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Traders at the Goldman Sachs booth on the floor of the New York Stock Exchange (Chris Hondros/Getty Images)
Traders at the Goldman Sachs booth on the floor of the New York Stock Exchange (Chris Hondros/Getty Images)

Fed orders Goldman to review mortgage practices Add to ...

The U.S. Federal Reserve ordered Goldman Sachs Group Inc. to hire a consultant to review practices of a former mortgage subsidiary on Thursday and said it plans to assess a monetary penalty for wrongful foreclosures.

The Fed’s crackdown sent Goldman shares down 3.5 per cent on Thursday, even as the bank announced that it had completed the sale of Litton Loan Servicing LP, the mortgage-servicing business at the heart of its foreclosure problems.

Litton’s regulatory troubles stem largely from the practice of “robo-signing,” in which bank employees signed foreclosure documents without reviewing case files as required by law.

Many large banks, including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc., have been targets of probes by state and federal regulators over the same issue, in the clean-up after a world financial crisis triggered in large part by bad mortgages in the United States and bonds backed by those loans.

The Fed cited “a pattern of misconduct and negligence” at Litton in announcing its enforcement action against Goldman.

An outside consultant will have to review all of Litton’s foreclosure activity in 2009 and 2010, to identify borrowers who suffered financial losses due to improper practices. Goldman will have to reimburse those customers and is also responsible for any fines that the Fed assesses after the review is complete.

Separately, Goldman also reached a foreclosure-practices pact on Thursday with New York Financial Services Superintendent Benjamin Lawsky, helping clear the way for the bank to sell the business to Ocwen Financial Corp. for $264-million (U.S.).

The bank agreed to forgive 25 per cent of principal balances for struggling homeowners who are 60 days past due on mortgage payments, at a cost of $53-million. Goldman will also compensate some Litton home loan borrowers for wrongful foreclosures at an indeterminate cost.

As part of the deal, Goldman, Litton and Ocwen all pledged to stop the robo-signing practice, institute new staffing and training requirements for employees handling foreclosures and withdraw pending foreclosure actions that are based on faulty paperwork. They also agreed to compensate borrowers for wrongful foreclosures and strengthen protections for homeowners in relation to late payment fees and insurance costs.

In return, Mr. Lawsky agreed to issue a “no objection” letter to the planned Litton-Ocwen transaction. But the agreement “does not preclude any future investigations of past practices or release any future claims or actions whatsoever,” the state agency said in a statement.

Goldman bought Litton in 2007 for $430-million, hoping to glean more information about the subprime mortgage market to help its trading business. But more recently, it has become a money-losing thorn in Goldman’s side.

The bank began considering a sale of Litton late last year, as the mortgage market continued to suffer losses and state and federal regulators began investigating industry-wide foreclosure problems. Goldman wrote down the value of the business by $220-million in the first quarter.

In a quarterly filing on Aug. 9, Goldman said Litton was facing probes by state attorneys general and banking regulators. A group of the nation’s largest banks are said to be working toward a settlement that could resolve some of those investigations and cost the industry billions of dollars.

Ocwen is now the 12th largest mortgage-servicer in the United States after having acquired Litton, a relatively small player that ranked 23rd in the industry.

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