Regulators, mortgage services agree on reforms

April 13, 2011

Three federal agencies announced agreements with the nation’s largest mortgage servicers Wednesday that aim to stem shoddy foreclosure practices. But the plans do not immediately impose financial penalties on the companies or force them to reduce the mortgage debt for troubled borrowers.

The deals require the mortgage servicers to identify and compensate borrowers who suffered financial harm, but the details have not yet been decided. The companies must also provide a single point of contact for struggling borrowers, many of whom complain of getting the runaround when they try to get help. Servicers also would not be able to foreclose on borrowers after granting them a loan modification.

Some lawmakers and consumer groups said the enforcement actions are weak and won’t fix the problems that surfaced last fall. By then, news reports and lawsuits showed that mortgage servicers were using fake documents, forged signatures and other shortcuts to quickly evict families from foreclosed houses. The revelations prompted many of the nation’s largest lenders to temporarily halt foreclosures and sort through the mess.

The three regulators that reached the deal Wednesday — the Office of the Comptroller of the Currency, the Federal Reserve and the soon-defunct Office of Thrift Supervision — have at times been cast by those critics as being too friendly to the industry.

State attorneys general, the Justice Department and several federal agencies are trying to negotiate a separate settlement with the banks, which sources say might force the companies to pay at least $20 billion in fines. That money would then be used to slash the mortgage debt of borrowers who owe more than their houses are worth.

The OCC said its deal would not undermine the broader settlement being negotiated by the attorneys general.

“I would not only hope that they would dovetail, but I think the two really need to mesh,” said John Walsh, acting comptroller of the currency.

Associate Attorney General Tom Perrelli, a lead negotiator for the Justice Department, said federal and state officials met with the largest mortgage servicers Wednesday to hammer out a deal that goes further than the agreements fashioned by the OCC and its partner agencies. For instance, Perrelli said his team is looking into how foreclosures are handled in bankruptcy court.

“We identified many of the same deficiencies but others as well,” Perrelli said.

Sources familiar with the matter said a rift has formed among the state officials and regulators who favor a get-tough approach and the officials from the OCC and its partners who have warned against overreaching.

Officials said the deal fashioned by the OCC, Fed and OTS will eventually impose civil penalties on the servicers. In addition, the servicers must hire an independent consultant to review foreclosures over the past two years to determine whether laws were broken and borrowers were wrongfully harmed. Based on the findings, the agencies would determine what restitution the bank would have to provide to those borrowers.

The mortgage servicers also have to come up with a plan to improve their handling of foreclosures and loan modifications in about two months.

The banks that have signed onto these agreements are Ally Financial, SunTrust, HSBC, Bank of America, Citigroup, J.P. Morgan Chase, MetLife, PNC, U.S. Bancorp and Wells Fargo. The banks represent 65 percent of the mortgage servicing industry, or nearly $6.8 trillion in mortgage balances.

The three agencies also addressed failures and unsound practices at MERSCORP, which registers and tracks mortgage ownership on behalf of the industry, and Lender Processing Service, which provides default-management services.

The actions taken by the three agencies are based on the findings of an interagency review last year that discovered “significant problems” from a sampling of foreclosure actions by those companies.

The companies violated federal and state laws, mishandled foreclosure documents and failed to properly oversee the foreclosure attorneys working on their behalf, the review concluded, contradicting past claims by the industry.

Consumer advocates and some lawmakers reacted negatively.

Rep. Maxine Waters (D-Calif.) said the enforcement actions are “disappointing – but not surprising – given the history of our nation’s banking regulators” who have been accused of being too soft on the institutions they oversee.

“I fear that these consent orders are merely an attempt to do an end-run around our state attorneys general,” Waters said in a statement.

Dina ElBoghdady covers housing policy for The Washington Post.
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