Series: Foreclosure Crisis How Banks and Government Fail Homeowners

Federal regulators say they're going to crack down after finding "critical deficiencies" with how banks and mortgage servicers have been handling struggling homeowners. But it's an open question just what form a punishment will take, with one regulator reportedly pushing lighter penalties than the others.

In prepared testimony before Congress today, John Walsh, the head of the Office of the Comptroller of the Currency, which oversees the nation's largest banks, said banks and servicers had violated state and federal laws, regulations and rules in rushing to foreclose on homeowners.

Banking regulators launched their review after the robo-signing scandal erupted, but it also includes how servicers have been handling homeowners' loan modification applications.

In his testimony today, Walsh says regulators are in "in the process of finalizing actions that will incorporate appropriate remedial requirements and sanctions." But just what that means isn't clear.

Both The Wall Street Journal and Huffington Post reported this morning that the OCC wants to go easier on the banks than other regulators, specifically the FDIC. The OCC has proposed "relatively modest fines," reports the Journal. It's not clear what would be considered "modest" for a bank the size of Bank of America, the largest servicer, and one with a poor track record.

In his testimony Walsh said some servicers are worse than others, and the penalties will be tailored accordingly. It's also unclear when regulators will decide what the punishments should be.

As we've reported, the administrations' mortgage modification program has faltered in part because it relied on the banks' voluntary participation. Servicers violated the program's rules with no consequences. The Treasury Department has said it's powerless to punish servicers. But federal regulators like the Federal Reserve, OCC and FDIC have clear authority to punish banks for violating laws.

There are signs in Walsh's testimony of the OCC's more favorable views toward servicers. A review of about 2,800 homeowner foreclosure cases, he's careful to say, found that servicers had indeed been "in contact with troubled borrowers and had considered loss mitigation alternatives, including loan modifications." Only a "small number of foreclosure sales" were illegitimate, he said. The people in foreclosure were actually delinquent.

What Walsh's analysis misses is the possibility that homeowners fell behind because of their servicer's errors. For example, homeowners have been pushed into delinquency after the servicer wrongly told them that to be considered for a modification they should miss payments.

In recent months, OCC officials have defended their oversight of servicers in testimony before Congress. In December, the OCC's chief counsel Julie Williams testified that over the past several years, the OCC had issued "numerous 'Matters Requiring Attention,' requiring improvements in servicers' loan modification operations and increased staffing." A "Matter Requiring Attention" is essentially a stern letter from the regulator that can result in an enforcement action if the bank doesn't fix the problem. The continued problems with servicers are evidence the OCC's actions fell far short of what was needed.