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WASHINGTON—The Justice Department and other federal agencies have intensified their review of the banking industry's foreclosure documentation problems, using their powers over bankruptcy proceedings to scrutinize the treatment of troubled mortgages.
A key part of the effort is the Justice Department Trustee Program, the federal watchdog overseeing bankruptcies, which has launched a broad review of Chapter 13 bankruptcy filings by homeowners trying to halt foreclosure proceedings.
A U.S. official said Wednesday that 17 federal Trustee offices around the nation have recently stepped up efforts to scrub Chapter 13 filing documents, looking for documentation errors or improper practices such as inflated fees. Under Chapter 13 bankruptcy, a borrower seeks to halt foreclosure and comes up with a plan to catch up with their mortgage debt within five years.
Leading the federal response is Associate Attorney General Thomas Perrelli, the Justice Department's No. 3 official, who has been tapped to coordinate the efforts of multiple federal agencies, including the Treasury Department and the Securities and Exchange Commission, and also share information with state attorneys general.
The increased federal scrutiny puts more pressure on the banking industry, which is already dealing with probes by 50 state attorneys general into allegations of the improper use of "robo-signers" to foreclose on homes. The industry is also bracing for the results of a separate probe by the Federal Housing Administration, which is scrutinizing the way banks process mortgage payments.
The reviews could lead to the government requiring banks to overhaul the way they modify mortgages and handle foreclosures, according to government officials involved in the discussions. Under agreements with the states, banks could also have to establish settlement funds to compensate homeowners who have been hurt by foreclosure errors, these people said.
No decisions have been made and the reviews are still in their early stages, the officials familiar with the matter said.
The new effort comes after criticism from homeowner-rights groups and others who have said the federal government wasn't doing enough to address the document problems.
There have been varying assessments of the foreclosure-documentation problems. Many in the banking industry acknowledge paperwork mistakes, but say they mostly concerned homeowners who were in default on their loans and would have lost their homes anyway. Critics say the errors show how the banking industry hasn't given homeowners a chance to rework the terms of their loan.
Federal officials hold weekly conference calls to discuss new developments and are beginning to challenge arguments from the banking industry that an intrusive investigation could damage the housing market's recovery.
Treasury Department Assistant Secretary Michael Barr said Tuesday the federal review of foreclosures found "widespread" and "inexcusable" breakdowns in the process. "These problems must be fixed," he told the Financial Stability Oversight Council, a consortium of regulators.
Scrutiny by federal Trustees is focusing on two common problems found in Chapter 13 filings, according to the U.S. official. In Chapter 13 filings, mortgage servicers are required to file a "proof of claim" to show how much they are owed by borrowers.
Trustees officials are scrutinizing documents for signs that lenders aren't inflating their claim or aren't improperly trying to resume foreclosure proceedings against borrowers. Homeowners are required to continue to make mortgage payments as the bankruptcy court considers the filing.
Similar problems were at the root of a Trustees settlement with the former Countrywide Financial Corp., announced in June. The agreement was part of a $108 million settlement between Countrywide and the Federal Trade Commission. The FTC and the Trustees alleged that Countrywide collected excessive fees from borrowers who were using Chapter 13 to try to keep their homes.
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