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Shielding banks from bilked borrowers

By Polyana da Costa · Bankrate.com
Thursday, April 11, 2013
Posted: 5 pm ET

Regulators chose to protect banks over consumers when they agreed to a $9 billion settlement that was based on "a made-up number" to end investigations of illegal foreclosure practices by some of the nation's largest mortgage servicers.

The accusation comes from Sen. Elizabeth Warren, D-Mass. On Thursday, she pounded federal regulators with questions over a foreclosure review settlement in which victims will receive "pennies on the dollar" while the Office of the Comptroller of the Currency and the Federal Reserve give up investigating the illegal practices.

They'd rather be fast than right

"If you can't correctly tell how many people were the victims of illegal bank actions, how can you possibly decide how much money is an appropriate amount for a bank settlement?" she asked the Federal Reserve's deputy general counsel, Richard Ashton, during a committee hearing.

His answer: Reviewing the files to properly estimate the number of victims "would have caused delays."

But the OCC and the Federal Reserve didn't seem to think delays would be a problem when a year and $2 billion were wasted on consultants who reviewed only about 100,000 loan files of the 4.2 million in question.

"We gave up looking for individual injuries," Ashton says. "Our priority was to get cash to borrowers."

Is $300 enough?

Many of these borrowers have been emailing me with questions since I wrote this post about the settlement, letting them know that their checks are on the way. Some of the emails come from borrowers who lost their homes to foreclosure after the lender gave them a loan modification that increased their monthly mortgage payments. Based on the chart of payments the OCC has released, these homeowners would get $300 in compensation.

This settlement shouldn't have been about getting homeowners $300 quickly, "but getting the right amount of cash to the right people," Warren told regulators.

The 4.2 million borrowers whose loans were serviced by the banks listed in the settlement will get some sort of compensation regardless of whether or not there was misconduct or errors in their loan files. Regulators had claimed that the servicers had broken the law in about 6.5 percent of the cases reviewed.

The 'made up' numbers

"The problem is that the 6.5 percent is not accurate," Warren told the OCC. "Your staff admitted to us that number is not based on random sample. It was determined based on whatever files had been reviewed by the time you shut down the investigation. The 6.5 percent was just a made-up number."

Illegal activity is confidential information

And what about the illegal activity the consultants identified in the files that were reviewed? Can the information be released to Congress? Can those families be told the finding of their reviews?

Warren and Sen. Sherrod Brown, D-Ohio, are aggressively pushing for it.

But the lawyers for the OCC and the Federal Reserve say there is a "process" for that because it would be "confidential" information.

"So you've made decision to protect the banks, but not the families that have been foreclosed against?" Warren asked Ashton.

Ashton says the regulators have not decided whether to inform families of issues found in their files.

OK, the 100,000 files that cost $2 billion to review must be worth something. Logic suggests that the OCC used those findings to help create the categories used by regulators to determine how much each borrower gets from the settlement.

But none of the consultants were involved in creating the payment chart, they told Warren during the hearing.

"Who put the people into each of these boxes?" Warren asked. Answer: The banks did.

"It now appears, the people who broke the law are the same people who determined who will be compensated from the breaking of that law," she concluded.

Follow me on Twitter @Polyanad.

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4 Comments
JimE L
April 14, 2013 at 7:47 am

2billion spent on 100,000 people is 20,000 per person.