Critics: Banks get 'wrist slap' for abuses

This post comes from Marilyn Lewis of MSN Money.

It's a dark day for consumers, if you believe critics of an agreement signed between federal regulators and 14 mortgage servicers -- the arms of banks that collect mortgage payments and foreclose in case of nonpayment.

The Federal Reserve, the Office of Thrift Supervision and the Office of the Comptroller of the Currency "found banks didn't hire enough workers; didn't adequately supervise outside lawyers and other firms; didn't ensure they had accurate foreclosure documentation; and didn't stop foreclosure proceedings when warranted," says MarketWatch. Post continues after video.

The agreement is supposed to stop such practices as "robo-signing" (in which bank officials sign foreclosure documents without knowing exactly what's in them), filing false court documents, and piling exorbitant late fees onto homeowners' bills -- practices that critics and some banks themselves have said were used.

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Servicers, including some of the nation's largest banks, have processed unprecedented numbers of defaults and foreclosures with limited staffs that apparently have been overwhelmed by the job.

Responding to the sanctions in the agreement signed this week, some servicers issued regrets for errors; others defended their records.

"Servicers were ill-equipped to deal with something so complicated. Nor did they have much incentive, because in most cases the loans had long ago been sold to investors," writes The New York Times.

Servicers who signed consent decrees include: Bank of America, JPMorgan Chase, Wells Fargo, Citigroup, Ally Financial, HSBC North America Holdings, PNC Financial Services, U.S. Bancorp, MetLife, SunTrust Banks, Aurora Bank, EverBank, OneWest Bank and Sovereign Bank. MERS (Mortgage Electronic Registration Systems Inc., of which the Mortgage Bankers Association is a shareholder) and Lender Processing Services Inc. also were admonished to improve internal controls.

Disagreeing over what's "tough"

The Federal Reserve described finding "a pattern of misconduct and negligence" that was "significant and pervasive."

The regulators said the agreements impose tough new requirements, ensuring that the servicers:

• Refrain from foreclosing once a mortgage is approved for modification.
• Provide remedies to borrowers who suffered losses from wrongful foreclosure.
• Comply with state and federal laws, particularly on foreclosures.
• Improve communications with borrowers and provide them the name of someone accountable in the servicer's office.
• Keep an eye on the activities of third-party vendors who work with borrowers.

The penalties include no fines, although fines may follow.

Representatives of prominent consumer groups call the agreements weak, a disappointment and possibly creating a worse situation than before.

The New York Times writes:

… consumer activists were unimpressed, saying the reforms let the banks police themselves.

"The banks who caused the economic crisis and received government bailouts are getting a free pass while homeowners still struggle to save their homes," said Alys Cohen of the National Consumer Law Center, a nonprofit consumer advocacy group.

What's needed, Cohen says, is a way to stop avoidable foreclosures.

Consumer advocates had hoped the agreement would give troubled homeowners help in renegotiating their mortgages and saving their homes.

Making things even worse?

The Times itself has been a vocal critic. In an editorial called "Banks are off the hook again," the newspaper last week called draft versions of the consent decrees "a wrist slap at best."

"At worst, they are an attempt to preclude other efforts to hold banks accountable." The editorial continues:

The draft does not call for tough new rules to end those abuses. Or for ramped-up loan modifications. Or for penalties for past violations. Instead, it requires banks to improve the management of their foreclosure processes, including such reforms as "measures to ensure that staff are trained specifically" for their jobs.

"The gist of the terms is that from now on, banks -- without admitting or denying wrongdoing -- must abide by existing laws and current contracts," it added. 

Auditors, chosen and paid by the banks, will examine servicer records, identifying any injured borrowers and investors and reimbursing them as the banks deem "appropriate."

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Adam Levitin, an associate professor of law at Georgetown University who's been watching the negotiations, says it's "a sham settlement" -- "worse than none at all."

The concern is that the settlements could contribute to legal claims by banks that they can ignore state regulations in favor of weaker federal rules.

The consent decrees are just the first shoe to drop in the drama involving banks and government over bad behavior by mortgage servicers. The other shoe -- a long-awaited settlement between the servicers and the 50 state attorneys general -- is still hovering. The states have leverage because their laws govern banking practices, to varying degrees.

Iowa Attorney General Tom Miller, leading those talks, told the Times earlier this week that a settlement between federal regulators and servicers "neither pre-empts nor impacts our efforts."

Miller said his group is trying to keep its work away from the pressure of the limelight.

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