U.S. banks face a serious risk of litigation and damage to their reputations if a key aspect of a settlement with bank regulators over foreclosure abuses is not credibly enforced, Federal Deposit Insurance Corp. Chairman Sheila Bair said on Thursday.
On Wednesday, bank regulators announced that 14 large housing lenders had agreed to overhaul their mortgage operations and compensate borrowers who were wrongly foreclosed upon.
Under the agreement, these mortgage servicers will have to hire an outside consultant to review foreclosure actions that took place between January 2009 and December 2010.
Where problems are found, banks must compensate these borrowers for financial damages they suffered.
"Frankly, as the insurer of these institutions, the litigation and reputational risk, we think, is significant so it is very important that that process has some credibility and integrity," Bair told the National Community Reinvestment Coalition's annual conference.
Borrowers who were harmed must receive help, she added.
Bank of America Corp., Wells Fargo & Co., JPMorgan Chase and Citigroup Inc. are among the 14 financial institutions and service providers that settled with the Office of the Comptroller of the Currency, the Federal Reserve and the Office of Thrift Supervision.
Bair said her agency would have a limited role in enforcing the settlement, but the FDIC will make its views on the review process known to banks and other regulators.
Critics of the plan have said it is not clear how the reviews will work and what type of problems will result in the banks' making payments to borrowers who were wrongly foreclosed upon.
"You have an outside reviewer chosen by the bank reviewing things under an uncertain standard and then also deciding what the harm was," Georgetown University law professor Adam Levitin, who has been critical of the mortgage industry and its record-keeping, said in an interview on Wednesday.
Under the agreement, banks will have to choose an outside consultant that is "acceptable" to the regulators.
Acting OCC head John Walsh told reporters on Wednesday that his agency would be looking closely over banks' shoulders while the reviews are carried out.
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