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G.A.O. Report Sees Deeper Bank Flaws in Foreclosures

By Michael Corkery, New York Times

A new government report suggests that errors made by banks and their agents during foreclosures might have been significantly higher than was previously believed when regulators halted a national review of the banks’ mortgage servicing operations.

When banking regulators decided to end the independent foreclosure review last year, most banks had not completed the examinations of their mortgage modification and foreclosure practices.

At the time, the regulators — the Office of the Comptroller of the Currency and the Federal Reserve — found that lengthy reviews by bank-hired consultants were delaying compensation getting to borrowers who had suffered through improper modifications and other problems.

But the decision to cut short the review left regulators with limited information about actual harm to borrowers when they negotiated a $10 billion settlement as part of agreements with 15 banks, according to a draft of a report by the Government Accountability Office reviewed by The New York Times.

The report shows, for example, that an unidentified bank had an error rate of about 24 percent. This bank had completed far more reviews of borrowers’ files than a group of 11 banks involved the deal, suggesting that if other banks had looked over more of their records, additional errors might have been discovered.

Regulators had calculated a preliminary error rate of 6.5 percent for all the banks when they negotiated the settlements last year, according to the report. The discrepancy raises questions about whether regulators would have revealed more errors if they had allowed the consultants to continue their reviews, resulting in higher payouts to homeowners.

“I’m concerned with these findings by G.A.O., which also show that the settlement was reached without adequate investigation into the harms committed by the servicers,” said Representative Maxine Waters, Democrat of California, one of four lawmakers who requested an investigation into the foreclosure review by the G.A.O. “Only a thorough review of poorly maintained or incomplete servicer files could have verified whether payments were commensurate with the harms committed.”

Regulators had found many issues with the way banks had handled foreclosures during the aftermath of the financial crisis, including bungled modifications and the practice of robo-signing, where reviewers signed off on mounds of foreclosure paperwork without verifying them for accuracy. Other errors ranged from wrongful foreclosures to improper fees charged to homeowners.

The settlement between the banks and regulators included $3.9 billion in cash payouts to 4.4 million homeowners and a requirement that the banks provide an additional $6 billion in foreclosure prevention measures.

Since regulators required the banks in 2011 and 2012 to undertake the independent foreclosure review, the program has been a lightning rod for critics.

Just last week, Representative Elijah E. Cummings, Democrat of Maryland, requested a hearing over the decisions to end foreclosure review in light of new information emerging about the extent of errors that banks were committing during the foreclosure process.

The consultants that the banks hired to review their files were racking up hundreds of millions in fees, but many had barely made a dent in reviewing all of the loan files.

A few banks had completed less than 2 percent of their review. The bank with the 24 percent error rate had completed 57.3 percent of its review, according to the government accountability report.

The delay prompted regulators last year to halt the review and strike the agreements with the 15 banks.

Despite the incomplete reviews, the Government Accountability Office suggested that the cash payouts — ranging from $125,000 to a few hundred dollars — were reasonable. The report found that if regulators assumed an error rate of 24 percent, then the payouts would have been lower than the $3.9 billion total.

A person briefed on the review said that it was difficult to extrapolate error rates from one bank that was smaller than many of the large financial firms like Bank of America, JPMorgan Chase and Wells Fargo.

The G.A.O. report, which was expected to be released on Tuesday, also criticizes regulators for failing to oversee the $6 billion in foreclosure prevention measures in the agreements.

Regulators did not define specific objectives for the foreclosure prevention measures, though they told the banks that they should be “meaningful,” according to the report.

In reality, the banks said they could meet their requirements under the agreement with regulators through their existing foreclosure prevention programs.

The report says that it also found issues with the way regulators are monitoring how the banks were meeting the foreclosure requirements.

Another problem for regulators is making sure the money reaches eligible homeowners, which can be difficult because many of them have been forced to move because of foreclosures.

As of January, about 80 percent of the checks sent to homeowners had been cashed, according to the draft of the G.A.O. report. The report says regulators were looking for better ways to locate homeowners who qualified for the payouts.

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