For all its tough talk, the Treasury can’t do jack to reign in lenders who are wrongfully denying home owners loan modifications. After seeing reports that some banks were basically modifying no loans at all, Treasury staffers huddled up to talk about withholding payments and levying fines on the baddest of the bunch. Unfortunately, they were told by their own lawyers that they don’t have that power. ProPublica reports, “staffers were walked back by Treasury lawyers, who said the government was only party to a commercial contract with servicers and not acting as their regulator.”

“At some point, Treasury needs to ask itself what value there is in a program under which not only participation, but also compliance with the rules, is voluntary,” said a new report (PDF) from the TARP’s (Trouble Asset Relief Program) special inspector general. “Treasury needs to recognize the failings of HAMP [Home Affordable Modification Program] and be willing to risk offending servicers. And if getting tough means risking servicer flight, so be it; the results could hardly be much worse.”

HAMP isn’t just hampered, it’s hamstrung, and it’s the Treasury doing the stringing. The department now says that only when the servicer has given a modification incorrectly and taken a payment can the department withhold incentives or take back payments.

But that view strikes law experts and consumer advocates as being overly narrow to , who question the Treasury’s timidity. Check out the ProPublica investigation for a more in-depth look at why.

Govt’s Loan Mod Program Crippled by Lax Oversight and Deference to Bank [Pro Publica]
SIGTARP Quarterly Report to Congress, January 26, 2011 (PDF) [SIGTARP.gov]

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