Borrowers Face Wide Disparity in Compensation for Wrongful Foreclosures

Only hours after regulators released federal guidelines detailing how much homeowners would receive for wrongful foreclosure actions due to banks' mortgage servicing failures, consumer advocates were up in arms.

Under the "remediation schedule" released Thursday, homeowners could receive a wide range of payments from as little as $1,000 to as much as $125,000.

Advocates were alarmed by the disparity in compensation to borrowers, noting that servicers who wrongly denied loan modifications to qualified borrowers — that later went into foreclosure — would only have to pay $15,000 to borrowers.

"Someone who lost their home due to the fault of the banks should get the maximum," says Bruce Marks, the chief executive of the Neighborhood Assistance Corporation of America. "We know the vast majority of borrowers were wrongly denied loan modifications and they won't qualify for the maximum amount."

But David Dunn, a partner at the law firm Hogan Lovells, said there is concern among banks and mortgage servicers that some borrowers who made verbal claims that they had a hardship but later could not provide documentation or did not qualify, would be entitled to a large payout.

"It's often very hard to pin down the documentation and determine where the customer is because their economic state is in flux," says Dunn. "Some of these numbers are very high, some are disproportionate given the ranges and what's surprising is how big the spread is in some instances."

The foreclosure review process has been a difficult one, notable for its fits and starts. It also is unclear whether the federal guidance on remediation will impact states.

At the early stage of the process, servicers believed they would be able to obtain a release of liability from any borrower who received a payout. But as the process dragged on, first the Federal Reserve Board and then the OCC backed away from that view and servicers now cannot make borrowers sign a waiver as a condition of receiving payment.

Though the OCC announced in April 2011 that wronged borrowers would be eligible for compensation, it took 14 months of working with the industry to hammer out a detailed guide as to what would be owed to borrowers.

The OCC and the Federal Reserve on Thursday extended for a second time the deadline for borrowers to request a review of their loan file. Borrowers now have until September 30 if they believe they may have suffered financial harm as a result of foreclosure errors in 2009 or 2010.

Paul Leonard, the California director of the Center for Responsible Lending, says the deadline should be extended until to the end of the year to give borrowers more time to respond. Servicers recently sent out a second round of mailings to borrowers that list the old deadline of July 31, he said.

Federal regulators also said that nearly 193,630 borrowers had requested a free review of their mortgage loan file and another 144,817 files had been selected for review by independent consultants from mortgage servicers' own portfolios. So far, nearly 4.4 million borrowers have received letters explaining how to request a review.

A full schedule of grievances and payments is available here.

The payments to borrowers range from $1,000 for failures to notify them about the government's Home Affordable Modification Program in a timely fashion to $125,000 for "egregious" errors, such as irrevocably foreclosing on a borrower who was complying with the terms of a loan modification. Correctable mistakes — such as wrongly filing a foreclosure but calling off the process or foreclosing but then revoking the action — cost less, running between $5,000 and $15,000.

How the process works will depend heavily on the role of the independent consultants reviewing the loan files. Under the process set by the OCC, the consultants are responsible for determining facts such as whether a borrower was in compliance with a modification at the time a foreclosure proceeding began and making judgment calls such as whether a bank "den[ied] a borrower's loan modification that should have been approved."

The consultants do not have the authority to order banks to write checks, however. Banks also appear to have a say.

The timeframe for the foreclosure review has been extended through September. The report states that banks are working with some consumer groups to get word out that borrowers and former borrowers can ask for their loans to be reviewed, though some housing advocates have raised concerns about the independence of the process.

"Servicers will prepare remediation plans based on the independent consultants' recommendations," the OCC report says. "The federal banking regulators must approve each servicer's remediation plan."

While more than 11,000 files have already been reviewed, no remediation payments or actions have yet occurred.

It is not clear how many borrowers were improperly denied loan modifications by servicers.

The 14 largest mortgage servicers were required to make extensive changes to their servicing and foreclosure processes. Regulators said the servicers continue to implement action plans to correct deficiencies in mortgage servicing, oversight and management of third-party service providers, management information systems, risk assessment, and compliance oversight.

Mortgage servicers reported completing 93% of the corrective actions required by last year's consent orders as of May 24.

"While the work completed to date represents a significant amount of progress, much work remains to be done to complete the implementation of the remaining items, validate test these actions, and ensure sustainability of the corrective actions," the OCC said in a statement.