Government Regulators Caution Banks on Foreclosure Documentation

Banks are experiencing backlogs in processing evictions and foreclosed home sales due to poor documentation. They have also been accused of using “robo-signers” to sign multitudes of foreclosure papers without the benefit of proper legal reviews. The fiasco has earned the ire of the public who are still angry at banks for receiving billions in taxpayer money to tide them over in the recent financial crisis.

Probes have been initiated by attorneys general across the country on the foreclosure activities of banks and to convince them to exert more efforts in helping borrowers hold on to their homes. Scheduled to meet with members of a multi-state group conducting the probe in November 2010 are the executives from Wells Fargo Corp., Citigroup Inc. and Ally Financial’s GMAC Mortgage.

The House of Representatives subcommittee of Financial Services has also scheduled a hearing on the subject and invited executives from the three banks and from JP Morgan and Bank of America. They also invited bank regulators to the hearing.

Major banking institutions and other mortgage lenders have admitted to the documentation problems they are experiencing but reassured probers that they have taken measures to improve the procedures. They also reassured government regulators of the accuracy of the foreclosures they have enforced in recent months.

Elizabeth Duke and John Walsh, Federal Reserve Governor and acting comptroller of the currency respectively, have said that they will release the findings of the probe they have undertaken in the early part of 2011. They also said that bank regulators have threatened banks of several enforcement actions available to them should banks fail to clean up their acts.

Bank regulators are likewise looking into the capability of banks to absorb the risk for the so-called “put-back” situation. This risk can stem from investor accusations that banks and other lenders have misrepresented loans underpinning demand repayment and mortgage securities.