Enforcement Action Coming Against Loan Servicers

Federal regulators may be close to issuing enforcement action against mortgage servicers involved in faulty foreclosure paperwork.

Foreclosure Sign
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Foreclosure Sign

The so-called "robo-signing scandal" erupted last fall, with reports that servicers were pushing through mass foreclosures with little to no checks, and documents were being signed without proper authority.

In response several servicers shut down their foreclosure systems to review procedures and are only now beginning to refile foreclosures. The enforcement action could be in conjunction with the fifty-state attorney's general investigation into foreclosures at the big bank servicers, led by Iowa attorney general Tom Miller.

In testimony obtained by CNBC, the Comptroller of the Currency, John Walsh, will tell the Senate Banking Committee Thursday that examinations of the major mortgage servicers, "found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules and have had an adverse affect on the functioning of the mortgage markets and the U.S. economy as a whole."

While no agreement with the state attorney's general is complete, Walsh goes on to say, "The OCC and the other federal banking agencies

with relevant jurisdiction are in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions with respect to the servicers within their respective jurisdictions. We also continue to assess and monitor servicers’ self-initiated corrective actions."

Sources tell CNBC federal regulators are still working out details with the state attorney's general, and different servicers could see different actions. AG Miller's office did not return calls. But in testimony before a House Financial Services subcommittee Wednesday, FHA Commissioner David Stevens said, "We are in discussion with 11 regulators, the attorneys general, the department of justice, in talking directly about several large servicers we've publically mentioned in terms of this effort working together with one possibility in joining in some sort of settlement with these institutions."

When pressed if the settlement would include a new government program, perhaps including principal write down for troubled loans, Stevens answered, "None of this involves Federal funds. If any settlement will be, or any fines or penalties will be assessed to institutions in due course based on the authorities that we currently have at HUD."

Major mortgage servicers include Bank of America , JPMorgan Chase , Ally Financial (formerly known as GMAC) and Wells Fargo .