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. housing bust since the Great Depression.
The so-called robo-signing revelations sparked a probe by the 50 state attorneys general into the mortgage servicing industry. Multiple hearings were held on Capitol Hill. States and homeowners have since sued mortgage servicers, alleging that homeowners were improperly foreclosed upon, that some were stuck with excessive fees and that some were improperly told they had to default on their mortgage to be considered for modifications.
The federal agencies said Wednesday that they found few cases in which homeowners were improperly foreclosed upon and that borrowers were seriously delinquent on their loans.
But they also said that mortgage servicing companies lacked sufficient staff, created improperly reviewed and notorized foreclosure court documents and lacked adequate quality control and auditing to prevent some foreclosures from moving forward even when a borrower had been approved for a loan modification or had filed for bankruptcy.
Some law firms hired by the mortgage servicers also claimed mortgage notes were lost or destroyed, even though the proper documents existed. They also sometimes signed documents on behalf of servicers without their authority or modified affidavits without their knowledge, the regulators said.
Overall, the companies emphasized "speed and cost efficiency over quality and accuracy," according to the review.
In agreeing to the consent orders, the banks neither admitted nor denied w rongdoing. The other companies were: Ally Financial (formerly GMAC), Aurora Bank, EverBank Financial, HSBC, MetLife, OneWest, PNC, Sovereign Bank, SunTrust Banks and U.S. Bancorp.
Actions were also brought against two companies that provide foreclosure services to the banks and others: Merscorp and its subsidiary, Mortgage Electronic Registration Systems; and Lender Processing Services and two of its subsidiaries, DocX and LPS Default Solutions.
Wednesday, several said they will make or already are making improvements. Wells Fargo said it's already addressing areas that require improvement. JPMorgan Chase called the changes "significant" and said it would hire up to 3,000 people to implement them.
The changes will cost banks only a modest amount of money, says banking analyst Paul Miller of FBR Capital Markets.
Consumer Groups Complain
As news of the pending settlements started to leak last week, more than 50 consumer groups asked regulators to withdraw the proposed changes.
On Wednesday, Rep. Elijah Cummings, D-Md., called the agreements "toothless." He's sponsoring a bill that he says would impose more serious reforms on the mortgage servicing industry.
Iowa Attorney General Tom Miller, who is leading the 50-state effort, reiterated Wednesday that the agreement between banks and regulators would not impede the other investigation.
It will likely take "a matter of months" to determine even if there will be a settlement, says Geoff Greenwood, Miller's spokesman.
Consumer advocates fear that banks will use the new agreements as a "shield" against other changes, says Katherine Porter, professor of law at the University of Iowa.
Porter says the attorneys general were "pursuing much more concrete remedies," including a ban on "dual track" measures in which servicers foreclose while homeowners are being considered for loan modifications.
The regulators' agreement would prevent foreclosures once a loan is approved for modification but could allow the process while applications are pending, says Alys Cohen of the National Consumer Law Center. That will "confuse homeowners, " she says.
Walsh disputes assertions that the rules are too weak or that they'll hurt the effort by the attorneys general. Instead, he expects banks to incorporate at least some of what the attorneys general want in the plans that banking regulators now require them to develop.
The two efforts "need to mesh," Walsh says, to create the type of overhaul the industry needs.
He also says the requirement that banks "look back" at past foreclosures and reimburse wronged homeowners will serve to penalize companies that acted improperly.
"It's a requirement that they take care of people," Walsh says.
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