Federal banking regulators are trumpeting an $8.5 billion settlement this week with 10 banks as quick justice for aggrieved homeowners, but the deal is actually a way to quietly paper over a deeply flawed review of foreclosed loans across America, according to current and former regulators and consultants.
To avoid criticism as the review stalled and consultants collected more than $1 billion in fees, the regulators, led by the Office of the Comptroller of the Currency, abandoned the effort after examining a sliver of nearly 4 million loans in foreclosure, the regulators and consultants said.
Because they have no idea how many borrowers were harmed, the regulators are spreading the cash payments among all 3.8 million borrowers -- whether there was evidence of harm or not. As a result, many victims of foreclosure abuses like bungled loan modifications, deficient paperwork, excessive fees and wrongful evictions will likely get less money.
"It's absurd that this money will be distributed with such little regard to who was actually harmed," said Bruce Marks, the chief executive of the nonprofit Neighborhood Assistance Corp. of America.
While the comptroller's office acknowledged flaws in the review, Bryan Hubbard, a spokesman for the agency, said the "settlement results in $3.3 billion being paid to consumers, and that is the largest total cash payout of any settlement involving borrowers affected by foreclosures to date."
The examination was plagued by problems from the start in November 2011, according to interviews with more than 25 people who reviewed foreclosures, 15 current and former regulators and six bank officials, who insisted on anonymity because they were not authorized to speak publicly or feared retribution.
Several former employees of a consulting firm doing reviews said that their managers showed bias toward the bank that hired them. Other reviewers said that the test questions used to evaluate each loan were indecipherable, and in some cases the process failed to catch serious harm. Many borrowers said they had never heard of the review or were so baffled by the process that they gave up or dismissed it as just another empty promise.
The review, which was hastily dismantled this week, was mandated by bank regulators amid public outrage over accusations that banks were robo-signing mountains of foreclosure filings without verifying them for accuracy. The review was supposed to cover any loan in foreclosure in 2009 and 2010, regardless of whether there was evidence of dubious practices.
The comptroller and Federal Reserve ordered the banks to hire consultants for the review and the regulators solicited claims from borrowers.
Patricia McIntosh, 46, said she would have jumped at aid to avert the foreclosure on her home in Lynn, Mass., but never got notice of the review.
"When you go through a foreclosure, you are sifting through so much junk mail and scams," McIntosh said, "so I keep my eyes open and I never got anything."
As of this week, the comptroller's office said that it had identified 654,000 potentially problematic foreclosures -- a combination of 495,000 claims submitted by borrowers and 159,000 files that the consultants flagged for review. The regulator said it was still determining the number of reviews completed, but the consultants said that only a third of the loans were fully reviewed.
A critical flaw from the start was that the federal government farmed out the work of scouring the millions of loans to several consulting firms that charged as much as $250 an hour and outsourced work to contract employees, many of whom had no experience reviewing mortgages, according to the reviewers, regulators and bankers.
Oversight by the regulators was nearly nonexistent, the reviewers said. Some employees working for one of the consultants, Promontory Financial, to pore over hundreds of thousands of Bank of America loans said that without a watchdog some consultants worked to minimize the number of homeowners found to be harmed.
One reviewer described how her supervisors routinely kicked back loans where she had identified harm. The reviewers would speak only if they were not named because they were searching for work.
"From Day 1, Promontory strove to conduct its review work as thoroughly and independently as possible. We adhered carefully to the scope and intent of the reviews prescribed by the OCC enforcement actions, using a methodology that the OCC approved. Our overarching concern at all times was to serve the best interests of borrowers," Debra Cope, a spokeswoman for Promontory, said in a statement.
Hubbard, the comptroller's spokesman, said "the OCC and the Federal Reserve staff provided ongoing oversight, had regular meetings and conversations, and were in the process of testing consultant findings." He said that the agency recognized the reviews had shortcomings but that "maintaining the course would have resulted in billions more being paid to consultants and fewer dollars to consumers."