The companies failed to meet basic program requirements, such as properly contacting borrowers, the official said. The details, first reported by The Washington Post on Wednesday, were part of a report that assessed the performance of the 10 largest participating servicers.
In separate statements Thursday, the three banks said they have made improvements that were not captured in the review conducted by the Treasury Department.
Wells Fargo said the report examined loan modifications handled at least a year ago and does not reflect improvements made by the bank since then. Wells Fargo plans to formally dispute the findings. A Chase spokesman said the bank “respectfully disagreed” with the administration’s assessment. Bank of America said it believes future reviews will confirm the progress it has made.
Through the initiative, servicers can collect at least $1,000 for each loan they permanently modify. The payment is meant to entice servicers to participate in the voluntary program, which has doled out $560 million in payments since its launch in March 2009.
The three targeted servicers — which received $24 million in payments last month — will not receive payments for permanent modifications reported from June onward until they address their weaknesses.
No estimates are available yet for how much will be withheld.
A fourth servicer — Ocwen Loan Servicing — also ranked among the worst performers, but it will continue to receive payments because its poor showing was due primarily to a portfolio of loans it recently acquired from another company, the official said.
The move is the first major action taken against servicers participating in the embattled program, which has been criticized as ineffective and too soft on the servicers.
The House recently approved a Republican-led measure that would kill the initiative in part because of its lackluster results, but the measure has not gained traction in the Senate.
When the program was created, the administration projected it would prevent 3 million to 4 million foreclosures before it expired in December 2012. But it is expected to fall far short of its goal, having permanently modified only about 700,000 loans so far.
The Treasury Department, which oversees the program, does not regulate the institutions that participate and officials therefore cannot impose fines or penalties, a Treasury Department official said Thursday. The only available leverage is to withhold incentive payments, administration officials said.
Tim Massad, the Treasury Department’s assistant secretary for financial stability, defended the decision to take action now even though the program has been criticized for years. In late 2009, there were only 30,000 permanent modifications done, Massad said. “That’s not very much money to withhold,” he said. At that time, the administration was more concerned about making sure that the servicers had procedures in place to handle the volume of loans coming their way, Massad said.
Borrowers and the investors who own mortgages also receive incentive payments for participating in the program. Their payments will not be withheld.