WASHINGTON A multi-bank settlement with regulators over past foreclosure abuses ran into new problems when some borrowers received smaller checks than they should have, the Federal Reserve said on Wednesday.
Some 4.2 million people are receiving checks as part of the deal mortgage servicers reached with the Office of the Comptroller of the Currency (OCC) and the Fed to settle allegations they improperly foreclosed on borrowers and made other processing mistakes during the U.S. housing crisis.
The amounts of the checks were determined based on rubrics approved by regulators. But the Fed said it became aware on Tuesday that some consumers whose loans were serviced by units of Goldman Sachs or Morgan Stanley had received checks for less than they amount they should have received.
About 96,000 people received the wrong amounts, the Fed said.
Rust Consulting, the firm chosen to manage the checks, will send an additional payment to those borrowers on May 17, the Fed said. The error was first reported by the New York Times.
"This is the worst settlement I have seen in my life, and it should be reopened," Representative Elijah Cummings, a Maryland Democrat, said in a statement.
He and other lawmakers have severely criticized the settlement, which they say is not transparent and has been plagued with errors.
Regulators ordered the servicers to conduct case-by-case reviews of loan files for borrowers whose homes were in foreclosure in 2009 and 2010 after banks admitted to "robosigning" documents and other servicing mistakes that led them to improperly seize some people's homes.
But that process proved time-consuming and expensive, with the banks paying about $2 billion in fees to outside consultants that were hired to conduct the reviews.
So regulators called off the reviews and reached a $9.3 billion settlement with servicers including units of Bank of America Corp (BAC.N), Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N), and Wells Fargo & Co (WFC.N). About $3.6 billion was to go toward cash payments to borrowers.
Borrowers are supposed to be compensated based on a dozen categories meant to assess where they were in the foreclosure process.
Two banks, Morgan Stanley (MS.N) and Goldman Sachs (GS.N), entered into separate settlements and agreed to pay more to some borrowers whose loans were serviced by units those two banks used to own but have since sold.
New checks from Rust Consulting will make up the difference between what those people should have received and what was in their original checks, the Fed said.
"The Federal Reserve will continue to closely monitor the payment agreement and Rust's work in distributing checks under the agreement," the regulator said.
In a statement, Rust Consulting blamed the problem on a clerical error and said it had corrected the mistake and plans to mail The supplemental checks soon.
This is not the first mistake reported in connection with the foreclosure review checks. The Fed said in April that some borrowers had trouble cashing their checks, but those problems were said to be fixed.
As of the close of business on Tuesday, about 2.1 million checks had been cashed totaling $1.9 billion, the OCC said.
(Reporting By Emily Stephenson and Aruna Viswanatha; Editing by David Gregorio)