96,000 borrowers shortchanged in mortgage settlement

bank settlements

Checks meant to compensate mortgage borrowers who fell victim to foreclosure abuses have finally started arriving in mailboxes -- but many of the checks have come up short.

Due to a processing error, 96,000 borrowers received checks for less than what they were owed under a settlement reached between the government and 13 mortgage servicers, the Federal Reserve said.

Under the terms of the settlement, 4.2 million borrowers who went through foreclosure proceedings during 2009 and 2010 are eligible for checks of between $300 and $125,000, for a total of $3.6 billion in payments.

The list of abuses include foreclosing on borrowers when they were in the process of modifying their mortgages; repossessing homes of borrowers who were supposed to be protected by bankruptcy law; and foreclosing on active duty service members, among other things.

Related: Hardest hit foreclosure neighborhoods

The deficient payments were sent to borrowers with mortgages serviced by former subsidiaries of Goldman Sachs and Morgan Stanley. The two firms, which had signed onto the settlement a few months after the original 11 lenders had first reached the deal, had agreed to pay higher sums to borrowers.

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But Rust Consulting, the company handling the issuance of the checks, applied the same compensation schedule to the clients of Goldman Sachs and Morgan Stanley as it did to those of the other banks, resulting in the shortfalls, according to David Holland, an executive vice president at Rust Consulting.

"The servicers gave us the lists of borrowers and the categories of [foreclosure abuse]. We misapplied the payment amount for the Goldman Sachs and Morgan Stanley borrowers," he said.

The company did not provide specifics, but the differences in the payouts could be significant. For example, Goldman Sachs and Morgan Stanley agreed to pay $38,750 to borrowers who were wrongfully foreclosed on when they were supposed to be protected by federal bankruptcy law, while the other banks agreed to pay $31,250 to such borrowers -- a $7,500 difference. Under the settlement, 108 borrowers were entitled to these higher payments from Goldman Sachs and Morgan Stanley.

Related: Payments coming for borrowers in $3.6 billion foreclosure settlement

Most of the 96,000 people who received the deficient checks, however, were slated to get much smaller amounts than that. Almost 42,000 of Goldman Sachs' and Morgan Stanley's clients were scheduled to receive $1,300 because their mortgage servicer ignored their request to modify their mortgage. That's $300 more than the other lenders agreed to pay borrowers for the same offense.

Rust Consulting's Holland did not break down how many checks were short for each category nor did they provide an average dollar amount for the shortfalls or a total.

The company announced Thursday that they had corrected the errors and would send out new checks to make up the difference starting as soon as May 17. The company said it gained nothing financially from the mistake.

This is not the first bump in the settlement's road. Some early recipients of settlement payments took the checks to check-cashing stores and had trouble cashing them. Holland said no more than 20 out of 2.1 million settlement checks that were cashed as of May 9th were denied.

"No checks were ever returned for insufficient funds," he said.

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