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."
While a monetary fine is still in the offing, some banks have already seen losses related to their servicing units. In its first quarter earnings announcement on Wednesday, JPMorgan Chase & Co. said that it is taking a $1.1 billion pretax loss from mortgage servicing rights assets adjustment and allocating $650 million in pre-tax expenses for costs related to foreclosures.
Under the order, banks are also required to reimburse any borrower who has been harmed by the institutions' actions.
Regulators are forcing the servicers to hire an independent consultant to conduct a review of their foreclosure actions from Jan. 1, 2009 to Dec. 31, 2010. The independent review should determine if lenders filed affidavits properly, charged improper fees to borrowers, and conducted loss mitigation activities in accordance with standards established under the Home Affordable Mortgage Program. In general, the review must determine if there were errors or deficiencies in the foreclosure review that resulted in financial harm to a borrower.
Banks must also stop conducting foreclosure proceedings at the same time they are pursuing loss mitigation efforts with a borrower. Regulators are requiring banks to establish a single point of contact for borrowers throughout the loan mitigation and foreclosure process.
The order also directs the banks to upgrade their loss mitigation and foreclosure proceedings, including improving communication, increasing staff, reviewing borrower complaints, ensuring proper credit from payments to borrower's accounts, and establishing mitigation procedures for second liens.
Banks must also upgrade their management information systems or technology systems that record payments and fees charged.
Banks also must improve their practices for outside consultants or third-party providers such as law firms. The banks must submit a plan to improve controls and oversight of their activities with the Mortgage Electronic Registration System.
Separately, the bank regulators and the Federal Housing Finance Agency are issuing orders against MERS and Lender Processing Services, which processes foreclosure documents. The order requires the companies to enhance governance and quality control and perform audits.
Under the cease and desist orders, banks must submit detailed action plans to regulators describing how they plan to comply with the order including timing, metrics and staffing. The regulators plan to share those details with the Justice Department with the hope of helping that side move toward an agreement with the servicers in the ongoing settlement talks.
The state AGs offered terms to the top five servicers in February that were primarily focused on pushing for principal reductions. But banks have said such a plan is a nonstarter.
On Tuesday, Brian Moynihan, the chief executive officer of Bank of America Corp., dismissed calls for principal reductions.
"In general, we do not see broad-based principal reduction as a sound policy decision for America," Moynihan said at the National Association of Attorneys General Presidential Initiative summit in Charlotte, N.C. "Fairness is a major concern — it's hard to see how we could justify reducing principal for many delinquent customers who represent a small portion of borrowers, but not for the vast majority of our customers who have stayed current on their loans — or to reduce principal for an investor, or a person who took out a cash-out refi at the height of the value in their market, when others were more conservative. There are unintended consequences to any policy, and we don't know what kinds of incentives such a policy could introduce into the market. There also is a question of whether it impacts the customer in any meaningful way."