Last week offered a very good snapshot of the state of things in the wake of mortgage crisis. On the one hand, there was news of a woefully inadequate $8.5 billion settlement as "remedy" for irresponsible (and worse) behavior by mortgage servicers. On the other, the Consumer Financial Protection Bureau announced regulations that might help stop such abuses from happening again.
The two news items underscore the marked difference between a government agency that stands down and one that stands up.
First up: the Office of the Comptroller of the Currency. Approximately 18 months and $1.5 billion ago, the OCC created an Independent Foreclosure Review to investigate big banks' well-documented mortgage abuses. These abuses included the infamous robo-signing scandal, in which bank-owned servicing companies used forged documents to foreclose on people illegally and force families out of their homes.
But that was just the tip of the iceberg. Servicers told homeowners they qualified for modified mortgages and allowed them to apply while simultaneously initiating foreclosures -- evidently open to whichever panned out first (rooting no doubt for foreclosure, since that's where the money is). Years after the mortgage bubble burst, servicers failed -- and in many cases continue to fail -- to hire enough customer service representatives to handle the crush of phone calls and paperwork, making it next to impossible for homeowners to get straight answers and very difficult for them to do what they need to do to save their homes.
Instead of investigating the mess itself, the OCC outsourced the job of identifying homeowners that had been wounded by servicer malfeasance. Private contractors who already worked for the big banks got the gig. No conflict of interest of epic proportions there, eh? After fiddling around for a year and a half, and sucking up $1.5 billion in fees, these "investigators" managed to review -- shock! -- only one third of the loan files they were given.
Last week, however, the OCC announced a settlement that will finally shut this fiasco down. At first glimpse, it looks like a great deal for consumers, with the servicing arms of megabanks including JPMorgan Chase, Citibank, Wells Fargo, Bank of America and six others agreeing to pay an eye-popping $8.5 billion.
Unfortunately, first glimpses can be deceiving.
"Did we drive a hard bargain? I think yes," Morris Morgan, a deputy comptroller at the OCC, told ProPublica.
I think not Mr. Morgan. Most of that money will pay for things the servicers are doing anyway, including loan modifications. Only $3.3 billion will go to homeowners, and that will be divided between 3.8 million borrowers. For those without a calculator handy, that's an average of $870 each. Be still my heart.
To someone who lost his house to mortgage servicer incompetence or malfeasance, that's not restitution. It's an insult. "The capped pool of cash payments is wholly inadequate in light of the scale of the harm," says Alys Cohen, staff attorney for the National Consumer Law Center.
Because the private contractors failed to do their job, no one really knows right now who among those 3.8 million actually got hurt by bad practices. So the settlement will be shared among people who were hammered as well as those who suffered little or no harm at all.
The OCC's "hard bargain" is yet another sweetheart deal for the banks. The first one, you may recall, was made back in 2003 when the OCC used its federal preemptive power to block states from enacting laws that would have stopped banks from earning record profits from the predatory subprime loans that caused the mortgage markets to overheat and the economy to crash.
A decade later, millions of families who have lost their homes or who remain mired in the foreclosure process are well aware of the mess the OCC helped to create. It remains a daily nightmare. And after raising hopes that some defrauded homeowners may finally see justice, the agency's bungled investigation and rushed settlement only managed to twist the knife deeper. Simply put, it's a travesty and still, no one goes to jail.
The same week that Comptroller's Office was busy committing this epic fail for American consumers, another agency scored what could well be an epic win.
The Consumer Financial Protection Bureau issued new rules last week clamping down on mortgage servicer abuses. It's a work in progress, but nonetheless it is real progress.
Instead of rushing to court on the first late payment, servicers must now wait four months after a loan goes delinquent before filing a foreclosure proceeding. Also banned: Dual tracking, in which servicers try to modify and foreclose upon the same mortgage at the same time.
Now, the CFPB will require that servicers do a better job communicating with borrowers, as well, so that informing them about other ways to save their homes will now be part of the job. And servicers can no longer use tricks such as "lost" payments and computer errors to reap the fees associated with pushing people into unnecessary foreclosure. They are accountable to the CFPB.
The bureau even will force banks to maintain accurate records that are easily accessible by borrowers, forcing the companies to clean up the paperwork debacle that was the most immediate cause of the robo-signing scandal.
"For many borrowers, dealing with mortgage servicers has meant unwelcome surprises and constantly getting the runaround. In too many cases, it has led to unnecessary foreclosures," the bureau's director, Richard Cordray, said when the rules were made public. "Our rules ensure fair treatment for all borrowers and establish strong protections for those struggling to save their homes."
The bureau's new rules balance the ballast on a badly listing ship, putting the "service" back in the mortgage servicing industry. The big banks that own the servicers have resolutely refused to do it. And for the last decade, the Comptroller's Office has proven to be so thoroughly overwhelmed by the industry it is charged with regulating that it can't even run a proper investigation when its own reputation is on the line.
Our government fell down last week. Then it got back up. While the bad news is that millions of people who've already been hurt by messy and fraudulent mortgage servicers may only receive a fraction of the justice they deserve, the good news is that for generations of consumers to come, mortgage servicers will be there to serve them, not the other way around.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.