Posted on Thursday, February 17, 2011
The federal bank regulator overseeing the nation's largest lenders is pushing for a quick and modest settlement to the months-long federal and state probes into abusive mortgage practices, frustrating other federal agencies and state regulators and raising questions over President Barack Obama's delay in naming a pro-consumer chief to head the agency.
The Office of the Comptroller of the Currency, which oversees lenders like JPMorgan Chase and Bank of America, plays a key role in the ongoing investigations launched last September into improper foreclosure practices. The federal review involves the OCC and other bank regulators, as well as the Departments of Justice, Housing and Urban Development and the newly formed Bureau of Consumer Financial Protection. The 50-state probe involves state attorneys general and state bank regulators.
But the OCC, known for its light-touch approach, is trying to come to a quick settlement with the banks it supervises, according to officials from multiple agencies involved in the investigations. The agency is negotiating an agreement that would cost the industry less than $5 billion in fines and mortgage modifications for troubled homeowners, including principal reductions, the officials said. Other agencies are pushing for something bigger.
On Wednesday, Rep. Patrick McHenry, a North Carolina Republican, said during a House hearing on housing issues that he had heard the potential settlement would be in the "tens of billions range." In 2008, state attorneys general reached an $8.4 billion agreement with just one company -- Countrywide Financial -- to settle predatory lending accusations. The money was used to aid distressed homeowners.
The OCC is also trying to persuade mortgage companies that collect payments from borrowers, known as servicers, into adopting new standards in how they deal with homeowners. The agency has wide influence over the way banks service mortgages: It supervises firms that control nearly two-thirds of all home mortgages in the U.S., or more than 33 million loans totaling about $5.8 trillion. But officials said the OCC's proposals give the institutions wide discretion, potentially undercutting their intent.
The OCC is said to be rushing to settle in hopes of forcing the hand of other regulators on the federal and state level, weakening their efforts to extract a more meaningful resolution. The probes have cast a pall over the industry as bank executives have been forced to answer questions about the investigations posed by investors and analysts. The industry wants to put the whole matter behind it and move on.
Officials at the Treasury Department and Federal Deposit Insurance Corporation have grown frustrated with the OCC's efforts, people familiar with the matter said. State regulators conducting their own probe said they aren't a part of the OCC's seemingly lonely action.
"Any statements or actions by the OCC at this point are on the agency's own behalf and not in conjunction with the 50-state attorneys general," Iowa Attorney General Tom Miller said in a statement. "Regardless of any federal action, we intend to fully pursue all state claims and remedies."
Spokesmen for the OCC didn't respond to a request for comment e-mailed after regular business hours.
State and federal officials are trying to reach a global settlement that will deter future abuses in the way mortgage servicers modify delinquent home loans and foreclose on homeowners, as well as levy penalties as a measure of restitution and force lenders to restructure distressed mortgages. The OCC's efforts subvert the possibility of a unified settlement, officials said.
In December, Federal Reserve Governor Daniel K. Tarullo said the federal review had found "significant weaknesses in risk-management, quality control, audit, and compliance practices as underlying factors contributing to the problems associated with mortgage servicing and foreclosure documentation."
"We have also found shortcomings in staff training, coordination among loan modification and foreclosure staff, and management and oversight of third-party service providers, including legal services," he said.
In the wake of the worst housing crisis in generations, consumer advocates, housing analysts and bank regulators have heavily criticized the industry's performance.
In addressing the recent controversies of improper foreclosures during a speech last November, Fed governor Sarah Bloom Raskin said procedural flaws like robo-signing and other efforts that cut corners are "part of a deeper, systemic problem." She added that she was "gravely concerned."
"The complex challenges faced by the loan servicing industry right now are emblematic of the problems that emerge in any industry when incentives are fundamentally misaligned, and when the race for short-term profit overwhelms sustainable, long-term goals and practices," Raskin said. "I believe that serious and sustained reform is needed to address the larger problems in mortgage servicing."
Tarullo said the "problems are sufficiently widespread that they suggest structural problems in the mortgage servicing industry."
"The servicing industry overall has not been up to the challenge of handling the large volumes of distressed mortgages," he said in December. "It is clear that the industry will need to make substantial investments to improve its functioning in these areas and supervisors must ensure that these improvements occur."
But as of last week, nothing had changed, Raskin said in another speech.
"These problems existed before November and as far as I can tell they remain unaddressed," Raskin said. "How do I know this? Late last year, the federal banking agencies began a targeted review of loan servicing practices at large financial institutions that had significant market concentrations in mortgage servicing. The preliminary results from this review indicate that widespread weaknesses exist in the servicing industry."
"These deficiencies pose significant risk to mortgage servicing and foreclosure processes, impair the functioning of mortgage markets, and diminish overall accountability to homeowners," she added. "I'm sure this has been said, but I'll say it again because I have seen little to no evidence of improvement in the operational performance of servicers since the onset of the crisis in 2007."
Bank regulators will address the issue on Thursday during a Senate hearing.
On Wednesday, Federal Housing Administration Commissioner David Stevens said that a settlement would come in the next month. Options include penalties against the nation's largest banks, more mortgage modifications for borrowers, and the reduction of homeowners' mortgage principal, he said.
Stevens also touched on how regulators aren't on the same page.
"There's two ways we can go about coming to a conclusion here," Stevens said. "We can come up with one set of solutions, assuming the general findings are the same, or we can go individually. That process is being worked through right now."
The FHA chief added that the agencies would have to work together "to make this less disruptive in the market," an acknowledgement that a massive principal write-down scheme would likely impair the nation's largest financial institutions.
The OCC's actions in trying to derail a more substantial settlement raises questions over the Obama administration's delay in nominating the agency's next leader.
Its last chief, John C. Dugan, stepped down in August after his five-year term ended, and joined Covington & Burling LLP, where he leads the firm's financial institutions group. Dugan "advises clients on a range of legal matters affected by significantly increased regulatory requirements resulting from the financial crisis," according to the firm's Web site. One of his colleagues is Edward Yingling, who last year stepped down as president and chief executive officer of the American Bankers Association, the industry's largest trade group.
Consumer advocates pushed for the White House to nominate an outsider who was less connected to the OCC's prior failures. The agency came under withering criticism for its lax oversight of the industry in a report published by the bipartisan, Congressionally-appointed Financial Crisis Inquiry Commission.
Treasury Secretary Timothy Geithner picked Dugan's former chief of staff at the OCC, John Walsh, as Dugan's interim replacement. Obama has not yet named his successor. The nomination requires Senate approval.
But Democrats lost six seats in the Senate in last fall's election. The administration now faces an uphill battle to get a tough regulator in the role.
Shahien Nasiripour, THE HUFFINGTON POST