While most of the headlines about abusive or half-baked foreclosure practices have focused on the huge retail banks — Wells Fargo, Bank of America, Citi, Chase, et al. — the big investment banks haven’t exactly been let off the hook.

Earlier today, the Federal Reserve announced a settlement — worth a total of $557 million — with Goldman Sachs and Morgan Stanley over allegations “for deficient practices in mortgage loan servicing and foreclosure processing.”

Specifically, the settlement involves allegations that Morgan Stanley’s Saxon Mortgage Services subsidiary and Goldman Sachs’ Litton Loan Servicing were just as involved in rubber-stamping foreclosure documents without any proper review or understanding of what they were signing.

Back in 2010, a Litton employee testified that she couldn’t define basic terms like “promissory note,” “mortgagee,” “lien,” “receiver,” or “defendant.” She also admitted that she didn’t know what the required conditions were for a bank to foreclose or who the holder of the mortgage note was.

“I don’t know the ins and outs of the loan, I just sign documents,” said the Litton employee at the time.

Last April, the man who had formerly headed Litton’s Executive Response Team called the company’s handling of foreclosures a “total disaster.”

In an interview, he said that faxed document were actually sent to a third-party company in India, which often misfiled or lost them, and that homeowners were frequently denied loan modifications because they hadn’t sent in paperwork, even though they had (a too-common complaint with all mortgage servicers in recent years).

He also discussed a process dubbed “denial sweep,” in which the Litton computers would automatically generate denial letters for every homeowner who hadn’t sent in documents, without checking if they had been lost or misplaced in the overseas office. He claimed that Litton management was only concerned about plowing through the pile of homes set to be foreclosed on.

Both Litton and Saxon have since been sold off to Ocwen Financial Corporation.

As for today’s settlement, $232 million is earmarked for direct payments to eligible borrowers while $325 million is to set aside for other assistance, such as loan modifications and forgiveness of deficiency judgments.

According to the Fed, more than 220,000 borrowers whose homes were in foreclosure in 2009 and 2010 with either Litton or Saxon will receive cash compensation under the agreement. The compensation for eligible borrowers will range anywhere from hundreds of dollars up to $125,000, depending on the type of possible servicer error.

Eligible borrowers are expected to be contacted by the payment agent by the end of March with payment details. As in many of the other settlements regarding foreclosure practices, accepting compensation in this settlement does not preclude the borrower from pursuing any legal claims they may have against their servicer.

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