Mortgages: US bank suspends repossessions; Calif asks all lenders to do same

It all looks almost like the USA's banks are getting civic minded in their old age. But it's not quite that simple. The banks are not withdrawing the actions or surrendering any rights. They are dealing with a problem that is, in part, due to the unforeseen effects of the repeal of the Glass-Steagal Act and the bringing into force of the Gramm-Leach-Bliley Act.

Since Gramm-Leach-Bliley, banks have been free to do business across the USA, either by forming a single national bank with branches in multiple states or making sales from a single point.

These banks are federally regulated. And so they pay attention to federal law and regulation.

But in the case of consumer borrowing, that is an area of regulation reserved to the States. Indeed, it is that which caused much of the problems in the recent negotiations over the development of new federal regulation: the states were not willing to give up their consumer protection measures.

And now the banks are finding that operating in multiple states means multiple sets of consumer protection law - and in relation to repossession, there are significant differences.

In California, Attorney Edmund Brown says " California law prohibits lenders from recording notices of default on mortgages made between January 1, 2003 and December 31, 2007, unless, subject to limited exceptions, the lender contacts or tries diligently to contact the borrower to determine eligibility for a loan modification. A notice of default must include a declaration of compliance with California law."

The situation in California is being made clear by Brown's office - and it is obvious that there are widespread problems across the whole USA. "JP Morgan Chase, the nation's third largest loan servicer, Ally Financial and One West have admitted that employees approved and signed foreclosure documents without first fully reviewing the borrowers' loan files. As a result, those borrowers lost their homes based on affidavits the bank never confirmed were accurate.

That the situation goes well beyond California is emphasised by Brown's office: "Ally Financial and JP Morgan have suspended foreclosures in 23 other states that, unlike California, require a court order for foreclosures. "

Now the problem arises as to who actually regulates the behaviour of the banks: They may have done nothing wrong under Federal law so Federal regulators may have no locus standi. But they are not regulated by the states so the state regulators are similarly handicapped.

That leave the prospect of civil court actions by borrowers who have lost as a result of wrongly formatted actions and possible criminal prosecution as the only available remedies.

Many would say that that is just how it should be.

But what is equally likely is that there will be class actions: these will not sue merely for actual loss. They will claim fraud and as a result, they will claim exemplary or other penalty damages.

Those claims will be settled on a nuisance basis.

And that will affect balance sheets and shareholder value.

And it's all because, again, banks have not been properly managed and compliance has been pushed into a back seat in the pursuit of business.