We were expecting them this week, and here they are. The Federal Reserve, along with federal regulators led by the OCC, released its enforcement actions against the 10 largest banks and two third-party support companies, which they say will “address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing.” The rhetoric is tough: the Fed calls the deficiencies from the servicers “significant and pervasive compliance failures” which constitute unsafe and unsound practices. In Fed-speak, that sounds serious enough.
It’s not. I haven’t had a chance to read all the enforcement actions, but Daniel Indiviglio is correct:
Simply looking at the bullet point titles for the enforcement actions gives you an idea of how mild the penalties must be:
Dedicated resources for communicating with borrowers/single point of contact
Management information systems
Would those enforcement subtitles have you shaking in fear? They all attempt to ensure that foreclosures are processed accurately and fairly in the future, but they fail to penalize banks and servicers for any wrongdoing that may have occurred in the past. This is akin to the OCC saying, “We know you guys made some mistakes, but let’s put the past behind us: the important thing is to do better in the future.”
The Fed release holds out the possibility of monetary sanctions in the future, but none were announced today. The banks simply have to subject their systems to an outside review – not even from the regulators themselves, but from a company they pay to do it – and they’ll be fine. The idea that they will pay back homeowners for wrongful foreclosures is way premature – the company doing the independent assessment could simply say that they found no wrongdoing, and it’s all over.
The actions against Lender Processing Services and MERS Corp are a little more interesting and unexpected. I don’t see any monetary penalties there either, but the LPS order stipulates pretty clearly that they executed false mortgage assignments habitually, and given that they created and signed millions of documents, that’s a pretty bold assertion. But again, it’s all review, compliance, risk assessment and the like. It’s the equivalent of being let off with a warning.
However, this consent order and the others could come in handy in the courts, where the only accountability will come from. And the order states clearly that:
The enforcement actions complement the actions under consideration by the federal and state regulatory and law enforcement agencies, and do not preclude those agencies from taking additional enforcement action. The Federal Reserve continues to work with other federal and state authorities to resolve these matters.
Even the FDIC has problems with this order:
The enforcement orders issued today are important, but they are only a first step in setting out a framework for these large institutions to remedy these deficiencies and to identify homeowners harmed as a result of servicer errors. While today’s orders put these large servicers on a path to improving their management of the foreclosure process, they do not purport to fully identify and remedy past errors in mortgage-servicing operations of large institutions. Much work remains to ensure that the servicing process functions effectively, efficiently, and fairly going forward [...]
There is evidence that some level of wrongful foreclosures has occurred. It is important that servicers identify any harmed homeowners and provide appropriate remedies. This is essential to managing litigation and reputation risk, as well as fairness to borrowers.
This order takes off the table many of the items in the AG settlement around reforming the servicing sector, like ending dual track and establishing a single point of contact (albeit a fake one). So the AG settlement can now focus on penalties if the AGs so choose.
What’s more, the courts still have jurisdiction here. And there are a number of possible outcomes there. So while this enforcement action is clearly nonsense, and is designed to undermine any other deal with the banks, they’re not out of the woods yet.
This is a terrible order, but it doesn’t have to be the end of anything. Justice can still be done, just not through captured banking regulators who were never going to deliver it.