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Los Angeles Times: Banks, regulators act to correct foreclosure flaws

April 14, 2011
In The News

By Alejandro Lazo and E. Scott Reckard

Citing "pervasive" misconduct in foreclosures, federal regulators have ordered the nation's biggest banks to overhaul their procedures and compensate borrowers injured financially by wrongdoing or negligence.

The four major bank regulators said their actions, to be followed by fines, wouldn't interfere with a wider-ranging investigation conducted by a coalition of state attorneys general and other federal agencies, including the departments of Justice, Treasury and Housing and the Federal Trade Commission.

The bank regulators have been criticized for failing to stop unsafe lending during the housing boom and for pre-empting state attempts to rein in predatory lending. Their orders Wednesday drew immediate criticism from consumer advocates and members of Congress who said the new measures didn't go far enough.

"These consent orders are worse than doing nothing," said Alys Cohen, staff attorney for the National Consumer Law Center. "They set the bar so low on some things and they give the banks carte blanche on others. And they give the appearance of doing something while giving banks control of the process."

But the regulators said the changes agreed to by banks and other major home-loan servicers would address frequent complaints about understaffed and undertrained foreclosure operations as well as shortcuts taken at the expense of consumers. Among the changes, the banks now must:

• Designate a single person for distressed borrowers to contact so they aren't bounced around from one call center employee to another.

• Put the foreclosure process on hold if a mortgage has been approved for a trial modification.

• Establish "robust" controls and oversight for the actions of law firms and others hired to help with foreclosures.

• Hire outside auditors approved by the regulators to review foreclosure proceedings in 2009 and 2010 and identify improper foreclosures, violations of state and federal law, and errors, misrepresentations or negligence that caused financial harm to borrowers.

• Compensate borrowers found to have been harmed financially by bank wrongdoing or negligence, including setting up a process for aggrieved borrowers to make claims for remediation.

The orders were issued against the 14 largest mortgage servicers, which agreed to address the problems without admitting or denying wrongdoing. Fines "are appropriate" and will be levied later, according to the Federal Reserve, which oversees the parent companies of 10 of the servicers, including Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc.

The Housing Policy Council, a Washington group representing 32 home lenders, called the settlements "a strong statement to ensure enhanced service to customers" and said many of its members "are already working to perform these activities.... We believe that these agreements will help move mortgage servicing standards forward in a positive manner for the consumer and the industry and will be good for the housing market."

Foreclosures remain a significant problem for the housing market although such activity has slowed since it was revealed that banks were conducting repossessions improperly.

Lenders seized 215,046 U.S. properties in the first quarter, a 6% decrease from the previous quarter and a 17% drop from the first quarter of 2010, according to Irvine-based RealtyTrac. In California, lenders repossessed 39,796 properties, down 14% from the year-earlier quarter.

The settlements stem from an investigation undertaken by the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corp. in November after numerous reports of "robo-signed" and improperly notarized court documents.

There also were widespread complaints of botched loan modifications that left distressed borrowers worse off, understaffed and undertrained servicing operations, and foreclosures made without documentation of who owned loans that had been sold and resold in the secondary markets where mortgage securities are created and traded.

"These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices at these institutions," the Fed said in a statement.

The changes would probably help borrowers such as Martin Galvan, who said his Hacienda Heights home was scheduled for a foreclosure sale this year even though he made 16 payments totaling more than $30,000 to J.P. Morgan Chase through a trial mortgage modification plan.

Many times he would call the bank and be asked to supply a certain set of documents only to later call again, have a different person handle his file and tell him that different documents were needed from him, Galvan said.

"It would be a great thing, basically, having one person handling your file instead of every time you make a phone call a different person talks to you," he said. "They had a lot of misleading information."

Galvan said that after he had an attorney intervene on his behalf, the bank granted him a permanent loan modification and apologized for scheduling his house for foreclosure.

Walter Hackett, a consumer attorney from Walnut who specializes in mortgage cases, portrayed the settlements as a weak reaction to "fraud on a scale not seen before in human history."

Reactions to the settlements were mixed on Capitol Hill, with Senate Banking Committee Chairman Tim Johnson (D-S.D.) praising the deal as "a step toward addressing the improper and fraudulent practices to which many of the country's largest mortgage servicers have admitted."

But Rep. Maxine Waters (D-Los Angeles) said the actions were weak and "fail to hold servicers accountable for the egregious, and often illegal, actions taken against American homeowners during the worst economic crisis since the Great Depression.