Homeowners who lost their homes due to botched foreclosures could finally start to receive compensation for their losses. It's all part of a settlement with lenders that started last year, yet government officials say the repayment system isn't working. So, regulators from a federal agency are reportedly now taking control of the situation.
Here’s how it all got started…
In February 2012, the federal government and 49 state attorneys general announced they had joined forces in a state-federal settlement with the five largest mortgage lending companies – Ally Financial, Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo. The agreement, known as the National Mortgage Settlement, came about after a government probe indicated that in 2009 and 2010, the five mentioned lenders had often cut corners on foreclosures, and were not always following the law. The $25 billion dollar settlement was designed to do accomplish five goals – compensate borrowers who lost their homes to foreclosures, forgive debt, give payment forbearances, arrange short sales, and refinance mortgages at lower rates.
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In return, the banks received limited protection from independent litigation.
The settlement also allowed any homeowner who felt that had unjustly lost their home in 2009 or 2010 to have a foreclosure review. As a result, the mortgage lending companies were forced to hire independent consultants who would review each case, and if the lender was found at fault, the homeowner would receive compensation. Federal regulators estimated that nearly 4.4 million borrowers qualified, and sent each of them letters explaining the review process, yet only 495,000 had applied for a review by the December 31st, 2012 deadline. Out of all of them, though, officials from the Office of the Comptroller of the Currency (OCC) said no borrowers have received compensation yet. That's why the OCC is reportedly taking control of the review and compensation settlement program.
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What happens next?
Although officials at the OCC are declining to comment at this time, many inside sources have linked information about the situation. Government insiders have told various news organizations that the OCC is set to replace the victim-by-victim compensation review program with $10 billion in flat penalties against the 14 largest mortgage lending servicers. In simple terms, the 14 lenders (including the five mentioned in the National Mortgage Settlement) could be instructed to pay lump-sum payments ranging from $500 to $125,000 to borrowers, depending on which improper practice or law was broken. In other words, a universally-accepted compensation scale would be created, and if it was determined that a lender broke a specific rule, they would have to pay an agreed upon flat-rate amount for breaking that rule to the borrower. The details are still being ironed out, including whether or not the independent consultants hired by the lenders will continue to conduct the reviews in the new system.
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At the same time, state attorneys general and federal authorities are continuing to press regional banks that also violated foreclosure laws to accept a settlement similar to the National Mortgage Settlement that was reached with the larger, nationwide lenders last year.
If that happens, even more money could be headed to borrowers who were unjustly removed from their homes due to violations of foreclosure laws.
All in all, lenders could end up paying billions of dollars for mistakes that were made by their employees during the housing market's collapse during the last four years.
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