Four years after the nation's largest mortgage servicers were ordered to clean up their foreclosure processes, many are still falling short of their obligations.
Six banks, including JPMorgan Chase, U.S. Bancorp and Wells Fargo, have not fully complied with consent orders related to the independent foreclosure review that began in 2011, the Office of the Comptroller of the Currency said Wednesday. The servicers were cited for a variety of issues including failing to respond to borrower requests for loan modifications, not making a good-faith effort to prevent foreclosures and not having compliance systems in place to track their progress.
The punishment for these infractions was harsh: Wells Fargo, the largest U.S. lender, and HSBC Holdings, Europe's largest bank, are prohibited from acquiring mortgage servicing rights, entering into new servicing contracts or offshoring servicing activity until the consent orders are terminated. Four banks - JPMorgan in New York, EverBank Financial in Jacksonville, Fla., Santander Holdings, the U.S. unit of Spain's Banco Santander, and U.S. Bancorp in Minneapolis - must each get approval from the OCC to acquire mortgage servicing rights and enter into new contracts, including outsourcing, sub-servicing or offshoring.
All six banks are restricted from appointing new officers responsible for residential mortgage servicing, and servicing risk management and compliance until the orders are terminated.
Those who have followed the independent foreclosure review process said the OCC is exerting renewed pressure on servicers even though the population of delinquent borrowers is on the decline.
Katherine Porter, a law professor at the University of California at Irvine, who is the California monitor of the separate 2012 national mortgage settlement, said that while servicing has improved dramatically in the past four years, there are still problems.
"The OCC brought a lot of firepower to this in terms of being harsh on penalties because this last chunk of servicing work won't get done unless regulators really push," she said.
Morris Morgan, the OCC's deputy comptroller for large banks, said he expects the banks to comply with the latest consent order "within months, not years." Further delays, he added, could lead to additional enforcement orders.
"The meter is still running relative to those six banks and the nature and severity of the additional action will be based on the length and severity of their continued non-compliance," Morris said on a conference call with reporters. "Like riding a taxi, [the meter] runs until you get off."
The OCC said that three banks - Bank of America, Citigroup and PNC Financial Services Group - had fulfilled their obligations and were formally released from their 2011 consent orders.
In the wake of the financial crisis, banks mishandled foreclosures on such a scale that regulators had to step in. But the "look back" reviews became nearly as controversial as the original servicing blunders, with consultants paid far more than what consumers would receive in payouts. The OCC ultimately scrapped the reviews in favor of a $9.3 billion settlement with most of the servicers.
The settlement was designed to compensate borrowers who may have been wrongly foreclosed upon or otherwise harmed. The OCC said more than $2.7 billion has been distributed to roughly 3.2 million eligible borrowers. Another $280 million in unclaimed funds will be distributed to states, the OCC said, but only after it exhausted efforts to reach eligible borrowers.
The individual consent orders against each bank identified areas where they had failed. HSBC failed to comply with 45 of 98 actionable items, while U.S. Bancorp failed 18, Wells Fargo failed 15, JPMorgan Chase failed 10 and Santander failed nine. EverBank failed four of 95 items.
The non-compliance generally fell into five categories: compliance, comprehensive action plan, management information systems and mortgage servicing generally including engaging in loss mitigation, foreclosure prevention and having a single point of contact for the borrower.
"All these banks have made significant improvements," Morris said. "We want to see how and in what way they respond to the remaining challenges that are in front of them."
It's unclear how the crackdown will affect the broader mortgage servicing market, but at the very least it could slow large transfers of mortgage servicing rights. JPMorgan Chase and Wells Fargo have been active buyers of servicing rights and if they are unable to acquire new portfolios, it could limit the options of potential sellers, observers said.
Dave Stephens, the chief operations officer at United Capital Markets, a mortgage servicing advisory firm in Greenwood Village, Colo., said JPMorgan Chase and Wells Fargo have the strongest appetite for mortgage servicing rights, and are the most likely to do big deals. For deals of $10 billion or less, there are plenty of buyers but larger deals could be problematic.
"If a big hedge fund with $50 billion invested in MSRs decides they want to exit the market, who is going to be the buyer? It would normally have been one of these banks," Stephens said. "I think the capital is still out there that's interested, but it's more of a chance the seller will now get penalized."
The restrictions will not affect JPMorgan Chase's purchase in May of $45 billion in servicing rights from embattled mortgage firm Ocwen Financial. A JPMorgan spokesman said the New York bank expects to comply with the order by the end of the summer.
Most of the large servicers have cut their workforces dramatically because of a decline in the number of delinquent borrowers. Others like Bank of America have sold off most of their problem legacy loans from the crisis. A declining population of delinquent borrowers and a lack of competition among servicers make it hard for investments and improvements to be made, Porter said.
"There are still tremendous operational challenges in servicing, and I hope these orders will continue to drive industry toward continuing to improve technology," Porter said. "Sound servicing is an important consumer protection even in a healthy economy."