WASHINGTON — After months of investigation, the federal banking regulators issued Wednesday a final cease and desist order against the 14 largest servicers that will require them to overhaul their operations, including improving loss mitigation efforts and foreclosure proceedings and creating a single point of contact for troubled borrowers.
The order will also require servicers to upgrade technology systems for recordkeeping, payments and fees, ban so-called "dual tracking" of mitigation efforts and foreclosure procedures, force enhanced oversight of third parties and mandate a third party consultants to review recent foreclosure activities.
Although the servicers agreed to the orders, they did not admit to or deny regulators' allegations. Nor did they pay a monetary fine. Several of the same servicers are facing a separate action from the 50 state attorneys general and other federal agencies which is likely to include a fine. Bank regulators, too, said some kind of fine was still in the offing.
"The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties," the central bank said in a press release. "These monetary penalties will be in addition to the corrective actions that the banking organizations are expected to take pursuant to the enforcement actions."
Regulators also released an 18-page report on the result of their investigation in which they noted weaknesses throughout the foreclosure and loss mitigation process.
"Although borrowers whose foreclosure files were reviewed were seriously in default at the time of the foreclosure action, some servicers failed to accurately complete or validate itemized amounts owed by those borrowers," the report said. "At those servicers, this failure resulted in differences between the figures in the affidavit and the information in the servicing system or paper file. In nearly half of those instances, the differences— which were typically less than $500—were adverse to the borrower.While the error rates varied among the servicers, the percentage of errors at some servicers raises significant concerns regarding those servicers' internal controls governing foreclosure-related documentation."
In their enforcement actions, regulators said they found "deficiencies and unsafe and unsound practices in residential mortgage servicing and in the banks' initial handling of foreclosure proceedings."
The regulators said that banks, contrary to law, filed affidavits for which they did not have personal knowledge or were not properly notarized. They also engaged in foreclosure litigation without ensuring that mortgage documentation was properly endorsed, failed to devote sufficient staffing and resources to the foreclosure process, and did not properly oversee outside and third-party vendors.
But regulators also backed up a key bank defense that despite significant problems in the foreclosure process, they did not uncover proof that institutions had wrongfully foreclosed on troubled borrowers.
"Examinations of these eight national bank servicers identified significant weaknesses in mortgage servicing and foreclosure governance that resulted in unsafe and unsound practices," the Office of the Comptroller of the Currency said in a press release. "The scope and degree of these practices differed among the servicers; however, based on the sample of the files reviewed by OCC examiners, borrowers in the sample were seriously delinquent at the time of foreclosures and servicers held the notes and the documents required to foreclose."
The investigation report said that, "with some exception, examiners found that notes appeared properly endorsed, and mortgages appeared properly assigned."
"The loan-file reviews showed that borrowers subject to foreclosure in the reviewed files were seriously delinquent on their loans," the report said. "The reviews also showed that servicers possess original notes and mortgages and therefore had sufficient documentation available to demonstrate authority to foreclosure."
