The banks, while acknowledging having taken improper foreclosure shortcuts,… (David Zalubowski / Associated…)
Banks are hashing out a $10-billion settlement with federal regulators to halt costly reviews intended to compensate borrowers whose foreclosures were marred by legal shortcuts, lost paperwork and improper fees.
The reviews — conducted by highly paid consultants hired by the banks themselves — have so far failed to deliver any meaningful assistance to homeowners. The failure has been long predicted by critics, including Sheila Bair, former chairwoman of the Federal Deposit Insurance Corp.
"Zero dollars have been given out," complained Faith Bautista, president of the National Asian American Coalition.
The reviews began in November 2011. So few borrowers asked for a foreclosure review that the regulators extended the deadline to apply three times before it expired Dec. 31. But as the new year approached, the reviews had not yet reached the stage at which any compensation could be delivered to aggrieved borrowers, said Bryan Hubbard, a spokesman for the Office of the Comptroller of the Currency.
Meanwhile, the banks have paid the consultants hundreds of millions of dollars, Joe Evers, the OCC's deputy comptroller for large banks, said in a recent conference call with reporters.
In a new settlement, the Federal Reserve and the Office of the Comptroller of the Currency, which regulates national banks, would abandon a requirement for case-by-case review. That requirement was imposed in April 2011 in reaction to widespread reports of abuses, including bank employees "robo-signing" foreclosure documents with no actual knowledge of the cases.
Spokesmen for the OCC and the Fed declined to comment on the proposed $10-billion settlement, first reported by the New York Times. Bank representatives spoke about it only on condition of anonymity because it was still being negotiated.
When the regulators suggested a large-dollar settlement, the banks welcomed it, said one official at a major bank. The official said the institutions, having endured months of stop-and-start negotiations before reaching the previous $26-billion settlement, wanted to resolve the issue before releasing their annual reports for 2012.
"The thinking was, this isn't working as is," the official said. "Why don't we agree upon a number [for payment] so we can do away with this endless look-back thing?"
Another bank official said: "I don't think anyone in the OCC can dispute the fact that it hasn't worked the way it was supposed to."
As of Dec. 31, 495,000 borrowers — about 11% of those eligible — had come forward with claims, Hubbard said. The OCC said the consultants had selected an additional 159,000 foreclosed-on homeowners for additional reviews in an effort to detect patterns of abuse that could then be addressed further.
Borrowers initially weren't told how they might be compensated, but in June the regulators promised various payments depending on the severity of the abuses. The compensation included $15,000 for those determined to have been wrongly denied loan modifications and $125,000 plus any lost equity for those whose homes were repossessed because of egregious violations.
The eligible group includes anyone whose home was in any stage of foreclosure in 2009 and 2010, when the abuses were widespread.
Whether all of the eligible borrowers would receive payments under a new settlement couldn't be determined. The banks, while acknowledging having taken improper foreclosure shortcuts, said the reviews turned up few borrowers who suffered serious abuse. Advocacy groups, by contrast, said the problem was that consultants overlooked problems and dragged their feet to generate more hourly fees.
The case-by-case reviews proved far more complex than the consultants had anticipated, said Paul Leonard, California director of the Center for Responsible Lending. Leonard said he had monitored the program by speaking with consultants as they implemented it.
"The early outreach was not well thought through," Leonard said, "particularly with minorities — non-English speakers — who were particularly hard hit by subprime mortgages and foreclosures."
The Fed and OCC settlement was with 14 large providers of mortgage customer service. They include the five huge lenders that previously agreed to a separate $26-billion foreclosure-abuse settlement with 49 state attorneys general and the federal departments of Justice and Housing and Urban Development: Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial.
A secondary bank regulator, the FDIC, had argued that all foreclosed-on borrowers should have their records examined, not just those who came forward with claims, Bair said.
In her 2012 book about the financial crisis, "Bull by the Horns," Bair called the consultant reviews "a ruse and a waste of time and money."
"I did not think consultants could be completely trusted to conduct an independent review of foreclosure files," she wrote. "They relied heavily on the banks for their consulting business; why would they conduct a thorough review that could end up costing the banks a lot of money to compensate past victims?"