WASHINGTON (Reuters) - Federal Reserve Governor Sarah Bloom Raskin on Saturday said the Fed must impose monetary penalties on banks who entered into an April agreement with regulators over how to fix problems in their mortgage servicing businesses.
“The Federal Reserve and other federal regulators must impose penalties for deficiencies that resulted in unsafe and unsound practices or violations of federal law,” Raskin said in remarks to the Association of American Law Schools. “The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties.”
Raskin did not say when the penalties will be announced.
She said that “appropriately sized” penalties would “incentivize mortgage servicers to incorporate strong programs to comply with laws when they build their business models.”
Mortgage servicers, many of which are large banks, collect home loan payments and manage issues like foreclosures.
The servicing issue burst into public view last year when government agencies began investigating bank mortgage practices, including the use of “robo-signers” to sign hundreds of unread foreclosure documents a day.
In April, 14 mortgage servicers, including Bank of America (BAC.N) and JPMorgan Chase (JPM.N), entered into a settlement with the Fed, the Office of the Comptroller of the Currency and the now defunct Office of Thrift Supervision on steps that have to be taken to correct and improve their servicing practices, such as providing borrowers with a single point of contact for questions.
As part of the agreement, these mortgage servicers have hired consultants to review foreclosures that took place in 2009 and 2010 to see if any were improper.
Regulators have said these reviews, which are ongoing, will help determine the size of any penalties the servicers will have to pay.
When asked by an audience member whether regulators may as part of the enforcement action seek to have banks reduce mortgage balances for some borrowers in an effort to keep them in their homes, Raskin said it is an option that should “stay on the table.”
“The notion of how we can bring principal reduction into an enforcement action I think is a good question and one that as we think through what remedies and tools that we have is one that should stay on the table,” she said.
Reducing borrowers’ principal has been controversial with critics charging it could create a “moral hazard” - the concept that rescue efforts breed further behavior that exacerbates the existing problem - prompting other borrowers to stop making timely loan payments.
Some consumer groups and congressional Democrats have criticized the use of consultants to do the “look-back” review of mortgage servicers, questioning how independent they will be since their core business is working with banks.
Regulators have defended the decision, saying the consultants, while hired by the banks, report to the agencies.
In her speech Raskin acknowledged the issue is “the subject of much debate” and said regulators would be able to “monitor and judge the completeness of the look-back.”
Democrats have also called for the agencies to publicly release the specifics of what the consultants find and servicers do in response.
On Saturday Raskin endorsed the idea of releasing information publicly but did not get into the specific details of what should be made available.
“The corrective actions that the mortgage servicers are undertaking pursuant to the enforcement actions in an appropriate format also need to be shared with the public,” she said.
Editing by Andrea Ricci