Regulators, Banks Reach Deal to Correct Foreclosure Flaws

Complaints about the foreclosure process being unfair to delinquent borrowers who have been trying to keep their homes were finally addressed in the second week of April, when the country’s largest mortgage lenders reached agreements with federal banking regulators.


Consumer advocates had been raising red flags for a long time about what they considered to be fundamental flaws in the foreclosure process. These flaws are expected be corrected by the settlement that was reached with the largest banks. In a related development, the attorneys general from all 50 states as well as the Department of Justice and other federal agencies are also seeking to settle with lenders.

The Federal Reserve and other enforcers of bank regulations launched a review of banking practices last year, which unveiled many violations of foreclosure processes and unsound practices. Rules were allegedly bent to hastily process applications, with an emphasis on quantity rather than quality and accuracy. The newly reached agreement is expected to fix the problems unearthed during the investigation, as well as improve governance, and the loan-modification process.

The agreements require the mortgage servicers to improve their communications with borrowers and to limit the extent to which they can pursue foreclosure during the loan-modification process.

Lenders are also required to ensure foreclosures are not pursued once a mortgage has been approved for modification. It also requires a single point of contact for borrowers throughout the loan-modification and repossession processes.



The agreements mandate lenders to establish systems to govern external companies that conduct foreclosures and related services on their behalf, including outside law firms. Banks must hire an independent company to conduct a review of all foreclosures conducted between Jan. 1, 2009, and December 31, 2010.



Banks are also required to establish a process for providing financial remedies to homeowners that believe they have been improperly foreclosed on by the institutions.



For a long time, federal regulators had been accused and criticized for not doing anything about the unsafe lending practices that were responsible for the housing bubble and its lingering after effects. Many consumer groups have expressed their displeasure with the new agreements because they believe regulators have not gone far enough to correct the flawed foreclosure process.



These groups criticized the proposed agreements to be dilute and toothless. The main bone of contention is the fact that banks are free to come up with their own internally developed plans for correcting and fixing problems. Banks get 60 days to create their plans.



“While homeowners and communities continue to face breached contracts, obstruction and misrepresentations from servicers, the proposed consent orders provide no new directions or standards to the financial institutions subject to your supervision,” a coalition of advocates, including the National Consumer Law Center and the Center for Responsible Lending, wrote in a letter to the federal regulators. “Rather, the proposal permits the perpetrators of these abuses to design a plan to comply with existing laws and contracts. This is insufficient to halt the abuses.”