Suits aim at smaller mortgage companies

The companies, known as mortgage servicers, are middlemen who collect monthly payments from homeowners and funnel the money to the banks or investors who hold the loans. As the only link between borrowers and lenders, they’re in the best position to rework the terms of loans under the government’s $50 billion mortgage-modification program. The servicers are paid by the government if the changes keep homeowners from falling behind on payments for at least three months.

But the industry has a checkered history. At least 30 servicers have been accused in lawsuits of harassing borrowers, imposing illegal fees, and charging for unnecessary insurance policies. More recently, the companies also have been criticized for not helping homeowners quickly enough - delays that lead to more fees for homeowners and profits for servicers.

The biggest players in the servicing industry - Bank of America, Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup - all face litigation, some of which has led to settlements with homeowners. All will receive federal money to modify loans.

But the industry’s smaller players, which specialize in servicing riskier subprime loans and loans already in default, face harsher accusations that they systematically abused borrowers.

“The irony is, in essence, the government is paying servicers to do their job, which is to do loan modifications where appropriate,’’ said Kurt Eggert, a law professor at Chapman University in Orange, Calif. “And that’s not a part of their job they were ever especially good at.’’

The government says it has no choice but to partner with the servicers because they are the only link between borrowers and the investors who indirectly own their mortgages through securities.

When President Obama announced the plan, called the Home Affordable Modification Program, in March, he said it would help up to 4 million homeowners avoid foreclosure. But only about 200,000 loan modifications are under way.

Under the Treasury program, the servicers could pocket more than $5,500 for each loan they modify. But they won’t be paid until the homeowners have made timely payments for three months. The servicers will also get government money to give to mortgage investors to compensate them for reducing the loans. How much will depend on what it costs the investors to modify the loan.

The largest mortgage servicing abuse lawsuit was brought against Select Portfolio Servicing, which was accused of imposing illegal fees and charging borrowers for insurance they did not need.

The company paid $55 million in 2003 to settle charges brought by the Department of Housing and Urban Development and the Federal Trade Commission. It is eligible for up to $660 million under the Obama plan - some to keep and some to pass on to investors and homeowners.

Most complaints against servicers allege similar abuses. Servicers often dispose of the harshest charges by settling without admitting guilt, as Select Portfolio did in 2003.

“There is no question that there have been significant abuses by servicers, and a big part of that is there’s no one who is carefully monitoring their work to make sure that they’re not taking advantage of borrowers,’’ Eggert said.

The proliferation of mortgages sold to risky, or subprime, borrowers created an opening for the servicing business. Firms specialized in collecting from people less likely to make timely payments, and profited as late fees mounted.