Federal Reserve Investigating Banks' Foreclosure Practices

The Federal Reserve will take an "in-depth" look at the way major mortgage lenders have handled foreclosures, to make sure they are being conducted properly.

Fed Chairman Ben Bernanke announced the investigation in remarks prepared for delivery to a group in Virginia today.

"We are looking intensively at the firms' policies, procedures, and internal controls related to foreclosures and seeking to determine whether systematic weaknesses are leading to improper foreclosures," Bernanke said. "We take violations of proper procedures seriously."

Bernanke said he expects regulators to have a preliminary report on their findings sometime next month. At issue is the way affidavits accompanying foreclosure paperwork have been handled. Court depositions have revealed that, in many cases, lenders did not follow the law in the way the the documents were signed and notarized.

States already investigating

The announcement of the Fed investigation follows action by all 50 state attorneys general, who have announced they are jointing probing the banks. On October 13 the attorneys general and dozens of state banking regulators are mounting a multi-state effort to demand that lenders find solutions to serious and potentially widespread problems in the foreclosure process across the country.

"While California continues its own vigorous efforts to ensure that homeowners facing foreclosure are treated fairly and lawfully," California Attorney General Jerry Brown said. "We are now working together with other attorneys general and regulators to seek solutions that reach across state lines to protect all borrowers at risk of losing their homes in this foreclosure crisis." 

The group will investigate whether individual mortgage servicers have improperly submitted documents in support of foreclosures.

Specifically, the group will investigate whether companies misrepresented on affidavits and other documents that they reviewed and verified supporting foreclosure documentation. The group will also attempt to determine whether companies also signed affidavits outside the presence of a notary public, along with other possible issues regarding servicing irregularities or abuses.

Legal action

Ohio Attorney General Richard Cordray has gone one step further, filing suit against one servicer, GMAC Mortgage.

"We know that as Ohioans were fighting to save their homes, this loan servicer benefited financially from the dire circumstances," Cordray said when he filed the suit October 6.. "Instead of stepping up and assisting those at risk of losing their homes, it is clear that GMAC chose to compound the problem through fraudulent and unfair and deceptive practices."

According to the lawsuit, GMAC and its employees committed fraud on Ohio consumers and Ohio courts by signing and filing hundreds of false affidavits in foreclosure cases. The fraud came to light after a GMAC employee, Jefferey Stephan of Sellersville, Pa., testified in a foreclosure case out of Maine that from 2006 to 2010, he signed thousands of affidavits without verifying the content.

Through the lawsuit, Cordray is asking the court to grant a preliminary and permanent injunction preventing GMAC/Ally from proceeding to foreclose in any pending Ohio case or allowing the property to be sold. Cordray is also asking for civil penalties of up to $25,000 for every violation of Ohio's Consumer Sales Practices Act and for consumer restitution.