Banks prodded to improve mortgage servicing

The nation's leading banks continue to fall short in servicing consumer home loans despite last year's national settlement that was intended to fix problems laid bare by the foreclosure crisis.

A monitor appointed to oversee how banks treat home loan customers, especially those at risk of foreclosure, said Wednesday that new tests were needed to "better hold" the banks accountable.

Of chief concern? When banks can pursue foreclosures against homeowners seeking home loan modifications.

The new tests will address "persistent issues" with loan modifications, billing statement inaccuracies and banks' failure to designate a single point of contact for borrowers to talk to, says Joseph Smith, the monitor overseeing the $25 billion settlement among servicers and state and federal regulators.

Separately, the five largest servicers agreed to new procedures to reduce multiple requests for documents and miscommunications with borrowers.

The announcements were made the same day that New York Attorney General Eric Schneiderman sued Wells Fargo, alleging that it continued to subject New York homeowners to "Kafkaesque delays and obstructions" in the home loan modification process, according to the suit filed in federal court in Washington, D.C.

Schneiderman had warned in May that it would sue Wells Fargo and Bank of America if they didn't improve servicing standards. BofA agreed to make changes, averting a lawsuit.

Wells Fargo, in response to the suit, says it has already taken steps to make the changes sought by New York and that a "collaborative approach — not protracted litigation" would offer the best path to improvement.

The lawsuit and new tests stem from dissatisfaction with the banks' performance under the national mortgage settlement.

In a June compliance report, Smith noted that a common problem found among mortgage servicers was their failure to notify homeowners of missing documents in loan modification requests within five days of receipt.

In Ju! ly, the Massachusetts attorney general also told Smith in a letter of its "significant concern" with loan modification processes. Attorneys general in Florida and Illinois have also expressed concerns that settlement terms weren't being met.

"We're still seeing many of the same problems with servicing," says Ira Rheingold, executive director of the National Association of Consumer Advocates. "They still can't get it right."

The New York lawsuit cites some homeowner experiences. In one case, Wells Fargo allegedly made "repeated demands" for information from a homeowner seeking a loan modification, even though most of it had been provided with the original application. The same homeowner allegedly was required to provide a "letter of explanation" about a $2 amount listed on one pay stub.

In other cases, Wells' demands for documents were "cryptic and confusing," the lawsuit alleges.

BofA, meanwhile, avoided a lawsuit by agreeing to make changes, including redesigning its "missing documents" letter to make sure that it communicates clearly with borrowers.

BofA has "done the right thing," Schneiderman says, while Wells "probably has more trouble with consumers than anybody else."

The national mortgage settlement resulted after a 2010 probe by state and federal regulators revealed widespread foreclosure-process abuses. In addition to BofA and Wells Fargo, others in the settlement are Citigroup, JPMorgan Chase and ResCap Parties.