Federal Reserve Board Governor Sarah Bloom Raskin told a law school group on Friday that the judicial morass arising out of the mortgage crisis , "reflects profound and pervasive misconduct in mortgage servicing.  It also calls for timely public enforcement." And, Raskin made clear, this enforcement will ultimately involve monetary penalties against the parties who engaged in that misconduct.

Raskin, speaking to at the Association of American Law Schools annual meeting on Creating and Implementing an Enforcement Response to the Foreclosure Crisis said, "Too many of the practices in the mortgage servicing industry have been developed and defended solely on the basis of "standard industry practice."   But many of these practices, she said, were not only standard, but shoddy and we are seeing courts reject many of them   

Significant resources are being consumed resolving the legal problems arising out of mortgage servicing Raskin said, including those involving missing or forged documentation, illegal foreclosures, abuses against active-duty U.S. military, inappropriate fees, and a range of other issues arising out of the Mortgage Electronic Registration System or MERS.  The abuses were not only those of mortgage servicers but the underwriting and secondary-market sides of the business as well.   "Significantly," she said, "the necessarily slow pace of a judicial response to these legal issues hinders the ability of the housing market to regain function and become a driver of a more-robust economic recovery."

The courts are sorting out the mortgage servicing cases but the Federal Reserve and other regulators must create and implement an enforcement response.  Since 2010 there has been a targeted review of servicing problems at the 14 large federally regulated financial institutions that had significant concentrations of mortgage servicing  and regulators found significant problems in all 14.  These problems pose risks to the safety and soundness of institutions, and impair the functioning of mortgage markets. 

Last April the Federal Reserve, Office of Thrift Supervision, and the Office of Comptroller of the Currency issued various formal enforcement actions against all 14 banking institutions with mortgage servicing operations.  These are cease and desist orders which require corrective actions plans to address errors, implement practices to prevent further abuses and address other significant mortgage servicing and foreclosure-governance shortfalls.

But, Raskin said, monetary penalties for the deficient practices in mortgage loan servicing and foreclosure processing also must be imposed against the 14 institutions. The Federal Reserve and other federal regulators must act against deficiencies that resulted in unsafe and unsound practices or violations of federal law, just as state banking commissioners and state attorneys general impose penalties for violations of state law. The Federal Reserve believes monetary sanctions in these cases are appropriate and plans to announce monetary penalties.

One purpose of monetary penalties, when they are appropriately sized, Raskin said, is to incentivize mortgage servicers to incorporate strong programs to comply with laws when they build their business models.  What we think of as the rule of law encompasses not merely theories of how laws are made and interpreted by courts. The rule of law includes enforcement itself.  The rule of law also involves decisions about whether there has been compliance, and if not, what should be done about it.

"The failure of timely enforcement leads to the entrenchment of bad practices and an increase in the costs of correction."  For example, the longer it takes for mortgage servicers to make the operational adjustments necessary to fix their sloppy and deceptive practices, the costlier and more difficult it becomes for them to sort them out and correct them.

This is an operational purpose, but as mentioned earlier, monetary penalties also remind regulated institutions that non-compliance has real consequences.  Financial institutions need to understand that they are responsible for assessing the effects their actions will have on consumers and the country as a whole, and factor those considerations into their business decisions. We should not forget that effective enforcement of our laws can animate our efforts as policymakers, regulators, business innovators, legal educators, and lawyers in creating the conditions that must exist for the emergence of an improved mortgage-servicing model that hinders neither economic growth nor homeowners' legal security. If a law is worth having, the law is worth enforcing.

 A failure by regulators to enforce the laws and regulations as strong antidotes to financial misconduct and unsafe and unsound practices by the institutions they regulate establishes de facto acquiescence to the dominant norms of the financial marketplace. At that point, our laws become the resting place for unfair practices and broad disrespect for the law generally. .  In reference to a phrase from Shakespeare's Measure for Measure, Raskin said, "the law is not a scarecrow where the birds of prey can seek refuge and perch to plan their next attack."