New York City Comptroller John C. Liu, on behalf of the trustees of the New York City Pension Funds, is calling on directors at Bank of America Corporation, Wells Fargo & Company, JPMorgan Chase and Citigroup to conduct an independent audit of their banks’ mortgage and foreclosure practices. The four banks are among the largest mortgage servicers in the country representing 56 percent of the nation’s $10.64 trillion mortgage industry.
Comptroller Liu—the investment advisor, custodian and trustee of the New York City Pension Funds, collectively valued at $106 billion—made the request in a shareholder proposal filed at each of the four banks. The proposal calls for the Audit Committee of the Board of Directors at each bank to conduct an independent review of the bank’s internal controls related to loan modifications, foreclosures and securitizations and to report their findings to shareholders by Sept. 30, 2011.
“We raised concerns with the banks in July that misaligned incentives, inferior customer service and repeated requests for paperwork were undermining the loan modification process and leading to unnecessary foreclosures for homeowners,” Comptroller Liu said. “The magnitude of these problems suggests a larger systemic failure with consequences that have not only adversely affected homeowners and become a drain on regional economies, but also left shareholders vulnerable to substantial liabilities."
Under both New York Stock Exchange (NYSE) listing requirements and the banks’ own governance documents, the Audit Committee of the respective boards—typically comprised of independent directors—is ultimately responsible for legal and regulatory compliance.
The shareholder proposal states that when the Boards of Directors report back to shareholders, the report should specifically address:
►Policies and procedures to address potential financial incentives to foreclose when other options may be more consistent with the Company’s long-term interests;
►Whether management has allocated a sufficient number of trained staff; and
►The company’s compliance with applicable laws and regulations, and its own policies and procedures.
The shareholder proposal was recently submitted to the banks and is scheduled to appear on proxy statements to be voted upon at each bank’s annual shareholder meeting between April and May 2011.
“Directors are elected by shareholders and as shareholders we intend to hold them accountable,” Comptroller Liu said. “The banks are under intensive legal and regulatory scrutiny and the independent directors are ultimately responsible for compliance. It’s time they step forward and reassure shareholders that the banks’ internal controls are robust.”
In response to reports of widespread irregularities at a number of large banks, including missing or faulty documentation, all 50 state attorneys generals launched a coordinated investigation into how lenders verified foreclosure documents. Numerous federal agencies are also reviewing bank foreclosure practices. While federal and state officials have focused on flawed foreclosures, an even bigger risk is that faulty paperwork will allow mortgage investors to force banks to repurchase troubled loans the banks had bundled and sold.
Goldman Sachs estimated the four banks face potential losses of $26 billion.
For more information, visit www.comptroller.nyc.gov.
