WASHINGTON — Federal regulators have told the nation's largest lenders to review their foreclosure guidelines after evidence that shoddy and missing paperwork may be causing troubled borrowers to be evicted from their homes prematurely, if not illegally.
In addition to clogging up courts with a backlog of stalled foreclosure cases, the controversy has prompted legal action from state attorneys general, consumer advocacy groups and others who fear that consumers were shortchanged in court proceedings because of the faulty documents.
Since most homeowners facing foreclosure don't hire an attorney, the integrity of those documents is essential for a fair disposition in court, said Charles Delbaum, an attorney with the National Consumer Law Center in Boston.
He said that sloppy paperwork "increases the possibility of an error being made in foreclosure proceedings and therefore increases the risk of harm to the homeowner."
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At issue are sworn legal statements, or affidavits, filed by lenders that provide basic facts about a foreclosure case, such as the delinquent amount owed, location of the property and some terms of the mortgage agreement. The documents are important because, without them, lenders would have to prove the facts in court.
Lending officials who sign the affidavits supposedly verify their knowledge of the information they contain. In a deposition for a foreclosure case in Maine, however, an official with GMAC Mortgage testified that he didn't review the information in the case before signing the affidavit. Earlier this, GMAC was renamed Ally Financial Inc. The new company retained GMAC Mortgage as a subsidiary.
Jeffrey Stephan also said in the deposition that he signs similar foreclosure affidavits for Ally Financial throughout the nation, said Maine attorney Andrea Bopp Stark.
The disclosure seems to confirm what many consumer advocates have complained about in foreclosure cases during the Great Recession: sloppy, missing or questionable paperwork provided by lenders in their rush to evict borrowers.
Stephan's deposition caused a local judge to vacate a summary judgment for foreclosure in one case. Stark then used Stephan's deposition to try to thwart foreclosure proceedings against several of her own clients whose mortgages were serviced by GMAC.
Ally Financial responded last week by suspending foreclosures in 23 states that require a court order to seize a property.
Gina Proia, an Ally spokeswoman, said the procedures that led to the faulty affidavits are no more.
"That process has been fixed. It's no longer taking place," Proia said.
However, the problem prompted the Office of the Comptroller of the Currency to tell other large lenders — those responsible for the bulk of the nation's mortgage originations — to review and follow their foreclosure guidelines to make sure that borrowers' legal rights are respected.
Lenders contacted by agency include Bank of America, Citibank, HSBC, PNC Bank, U.S. Bank and Wells Fargo, said Kevin Mukri, an agency spokesman.
"Although the foreclosure process is a state matter, we're going to make sure that procedures are followed properly and correctly. We want all consumers treated with respect," Mukri said.
Wednesday, J.P. Morgan Chase suspended 56,000 foreclosure cases in the same 23 states as Ally because of similar paperwork problems.
"We have begun to systematically re-examine documents we have filed in current foreclosure proceedings to verify that the affidavits and other documents meet the standard of personal knowledge or review where that is required," a company statement read.
Thomas Kelly, a J.P. Morgan spokesman, said accuracy of the information in the affidavits wasn't affected by whether the signer knew the precise details of the case. The documents were actually prepared by "appropriate personnel with knowledge of the relevant facts based on their review of the company's books and records," the statement read.
Kelly said the company would provide updated affidavits as needed. It's asked local courts not to enter any judgments in pending cases until its review is completed in a few weeks.
On Friday, Maine attorneys Stark and Thomas Cox joined the Center for Responsible Lending and the National Consumer Law Center in seeking a class action lawsuit to stop pending foreclosures or foreclosure sales by GMAC Mortgage until its procedures and practices conform with state law.
The suit, filed on behalf of five Maine homeowners, could eventually have several hundred plaintiffs. The action seeks to reimburse affected homeowners for court costs stemming from foreclosures with faulty paperwork.
Earlier this week, Colorado's attorney general, John Suthers, called on Ally to extend its foreclosure moratorium to his state.
The consumer protection division for North Carolina's attorney general, Roy Cooper, is also investigating questionable tactics by Ally and GMAC Mortgage.
"Many North Carolina homeowners are struggling during these tough times to hold on to their homes," Cooper said. "I want to make sure that foreclosure actions by mortgage companies follow the law and give homeowners a fair chance to keep their homes."
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