By Paul Kiel
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.
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.