When homeowners discovered that an account that was supposed to compensate them for foreclosure abuses lacked sufficient funds to cash their checks, the consulting firm at the center of the mishap promised that the problem was fixed and that the checks were valid.
But three weeks later, that promise fell short.
This time, according to officials briefed on the matter, the consulting firm, Rust, issued a raft of checks with wrong amounts. The mistake, officials said, cheated struggling homeowners out of thousands of dollars.
Federal authorities are now ordering Rust to fix its mistake, the officials said, though the problems continued as of Wednesday afternoon.
Rust did not immediately return calls for comment.
The incident once again cast a harsh spotlight on Rust. Despite a mixed track record, it was selected as the distributor of checks as part of a $3.6 billion settlement deal between federal regulators and the nation’s largest banks. The settlement deal, struck in January, came after regulators accused the 13 lenders, including JPMorgan Chase and Bank of America, of wrongful evictions, bungled loan modifications and other abuses.
The continued problems at Rust raise questions about the government’s oversight of the firmâ€" and the wisdom of hiring it in the first place. With more than three dozen government contracts to its name, and its own political action committee spreading campaign donations across Washington, the Minnesota-based firm has become a favored middleman for class-action lawsuits and government settlements.
When at least one bank suggested an alternative consulting firm for the foreclosure settlement, regulators balked, according to people briefed on the matter. The regulators instead suggested that the banks hire Rust.
But problems emerged soon after the settlement was announced in January. The consulting firm, officials said, delayed the checks for weeks as it struggled to gear up for the payments. Once Rust issued the first round of checks in April, it failed to move money into the bank account used for the settlement, preventing some homeowners from cashing their checks, according to a report in The New York Times.
More recently, homeowners have complained about clerical errors at Rust, problems like sending checks to the wrong addresses and issuing checks to deceased borrowers.
Norma Gammon, 54, said she thought things couldn’t get much worse after her home in Evansville, Ind., was sold at foreclosure auction in June. But then she started dealing with Rust. After contacting Rust at least six times to update her address, Ms. Gammon said, she learned that the firm sent the check to her foreclosed property. To receive another payment, Ms. Gammon has to fill out a new form. But Rust says the form has been sent three times, apparently to the wrong address.
“It’s so frustrating that I just want to cry,†she said.
The firm’s latest mistake â€" sending out checks in the wrong amounts â€" could also prove difficult to remedy.
The problem stems from last week, when Rust issued checks to customers of Morgan Stanley and Goldman Sachs. Unlike the other banks involved in the settlement, Goldman and Morgan’s foreclosures were not part of a long independent assessment by outside auditors. As such, the banks agreed to pay some of its customers an extra sum.
But Rust, according to the officials briefed on the matter, failed to follow Goldman and Morgan’s payout plan. Instead, it issued checks to Morgan and Goldman customers based on a metric adopted by the 11 other banks.
The misstep deprived the homeowners of thousands of dollars. For example, some customers in bankruptcy who were evicted wrongfully deserved $4,650. But they received $3,750 instead.
It is unclear how many of the 220,000 Morgan Stanley and Goldman Sachs customers received the wrong amount. But one person briefed on the matter described the problem as “huge.†It most likely affected every borrower who was entitled to more money under the Goldman and Morgan plan.
Regulators detected the problem on Tuesday, when a concerned borrower called the Federal Reserve to complain, according to a person briefed on the matter. Since then, the Fed has ordered Rust to devise a solution “fast,†the person briefed on the matter said, adding that the Fed expected to announce a resolution to the problem soon.
Regulators have also noted that many consumers have had no trouble cashing their checks. By the end of Tuesday, regulators say, homeowners successfully cashed or deposited about two million checks, or slightly more than half of the total checks issued.
Still, that leaves nearly two million people who have either delayed cashing the check or have had problems doing so. Cynthia Singerman, a staff lawyer with Housing and Economic Rights Advocates, said that some of the problems morph from seemingly simple clerical fixes into a persistent problem for struggling homeowners. One of Ms. Singerman’s clients whose home in Pleasanton, Calif., is in foreclosure, can’t cash the $1,000 check she received from Rust on April 12. The problem, Ms. Singerman said, is that the check is made out to the homeowner’s husband, who died more than three years ago.
