Alarmed by significant deficiencies uncovered as part of a regulatory review of mortgage servicer practices, the federal banking agencies are preparing formal enforcement actions against the largest servicing firms that they hope will set de facto standards across the industry, according to sources familiar with the situation.
The enforcement orders are expected to hit most, and possibly all, of the 14 mortgage servicers reviewed by regulators after foreclosure problems surfaced in the press last year, but the largest firms — including Bank of America Corp., JPMorgan Chase, Wells Fargo, and Ally Financial — are likely to face the toughest requirements, due to the sheer number of issues that must be addressed, sources said.
The orders are expected to be coupled with a global settlement with other government entities investigating the servicing industry, which is almost certain to include civil money penalties. Regulators are still discussing the terms with state attorneys general, the Justice Department, the Department of Housing and Urban Development, the Treasury Department and the Consumer Financial Protection Bureau (CFPB).
"The [Office of the Comptroller of the Currency (OCC)] and the other federal banking agencies with relevant jurisdiction are in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions with respect to the servicers within their respective jurisdictions," said Acting Comptroller of the Currency John Walsh, according to prepared testimony obtained by American Banker and due to be delivered Thursday to the Senate Banking Committee.
"We expect that our actions will comprehensively address servicers' identified deficiencies and will hold servicers to standards that require effective and proactive risk management of servicing operations, and appropriate remediation for customers who have been financially harmed by defects in servicers' standards and procedures. We also intend to leverage our findings and lessons learned in this examination of enforcement process to contribute to the development of national servicing standards."
Regulators are hoping the enforcement orders will send a message to the rest of the servicing industry. Although the exact details of the orders are still under discussion, sources said they are likely to include requirements that servicers beef up staffing, establish a single point of contact for borrowers, and conduct a comprehensive look back at their servicing portfolio to detect and correct problems.
The Federal Deposit Insurance Corp. (FDIC) and other government officials are also pushing to include an agreement to offer enhanced, streamlined modifications to troubled borrowers in exchange for a clearer path to foreclosure if re-default occurs after the workout. It remains unclear, however, if regulators will take such a step.
Several banks had initially expected the enforcement orders to come as early as this week, but that timeline appears to be slipping. Sources indicated regulators are shooting to issue the orders, along with the global settlement, sometime in March. After the orders are released, regulators will follow up with a report on the findings of their review and further recommendations.
There also appear to be differences among the agencies in how tough to make the enforcement orders and how high the monetary penalty should be.
The CFPB, among others, has been pushing for steep fines to be assessed on servicers, coupled with stringent remedial actions. The FDIC is also said to be pushing for tougher enforcement measures, while the OCC is concerned about taking overly harsh actions. Regulators met Monday with Treasury Secretary Tim Geithner and representatives from the Federal Housing Finance Agency, HUD and CFPB to discuss the pending actions.
Although the orders will effectively establish standards for the largest servicers, they are not expected to supplant efforts already underway for regulators to issue their own formal set of rules. Regulators are still divided on where and how to set such standards, with the FDIC pushing to include them as part of a risk-retention rule while the OCC wants to craft a stand-alone measure.
Regulators have been hinting for weeks that they may take enforcement actions against servicers, as they sought to reassure Congress they are on top of the issue. "We are directing banks to take corrective action where we find errors or deficiencies, and we have an array of informal and formal enforcement actions and penalties that we will impose if warranted," Walsh said in testimony on Dec. 1. "These range from informal memoranda of understanding to civil money penalties, removals from banking, and criminal referrals."
FDIC Chairman Sheila Bair has been vocal that any solution must result in industrywide standards.
"In order to remedy failures endemic to the largest mortgage servicers, I hope to see enforceable requirements that will significantly improve opportunities for homeowners to avoid foreclosure," Bair said in a January 19 speech to the Mortgage Bankers Association.
Some observers said it's apparent the servicers should have taken remedial steps on their own before regulators stepped in.
"It's unfortunate it had to get this point," said William Longbrake, an executive-in-residence at the University of Maryland. "It would have been better if the industry had done these things without the federal government."
While the settlement is likely to be bad public relations for the servicers involved, Jaret Seiberg, a policy analyst at MF Global's Washington Research Group, said a global settlement may still be positive news for the industry.
"A global settlement should be extremely positive for banks by putting this issue to rest and letting the industry move past the paperwork snafus," Seiberg said.
He was most intrigued by the potential for streamlined modifications, saying such a requirement could have an impact.
"The easier you make the modification the more likely you are to get a modification, so the concept makes a lot of sense," Seiberg said. "For the industry, where there is an automatic modification and then foreclosure if the borrower goes delinquent a second time, you could end up benefiting the banks because it's going to eliminate a lot of uncertainty now about the ability of financial firms to foreclose on borrowers behind on payments. Right now there are so many programs out there, it difficult to know when banks can foreclose. This would set up a streamlined model."
The bank regulators began an interagency review team of the 14 largest servicers in September following reports of robo-signing and foreclosure problems at BofA, Ally, and JPMorgan.
According to the OCC, the eight largest national bank mortgage servicers account for approximately 63% of all mortgages outstanding in the United States and nearly 33.3 million loans totaling almost $5.8 trillion in principal balances as of June 30, 2010.