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Banks Fail Seven Servicing Compliance Tests, but Pass Most Benchmarks

The country's largest mortgage servicers passed most of the tests enacted to ensure they are following recommended servicing guidelines, but three out of the five institutions still failed on several different tested metrics.

The latest report from the National Mortgage Servicing Settlement Monitor prompted the Department of Housing and Urban Development to issue a warning to servicers who failed.

It’s important to note that two of the big servicing shops passed all of the underlying tests – Wells Fargo and the parties dealing with ResCap's servicing settlement. However, despite 29 different benchmarks being used, not all of the metrics are tested each time. Servicers were only evaluated on the factors tested in the most recent period.

"The Independent Monitor’s ongoing work is playing a vital role in our work to reform the servicing industry and hold it accountable for how they treat homeowners," said HUD Secretary Shaun Donovan. "While today’s report shows the National Mortgage Settlement’s compliance structure is identifying abuses and rectifying problems for consumers, it’s clear that these financial institutions still need to improve in a number of areas."

Donovan cited two key areas of weakness—the servicers sending of notices and their strength in communicating to struggling homeowners.

The HUD Secretary said he expects these issues to be resolved in the next series of reports or servicers will face "severe penalties."

The servicers tested include Bank of America (BAC), Chase (JPM), Citi (C), Wells Fargo (WFC) and parties tied to ResCap.

Despite some of the largest servicers failing on seven key metrics – five of which were mentioned in past reports – a closer look shows individually the banks are passing a majority of the tests issued.

Bank of America, for example, passed on 29 key metrics, but failed when it was measured on loan modification document collection timelines, pre-foreclosure initiation and its handling of motions for relief from stay.

The good news is Bank of America is passing on some of the key servicing issues that prompted the national settlement. The company passed the test which looks at the practice of dual-tracking and is solid when it comes to its short-sale decision timelines and force-placed insurance timelines.

Chase, on the other hand, failed on its pre-foreclosure initiations and fell short on complying with timelines when making loan modification decisions. Still, the company passed 27 other tests.

The Citi results mirrored the others in that it failed only two tests – one of which is dealing with pre-foreclosure initiations. The bank also failed in complying with short-sale documentation collection timelines.

The parties dealing with servicing issues tied to ResCap, a lender that went through a bankruptcy reorganization, passed all 29 key metrics. Wells Fargo also received passing grades across the board.

"My team and I tested the banks’ compliance with the National Mortgage Settlement’s original 29 metrics for the first half of this year," said Joseph Smith, monitor of the National Mortgage Settlement. "My testing confirmed six fails in the first quarter of 2013 and one in the second quarter of 2013. The banks are all taking action to address the failures through detailed corrective action plans."

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