Had the country's biggest banks worked in good faith with struggling homeowners under a mortgage modification program, the foreclosure crisis would have been sharply curtailed. But instead of giving homeowners fair consideration under the federal program, too many big banks served their own interests. Bank of America, the largest loan servicer in the program, sabotaged the modification effort by financially rewarding employees for foreclosing on homes and deceiving homeowners, according to a lawsuit. Relief was refused to thousands of people who should have qualified, leading to unnecessary suffering and dislocation. Federal regulators should have done a better job policing the banks. The financial sector will not do what is right on its own.
Former employees of Bank of America say its practices were designed to defeat modifications under the government's Home Affordable Modification Program, the main federal program for helping homeowners avoid foreclosure by providing incentive pay to mortgage servicers to modify loans. Six former bank employees and one contractor, including former managers and rank-and-file workers, say that twice a month the bank used a procedure called a "blitz" to deny between 600 and 1,500 modifications to clear older files, regardless of the merits. To cover the bank's improper actions, they allege, the bank had employees justify denials with blatant falsehoods, such as claiming that the homeowner failed to submit required documentation.
Former bank collectors said they were rewarded for denying applications and moving homeowners into foreclosure with financial bonuses of $500 or gift cards to restaurants or retail stores. Bank of America claims all the former employee statements, which are part of a Boston-based federal class-action suit brought on behalf of homeowners, are full of inaccuracies.
But a study late last year by the Federal Reserve Bank of Chicago and other major financial regulation and academic institutions supports the allegation that many big bank mortgage servicing operations were woefully disorganized and understaffed, resulting in about 800,000 qualified homeowners being denied modifications under the program. According to the online investigative media outlet Pro Publica, which has been tracking problems in the loan modification program, Bank of America was much slower to modify loans than other big banks, many of which had slow loan servicing because they didn't invest in those departments.
Bank of America is also the focus of a warning letter from Florida Attorney General Pam Bondi earlier this month accusing the bank of delays and other noncompliance issues in mortgage modifications under the terms of the $25 billion national mortgage settlement.
Aggressive government oversight is an essential component of consumer protection. But in the cases of Bank of America and other large banks that participated in the loan modification program, regulators failed to ensure that the program worked as intended.