Federal bank regulators announced new rules Wednesday for 14
of the nation's largest mortgage servicers, saying the changes will
curb past and future foreclosure abuses.
Spawned by a federal investigation that identified "significant weaknesses" in mortgage servicer practices, regulators said the changes they're imposing represent major reforms in an industry that touches virtually every U.S. homeowner with a mortgage.
In the government's most forceful response yet to the nation's four-year foreclosure crisis, the regulators ordered the mortgage servicers to hire outside firms to review every foreclosure action they had pending from Jan. 1, 2009, through Dec. 31, 2010, identify borrowers harmed by the servicers' deficiencies and compensate them. They also face unspecified financial penalties that are still to come, regulators said.
The banks and other companies covered by the orders collect the monthly payments from homeowners representing about two-thirds of the residential mortgage market.
The banking regulators' actions are "intended to fix what is broken" and identify and compensate borrowers who were victims of improper foreclosure processes, says John Walsh, acting Comptroller of the Currency, whose office investigated the servicers along with the Federal Reserve and the Office of Thrift Supervision.
Consumer advocates say the changes are too little, too late, create no meaningful protections for consumers and are far less aggressive than those being pursued by the 50 state attorneys general, whose investigation of mortgage servicers is continuing.
The regulators "let the banks play a 'Get out of jail free' card," says Adam Levitin, professor of law at Georgetown University.
The regulators said the mortgage servicers -- including Bank of America, Citibank, JPMorgan Chase and Wells Fargo -- had significant weaknesses in their mortgage servicing and foreclosure processes.
The problems violated state and federal laws, the regulators say. Even more critically, they raised costs or limited the options of borrowers trying to keep their homes, slowed the housing market's recovery by prolonging the foreclosure crisis and placed excessive burdens on the court system, the regulators said.
To correct those deficiencies, the mortgage servicers agreed to make changes that will include:
Giving distressed homeowners a single point of contact when dealing with their mortgage servicer.
Not foreclosing if modified mortgages are not delinquent.
Increasing supervision of third-party vendors, including foreclosure law firms that handle work for them.
Creating a process to let borrowers submit requests for remediation if they think they've been treated unfairly.
Outcry Over 'Robo-signers'
The new rules hit an industry that, before the foreclosure crisis, largely operated in anonymity and quiet purpose, managing millions of U.S. mortgages for an increasingly large percentage of the U.S. population.
The wraps came off last fall with revelations that some servicers hired law firms or employees who improperly prepared foreclosure documents in tens of thousands of cases, apparently to keep up with the mushrooming backlog of foreclosures. More than 1 million U.S. homeowners lost their homes last year, amid the worst U.S.
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