Feds investigation uncovers ‘widespread consequences’ from faulty foreclosures

A report released by the Federal Reserve and the Office of the Comptroller of the Currency on its investigation of major servicers concluded improper foreclosure practices were widespread across the industry. In conjunction with consent orders and an upcoming fine, regulators directed the servicers to hire third-party companies to conduct a more detailed review of foreclosure actions taken between Jan. 1, 2009 and Dec. 31, 2010. The OCC and the Fed reviewed 2,800 borrower foreclosure files in their investigation, evaluated the servicers’ self-assessments and staff involved in the preparation of foreclosure documents, according to the report. The file reviews did not provide a complete analysis of the payment history of each loan before foreclosure, and regulators admitted it may not have uncovered misapplied payments or unreasonable fees. The servicers investigated represent a collective two-thirds of the entire servicing industry. But while performance varied from servicer to servicer, regulators said the problems violated federal and state law. “Thus, the agencies consider problems cited within this report to have widespread consequences for the national housing market and borrowers,” regulators said. Regulators showed the scope of those consequences. Borrowers faced extended time in the foreclosure process, excess and improperly assessed fees. States showed foreclosure timelines to an average of 450 days at the end of 2010, regulators said. And courts have begun “lose confidence” in the reality of these affidavits. Regulators found that although most of the borrowers were in serious default at the time of their review, some servicers failed to accurately complete or validate amounts owed by those borrowers. “While the error rates varied among the servicers, the percentage of errors at some servicers raises significant concerns regarding those servicers’ internal controls governing foreclosure-related documentation,” according to the report. The investigation also found servicers overly relied on third-party law firms and vendors such as Lender Processing Services (LPS) and Mortgage Electronic Registration Systems. Contracts between the servicers and these default management service providers were “generally inadequate” and provided little room for oversight, according to the report. As far as MERS goes, the investigation found a range of problems including quality control, internal audits and an inability to address any foreclosure-processing risks. For both LPS and MERS, regulators will sanction both and force the companies, just as the servicers, to repair their operations and put them in compliance. LPS said it has discontinued its affidavit services. These enforcement actions and frequent monitoring will remain at the servicers and outsourcing companies until they demonstrate the weaknesses and deficiencies have been corrected, regulators said. The report concludes that the servicers and their vendors were overwhelmed by the rising foreclosure inventory and cut corners to speed up the process of working through it. “The risks presented by weaknesses in foreclosure processes are more acute when those processes are aimed at speed and quantity instead of quality and accuracy,” regulators said.