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Fed's Raskin: Servicers To Face Fines and Penalties

by devteam January 9th, 2012 | Share

Federal Reserve Board Governor SarahrnBloom Raskin told a law school group on Friday that the judicial morass arisingrnout of the mortgage crisis , “reflects profound and pervasive misconduct in mortgagernservicing.  It also calls for timelyrnpublic enforcement.” And, Raskin made clear, this enforcement will ultimatelyrninvolve monetary penalties against the parties who engaged in that misconduct. </p

Raskin,rnspeaking to at the Association of American Law Schools annual meeting on Creating and Implementing an EnforcementrnResponse to the Foreclosure Crisis said, “Toornmany of the practices in the mortgage servicing industry have been developedrnand defended solely on the basis of “standard industry practice.”   But many of these practices, she said, werernnot only standard, but shoddy and we are seeing courts reject many of them   </p

Significantrnresources are being consumed resolving the legal problems arising out ofrnmortgage servicing Raskin said, including those involving missing or forgedrndocumentation, illegal foreclosures, abuses against active-duty U.S. military,rninappropriate fees, and a range of other issues arising out of the MortgagernElectronic Registration System or MERS. rnThe abuses were not only those of mortgage servicers but the underwritingrnand secondary-market sides of the business as well.   “Significantly,”rnshe said, “the necessarily slow pace of a judicial response to these legalrnissues hinders the ability of the housing market to regain function and becomerna driver of a more-robust economic recovery.” </p

Therncourts are sorting out the mortgage servicing cases but the Federal Reserve andrnother regulators must create and implement an enforcement response.  Since 2010 there has been a targeted reviewrnof servicing problems at the 14 large federally regulated financial institutionsrnthat had significant concentrations of mortgage servicing  and regulators found significant problems inrnall 14.  These problems pose risks to thernsafety and soundness of institutions, and impair the functioning of mortgagernmarkets.  </p

LastrnApril the Federal Reserve, Office of Thrift Supervision, and the Office ofrnComptroller of the Currency issued various formal enforcement actions againstrnall 14 banking institutions with mortgage servicing operations.  These are cease and desist orders whichrnrequire corrective actions plans to address errors, implement practices tornprevent further abuses and address other significant mortgage servicing and foreclosure-governancernshortfalls.</p

But,rnRaskin said, monetary penalties for the deficient practices in mortgage loanrnservicing and foreclosure processing also must be imposed against the 14rninstitutions. The Federal Reserve and other federal regulators must act againstrndeficiencies that resulted in unsafe and unsound practices or violations ofrnfederal law, just as state banking commissioners and state attorneys generalrnimpose penalties for violations of state law. The Federal Reserve believesrnmonetary sanctions in these cases are appropriate and plans to announcernmonetary penalties. </p

Onernpurpose of monetary penalties, when they are appropriately sized, Raskin said,rnis to incentivize mortgage servicers to incorporate strong programs to complyrnwith laws when they build their business models.  What we think of as the rule of lawrnencompasses not merely theories of how laws are made and interpreted by courts.rnThe rule of law includes enforcement itself.  The rule of law also involves decisions aboutrnwhether there has been compliance, and if not, what should be done about it. </p

“The failure of timely enforcementrnleads to the entrenchment of bad practices and an increase in the costs ofrncorrection.”  For example, the longer itrntakes for mortgage servicers to make the operational adjustments necessary tornfix their sloppy and deceptive practices, the costlier and more difficult itrnbecomes for them to sort them out and correct them. </p

This is an operational purpose, butrnas mentioned earlier, monetary penalties also remind regulated institutionsrnthat non-compliance has real consequences. rnFinancial institutions need to understand that they are responsible forrnassessing the effects their actions will have on consumers and the country as arnwhole, and factor those considerations into their business decisions. We shouldrnnot forget that effective enforcement of our laws can animate our efforts asrnpolicymakers, regulators, business innovators, legal educators, and lawyers inrncreating the conditions that must exist for the emergence of an improvedrnmortgage-servicing model that hinders neither economic growth nor homeowners’ legalrnsecurity. If a law is worth having, the law is worth enforcing. </p

 A failure by regulators to enforce the lawsrnand regulations as strong antidotes to financial misconduct and unsafe andrnunsound practices by the institutions they regulate establishes de factornacquiescence to the dominant norms of the financial marketplace. At that point,rnour laws become the resting place for unfair practices and broad disrespect forrnthe law generally. .  In reference to a phrasernfrom Shakespeare’s Measure for Measure,</iRaskin said, "the law is not a scarecrow where the birds of prey can seekrnrefuge and perch to plan their next attack."

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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