiating a foreclosure action, or charging any foreclosure fees, unless they have reviewed all available records to verify that the consumer is in material default, confirmed that the defendants have not subjected the consumer to any illegal practices, and investigated and resolved any consumer disputes.
5. Prohibits the defendants from violating the the Fair Debt Collection Practices Act (FDCPA), the Fair Credit Reporting Act (FCRA), and the Truth in Lending Act’s (TILA).

The settlement further requires Bear Stearns and EMC to establish and maintain a comprehensive data integrity program to ensure the accuracy and completeness of data and other information they obtain about consumers’ loan accounts, before servicing those accounts. They must also obtain an assessment from a qualified, independent, third-party professional within six months and then every two years, for the next eight years, to assure that their data integrity program meets the standards of the order.

In its complaint, the FTC pointed out the a prominent role Bear Stearns and EMC played in the secondary market for residential mortgages. During the explosive growth of the mortgage industry, both companies acquired and securitized loans at a rapid pace, but they also paid inadequate attention to the integrity of consumers’ loan information and to sound servicing practices. As a result, in servicing consumers’ loans, Bear Stearns and EMC neglected to obtain timely and accurate information on the loans, made inaccurate claims to consumers, and engaged in unlawful collection and servicing practices. (As an aside, these practices occurred prior to JP Morgan Chase & Co.’s acquisition of Bear Stearns, which became effective on May 30, 2008.)

According to the complaint, EMC is characterized as the mortgage servicer for many of the loans Bear Stearns and EMC acquired. Many of these loans are subprime or Alt-A (less than prime) loans, including nontraditional mortgages such as pay option adjustable rate mortgages (i.e., “pick-a-payment” loans), interest-only mortgages, negative amortization loans, and loans made with little or no income or asset documentation. EMC’s loan servicing portfolio has grown significantly in recent years; as of September 2007, it serviced more than 475,000 mortgage loans with a total unpaid balance of about $80 billion.

If the U.S. District Court for the Eastern District of Texas approves the settlement, consumers who are eligible for redress will be contacted by mail. The Commission’s consumer hotline regarding the settlement is 1-877-787-3941.