Bloomberg News
SEP 12, 2013 12:50pm ET
Regulators Warn Banks Not to Flout $25B Foreclosure Deal
When the largest U.S. banks agreed to pay $25 billion last year to settle
claims of abusive foreclosure practices, they promised to stop seizing homes from borrowers who had completed applications for mortgage help.
Now regulators say lenders may be flouting the spirit of
the deal by repeatedly asking for additional paperwork from borrowers
seeking loan modifications and then foreclosing while treating the
applications as incomplete.
The Consumer Financial Protection
Bureau and the court-appointed monitor of the 2012 foreclosure
settlement are among those moving to tighten oversight of the process
known as dual-tracking, when borrowers facing the loss of their homes
are simultaneously negotiating changes in their loans. Mortgage
servicers who violate the rules or the terms of the deal could face
sanctions including fines of $1 million per infraction.
“It is an important outstanding issue of unfinished business,” Joseph A. Smith Jr., the monitor, said in an interview.
Smith,
who is responsible for ensuring Bank of America Corp., JPMorgan Chase
& Co., Wells Fargo & Co., Ally Financial Inc. and Citigroup Inc.
live up to their promises, said he is preparing to start measuring how
well banks are communicating with borrowers about loan-workout
applications. That could determine whether the servicers or homeowners
are at fault for incomplete files.
Separately, the consumer bureau
this week plans to complete proposed changes to pending
mortgage-servicing rules aimed at tightening restrictions on
dual-tracking, according to a person briefed on its work. The rules, to
take effect in January, would cover all lenders, including those who
aren’t parties to the settlement such as Ocwen Financial Corp. and
Nationstar Mortgage Holdings.
Richard Cordray, director of the
consumer bureau, said in an interview that he has personally met with
the heads of the top 25 mortgage servicers, banks and non-banks alike,
“to tell them face to face that this is a major priority for the bureau
and that it’s something they need to focus on.”
Other U.S. and
state agencies also have vowed to pursue banks that violate the
settlement terms. U.S. Housing and Urban Development secretary Shaun
Donovan has said that authorities would fine banks or “haul them back
into court” if they failed to improve treatment of borrowers. New York
attorney general Eric Schneiderman said he is preparing to sue Bank of
America and Wells Fargo for breaching the terms of the settlement.
Paul
Leonard, a senior vice president at the Housing Policy Council, a group
representing mortgage servicers, said complaints about dual-tracking
partly reflect a “misunderstanding” of what the settlement requires.
“Some
people think that if there is any contact from the servicer to the
borrower that any part of the foreclosure process stops,” Leonard said
in an interview. “That is not the case.”
Bank of America “is in
compliance with all standards related to dual-tracking,” spokesman Rick
Simon said in an emailed statement.
Even as foreclosures decline
and the housing market turns around, nearly 2.9 million borrowers have
missed at least three mortgage payments and remain in danger of losing
their homes, according to data compiled by the housing department. Loan
modifications, which reduce monthly payments, are meant to help
delinquent borrowers become current again.
Lenders have completed
nearly five million mortgage workouts since 2009, about 1.2 million of
them through the Home Affordable Modification Program, in which the U.S.
Treasury offers incentive payments to lenders for each loan modified
for a delinquent borrower. The median HAMP workout reduced borrowers’
monthly mortgage payments by nearly 40%, or $547, according to Treasury
data.
During the same time period, servicers repossessed about 3.7 million homes, according to data compiled by RealtyTrac Inc.
While
no national data has been published that measures the scope of
dual-tracking, housing lawyers and advocates said that they continue to
see homeowners who were wronged in the workout process.
“We’re
hearing complaints from customers of every major servicer,” said Gary
Klein, a Massachusetts attorney whose clients have sued Bank of America
for failing to modify their mortgages.
U.S. District Judge Rya
Zobel in Boston last week denied the request of homeowners in 26 states,
including Klein’s clients, to be considered for class-action status
because their claims were not similar enough. Still, Zobel said that
Bank of America had a “Kafkaesque bureaucracy” that determined which
documents homeowners had to submit and said the borrowers’ claims “may
well be meritorious.”
John Bartholomew, an attorney with the
Atlanta Legal Aid Society, said an example of the pattern is how
Citigroup dealt with one of his clients, Gwendolyn Green, a drugstore
employee in Loganville, Ga.
Green said in an interview that she
fell behind on her mortgage payments after her former husband’s
truck-parts business went bankrupt and they divorced. She first applied
to Citigroup for a loan modification in October 2012. On July 1, the
bank notified her she’d have one. Then came the bad news: Her monthly
payment would be reduced by only $1.01, to $984.49.
Even though
she began making the payments under the program, Green said, Citigroup
notified her it still plans to seize the ranch home, which has an
assessed value of $115,000, on Oct. 2.
Green said Citigroup
repeatedly demanded paperwork she had already faxed multiple times,
notably a document confirming her sole ownership of the home. She said
she kept records to prove it.
“They keep asking for the same
things over and over and over again,” Green said. “They change people
who handle the case, and each time a new person comes on, they ask for
the same things.”
Citigroup spokesman Mark Rodgers declined to
discuss Green’s case other than to say that the bank “correctly followed
strict guidelines set forth by governmental agencies” when dealing with
her loan modification.
The HAMP program, under which Green
applied for help, also bars dual-tracking. Still, the HAMP rulebook
“does not say that foreclosure sales cannot be scheduled and postponed,”
Rodgers said.
“There is no universe where Citi is allowed to
schedule homeowners like Ms. Green for three consecutive foreclosures
after they’ve accepted and are current on a trial modification,”
Bartholomew said.
Like the national settlement, the consumer
bureau’s rules, which were first published in January, will bar
foreclosure when a homeowner has submitted a complete application for a
loan modification. The new language to be inserted this week could also
bar foreclosure if a servicer has told a borrower that an application is
complete and subsequently discovers that more documentation is
required.
The agency also has been soliciting public feedback
about whether it needs to be even more prescriptive in defining what
constitutes a finished application so that isn’t left up to the banks.
Commenters including Massachusetts Attorney General Martha Coakley
responded that there should be a more uniform definition of when the
paperwork is complete.
Cordray said the regulations will be “very specific” about the requirements.
“I
would have been glad to be able to think that we could oversee the
industry with looser rules, but I just don’t think we can,” Cordray
said.
Katherine Porter, who monitors the mortgage settlement on
behalf of California attorney general Kamala Harris, identified the lack
of a concrete definition of a complete loan-assistance application as a
“serious problem” in a June report.
Porter said she has received
more than 3,300 complaints from homeowners that banks aren’t following
the rules. The breakdowns usually involve communication failures between
departments of the same bank or the incompatibility of computer systems
containing different pieces of information about a loan file, she said
in an interview.
The banks “do make calls. They do send letters,”
Porter said. “And I think many of the consumers are really desperately
trying to get their documents in. There’s a mismatch in the way that
they’re communicating with each other.”
Porter said that if she had one wish, “I would wish for deep investment in better technology.”
Technology
woes were at the root of Smith’s findings in a June report that
monitored the settlement banks’ servicing practices. The report showed
that Citigroup, Bank of America and Wells Fargo had failed to meet
deadlines for notifying borrowers that their workout applications were
incomplete.
“Areas in which our performance has temporarily fallen
outside of the allowable thresholds did not result in inaccurate
foreclosures or improper loan-modification denials, and corrective
action plans for those areas are being submitted to the monitor and
implemented,” Simon, the Bank of America spokesman, said.
