(MoneyWatch) Some of the nation's biggest banks and mortgage lenders will pay $8.5 billion to resolve federal charges that they illegally foreclosed on homeowners. Yet consumer advocates are criticizing the deal as failing to offer adequate compensation to aggrieved borrowers.
The settlement, announced Monday, supersedes a previous government agreement under which homeonwers could seek mortgage relief under a so-called "Independent Foreclosure Review." Under the new agreement with the Office of the Comptroller of the Currency, which oversees large banks, 10 lenders and mortgage servicers will offer cash payments and other mortgage assistance to eligible borrowers.
The 10 servicers -- Aurora, Bank of America, Citibank, JPMorgan Chase, MetLife Bank, PNC, Sovereign, SunTrust, U.S. Bank and Wells Fargo -- are subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing.
"When we began the Independent Foreclosure Review, the OCC pledged to fix what was broken, identify who was harmed and compensate them for that injury," said OCC chief Thomas Curry in a statement. "While today's announcement represents a significant change in direction, it meets those original objectives by ensuring that consumers are the ones who will benefit, and that they will benefit more quickly and in a more direct manner.
Consumer groups said the latest settlement was necessary. "The independent foreclosure reviews were deeply flawed, and any movement towards more compensation for homeowners is a step in the right direction," said Alys Cohen, staff attorney for the National Consumer Law Center, in a statement.
The OCC and the Federal Reserve announced theprocess in November 2011, saying it was designed to help eligible borrowers whose homes were improperly seized between 2009 and 2010. The reviews were a response to widespread fraud and paperwork errors by banks and loans servicers in foreclosing on properties following the housing crash, including illegally "robo-signing" foreclosure documents.
"The Independent Foreclosure Review was intended to compensate homeowners who suffered as a result of the mistakes their mortgage servicers made in the foreclosure process, added Ellen Taverna, legislative director for the National Association of Consumer Advocates. "It is vital that the regulators ensure that this process going forward be transparent and fair and finally put homeowners first with sufficient compensation."
Under the terms of the new agreement, participating loan servicers would stop using Independent Foreclosure Reviews and replace it with a broader framework designed to more quickly funnel compensation to eligible borrowers.
Both banks and consumer groups had criticized the foreclosure reviews, citing the loan-by-loan reviews as costly, time-consuming and an ineffective way to reach many homeowners. Banks were paying large sums to consultants to review the files, while some questioned just how impartial those "independent" reviewers were.
"Communities of color were particularly hard hit by abusive mortgage practices," said Debby Goldberg, special project director at the National Fair Housing Alliance. "In order for the public to have any confidence in the fairness of this settlement, the OCC and the Federal Reserve must ensure that borrowers in these communities have equal access to the help it provides. The regulators must also report to the public on the demographic and geographic makeup of those to whom the settlement provides assistance."
The $8.5 billion sum includes $3.3 billion in direct payments to qualified borrowers and $5.2 billion in "other assistance," such as loan modification and deficiency judgments. According to the OCC, the agreement ensures that more than 3.8 million borrowers whose homes were in foreclosure with the 10 servicers in 2009 and 2010 will receive cash compensation "in a timely manner."
Eligible borrowers will receive compensation ranging from $1,000 up to $125,000, depending on the error, regardless of whether they filed a request for review form. Borrowers do not need to take further action and should expect to be contacted by a payment agent by the end of March with details.
But Cohen questioned the amount of money people could receive under the deal. "The capped pool of cash payments is wholly inadequate in light of the scale of the harm," she said. "If the reviews had been done right the first time, banks would have been on the hook to pay far more to homeowners, even though the planned scheme for recompense fell far short of full compensation."
Though the new program is intended to help consumers more quickly, it also outlines the importance of oversight of the mortgage servicing industry, housing advocates contend.
Borrowers who receive compensation will not be required to execute a waiver of an legal claims they may have against their servicer, and the servicers' internal complaint processes will remain available.