Borrowers shorted on mortgage relief checks

Correction: This story is updated to reflect that the Federal Reserve became aware of a problem with the compensation checks on Tuesday, not Friday.

May 8, 2013

Thousands of victims of foreclosure abuse got an unpleasant surprise in the mail last week: compensation checks for less money than they were owed.

The Federal Reserve said Wednesday that about 96,000 homeowners who are entitled to a cut of a $3.6 billion settlement with mortgage servicers accused of faulty and fraudulent foreclosures received less than they were owed.

Rust Consulting, a firm hired to distribute the checks, mistakenly sent borrowers whose mortgages were serviced by Goldman Sachs and Morgan Stanley the wrong amounts, but will issue new checks to make up the difference around May 17. The Fed said it became aware of the problem on Tuesday.

In a statement, the central bank said it “directed Rust to distribute the supplemental payments to affected borrowers as soon as possible,” adding that the Fed would “continue to monitor the payments closely.”

A Rust spokesman did not immediately return a call for comment.

The mishap is the latest setback for the settlement. A number of checks issued in April bounced due to insufficient funds. Rust neglected to move the $3.6 billion collected from the 13 servicers involved in the settlement into a central account at the bank that issued the checks. Regulators quickly rectified the problem, but not before being bombarded with complaints.

The settlement is the latest iteration of a deal the Fed and the Office of the Comptroller of the Currency struck with the nation’s largest mortgage servicers in 2011. After regulators identified flawed foreclosure filings, the servicers agreed to pay homeowners pending review of their files.

But in the 12 months that the foreclosure review was under way, no homeowners received compensation, though the eight consultants managing the process were paid nearly $2 billion. Regulators abandoned the review and brokered a $9.3 billion settlement with most of the banks, which included a total of $3.6 billion in direct payments to borrowers.

More than half of those impacted will receive no more than $300.

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