Many large US banks are scaling back their mortgage-collection operations, once-lucrative businesses that face heightened scrutiny as the new consumer finance regulator vows to step up its oversight of the industry.

The Consumer Financial Protection Bureau, created last year as part of the Dodd-Frank overhaul of US financial regulation, will make the supervision of mortgage servicers, which collect payments and handle foreclosures, one of its top priorities, said Raj Date, a CFPB official.

The increased oversight is likely to lead to higher compliance costs, experts said, as the agency seeks to prevent abuses, such as lenders’ use of “robosigners”, agents who process foreclosure filings en masse without examining the underlying paperwork.

“The mortgage servicing market has been bogged down by widespread reports of pervasive and profound consumer protection problems,” Mr Date said. “We are going to take a close and measured look at whether servicers are following the law.”

Bank earnings reports last month showed that three of the four biggest home loan servicers by volume had reduced the number of contracts they handled, which also reflects the increasing cost of collecting payments from distressed borrowers and pursuing foreclosures.

Bank of America cut its portfolio by 8 per cent year on year and promised to shed more home loans. JPMorgan decreased the number of contracts it handles for investors by 9 per cent, while Citigroup reduced its portfolio of third-party mortgages by 19 per cent. Only Wells Fargo increased the number of mortgage contracts it services for others.

Tim Sloan, Wells chief financial officer, said the lender’s mortgage division would continue to expand.

“You have to step back and decide: ‘Well, do you want to be in the mortgage business today?’” Mr Sloan said.

As Wells grabs market share, it will face a regulator that promises to pay special attention to areas ignored by its predecessors, consumer advocates said. Federal regulators previously focused on banks’ income from mortgage servicing, as opposed to their treatment of borrowers, according to a 2010 audit by the US Government Accountability Office.

By comparison, CFPB examiners will interview borrowers who allege they have been harmed by their mortgage servicers, according to the agency’s supervision manual released last month. Examiners will also probe whether foreclosure documents match internal records and whether servicers have proper documentation to pursue home seizures.

“This is a new day and age for the banks,” said Kathleen Day, spokeswoman for the non-profit Center for Responsible Lending. Mortgage servicers, she said, “finally have to follow the rule of law when confiscating people’s property”.

In promising to examine loan files and interview borrowers, the CFPB is “pushing the envelope as much as they can”, said Alys Cohen, an attorney at the National Consumer Law Center who previously worked for the US Federal Trade Commission’s consumer protection unit.

The enhanced oversight will come at a cost to servicers, which until the financial crisis earned steady income processing payments and distributed proceeds to investors. Close examination by regulators “will create additional challenges that will result in further disruptions to normal servicing practices”, Moody’s Investors Service said in a report. Analysts said servicers’ expenses would rise as a result.

Already, costs for servicers have been driven up by record defaults and increased scrutiny of their operations. JPMorgan’s servicing unit has recorded losses, excluding interest-rate hedges, in each of the past four quarters totalling $2.3bn.

Bank of America, used to collecting steady payments from reliable homeowners, employed about 10,000 workers at the end of 2008 to handle delinquent borrowers, according to a March presentation for investors.

Flooded by a surge of delinquencies, it failed to keep pace with the rising demands placed by distressed borrowers, regulators have said.

Under fire from regulators for sloppy practices, it now devotes 42,000 employees to this task.

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