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OCC head tells American Banker regulatory symposium that banks could face restitution after complaint reviews. Gruenberg, meanwhile, announces FDIC community-bank initiatives.
September 19 -
Regulators' consent orders let mortgage servicers select the firms to review their actions. Allowing the banks to choose their own judge, jury, and jailer presents almost untenable conflicts of interest.
October 6 -
Regulators' mortgage servicing consent orders require big banks to conduct a thorough review of their foreclosures. On Friday they were told what "thorough" means.
May 20
The foreclosure review process mandated by a federal consent order is turning out to be far more punitive and costly than banks and mortgage servicers initially thought, industry sources say.
Because regulators have not yet decided what financial remedies would be given to borrowers who were wronged, bank executives are concerned that the tab will be open-ended.
Large mortgage servicers on Tuesday took the first step in a massive, government-mandated outreach campaign to determine whom their foreclosure practices harmed.
Six months after signing federal consent orders, the 14 banks and thrifts have just started mailing letters to 4 million borrowers who lost their homes in 2009 and 2010. The Office of the Comptroller of the Currency and the Federal Reserve in April
The servicers have created a website, www.independentforeclosurereview.com, and a toll-free number where consumers can request a review of their case. An advertising campaign is scheduled to begin this month.
Joe Evers, the OCC's deputy comptroller for large banks, said on a conference call with reporters that the reviews will cost banks "hundreds of millions of dollars."
Under the enforcement actions, the 14 large mortgage servicers were required to hire independent firms to review foreclosure cases for errors, misrepresentations, or other deficiencies that hurt borrowers.
It could take several months for a review of each individual case to be completed, Evers said. He would not say whether borrowers who received compensation as part of the foreclosure review process also would be eligible for additional money under settlement negotiations
"I can't tell you how long this process will take," he said. "To the extent there is financial injury, checks could be cut earlier in the process."
Jeffrey Naimon, a partner at the law firm BuckleySandler LLP in Washington, says banks are likely will spend $2,000 or more to review each loan file under the consent order.
"There is a gigantic penalty in doing this," Naimon says. "The amount of money these banks are spending beyond management and distraction cost is so astonishing, it's millions and millions in consulting and legal fees."
Another bank lawyer involved in the process compared the public outreach campaign to a Chinese fire drill (picture 20 people getting out of a Volkswagon Beetle, walking around and hopping back in.) "It's an ineffective and chaotic exercise," this person said, "with a massive uptick in legal work for the firms involved."
In addition to reviewing a sample of all loans that went into foreclosure in the two-year period, each servicer must review all loans subject to the Servicemembers Civil Relief Act and all bankruptcy cases that involved a foreclosure. Reviewers will also check if borrowers were offered appropriate loan modifications and if servicers' denials of loan modification were done properly.
Bryan Hubbard, an OCC spokesman, describes the process as "analogous to a very large class-action settlement." The OCC said servicers had agreed to hire Minneapolis-based Rust Consulting as the claims processor.
Form letters will be mailed to homeowners who were at some stage of foreclosure from January 2009 to December 2010. The letters will be sent through the end of 2011. Borrowers have until April 30 to reply.
David Dunn, a partner with the law firm Hogan Lovells, says the foreclosure reviews mark a seismic shift for the OCC.
"It's a sea change in terms of their mission and constituency which is historically the regulatory good and not remediation or compensation for an individual wrong," says Dunn, who has litigated hundreds of foreclosure cases.
Regulators have been criticized for allowing banks to pick their own independent consultants, accounting giants and law firms to conduct the reviews. The OCC and Federal Reserve already rejected some consulting firms and law firms from participating.
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John Walsh, the acting comptroller of the currency, said in September that the OCC had issued guidance to the independent reviewers on how to determine whether a borrower had suffered financial injury. That guidance has not been made public, Evers said Tuesday.
The reviewers will collect records and data from both servicers and borrowers.
"Between the two sets of information, they should be able to determine whether there was financial injury or harm," Evers said. "They will be looking to make sure the servicers provide complete and accurate records."
Bill Fricke, a vice president and senior credit officer at Moody's Investors Service, says banks already know how many borrowers were harmed because they did their own internal reviews after imposing foreclosure moratoriums in December in the wake of the robosigning scandal.
"Obviously it's not in their best interest to say 'x number of loans were messed up,' and they weren't required to do any public disclosure, so we're taking the servicers' word for it that they went through and did a review," he says.
Moody's identified JPMorgan Chase & Co. and Bank of America Corp. as the weakest servicers because they made so many acquisitions involving disparate servicing platforms and technologies. These two servicers "were less able to process the increased number of problem loans," Fricke says.
A consultant to one of the largest banks says there will be "a big number" of consumers who will be found to have been harmed financially, particularly on loans insured by the Federal Housing Administration. Many lenders originated FHA loans with no quality control, the consultant said.
One potential sticking point for reviewers is the evolving nature of the government's foreclosure policies. Because different rules were in place at different times in the foreclosure process, banks and consultant have created templates and checklists to attempt to track what modification programs borrowers would have qualified for at a given time.
Another problem is that many servicers simply destroyed or lost loan modification documents, which will further complicate the review process. Banks also have complained about a scarcity of qualified people to conduct the reviews.
The servicers have long insisted that no borrowers were harmed by their shoddy foreclosure practices. They still maintain that robo-signing procedures were widespread and that the glut of mortgage losses and legal liabilities were caused by nonbank lenders that are now out of business, leaving the large-bank servicers to pick up the tab.
"You look at the laundry list of things that banks and financial institutions did wrong — they didn't have the documentation straight and the person who signed the [foreclosure] affidavit did not review it or swear before a notary," Dunn says. "But as it turns out, the borrower was in default, there was a loan and a mortgage, and the borrower had been paying the servicer under that arrangement for years. So how did these procedures hurt the borrower who defaulted? Nobody has gotten granular in terms of talking about what the relief would be or what the wrong really is."
