Critical Signs in Foreclosure Talks

Hopes are fading for a far-reaching settlement between regulators and banks over improper home foreclosures as some regulators press ahead to reach their own settlements with banks that others involved in the talks deem weak.


The dispute pits federal regulators against state attorneys general, who are seeking stiff penalties and comprehensive changes in the way banks foreclose on homeowners and modify loans. Advocates of tougher sanctions accuse federal banking regulators, including the Office of the Comptroller of the Currency and the Federal Reserve, with going easy on the banks.

Federal regulators are on the verge of sending their orders, and federal and state officials are scrambling to maintain an uneasy alliance as talks reach a critical point and test whether there can be a universal settlement.

Banks' inability to move properties through the foreclosure process could further delay any housing-market recovery. Over the past two months, differences between federal and state officials emerged over the proper remedies to potentially fraudulent foreclosure-filing practices. Those divisions have raised the prospect that states and federal agencies may ultimately issue their own orders independently.

Already, there are signs of discontent. A letter sent Monday to the Federal Reserve from 22 current and former members of the board's Consumer Advisory Council called the proposed consent orders "profoundly disappointing" and said they leave "too much discretion" to mortgage companies. They fail to impose penalties, the letter said, for their wrongful conduct. A Fed spokeswoman declined to comment.

Meanwhile, officials on all sides played down concerns that federal regulators' pending enforcement actions could undercut states' and other federal agencies' efforts to push for stronger sanctions. "The steps that have been taken by regulators … should coordinate well with the progress we're making with the state attorneys general," said Housing Secretary Shaun Donovan in an interview.

A spokesman for the OCC said the pending orders "create a framework for remedial action, but there's no reason that additional procedures sought from the states can't fit within that framework. … Nothing that we're doing is intended to impede any action by the state attorneys' general."

The orders are expected to give banks 60 days to establish plans for ensuring their mortgage-servicing processes provide clearer controls to prevent the kind of documentation errors that brought foreclosures to a halt last fall. The action plans also will require servicers to hire more staff to better aid borrowers through loan modifications.

Federal regulators aren't yet issuing financial penalties. But if they are to reach a coordinated settlement, their orders put pressure on state attorneys general and other federal officials to hash out a deal within the 60-day time frame that regulators have given banks to prepare their action plans. It isn't clear whether state attorneys general are prepared to strike a deal within that time frame.


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