For years now, there has been a misconception which has been driven home by the National Association of Mortgage Field Services (NAMFS) that pre conveyance properties are the hallowed domain of the financial institutions and thus whatever they want to do; anything which they want to pay, is allowed. Whereas, this type of mentality is normally restricted to the higher echelons of power, in the instant case each and every Member of NAMFS whom is an Order Mill, have had a vested interest in keeping this belief alive —this includes my previous Clients whom are NAMFS Members and Order Mills. The reality is that many things have changed within the Mortgage Field Services Industry and NAMFS has been left behind. And as we will discuss in our next article, the US Government filed its first suit on 13 April 2015 against an Order Mill in Syracuse, NY, for violations of the Fair Labor Standards Act (FLSA).
The McNamara – O’Hara Service Contract Act (SCA) states, in pertinent part,
The McNamara-O’Hara Service Contract Act requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality, or the rates (including prospective increases) contained in a predecessor contractor’s collective bargaining agreement. The Department of Labor issues wage determinations on a contract-by-contract basis in response to specific requests from contracting agencies. These determinations are incorporated into the contract.
Now, as we discussed yesterday, the US Department of Housing and Urban Development (HUD) appears to have determined that pre conveyance properties are under their umbrella with respect to actions pertaining to SCA and Davis – Bacon Act (Davis Bacon) violations. HUD stated that any issues stemming from either SCA or Davis Bacon are mandated to be referred to the US Department of Labor‘s (DoL) Wage and Hour Division (WHD).
The Mortgagee Letters would in fact flow down to the mortgagee’s prime pre-conveyance servicers.
The reality is that the US Government has finally begun to come to its senses. While NAMFS and its Carnival Ship of Fools have yet to realize they are simply tourists passing through, many of us have already begun preparing for the inevitable. The inevitable has two possibilities both of which are beneficial to Labor and the US Taxpayer. More on that later. What we are going to take a look at first, is the quantification of precisely that which HUD has laid out before Labor like a trail of bread crumbs on the path for Hansel and Gretel.
For quite sometime, there has been some misunderstanding with respect to a section of HUD Policy and Procedure commonly referred to as HUD 220.127.116.11 which, in a nutshell, states that neither the Order Mills nor the Contractors may perform Mortgage Field Services, administrative or tangible services, upon the same asset in both a pre and post conveyance setting. Here is how HUD explains it,
The short answer is that HUD does not have the manpower to conduct Quality Assurance on all of the properties in its inventory, especially for initial services. When title first conveys to HUD, we require the FSMs to conduct a HUD Initial Property Inspection Report (HIPIR). One of the primary goals of the HIPIR is to establish whether the mortgagee performed due diligence in their P&P duties. Any surchargable damage found at the properties that the FSM identifies can be referred to HUD’s MCM for downward adjustment of future claims paid to that mortgagee. If we allowed pre-conveyance servicers to perform post conveyance FSM services, it’s possible that they could be essentially QCing their own work. If it could easily be tracked who performed pre-conveyance services at an individual property, we could likely avoid the across the board ban, but doing so has proven very difficult.
With respect to SCA and Davis Bacon, HUD had the following to say,
Unfortunately, SCA and Davis Bacon would both only apply to federal contracts (eg. FSM contracts awarded by HUD), but both acts do in fact have flowdown provisions that apply to subcontractors performing under federal contracts. All private sector labor is solely covered under FLSA. Davis Bacon is limited to construction, but covers some of the required repair work, like putting on a new roof, or replacing a set of stairs. Almost all other services, such as debris removal, cleaning services, lawn care, etc. fall under SCA. DOL randomly audits our FSM contracts (typically a few annually) to ensure compliance.
And to clarify, HUD admits that in accordance with Mortgagee Letter 10 – 18, HUD as well as FHA both have oversight upon pre and postconveyance assets. From HUD,
The Mortgagee Letters would in fact flow down to the mortgagee’s prime pre-conveyance servicers. However, HUD holds the mortgagee accountable, and not the pre-conveyance servicer directly. It should be the mortgagees conducting the quality reviews of their primes. However, I’m guessing many would rather risk getting their FHA claims reduced as a result for non-compliance rather than putting the necessary infrastructure in place to conduct the inspections. Think of it this way, the FHA claim value is always going to be a better proposition than the risk they incur for non-FHA secured loans. A partial claim is still better for the mortgagee than absorbing the entire loss themselves.
So, the stage is set. Now, to clarify that HUD is actually interested in the endgame — more on why in just a moment — and to establish with clarity the fact that HUD is not alone in this regime change, the picture is quite clear that the US Department of Labor‘s (DoL) Wage and Hour Division are going to up the ante.
I’m curious whether the labor concerns you identified extend beyond Safeguard or the other pre-conveyance servicers? We do run into various complaints from subcontractors regarding our prime FSM contractors. However, our dealings with these subcontractors typically needs to be maintained through the primes to avoid additional privity of contract issues. For example, we cannot intervene in negotiated rates for services between the prime and their subcontractors, unless HUD can demonstrate that the prime is not acting in accordance with either Service Contract Act (SCA) or Davis Bacon Act, which both have established prevailing wages depending on the type of service performed. If we do identify violations of either SCA or Davis Bacon, we are also required to refer them to Department of Labor (DOL), who maintains enforcement rights under both Acts.
Now, we can move forward and give way, perhaps, to those whom might do it better. And the reality is that DoLWHD has already filed suit in New York and this is the first of many coming down the pike.