Servicers Face New Rules, Penalties for Foreclosure Processing Mistakes

When evidence surfaced last fall of flawed foreclosure documentation and robo-signers within some of the nation's largest servicing shops, federal regulators launched an investigation into the foreclosure and servicing practices of 14 companies, including ""Bank of America"":http://www.bankofamerica.com, ""Citigroup"":http://www.citigroup.com, ""GMAC Mortgage"":http://www.gmacmortgage.com, ""JPMorgan Chase"":http://www.jpmorganchase.com, and ""Wells Fargo"":http://www.wellsfargo.com.

[IMAGE]

John Walsh is head of the Office of the Comptroller of the Currency. His agency, along with the FDIC, Federal Reserve, and the Office of Thrift Supervision, have been conducting on-site evaluations and examinations of individual loan files for the past few months. The agencies also conducted investigations of the ""Mortgage Electronic Registration Systems, Inc."":http://www.mersinc.org (MERS) and ""Lender Processing Services"":http://www.lpsvcs.com (LPS), which provide services to support mortgage servicing and foreclosure processing to a number of institutions.

Walsh told members of the Senate Banking Committee Thursday that the probe has uncovered ""critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors.""

He said these deficiencies have resulted in violations of state and local foreclosure laws, as well as federal regulations and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy.

""By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner,"" Walsh told lawmakers.

[COLUMN_BREAK]

He said the regulators are ""in the process of finalizing actions"" that will include operational changes, sanctions and penalties against servicers, and remediation for borrowers who have been financially harmed by defects in servicers' procedures.

The _Wall Street Journal_, citing “people familiar with the situation,” says although regulators have not agreed on exact particulars of the punishment, some banks could be notified of the enforcement actions being taken against them within days.

Walsh also assured lawmakers that the regulatory agencies intend to leverage their findings and lessons learned to develop a set of national mortgage servicing standards. He said the OCC has already drafted a framework for comprehensive mortgage servicing standards that has been shared with the other agencies.

In ""Walsh’s testimony Thursday"":http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=99d7b6a8-d834-46e6-a088-f463fb740cf0, he listed off 12 specific areas that will be addressed by the new national standards, including ensuring documents provided by borrowers and third parties are maintained and tracked so that borrowers are not asked to resubmit the same information; providing borrowers with a single point of contact for loss mitigation; and prohibiting foreclosure on a property when the borrower is in a trial or permanent modification.

Walsh said he “believes that mortgage servicing standards should apply uniformly to all mortgage servicers and provide the same safeguards for consumers, regardless of whether a mortgage has been securitized.""

Walsh did note, however, that despite the procedural deficiencies found, regulators’ examinations of specific cases and reviews of servicers’ custodial activities found that loans that were sent to foreclosure were seriously delinquent, and that servicers maintained documentation of ownership to support their legal standing to foreclose.

In addition, he said case reviews evidenced that servicers were in contact with troubled borrowers and had considered loss mitigation alternatives, including loan modifications.

He said only a small number of foreclosure sales should not have proceeded because of an intervening event or condition, such as the borrower being covered by the Servicemembers Civil Relief Act; filing bankruptcy shortly before the foreclosure action; or being approved for a trial period modification.