Aggrieved homeowners ensnared by a foreclosure system riddled with misconduct and error are set to get their first shot at winning some cash back from the banks.
Under orders from federal regulators, 14 mortgage servicers on Tuesday began mailing out 4.3 million letters to potential victims of wrongful foreclosure practices. The letters will invite borrowers to submit their cases for a free review by independent consultants that are funded by the lenders but vetted by regulators.
Borrowers may be compensated if the reviewers and regulators find that the homeowners were harmed financially.
"These requirements help ensure that the servicers provide appropriate compensation to borrowers who suffered financial harm as a result of improper practices," said John Walsh, acting comptroller of the currency, whose agency regulates the nation's largest banks. The Federal Reserve has also issued the enforcement orders.
Those letters will go out to people who were in foreclosure in 2009 and 2010, a period identified by the regulators as the peak of foreclosure misconduct. In addition to the mailings, an advertising campaign will begin shortly to get the word out to people potentially harmed by the errors.
The start of the review process by the regulators is the first tangible action to stem from widespread revelations last year that banks made a host of errors when foreclosing on troubled borrowers.
Among other problems, mortgage servicers employed so-called robo-signers — people who signed foreclosure documents en masse without properly reviewing them — and took back homes from people even though they were being reviewed for loan modifications.
Consumer advocates criticized the federal regulators Tuesday for what they said was a lack of transparency in their reviews, saying they were concerned that many borrowers injured by faulty foreclosure practices would not be reached.
Regulators haven't released a system for determining how much to compensate borrowers found to have been foreclosed on improperly, and it isn't clear whether borrowers will have to give up their rights to further claims if they are compensated in some way. The names of the independent consultants whose work is funded by the banks will be released soon.
"I think that federal regulators … are more concerned about banks' bottom lines than whether banks follow all the rules," said Kurt Eggert, a law professor at Chapman University in Orange. "They are trying to fix the servicing problem without it costing the banks much, which is impossible."
He added that the moves by the federal regulators could detract from efforts by state attorneys general that also are aimed at reaching a settlement with the nation's largest banks over faulty foreclosure and mortgage servicing practices. Those negotiations continue even though some states have voiced concern over the direction of the talks; California has dropped out of them altogether.
"I worry that this effort will make it harder, for example, for the states to do something meaningful because servicers will just say, 'Hey, there is this federal process, it's working, leave us alone,'" Eggert said.
Bryan Hubbard, a spokesman for the comptroller's office, stressed that the outreach effort was only an initial step in what will be a series of actions.
The mortgage servicers that agreed in April to clean up their foreclosure practices and compensate victims include the nation's largest: JPMorgan Chase Bank, Bank of America Corp., Citibank and Wells Fargo & Co. Lesser-known servicers and foreclosure processing firms, such as Lender Processing Services of Jacksonville, Fla., also signed on to the enforcement orders.
Each mortgage servicer is required to mail one letter to each customer eligible for the review. About 70% of those potentially slated to receive letters are still in their homes. Hubbard said the firm hired to reach the borrowers on behalf of the banks, Rust Consulting, also has experience reaching people in mass mailings, particularly in class-action cases, and would use sophisticated methods to reach those borrowers who are no longer in their homes.
Borrowers who want to learn more about the federal claims process can visit IndependentForeclosureReview.com or call (888) 952-9105.
Borrowers must request reviews by April 30, and the foreclosures must have been on primary residences to be eligible.