WASHINGTON — Revealing that the federal banking agencies have found significant "structural problems" in the mortgage servicing industry, Federal Reserve Board Gov. Dan Tarullo called Wednesday for the creation of national foreclosure standards.

While Tarullo said it should be left to Congress whether those standards would preempt state laws governing foreclosures, he said ongoing issues warrant the creation of some kind of federal rules.

"In light of the range of problems already encountered, and the prospect of further changes in the industry—including the possible migration of more servicing activity to non-banking organizations--it seems reasonable at least to consider whether a national set of standards for mortgage servicers may be warranted," he said.

At a Senate Banking Committee hearing on the issue, Tarullo acknowledged that such a move would be a gigantic change to the current system, but said it is clear servicers are struggling to comply with various local rules.

"It has been increasingly apparent that the inadequacy of servicer resources to deal with mortgage modifications--an area that was a point of supervisory emphasis—was actually a reflection of a larger inability to deal with the challenges entailed in servicing mortgages in many jurisdictions and dealing with a complicated investor base," he said. "For example, foreclosure procedures are specifically the province of real property law governed by the states, and can vary not only by state, but also within states and sometimes even within counties."

While the banking agencies are still reviewing practices at servicers, he said they have already found massive problems.

"While quite preliminary, the banking agencies' findings from the supervisory review suggest significant weaknesses in risk-management, quality control, audit, and compliance practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation," he said. "We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services."

As a result, regulators have expanded their review to include loans that are past due but not yet in foreclosure.

Although Congress has criticized regulators for not taking aggressive action, Tarullo and the other agency heads testifying on Wednesday pledged to take disciplinary measures where appropriate.

"As examiners identify weaknesses, they will require firms to take remedial action and, when necessary, require servicers to address resource

shortfalls, training and coordination problems, and control failures," Tarullo said.

Overall, he said that although not every servicer is in trouble, the problems are significant.

"The problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry," Tarullo said. "The servicing industry overall has not been up to the challenge of handling the large volumes of distressed mortgages… It has now become evident that significant parts of the servicing industry also failed to handle foreclosures properly."

Fixing those problems may require substantial changes, he said, including national foreclosure standards and more examinations of nonbank affiliates.

"Fixing the problems in the mortgage servicing industry may also require thinking about some fundamental structural changes to the current mortgage system," Tarullo said. "This episode has underscored the importance of our using the new authority given the Federal Reserve in the Dodd-Frank Wall Street Reform and Consumer Protection Act to send our examiners into non-bank affiliates of large bank holding companies, including those in large institutions that have become bank holding companies only in the last couple of years."

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