By ALAN ZIBEL And IAN TALLEY
WASHINGTON—The Federal Reserve on Tuesday ordered Morgan Stanley MS -2.75%to review thousands of foreclosures conducted by a mortgage-servicing unit it sold this year and said it would levy fines against the investment bank.
The consent order requires Morgan Stanley to hire an independent consultant to review foreclosures handled by the firm's former Saxon Mortgage Services unit between 2009 and 2010. It adds to a list of mortgage-servicing firms that U.S. bank regulators have ordered to overhaul their mortgage-servicing operations and compensate borrowers who were harmed.
Last October, Morgan Stanley agreed to sell Saxon to Ocwen Financial Corp.,OCN -1.01% ending the investment bank's foray into subprime-mortgage servicing. That deal closed Monday.
Saxon was the 34th-largest loan servicer in the U.S., collecting payments on more than 225,000 home loans, the Fed said. Saxon processed more than 60,000 foreclosures in 2009 and 2010. Morgan Stanley declined to comment.
The Fed alleged that Saxon employees filed numerous foreclosure documents without personally verifying their contents and filed in courts mortgage documents that were not properly notarized and, in response to the surge of foreclosures, failed to devote enough resources to handle homeowners' requests for help on their mortgages.
The Fed said in a statement that the Morgan Stanley review is intended to "provide remediation to borrowers who suffered financial injury as a result of wrongful foreclosures or other deficiencies identified in a review of the foreclosure process."
Morgan Stanley has already agreed to pay for any civil financial penalties bank regulators may assess against the Saxon unit, the central bank said. The Fed has not disclosed the size of any penalties.
The Fed's agreement with Saxon is similar to one reached last year with Goldman Sachs Group Inc., GS -2.03% which also sold its Litton Loan Servicing business to Ocwen.
A year ago, the Fed and the Office of the Comptroller of the Currency ordered 14 large mortgage-servicing companies to hire independent consultants to review foreclosures and overhaul foreclosure practices. Consumers who suffered "financial injury" could be in line for compensation after the consultants review homeowners' cases.
The nation's mortgage-servicing companies have been under federal and state scrutiny since revelations emerged in fall 2010 that banks used "robo-signers" to file foreclosure documents without personally verifying their contents.
Federal and state officials earlier this year reached a $25 billion settlement of foreclosure-abuse allegations with the nation's five largest mortgage-servicing firms:Bank of America Corp., BAC -2.38% Wells Fargo WFC -0.43% & Co., J.P. Morgan Chase JPM -1.85% & Co., Citigroup Inc. C -1.89% and Ally Financial Inc. As part of the state-federal settlement, the Fed announced $766.5 million in fines against the five large banks.
Suzanne Killian, senior associate director of the Fed's division of consumer and community affairs, said last month that eight more institutions will be fined. The Fed did not disclose the size of the new fines.
—Brett Philbin contributed to this article.Write to Alan Zibel at alan.zibel@dowjones.com and Ian Talley atian.talley@dowjones.com
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