SEC Urges Banks to Disclose Potential Losses From Foreclosures

The U.S. Securities and Exchange Commission urged banks to disclose their expected losses from flawed foreclosure documents, as mortgage-bond investors demand refunds on billions of dollars of securities.

Lenders must disclose circumstances that they “reasonably expect” to have an “unfavorable impact” on financial results, the SEC said in a letter posted on the agency’s website today. The letter was sent because of “concerns about potential risks and costs associated with mortgage and foreclosure-related activities,” the SEC said.

Federal regulators and attorneys general from all 50 states are investigating whether loan-servicing companies used improper procedures during foreclosure proceedings, including so-called robo-signers who didn’t check documentation. Investors such as Pacific Investment Management Co. have demanded that banks buy back faulty loans that were bundled into bonds.

Banks should set aside funds for litigation and “other contingencies when it is probable” that they will have losses, the letter said. If companies can’t estimate losses, then they should say so, the SEC said.

JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. have set aside a combined $10 billion to cover buybacks. SEC spokesman John Nester declined to say which banks received the letter.

Banks should also disclose financial obligations that stem from packaging loans into securities, the letter said. Other topics lenders should discuss include potential delays in completing foreclosures and risks posed by “potentially higher repurchase requests,” the letter said.

To contact the reporter on this story: Jesse Westbrook in Washington at jwestbrook1@bloomberg.net

To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net

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