Home > Mortgages > Feds Replace Flawed Foreclosure Review With Vague $8.5 Billion Settlement

Comments 4 Comments

The Independent Foreclosure Review was supposed to be a full and fair investigation of the big banks’ foreclosure abuses, and it was trumpeted as the government’s largest effort to compensate victimized homeowners. Federal regulators, who designed the review, forced banks to spend billions to carry it out. Millions of homeowners were eligible and hundreds of thousands submitted claims. But last week, the very regulators who launched the program 18 months ago announced that it had all been a massive mistake and shut it down.

Instead, 10 banks have agreed to pay a total of $3.3 billion in cash to the 3.8 million borrowers who had been eligible for the review. That’s an average of around $870 per borrower. But typical of a process that’s been characterized by confusion, delays and secrecy, regulators said the details of how the money will be doled out were not yet available.

The headline number for the settlement is $8.5 billion, but that includes $5.2 billion in “credits” the banks will receive for actions they take to avoid foreclosures, such as providing loan modifications. That’s very similar to the separate $25 billion settlement reached last year between five banks, 49 states and the federal government. That settlement has been criticized for awarding credit to banks for things they were already doing.

Officials from Office of the Comptroller of the Currency, one of the federal regulators that ran the review and negotiated the new settlement, did not say how they arrived at the $3.3 billion in cash. Pressed on this question during a conference call with reporters last week, an official would only say, “The best way to think about that is that it was a negotiated amount. It represents an acceleration of payments to consumers that results in more consumers getting more money in a much quicker time frame.”

Critics had assailed the original review since it was launched. Regulators required each bank to hire an “independent” consultant to review the case of each eligible homeowner, evaluate if the bank had committed errors or abuses and, if so, determine how much money, up to $125,000, that the bank would have to pay the borrower.

But those consultants turned out to be companies that had other contracts with the banks and so relied on them for business, causing consumer advocates and some members of Congress, among others, to question how independent the consultants could be. Fueling suspicion was the fact that many details of how the banks and the consultants actually worked together were kept secret. Last year, ProPublica published a series of articles revealing that the banks’ own employees were heavily involved in the supposedly independent review, calling into question its fundamental integrity.

Regulators dumped the review and struck a deal for two main reasons, OCC officials said on the conference call with journalists. The officials spoke on the condition they not be named.

First, they said, the reviews had taken far too much time. That was great news for the consultants that had been hired by the banks to conduct the reviews, because the banks have paid them more than $1.5 billion. But all that work has not resulted in a single payment to a borrower.

Second, months and perhaps years from now, when the consultants finally finished their work, most borrowers still would not have received compensation. The officials said only 6.5 percent of the case reviews completed so far had produced evidence of harm to the borrower.

Given the flaws in the review, it’s questionable whether that rate is “remotely accurate,” said Alys Cohen of the National Consumer Law Center. “Because the reviews were flawed,” she said, “basing a total settlement number on them would grossly understate the harm and really be an abdication of responsibility on the part of regulators.”

Divvying Up the $3.3 Billion

The OCC officials said the details of how the $3.3 billion will be distributed had not been finalized and likely would not be made public for several more weeks. But they outlined the basic approach.

As originally designed, the review identified 13 categories of potential harm and put a price tag on each. For the worst errors, banks would have had to pay victimized borrowers up to $125,000, while for lesser problems they would have had to pay only $1,000 or even no cash compensation at all.

The new settlement will work in a similar way. Each of the 3.8 million homeowners will be placed in categories, they said. The categories would be broadly similar to the ones from the review. For instance, one category might be homeowners who were denied a loan modification and later lost their home to foreclosure. Another might be those who were put in foreclosure, but received a modification and are still in the home.

Each category will have an associated payment. Borrowers who fall in more than one category will receive the highest category payment they qualify for.

As for the amounts borrowers in each category might receive, it will likely range from $125,000 down to a few hundred dollars. Officials said the precise amounts had not yet been decided.

Unlike the original review, no case-by-case effort will be made to sort out who was really the victim of a bank error or abuse and who was not. Instead, basic criteria will be used to assign homeowners to a category, and everyone in the same category will receive the same amount.

The banks themselves will sort all the homeowners into the various categories, the officials said, but regulators will oversee that process. They argued that the banks had no incentive to game the process since the total amount each bank will have to pay out had already been determined. There is no way for a bank to reduce that sum.

495,000 borrowers submitted claims as part of the original review process. Those borrowers will receive a higher payment than borrowers who did not submit a complaint, but the officials would not say how much that would be.

It’s unclear when regulators will release the full details of the process, but they did commit to a timeline: Borrowers will be contacted by the end of March with news of their payment amount.

This article was originally published on ProPublica.

Image: JefferyTurner, via Flickr

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

  • Pingback: Securitization Audit News Feds Replace Flawed Foreclosure Review With Vague $8.5 Billion … | Securitization Audit News()

  • Barbara Hale

    Many homeowners did not have access to coputers and for those who had access could not send as IFR had closed it down. What now.

  • http://yahoo Juli

    I have not been contacted yet… But that does not suprise me…checks will probably bounce if I ever Do get one…

  • http://yahoo Juli

    I have not yet been contacted! ANd there is not one phone number to contact

  • Pingback: Double Whammy: Mortgage Settlement Payments Will Be Taxed | Best Credit Repair()

  • allan besner

    I went through a lengthy mortgage modification process over 2 years! Through these years citi mortgage did almost everything this settlement was supposed to punish them for ! In the end I had to hire an outside firm to help me do what should have been a free service! I feel like I am owed at least 10,000 dollars the amount of money that I had to pay to get my mortgage modified. Not to mention the mental anguish the whole process put me through!

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team