Sarbanes-Oxley May Leave Bank Execs Legally Vulnerable

The housing crisis may now get as personal for bank executives as it has for individual homeowners.

As the foreclosure document scandal reaches the "material weakness" level for the largest banks, attorneys representing foreclosed borrowers want to hold servicing executives personally liable for overseeing processes such as robo-signing, in which some employees rubber-stamped foreclosure affidavits without verifying the information.

At issue is how the big banks' internal audit and Sarbanes-Oxley controls failed to catch such systemic problems, mortgage executives and risk management experts contend.

"Yes, there was material weakness and the proof is material losses," said David C. Stephens , chief financial officer and chief operating officer at United Capital Markets, a Greenwood Village, Colo., firm that provides hedging services on mortgage servicing rights. "The question then becomes, 'Is anyone that signed off on Sarbanes-Oxley responsible?'"

Servicing executives were required by the Treasury Department to sign Sarbanes-Oxley-type agreements by Sept. 30 certifying they were in compliance with the Making Home Affordable Program. Some servicing executives initially balked at signing personal requirements akin to the Sarbanes-Oxley Act of 2002, which required that executives take personal responsibility for the accuracy and completeness of a company's financial statements.

The agreements make it a federal crime to provide false or misleading information to Fannie Mae or Freddie Mac.

While the issue of robo-signing foreclosure documents is not addressed specifically in the 17-page servicer participation agreement, it does state that the "servicer is in material compliance with, and certifies that all services have been materially performed in compliance with all applicable federal, state and local laws, regulations, regulatory guidance, statutes, ordinances codes and requirements."

Some mortgage experts and lawyers say servicers now face the risk of lawsuits brought under the False Claims Act if they certified that their own internal servicing processes were in compliance with applicable law.

"There is a legal obligation to deal in good faith with the borrower," said Matthew Weidner , a Tampa, Fla., attorney who represents hundreds of borrowers.

"In addition to Sarbanes-Oxley, they had an obligation in the pooling and servicing agreements to do proper default servicing before a borrower even got to foreclosure."

Laurence Platt , a partner in the financial services group at K&L Gates in Washington, said servicers have acknowledged problems with some of their processes, but it would still be difficult for borrowers to prove that those processes led to an improper foreclosure.

"There might have been a breakdown in procedures, but there was not an intent to proceed or to foreclose on borrowers," Platt said. "These are overworked people just trying to keep up with mountains of paperwork, trying to comply with their requirements."

Peter Swire , a law professor at Ohio State University and a former special assistant to the president for economic policy, said most servicers still fail to recognize that problems with foreclosure documentation have risen to the level of being a "material weakness."