Time to Pay the Piper? Large Banks May Face Big Fines For Mortgage Practices

by:    Michael L. Rich

Several large banks – including Bank of America, Wells Fargo and Citigroup – warned investors on February 25, 2011 that they could face sizable financial penalties as a result of state and federal investigations into abusive mortgage practices.  These disclosures follow a furor in recent months over how residential foreclosures were being conducted.

Up until now, the fallout has mostly threatened to blemish the reputations of these big banks.  Now, it appears more may be at stake.  The disclosures, made in the banks’ annual financial filings with the Securities and Exchange Commission, suggest that serious financial consequences may be in store.


In the Fall of 2010, state attorneys general and federal regulators began scrutinizing certain servicers’ practices after widespread reports of foreclosures being pursued despite lost or missing documents, bank employees signing off on thousands of pages of paperwork a month after only cursory review or no personal knowledge (coined as “robo-signing”), and even instances of banks mistakenly pursuing homeowners who should not have been threatened with foreclosure.

The current environment of heightened regulatory review and widespread media coverage has the potential to subject certain of these banks to even more scrutiny that could significantly adversely affect not only their reputations but also their bottom line.  The latest disclosures suggest increased prospects for material fines, penalties, equitable remedies (including requiring default servicing or other process changes), other potential enforcement actions, and resulting legal costs.  Wells Fargo, for example, said in its filing that it was “likely that one or more of the government agencies will initiate some type of enforcement action,” including possible “civil money penalties.”

Since last fall, a task force of federal bank regulators have been reviewing the foreclosure practices and internal controls of the 14 largest mortgage servicers.  The examination already has revealed a range of sloppy practices of these servicers, ranging from inadequate staffing, lax oversight of outside law firms and other vendors engaged to assist with the foreclosure process, and errors with documentation.  Various corrective actions have already been ordered, and more seem likely to follow, both at the federal and state level.

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