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State and federal officials are pushing to more tightly regulate the way banks and other mortgage servicers treat struggling homeowners in a bid to stem foreclosures.
Current government modification programs are largely voluntary, and there are few rules governing servicers’ practices. But on Thursday, the nation’s largest banks, including Wells Fargo & Co., Bank of America Corp., and Citigroup Inc., received a detailed 27-page proposal from state attorneys general and federal agencies to force a shakeup in banks’ mortgage-servicing policies.
One mortgage industry executive familiar with the document described it as “almost like a wish list.” It is “very prescriptive,” this person said. “It gets into the minutiae of how this group wants servicers to manage loans.”
The document is separate from any proposed financial penalties to settle various abuses that surfaced last fall. That settlement could include requirements for banks to write down more than $20 billion in loan balances for borrowers that are underwater or to pay more in fines. The current proposal, outlining a code of conduct, is designed to lay the foundation for more permanent changes in mortgage-servicing practices that would outlast such a settlement.
Previous federal efforts to push banks to voluntarily rework mortgages have been deemed by many to be a failure, but addressing those shortcomings has been the subject of an intense debate. At congressional hearings this week, Republicans called for the termination of government loan-modification programs while Democrats argued that more should be done to rework flagging initiatives.
Government officials are attempting to use the settlement to force changes in the way banks treat consumers who are having trouble making their mortgage payments. The document remains the starting point for negotiations and is likely to change as banks respond about the feasibility of different requirements, according to people familiar with the matter.
The government investigation, sparked by the robo-signing controversy that erupted last fall, quickly widened into a broader review of banks’ mortgage-servicing infrastructure as regulators uncovered deeper problems. Federal banking agencies found “critical deficiencies and shortcomings” at the nation’s largest banks in document procedures, oversight of outside law firms and other areas, according to the head of the Office of the Comptroller of the Currency.
Borrowers and housing counselors say homeowners are forced to navigate a confusing maze to apply for a loan modification. That has left borrowers further behind on payments and more vulnerable to foreclosure. Bankruptcy trustees and foreclosure-defense attorneys, meanwhile, have uncovered flaws in the way banks track and record ownership of notes.
The code of conduct proposal was drafted by state attorneys general, the U.S. Department of Justice and three other federal agencies. It comes on the heels of separate enforcement actions submitted by bank regulators.
The proposal outlines formulas that would force banks to consider offering loan write-downs to underwater borrowers more regularly during the modification process, according to people familiar with the document. It also spells out more detailed modification timelines that servicers must meet. For example, banks would have to acknowledge the receipt of modification applications within 10 days and would need to notify borrowers within 30 days if their application was rejected, according to these people.
In addition to providing a single point of contact for borrowers, it would force servicers to freeze foreclosures while banks are evaluating a borrower for a modification. Banks would face fines for violating the terms and be subject to independent monitoring by third parties to ensure compliance.
The document also spells out steps for banks to verify the accuracy of amounts owed, people familiar with the proposal said. Banks will face limits on fees that they can impose on delinquent borrowers. The document also includes a list of directives to improve tracking of mortgage notes and the chain of title, and to boost oversight of foreclosure law firms and third-party vendors, these people said
The code of conduct references the Mortgage Electronic Registration System, or MERS, an electronic lien-registry system designed to facilitate the recording of mortgages. It says details clarifying the use of MERS may be spelled out later.
Banks said they are studying the document. “We are analyzing what was shared with us yesterday,” said a spokeswoman for Wells Fargo. A spokesman for Citigroup said, “Our discussions with government officials are confidential.” Bank of America declined to comment.
On average, loans that went through foreclosure in January had been delinquent for 507 days, up from 319 days two years ago, according to Lender Processing Services. One bank executive said the concern is these new requirements may slow foreclosures further. “It is going to be no small task to reconcile all the new protocols,” this person said.
Critics, meanwhile, have argued that the administration’s approach is designed “not to save the consumer, but to save the industry,” said William K. Black, a former bank regulator who now teaches economics and law at the University of Missouri-Kansas City. While $20 billion “is a significant amount of money,” relative to the problems caused by banks, “it’s a pittance,” he said.
Hundreds of homeowners are expected to press state officials for mandatory loan modifications and principal write-downs when the National Association of Attorneys General holds its annual Spring meeting in Washington, D.C. next week.
By NICK TIMIRAOS And RUTH SIMON
—Dan Fitzpatrick also contributed to this article.
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