Washington is seeking help from an unlikely group in its effort to distribute billions of dollars to struggling homeowners in foreclosure: the same banks accused of abusing homeowners with shoddy foreclosure practices.
In doing so, the regulators are trying to speed the process after a flawed, independent foreclosure review delayed relief for millions of borrowers, according to people briefed on the matter. But housing advocates worry that the banks, eager to end the costly process, could take shortcuts as they comb through loan files for errors, potentially diverting aid from the neediest homeowners.
Regulators say they will check the work. And banks have already agreed to pay a fixed amount to troubled homeowners, creating another backstop.
According to officials involved in the process, who spoke anonymously because the matter is not public, the regulators had few alternatives.
Last month, the Office of the Comptroller of the Currency scuttled the foreclosure review by independent consultants because it was marred by delays and inefficiency. Instead, the regulator struck a multibillion-dollar settlement directly with the nation’s largest banks, a deal that includes $3.6 billion in payments to aggrieved homeowners.
To accelerate the payments, the comptroller’s office decided to cut out the middlemen, the consultants, from the reviews. In a conference call last week, the government outlined a plan to use the lenders instead, according to people with direct knowledge of the discussion. Banks will now have to assess each loan for potential errors, which will help determine the size of the payments to homeowners.
The decision to tap the banks for support is the latest twist in the review of more than four million foreclosures, a process that has incensed lawmakers and ensnared the nation’s largest lenders. Regulators are eager to make the payments to homeowners, who have languished for more than a year.
In 2012, housing advocates, regulators and some bank executives suggested the comptroller’s office release an initial round of payments to homeowners, people briefed on the matter said. Such a move might have quelled suspicions among homeowners that the independent review was an empty promise, or worse, a fraud. But the effort went nowhere.
Now, the first payments to homeowners are not expected until late March.
For Judie Lee, 51, a paralegal who is battling to save her three-bedroom home in Lynn, Mass., it might not come in time. Ms. Lee says she submitted a request for aid more than six months ago after a series of botched loan modifications.
“We are in trouble,” said Ms. Lee, who said that she fell behind on her loan payments after losing a job in 2007.
Under the plan outlined last week, the banks will pore over loan files like Ms. Lee’s to identify the worst possible errors. Military personnel illegally foreclosed on, for example, will rank highest on the list. Borrowers who might be current on their loan payments – and therefore did not warrant a foreclosure – will be next.
Regulators will then decide how much money to pay each category of borrower. The worse the errors, the bigger the payout.
The plan, regulators say, offers a more equitable way to divide the money than paying the same amount to each homeowner.
The strategy, though, presents potential conflicts of interests. The banks, in haste to meet tight deadlines, could fail to provide an accurate portrayal of what went wrong. The loan files are also in disarray, officials say, complicating the task for banks.
“The whole process has been a slap in the face to homeowners and a slap on the wrist to banks,” said Isaac Simon Hodes, an organizer with the community group Lynn United for Change. “The latest development shows how there has been no accountability.”
Regulators say the lenders have no incentive to manipulate the reviews. Under the settlement, the banks committed to dole out a set amount. Bank of America must distribute $1.1 billion to homeowners. Wells Fargo owes more than $700 million. The costs will not change, regardless of what the banks find in the loan files in the coming weeks.
The Office of the Comptroller of the Currency, which is running the review, also said it would perform regular checks on the banks’ work and make sure they adopt controls to prevent errors.
“Regulators will verify and test the work of servicers to slot borrowers into broad categories and then regulators will determine the amount of payment for each category,” explained Morris Morgan, the deputy comptroller in charge of supervising large banks.
By relying on the banks, regulators can part ways with the consultants.
Despite billing for roughly $2 billion in fees in the 14-month review, consultants examined only a sliver of the 500,000 complaints filed by homeowners, people involved in the matter said. Their efforts were stymied, in part, because regulators urged consultants to first scrutinize a random sample of the four million foreclosures before digging into specific homeowner complaints, the people involved said. The decision, the people said, may have undercut the scope of the settlement and potentially deprived homeowners of additional relief.
Consultants were also criticized for a faulty review process.
Some consulting firms, including the Promontory Financial Group, farmed out much of the work to contract employees. Others faced questions about their objectivity. The consultants, critics note, were paid billions of dollars by the same banks they were expected to police.
Some consultants say they sounded repeated alarms about the process. Last spring, a group of consulting firm executives met with comptroller officials in Washington to voice concerns that the reviews were too narrow, according to people with direct knowledge of the meetings.
Other people close to the review say consultants were only partly to blame for the problem. The review process, with its narrow focus, was created by the comptroller’s office in 2011, under previous leadership.
Now, some consultants feel spurned by the regulators’ decision to hand off the review.
“Why did you not trust the banks a month ago?” asked one consultant who spoke anonymously for fear of offending regulators. “And why do you solely rely on them now?”