By: Abigail Field

The shares of Lender Processing Services (LPS) came under fire Friday, dropping nearly 20% on unusually high volume after Nevada Attorney General Catherine Cortez Masto filed fraud charges against the company.

Although LPS, a billion dollar company by market capitalization, has several business lines, the fraud charges relate to its largest (by revenue) default services division. Given the nature of the charges and the mound of evidence AG Masto cites in the complaint, Friday’s fall in share price is likely only the beginning.

In recent years, LPS’s default servicing division has come under fire for two practices central to the attorney general’s charges: document fraud and illegal fee-splitting. Both types of claims go right to the heart of LPS’s business model.

As the complaint details, the standard business practices of the LPS facilities in Minnesota and Georgia involved the routine signing of documents and notarization of documents in ways that were contrary to the documents’ own claims and state law. For example, people were trained to forge other individuals' names and then notarize their forgeries in their own names. 

On the fee splitting issue, the Nevada AG’s suit details how LPS provides its services to mortgage servicers for free, and gets paid by charging the network of attorneys it manages a variety of fees. The AG called such fees "kickbacks" and pointed out that the management of the attorneys appears to be at least tantamount to the illegal practice of law. In fact, LPS has faced two lawsuits charging that its practice of charging these fees to attorneys is illegal fee-splitting, but LPS was able to defeat both suits on procedural grounds.

LPS responded to the charges with a short press release that was striking despite its brevity because it accused the Attorney General of itself violating Nevada law and by noting that LPS had "discovered, during its own internal reviews, potential issues related to some of its past document execution practices." LPS continued: "However, the company is not aware of any person who was wrongfully foreclosed upon as a result of a potential error in the processes used by its employees."

Unfortunately for LPS, its claim that the "potential issues" occurred solely in the past is not credible because documents reflecting the problems have turned up in courts long after its previous claims that it had discovered and ended problematic practices. Moreover, "no harm, no foul" may be a defense that resonates with the public, but even if true isn’t a defense to the charges the AG brought.

LPS shares stabilized on Monday, but as the litigation progresses -- and if investors file additional lawsuits as a pension fund did in the wake of early robosigning reports -- it’s hard to see what will keep its share price steady.

Abigail Caplovitz Field is a writer and attorney in New York. Her blog, reality check, focuses on banking and the foreclosure crisis.