NEW YORK Ohio Attorney General Richard Cordray on Friday said he sued Carrington Mortgage Services, LLC, one of the biggest subprime servicers, for failing to provide homeowners with acceptable ways to avoid foreclosure.
The joint lawsuit with the Ohio Department of Commerce alleges that Carrington breached a January 2008 agreement to make "good faith" modifications on loans to avoid foreclosures, Cordray said in a statement. It also claims that Carrington violated a consumer law with incompetent service.
Cordray said the lawsuit represents a "new tactic" in fighting the foreclosure crisis that has been especially harsh in the Midwest. It comes as lawmakers and regulators have also stepped up their efforts to stop the rise in foreclosures that are feeding a vicious cycle of defaults, which threaten the recovery of the U.S. economy.
"This lawsuit makes it clear that we have reached zero tolerance for this kind of behavior from loan servicers," Cordray said in a statement. "We've tried to work with them, but now we must take action."
Ohio had the 12th highest foreclosure rate in the nation in the first half of this year, when nearly 59,000 foreclosure filings were made, according to RealtyTrac.
Carrington asserted that Cordray has declined its offer to work toward helping homeowners, and said the lawsuit was "meritless litigation."
The lawsuit seeks consumer restitution, civil penalties and damages, Cordray said in the statement.
Servicing companies, which collect and distribute mortgage payments from homeowners, are at the heart of President Barack Obama's efforts to stabilize the housing market. More than two dozen servicing companies, including Carrington, have enlisted to participate in the Home Affordable Modification Program under which they receive financial incentives for rewriting sustainable loans.
But disappointment with the HAMP program led the U.S. Treasury this week to prod servicers to boost their efforts.
"Carrington remains single-mindedly committed to helping homeowners throughout this difficult economic cycle and has modified loans for approximately half of its customers, the vast majority of which are now back on track and remain in their homes," the Santa Ana, California-based company said in an e-mailed statement.
Cordray said Carrington violated an agreement with Ohio to resolve a dispute over the states' litigation against New Century Financial Corp, a defunct subprime lender. Carrington's parent, Carrington Capital Management, LLC, purchased New Century's servicing unit in 2007.
Specifically, Carrington failed to provide borrowers with terms "reasonably designed to avoid foreclosure," and did not provide copies of the terms to the state, Cordray said.