May 26, 2011 / 12:52 AM / 8 years ago

UPDATE 2-NY Fed probing Goldman mortgage servicing unit

* Probe of mortgage servicing unit Litton Loan Servicing

* Fed says in possession of letter by Litton employee (Adds comment from NY Fed, details from co’s 10-Q, background)

May 25 (Reuters) - The Federal Reserve Bank of New York is investigating whether Goldman Sachs’ (GS.N) mortgage servicing arm did not conduct proper reviews before denying borrowers the option to lower their payments under a government loan modification programme.

In its quarterly filing with the SEC earlier this month, Goldman said regulators had sought information on the foreclosure and servicing protocols and activities of its mortgage servicing unit Litton Loan Servicing.

“We are in possession of the letter and are conducting an inquiry,” a NY Fed spokesperson told Reuters, referring to a letter from a Litton employee sent to the NY Fed by the Financial Times. A spokesperson for Goldman Sachs declined to comment when contacted by Reuters.

Houston, Texas-based Litton had denied loans modification to borrowers without appropriate review under a “denial sweep” strategy in order to clear a backlog of applications, FT reported.

Goldman had said in the filing that is cooperating with the regulators’ requests and reviewing Litton’s practices, adding that inquiries could result in the “imposition of fines or other regulatory action.”

Earlier this year, Goldman said it was looking at selling Litton and is reportedly in talks with Ocwen Financial Corp (OCN.N) for the sale. [ID:nN20198642]

Goldman had bought Litton in 2007 for about $430 million, hoping to glean more information about the housing market to aid its mortgage-bond trading business. Shortly after the deal closed, the subprime housing market fell into shambles.

Last week, it was reported that Goldman expects to be served subpoenas from U.S. prosecutors seeking more information about the firm’s mortgage-related business. [ID:nN19156251]

FT said Litton had denied modification of loans that met the criteria for a government modification, citing a person familiar with the unit.

The paper said loans were denied modification on account of missing documents, even though Litton’s computer system reflected receipt of the necessary paperwork.

At other times, the Goldman unit denied loan modifications as Litton employees made mistakes in how they calculated the borrower’s income.

Litton was unavailable for comment outside regular business hours.

Goldman Sachs shares closed at $136.24 on Wednesday on the New York Stock Exchange.

Reporting by Himank Sharma, Siddharth Cavale and Abhiram Nandkumar in Bangalore; Editing by Lisa Shumaker, Phil Berlowitz

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