Mortgage Servicers May Face Sanctions, New Rules, Regulator Says

U.S. banking regulators investigating flawed foreclosures are “finalizing” remedial requirements and sanctions against mortgage servicers, Acting Comptroller of the Currency John Walsh said.

Banking regulators, the Department of Justice, and state attorneys general began reviewing foreclosures last fall at the 14 largest federally regulated loan servicers, including Bank of America Corp., Wells Fargo & Co., Citigroup Inc. and the GMAC unit of Ally Financial Inc., after evidence surfaced that bank employees and contractors were seizing homes without proper review or complete documentation.

In testimony prepared for a hearing of the Senate Banking Committee today, Walsh said regulators uncovered “critical deficiencies and shortcomings” that “resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse effect on the functioning of the mortgage markets and the U.S. economy as a whole.”

Federal Housing Administration Commissioner David Stevens told a congressional panel yesterday that government agencies could come to agreement on enforcement actions and financial penalties within about a month.

Most regulators found problems during their examinations that would merit sanctions, but they have not yet decided whether a unified settlement will take place, Stevens said during a hearing of the House Financial Services Committee.

“We can work with the other regulators to come up with a set of solutions, assuming the general outcomes and findings are the same, or we can go individually,” Stevens said during the hearing.

Attorneys General

The attorneys general have said they plan to address the loan-modification process in settlements with major servicers. They may push to bar foreclosures when borrowers are already seeking modification and to create a fund to compensate victims of wrongful foreclosures.

It would be “really premature” to discuss the content or timing of a possible settlement, Stevens said in an interview after the hearing.

“We would love to come to a mutual outcome that respects the need to get the market stabilized as well as respects all the regulators involved and the institutions that are going to need to settle,” he said.

Stevens said regulators were still trying to reach consensus on the size of financial penalties. “This comes down to, what are the actual violations we can identify?” he said. “We haven’t aggregated them all together. What are the potential costs that each agency could assess?”

Changing Rules

Federal regulators also are considering changing the rules governing foreclosures.

Changes being studied include a new fee structure for servicers, independent reviews of rejected requests to ease loan terms and a fund to compensate victims of improper foreclosures, according to Sheila Bair, chairman of the Federal Deposit Insurance Corp. and federal and state regulators.

Walsh said in his prepared testimony that regulators examined 2,800 foreclosure cases to determine whether banks had adequate procedures, staffing, oversight of contractors, documentation, and quality control. They also evaluated whether the servicers made contact with borrowers and tried to avert the foreclosure. The degree of problems varied by servicer, Walsh said.

“We intend to leverage our findings and our lessons learned in this examination and enforcement process to contribute to the development of national mortgage servicing standards,” Walsh said in his testimony.

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