WASHINGTON — Alarmed by significant deficiencies uncovered as part of a regulatory review of mortgage servicer practices, the federal banking agencies are preparing formal enforcement actions against the largest servicing companies, hoping the actions will set de facto industry standards, according to sources familiar with the situation.
The enforcement orders are expected to hit most, and possibly all, of the 14 mortgage servicers reviewed by regulators after foreclosure problems surfaced in the press last year, but the largest companies — including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Ally Financial Inc. — are likely to face the toughest requirements due to the sheer number of issues that must be addressed, sources said.
The orders are expected to accompany a global settlement with other government entities investigating the servicing industry that is almost certain to include civil money penalties. Regulators are still discussing the terms with state attorneys general, the Justice Department, the Department of Housing and Urban Development, the Treasury Department and the Consumer Financial Protection Bureau.
"The OCC and the other federal banking agencies with relevant jurisdiction are in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions with respect to the servicers within their respective jurisdictions," said Acting Comptroller of the Currency John Walsh, according to testimony obtained by American Banker that is due to be delivered Thursday to the Senate Banking Committee.
"We expect that our actions will comprehensively address servicers' identified deficiencies," Walsh is to say, "and will hold servicers to standards that require effective and proactive risk management of servicing operations and appropriate remediation for customers who have been financially harmed by defects in servicers' standards and procedures. We also intend to leverage our findings and lessons learned in this examination of enforcement process to contribute to the development of national servicing standards."
Regulators are hoping the enforcement orders will send a message to the rest of the servicing industry. Though details of the orders remain under discussion, sources said they are likely to include requirements that servicers beef up staffing, establish a single point of contact for borrowers and take a comprehensive look back at their servicing portfolios to detect and correct problems.
The Federal Deposit Insurance Corp. and other government agencies are also pushing to include an agreement to offer enhanced, streamlined loan modifications to troubled borrowers in exchange for a clearer path to foreclosure if redefault occurs. It remained unclear, however, whether regulators would take that step.
Several banks had initially expected the enforcement orders to come as early as this week, but that timeline appears to be slipping. Sources indicated that the regulators are now shooting to issue the orders, along with the global settlement, sometime in March.
After the orders are released, regulators will follow up with a report on the findings of their review and further recommendations.
Differences also appear to have arisen among the agencies on how tough to make the enforcement orders and how high the monetary penalties should be. The CFPB, among others, has been pushing for steep fines on the servicers, coupled with stringent remedial actions. The FDIC is also said to be pushing for tougher enforcement measures, but the Office of the Comptroller of the Currency is concerned about taking overly harsh action. Regulators met Monday with Treasury Secretary Tim Geithner and representatives of the Federal Housing Finance Agency, HUD and CFPB to discuss the pending actions.
Though the orders would effectively establish standards for the largest servicers, they are not expected to supplant agency efforts already underway to issue their own formal set of rules. Regulators are still divided on where and how to set such standards. The FDIC is pushing to include them in a risk-retention rule, but the OCC wants to craft a stand-alone measure.
Regulators have been hinting for weeks, as they sought to reassure Congress they are on top of the issue, that they may take enforcement actions against servicers.
"The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry," Federal Reserve Gov. Sarah Bloom Raskin said in a speech last Friday. "The agencies intend to report more specific findings to the public soon, but I can tell you that these deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners."
FDIC Chairman Sheila Bair has been insistent that any solution must result in industrywide standards.
"In order to remedy failures endemic to the largest mortgage servicers, I hope to see enforceable requirements that will significantly improve opportunities for homeowners to avoid foreclosure," Bair said in a Jan. 19 speech to the Mortgage Bankers Association.
Some observers said it is apparent that the servicers should have taken remedial steps on their own before regulators stepped in.
"It's unfortunate it had to get [to] this point," said William Longbrake, an executive-in-residence at the University of Maryland. "It would have been better if the industry had done these things without the federal government."
Though a settlement is likely to be bad public relations for the servicers involved, Jaret Seiberg, a policy analyst at MF Global Inc.'s Washington Research Group, said a global settlement may still be positive news for the industry.
"A global settlement should be extremely positive for banks by putting this issue to rest and letting the industry move past the paperwork snafus," Seiberg said. He said he was most intrigued by the potential for streamlined modifications, saying this could have an impact.
"The easier you make the modification, the more likely you are to get a modification, so the concept makes a lot of sense," Seiberg said. "For the industry, where there is an automatic modification and then foreclosure if the borrower goes delinquent a second time, you could end up benefiting the banks because it's going to eliminate a lot of uncertainty now about the ability of financial firms to foreclose on borrowers behind on payments."