It's not the big penalty from the fifty state attorneys general, but it will hit big bank bottom lines in a big way.
The Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision released enforcement action against fourteen major bank/servicers in the form of consent orders.
Bank of America , JP Morgan Chase , Ally Financial, Wells Fargo, SunTrust, Citibank, HSBC, MetLife, PNC, U.S. Bank, Aurora Bank, EverBank, OneWest Bank and Sovereign Bank will all be hit with no fewer than 16 new requirements for mortgage servicing and loss mitigation.
They will also have to overhaul oversight of third-party vendors, including lawyers, who provide foreclosure services.
"These reforms will not only fix the problems we found in foreclosure processing, but will also correct failures in governance and the loan modification process and address financial harm to borrowers," according to acting Comptroller of the Currency John Walsh.
While there is no penalty involved in this action yet (penalties often follow enforcement actions), the Federal Reserve release says, "The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties."
The Fed regulates Ally Financial, SunTrust [STI 29.20 -0.40 (-1.35%) ] and HSBC [HBC 53.8058 0.3158 (+0.59%) ] . The OCC also says the enforcement actions, "do not preclude determinations regarding assessment of civil money penalties."
As part of the enforcement though, the banks will be required to engage an independent firm to review foreclosure actions from January 1, 2009 through December, 2010 to assess whether foreclosures complied with federal and state laws and whether there were in fact grounds to foreclose.
If the foreclosures are found to be faulty and borrowers were harmed financially by "deficiencies," the banks will have to remediate the borrowers in some way.
There's your big can of worms. I asked an OCC spokesman if this wouldn't release an incredible floodgate of claims, he replied, "There are going to be a large number of claims submitted." He said that remediation could include monetary damages and even the borrower getting the home back.
The banks will have to submit a plan to regulators for this review process for approval. The process must allow anyone who believes they have suffered financial harm to submit a claim for consideration.
While this part may get the most attention, the overhaul of the foreclosure process is what you might expect. It's mostly forcing the servicers to improve on foreclosure documentation, oversight, and chain of ownership.
It requires independent reviews and a single point of contact for borrowers facing foreclosure. The action prohibits dual tracking, when one arm of the bank pursues foreclosure while another pursues modification.
"We will work hard to address these issues and believe executing on the required changes will make a meaningful difference in our customers’ experience with us," according to a JP Morgan statement. Bank of America [BAC 13.332 -0.138 (-1.02%) ] and Wells Fargo [WFC 30.7801 -0.6199 (-1.97%) ] had no comment before the 1 pm release.
All of this is supposed to happen pretty quickly, within 120 days of the order. Most of the big banks have already implemented many of these requirements. This morning JP Morgan Chase [JPM 46.38 -0.26 (-0.56%) ] reported $1.1 billion in Q1 risk management losses for new mortgage servicing procedures.
The action comes before any settlement with the fifty state attorneys general, headed by Iowa's Tom Miller. That process has hit many snags, especially over a proposed $20 billion bank penalty that could be used to write down principal on troubled loans. The federal regulators say they are working with the Department of Justice, which is taking the lead with the 50 state attorney's general.
"These actions do not preclude any action by other regulators, including the attorneys general, for issues they uncover within their jurisdictions," the OCC spokesman added.