A settlement between some federal regulators and 14 of the nation's biggest financial institutions does not mean the end of a wide-ranging probe into shoddy lending practices and wrongful foreclosures, officials said Wednesday.
The banking companies and lenders, led by Bank of America, Wells Fargo, JPMorgan Chase and Citigroup, agreed Wednesday to compensate borrowers who were wrongly foreclosed upon and to overhaul their operations. Fines are to be determined later.
The deal was reached with three federal banking regulators: the Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision.
But the industry still faces the prospect of a tougher settlement with a second group that includes all 50 state attorneys general, the Treasury and Justice departments, the Federal Trade Commission and others, including the newly created Consumer Financial Protection Bureau.
Iowa Attorney General Tom Miller, who is leading the talks for the states, said Wednesday his group was reviewing the move by federal regulators but said the state probe will continue into the "dysfunctional mortgage servicing and foreclosure system."
"Today's actions by the OCC will not limit our pursuit of remedies and reforms," he said in a statement.
Housing advocates say the measures unveiled Wednesday don't go nearly far enough to solve the underlying problems that have led to millions of people losing their homes in foreclosures and millions more owing more than their homes are worth.
"Much of what is being proposed today is best practices that the industry is already moving toward," said Jess Van Tol, a spokesman for the National Community Reinvestment Coalition, which helps homeowners facing foreclosure. "This is really too little, too late."
Wednesday's order highlighted results of an investigation into abusive industry practices that included document forgeries and "robo-signing" of foreclosure paperwork that became public last fall. The investigation also found court filings that weren't properly notarized, mortgage documents that weren't transferred properly, inadequate staff for the foreclosure process and lack of oversight of outside firms.
"These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices at these institutions," the Fed said in a statement.
The state-led group is seeking tougher measures including detailed document procedures, specific rules for dealing with borrowers and guidelines for modifying loans that include reducing principal.
JPMorgan Chase CEO Jamie Dimon said he expects banks to pay fines eventually, adding that resolving the issue "will be good for everybody." JPMorgan expects banks' costs for mortgage servicing will result in $1 billion in additional staffing, legal costs and possible penalties.
Citigroup said in a statement that the company is "committed to working with our regulators to further strengthen our programs in these areas and meeting these new requirements by the implementation deadlines." Wells Fargo called the orders an "unprecedented measure and a tough message to take, but it will make mortgage servicing practices better across the board."
Housing advocates say the requirements are not specific enough to insure any meaningful change in a process that has been mired in red tape.
"The problem with the settlement is that it doesn't provide any details, and therefore homeowners have no guarantee that they'll be given a fair shake by the banks," said Alys Cohen, a staff attorney for the National Consumer Law Center. "All the banks have agreed to do is follow the current law, which doesn't adequately protect homeowners."
Housing advocates say homeowners with mortgage problems still face a labyrinth of red tape, lost documents and lenders unwilling to modify loan terms to more affordable payments.
"The major issue continues to be that it takes forever for people to be put in a trial loan modification — or the servicers and lenders proceed with a foreclosure while the person is in the trial modification," said Helen Reynaud, vice president of national grants for the National Foundation for Credit Counseling. "Those modifications are also still having a devastating impact on credit scores, and that really impairs people's ability after the foreclosure to move and rent or get a job."
Reynaud said struggling homeowners will face even longer odds getting help with their mortgages following last week's round of federal budget cuts, which will eliminate $88 million in funding to support HUD-sponsored housing counseling agencies.
Though critics of Wednesday's enforcement action say it didn't go far enough, mortgage lenders still face additional penalties and restrictions. The order did not include fines for the industry, but the Federal Reserve said it "plans to announce monetary penalties."
"The (attorneys general) want actual standards," Cohen said. "The problem now is the servicers have carte blanche to decide the details of how they will run their business. And that hasn't worked."
The parallel efforts may owe something to a rivalry between the OCC and the states that erupted in 2003, when the federal bank regulator asserted its authority over state regulators in a policy known as "pre-emption."
As mortgage complaints began rising, some attorneys general chafed at having to sit on the sidelines, unable to enforce state fair lending laws. In 2007, following a challenge by New York's then-Attorney General Andrew Cuomo, the Supreme Court effectively overturned that pre-emption, clearing the way for the current negotiations between the states and mortgage lenders.
Talks began about two weeks ago between mortgage lenders over a detailed, 27-page "term sheet" that outlines specific rules governing everything from document handling and fee restrictions to guidelines on modifying loans by forgiving principal — a major sticking point in the government's failed attempts to contain the foreclosure crisis.
"I think it would be a mistake to assume that what you see from the OCC is what you're going to see from the attorneys general and the other federal partners," said Geoff Greenwood, a spokesman for Miller, the Iowa attorney general. "The settlement will not be at the edges. It will be substantive change, or we won't settle.
Congress may weigh in yet again, following multiple efforts to resolve the mortgage morass. Last month, lawmakers voted to shutter the beleaguered $50 billion Home Assistance Modification Program after only a fraction of the money was spent. The program fell far short of its goal of helping millions of homeowners avoid foreclosure — largely because it was entirely voluntary.
Democratic lawmakers have advocated a tougher measures, including a much larger effort to write down the value of loans for troubled homeowners. But Republicans at the state and federal level reject that approach, calling it an overly broad response to the foreclosure-document problems.
Since the housing market collapsed in 2006 after a wave of rogue mortgage lending, some 5 million homes have been lost to foreclosure. Roughly 2.4 million mortgages were in foreclosure at the end of last year, and another 2 million were 90 days or more past due, putting them at serious risk of foreclosure.