Big banks and mortgage servicers have reportedly botched loan documentation, falsified foreclosure paperwork, and aggressively avoided modifying mortgages. Today, federal regulators took action to chastise the big banks for their past failures. The enforcement action is mild. How mild? Imagine a parent who only lightly admonishes a child, frowning slightly, giving the child a light pat on the behind, and sending him on his way. There were no fines issued.
The action comes from the Office of the Comptroller of Currency, which performed a review of foreclosure practices in cooperation with the Federal Reserve and the Office of Thrift Supervision. It is addressed to eight large banks: Bank of America, Citibank, HSBC, JPMorgan Chase, MetLife Bank, PNC, U.S. Bank, and Wells Fargo. All the big names are there. It also applies to two third-party service providers: Lender Processing Services and MERSCORP.
Simply looking at the bullet point titles for the enforcement actions gives you an idea of how mild the penalties must be:
- Compliance program
- Foreclosure review
- Dedicated resources for communicating with borrowers/single point of contact
- Third-party management
- Management information systems
- Risk assessment
Would those enforcement subtitles have you shaking in fear? They all attempt to ensure that foreclosures are processed accurately and fairly in the future, but they fail to penalize banks and servicers for any wrongdoing that may have occurred in the past. This is akin to the OCC saying, "We know you guys made some mistakes, but let's put the past behind us: the important thing is to do better in the future."
But what about those mistakes? Does the OCC want the banks to do anything to try to correct them -- to make it up to the homeowners they misled, treated badly, or kicked out of their home more aggressively than the law proscribed? To be fair, the OCC does order the banks to make good on their transgressions, but it doesn't specify precisely how that should be done. This comes under the "foreclosure review" section. Quoted in full:
Retain an independent firm to conduct a review of residential foreclosure actions that were pending at any time from January 1, 2009, through December 31, 2010, to determine any financial injury to borrowers caused by errors, misrepresentations, or other deficiencies identified in the review, and to remediate, as appropriate, those deficiencies.
Some monetary damages could theoretically result from these reviews. But it's a little unclear how any mistakes will be remedied "as appropriate." The OCC doesn't provide any explanation for what banks should owe, or how that will be determined. For example, what is the financial injury for a family that wasn't given ample time to modify their mortgage if their home has since been seized? Will the third party decide? Will the cases go to court? Will the OCC intervene?
There's a pretty big downside to this review process: it is likely to further delay foreclosures. Any of those loans that are still being processed are sure to take months longer to complete, as the reviews will have to be completed before banks will evict borrowers in default.
The only other mildly significant order regards loan modification. The OCC insists that, when a bank starts a modification for a borrower, it does so with the sole intent of trying to modify the mortgage. That might sound trivial, but in the past, banks often pursued a so-called "dual-track" for a defaulted mortgage. This consists of the bank performing a modification and taking foreclosure action simultaneously. The theory goes, if the modification doesn't work out, then the servicer can foreclosure without having to delay the process. But reportedly, some homes were foreclosed on before the modification could be finalized.
While regulators have gone pretty easy on the banks and servicers, this isn't the end of foreclosuregate. Lawsuits are still pending from the state attorneys general. A settlement or more serious punishment may come from that. Some investors are also suing banks over their poor documentation and procedures. So we'll have to wait to see if the courts treat the big banks as kindly as regulators.