Banks Warned Not to Flout Foreclosure Deal
Residents move out of a home they have been renting that has been foreclosed on in Rancho Cordova, California, in 2012. The home to the left has also undergone foreclosure proceedings. New rules cut the time that homeowners can qualify for an FHA loan after foreclosure. (Jose Luis Villegas/Sacramento Bee/MCT)
Washington — 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 Smith, the monitor, said in an interview.
Smith, who is responsible for ensuring Bank of America, JPMorgan Chase, Wells Fargo, Ally Financial and Citigroup 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 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 5 million mortgage workouts since 2009, about 1.2 million of them through the Home Affordable Modification Program, or HAMP, 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 percent, or $547, according to Treasury data.