Banks to be penalized for mishandling foreclosures, a regulator testifies

Reporting from Washington — Major U.S. banks are about to get penalized for “critical deficiencies” and shortcomings in how they handled foreclosures, a top federal regulator said Thursday at a Senate Banking Committee hearing examining the Dodd-Frank Act six months after its congressional approval.

“These deficiencies have resulted in violations of state and local foreclosure laws, regulations or rules,” said John Walsh, acting comptroller of the currency. Banking regulators are preparing sanctions and “remedial requirements,” he said.

The Office of the Comptroller of the Currency and other bank regulators, including the Federal Deposit Insurance Corp., have been investigating bank servicers in the wake of revelations about foreclosure-documentation errors at big banks and a stalled application process for many troubled borrowers seeking to modify their mortgages.

Regulators have been reviewing files in response to concerns that mortgage-servers are improperly racing documents through the foreclosure process.

Loan servicers, often owned by the biggest U.S. banks, collect a fee for handling all aspects of a loan, including sending monthly payments to mortgage investors, maintaining records and collecting and paying taxes and insurance.

The regulators conducted foreclosure-processing examinations at servicers owned by Bank of America Corp., Wells Fargo & Co., JPMorgan Chase & Co. and Citigroup Inc., according to Walsh’s testimony. Each of the banks is also among top securitizers of mortgage loans and holders of second mortgages.

The agencies also examined Ally Financial Inc., formerly known as GMAC; MetLife Inc.; PNC Financial Services Group; SunTrust Banks Inc. and others.

Walsh said the bank servicers fell short in monitoring third-party law firms and vendors.

“By emphasizing timeliness and cost efficiency over quality and accuracy, examined institutions fostered an operational environment that is not consistent with conducting foreclosure processes in a safe and sound manner,” Walsh said.

He added that a small number of foreclosure sales should not have proceeded because the borrower had already been approved for a trial modification or had filed for bankruptcy shortly before the foreclosure action.

But John Carey, spokesman at Americans for Financial Reform, said he was skeptical that the sanctions imposed on banks for servicer failures would be commensurate with each institution’s violation.

“We believe that the OCC is clearly trying to catch up, but they have a record of standing in the way of protecting borrowers,” Carey said of the Office of the Comptroller of the Currency. “Systemic failures by some of the country’s biggest banks occurred — and continue to occur — on the OCC’s watch.”

Orol writes for MarketWatch.com/McClatchy.