Can you put a price on the damage caused by a wrongful
foreclosure? Banking regulators have. And it’s $125,000. Or
$60,000. Or $15,000. Or… it’s unclear.
Last November, banking regulators launched a process to force
the big banks to compensate homeowners victimized by their foreclosure abuses. Many
crucial details remained unclear, including how much victims might receive.
More than seven months later, regulators finally released a
“framework” that shows some of the possible outcomes. It’s a list of
thirteen mortgage servicing “errors,” each with its own associated form of
compensation. In addition to fixing
the bank’s errors, remedies include cash payments ranging from $500 all the way
up to $125,000.
It turns out that, for homeowners seeking compensation for
those errors and abuses, it’s crucially important just how the servicer messed
up. The logic for the differences in payment isn’t always apparent and in some
instances seems to defy common sense.
Two homeowners who each had their bid for a modification
mishandled, for instance, could emerge with either $125,000 or $15,000
depending on just where in the process the error occurred. Regulators also left
unsettled how homeowners will be compensated for so-called robo-signing,
the scandal that provoked the foreclosure review to begin with.
With consumer
response to the review so far underwhelming, regulators also extended the
deadline for homeowners to submit a claim to September 30. It was originally
April 30.
Attorneys with the Office of the Comptroller of the Currency
(OCC), the primary regulator for the largest banks, told us the compensation is
appropriately tailored for differing circumstances.
Readers wanting to
know whether they might qualify for the foreclosure review should see our detailed list of Frequently Asked
Questions. The FAQ also covers
the separate National Mortgage Settlement arrived at earlier this year.
The worst errors, the ones reaping the $125,000 payouts, fit
into three categories. The first covers active duty members of the military who
were foreclosed on while protected
by the Servicemembers Civil Relief Act. The OCC
attorneys said they arrived at $125,000 for these worst errors in part because
it’s close to what the Justice Department used in recent legal settlements with
banks for violating that law. (In all cases, the cash compensation drops to
$15,000 if the servicer returns the home to the borrower.) The $125,000 payment
is the same regardless the size of the borrower’s mortgage, but since
homeowners aren’t being required to waive any legal claims to accept the money,
they could go to court to recoup more.
The other two categories for max compensation encompass a
far broader range of homeowners: those who ended up in foreclosure as a direct
result of bank error (by mishandling payments, for example) and those who were
in trial modifications when the bank foreclosed.
Over the years, we’ve reported
extensively on the
number of ways that mortgage servicers botched the applications of
homeowners trying to avoid foreclosure through a loan modification. Servicers
regularly lost homeowners’ income documentation, miscalculated
incomes, and generally made homeowners run a gauntlet of errors, confusion
and frustration to emerge with a modification. Trial modifications, which were
supposed to last only three months and easily transition to a permanent
modification, often lasted many months longer only to end badly. Many homeowners
were foreclosed
on prematurely.
A number of the 13 categories regulators have laid out focus
on these modification errors. For instance, if the bank simply never evaluated
a homeowner for a modification before foreclosing and the homeowner would have
qualified, then the review will result in compensation of $15,000. If the bank
denied a modification in error, that’s also $15,000.
But trial modification errors result in much larger
compensation, resulting in a discrepancy that seems to make little sense. If
the homeowner was accepted for a trial modification, made the payments as
agreed, and then the servicer foreclosed without giving a final answer, that
would be $125,000. But if the servicer did give an answer to that homeowner,
even if it was entirely baseless wrong denial, and then foreclosed, it would be
only $15,000.
The attorneys for the OCC said there were a number of
reasons that homeowners foreclosed on while in trial modifications deserve much
higher compensation than those who suffered other modification abuses. The
first and main reason is that there’s a clear legal distinction between the
servicer plainly violating a written agreement with the homeowner and other
situations. That was one of the main guiding ideas in how they allocated the
compensation, they said. The highest amounts are reserved for scenarios where
the servicer either violated the mortgage by improperly handling the account or
didn’t abide by the trial modification agreement.
If a homeowner fell behind on her payments, applied for a
modification, but was foreclosed on before the bank even gave an answer, that’s
an entirely different scenario, they said. The servicer’s failure to process
the loan modification application “is not the reason why the borrower was
foreclosed upon,” said one attorney. “They were foreclosed upon because they
were delinquent on their mortgage terms.”
Furthermore, they said, that homeowner wouldn’t have much of
a shot in court if she sued, even if it’s clear that the bank broke the rules
of the government’s loan modification program (as they regularly
did). That’s because the
largely toothless program didn’t provide homeowners with any legal recourse
for rule-breaking servicers. If, however, the homeowner could point to a clear
violation of a written agreement, they might be able to win damages in court.
Such reasoning “turns the idea of remediation on its head,”
said Diane Thompson of the National Consumer Law Center. “Borrowers who lose
their homes wrongfully for any reason suffer the same amount of financial
injury and harm, whether or not they could or would bring a separate lawsuit to
challenge that wrongful foreclosure.”
It also sends the wrong message to mortgage servicers, Thompson
said, to have such a mild penalty for failing to consider a homeowner for a
modification at all when there’s such a significant payment associated with
trial modification errors. “This essentially rewards servicers for having
failed to process loan mods.”
The OCC said it arrived at its framework after seeking a
variety of viewpoints, including those of consumer advocates.
One major aspect of the framework that remains unclear is
what might be offered as compensation for robo-signing.
The foreclosure review was prompted by revelations
that the major banks had filed thousands of false affidavits in courts across
the country when seeking to foreclose on homeowners. Banks have also often
filed forged or flawed documents when attempting to demonstrate the right
to foreclose. But the framework only says that compensation in cases where the
servicer didn’t properly document the right to foreclose will be “determined on
a case-by-case basis as state law dictates.” The OCC attorneys could give no
further information about this.
We have updated our
FAQ on the Independent Foreclosure Review to include a brief discussion of
the framework, but homeowners wanting more information should
see the framework itself and the
lengthy FAQ that regulators produced about it.
To help us continue reporting on this issue,
homeowners going through the process can also
fill out our foreclosure questionnaire or contact us to
let us know what’s happening.
