Fed Report Finds No Wrongful Foreclosures By Banks, Consumer Advocates Slam Methodology
This story was updated to include additional information.
WASHINGTON, D.C. -- A months-long internal investigation into abusive mortgage practices by the Federal Reserve found no wrongful foreclosures, members of the Fed's Consumer Advisory Council said Thursday.
During a public meeting attended by Fed chairman Ben Bernanke, consumer advocates on the panel criticized the central bank's examiners for narrowly defining what constitutes a "wrongful foreclosure." At least one member of the panel, comprised of consumer finance experts not employed by the Fed, voiced concerns that the public would not take the Fed's findings of improper practices seriously, since the wide-ranging review did not find a single homeowner who was wrongfully foreclosed upon.
Members of the panel were briefed on the report's findings on Wednesday by Fed staff during a closed-door meeting. It appears the results were not supposed to have been disclosed Thursday.
The Fed's findings seem to support claims from the banking industry, which has admitted to sloppy practices but has maintained that the homeowners whose homes have been repossessed were substantially behind on their payments.
But all 50 state attorneys general joined together last fall to probe banks' foreclosure practices after several companies halted home repossessions when improper paperwork practices -- like the so-called "robo-signing" scandal -- came to light. The law enforcement officers have said they've found banks violated numerous state laws. State and federal officials are considering a large-scale settlement with banks and mortgage servicers that could include penalties totaling up to $30 billion and requirements to modify more distressed mortgages.
The Fed's report will only further the disagreements between bank regulators, whose top priority is ensuring the safety and soundness of the banking system, and law enforcement officials, who are concerned with reportedly widespread violations of state and federal bankruptcy and consumer protection laws during foreclosures.
The Fed's report on the internal probe, carried out by the Fed's bank examiners, has not been released to the public. The Fed declined to specify when it will be released. The central bank also declined to comment on the report's findings or on the statements made by members of its advisory panel.
When consumer advocates on the panel slammed the results of the Fed's investigation, Fed Governor Daniel Tarullo and Sandra F. Braunstein, the Fed's director of consumer and community affairs, questioned the advocates' characterizations of what they were told during their Wednesday briefing.
But multiple members of the panel pushed back, reciting exact phrases they heard on Wednesday. One panel member later showed The Huffington Post his notes from the meeting.
Kirsten Keefe, a member of the Fed consumer panel and an attorney at the Empire Justice Center in Albany, New York, said the Fed's report defined "wrongful foreclosures" as repossessions of borrowers' homes who were not significantly behind on their payments.
Based on that definition -- the homeowners were already in default -- the Fed found the foreclosures to be justified, members said.
But Keefe, who represents troubled borrowers, argued that the definition should be expanded to include foreclosures in which the wrong party brought the foreclosure action or cases that involve significant errors in foreclosure documents, like an inflated past-due amount, for example. Other consumer advocates at Thursday's public meeting appeared to agree.
"It is so dangerous to make the conclusion that we heard yesterday that there were no wrongful foreclosures," said Mark Wiseman, a former principal assistant attorney general in Ohio who oversaw consumer protection matters.
"That homeowners were not delinquent has never been our contention," said Rashmi Rangan, a member of the panel and the executive director of the Delaware Community Reinvestment Action Council. "Our contention is that many of these foreclosures were avoidable."
Mary Tingerthal, the Fed council's vice chair and the commissioner of the Minnesota Housing Finance Agency, worried that the public would only pay attention to the report's "headline" finding, she said, which is that bank examiners did not find improper foreclosures. The Fed did find significant problems in banks' mortgage operations, she said.
The Fed reviewed just 500 loan files, said Rangan, citing Wednesday's briefing.
The small sample size is similar to a separate investigation of national banks' mortgage operations by examiners at the Office of the Comptroller of the Currency, another bank regulator.
The OCC's acting chief, John Walsh, last month told a Senate committee that the agency had found a "small number" of wrongful foreclosures during its review of just 2,800 mortgages that experienced foreclosure last year.
By comparison, nearly 2.9 million homes received a foreclosure filing in 2010, according to RealtyTrac, a California-based data provider. More than one million homes were repossesed, a record.
Citing Wednesday's briefing, Rangan said the Fed review found numerous flaws in banks' procedures and internal mortgage operations, and that the Fed's bank examiners directed the firms to fix those problems.
One firm was found to be using Microsoft DOS, an outdated computer operating system, to handle home mortgages, Rangan said.
Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.