Fed Report Finds No Wrongful Foreclosures By Banks, Consumer Advocates Slam Methodology

WASHINGTON, D.C. -- A months-long investigation into abusive mortgage practices by the Federal Reserve found no wrongful foreclosures, members of the Fed's Consumer Advisory Council said Thursday.

During a public meeting attended by Fed chairman Ben Bernanke and other regulators, consumer advocates on the panel criticized federal bank regulators for narrowly defining what constitutes a "wrongful foreclosure." At least one member of the panel voiced concerns that the public would not take the Fed's findings of improper practices seriously, since the wide-ranging review did not find a single homeowner who was wrongfully foreclosed upon.

The Fed's findings seem to support claims from the banking industry, which has admitted to sloppy practices but has maintained that the homeowners whose homes have been repossessed were substantially behind on their payments. The Fed's report has not been released to the public.

All 50 state attorneys general joined together last fall to probe banks' foreclosure practices after several companies halted home repossessions when improper paperwork practices -- like the so-called "robo-signing" scandal -- came to light. The law enforcement officers have said they've found banks violated numerous state laws. State and federal officials are considering a large-scale settlement with banks and mortgage servicers that could include penalties totaling up to $30 billion and requirements to modify more distressed mortgages.

The Fed's report will only further the disagreements between bank regulators, whose top priority is ensuring the safety and soundness of the banking system, and law enforcement officials, who are concerned with reportedly widespread violations of state and federal bankruptcy and consumer protection laws during foreclosures.

Kirsten Keefe, a member of the Fed consumer panel and an attorney at the Empire Justice Center in Albany, New York, said the Fed's report defined "wrongful foreclosures" as repossessions of borrowers' homes who were not significantly behind on their payments.

Based on that definition -- the homeowners were already in default -- the Fed found the foreclosures to be justified, members said.

But Keefe, who represents troubled borrowers, argued that the definition should be expanded to include foreclosures in which the wrong party brought the foreclosure action or cases that involve significant errors in foreclosure documents, like an inflated past-due amount, for example. Other consumer advocates at Thursday's public meeting appeared to agree.

Mary Tingerthal, the Fed council's vice chair and the commissioner of the Minnesota Housing Finance Agency, worried that the public would only pay attention to the report's "headline" finding, she said, which is that bank examiners did not find improper foreclosures. The Fed did find significant problems in banks' mortgage operations, she said.

The Fed reviewed just 500 loan files, said Rashmi Rangan, a member of the panel and the executive director of the Delaware Community Reinvestment Action Council.

Last year, foreclosure notices were filed on more than 3 million properties, according to data provider Realtytrac. More than one million homes were repossesed, a record. More than 11 million Americans currently owe more than their home is worth, according to CoreLogic, a real estate data provider.

"That homeowners were delinquent has never been our contention," Rangan said. "Our contention is that many of these foreclosures were avoidable."

Rangan said the report found numerous flaws in banks' procedures and internal mortgage operations, and that the Fed directed the firms to fix those problems. One firm was found to be using Microsoft DOS, an outdated computer operating system, to handle home mortgages, Rangan said. DOS was popular in the 1980s.

The Fed's Consumer Advisory Council meets every few months. Members of the panel were briefed on the report's findings on Wednesday.

Shahien Nasiripour is a business reporter for The Huffington Post. You can send him an e-mail; bookmark his page; subscribe to his RSS feed; follow him on Twitter; friend him on Facebook; become a fan; and/or get e-mail alerts when he reports the latest news. He can be reached at 646-274-2455.