Connecticut Attorney General Richard Blumenthal on Monday accused Ally of using "defective foreclosure documents" in its filings and said he ordered the moratorium "to forestall horrendous, illegal harm against homeowners." California Attorney General Edmund G. Brown Jr. on Friday called Ally's document review process a "sham."
In Illinois, Attorney General Lisa Madigan said she "wants to see Ally stop the filing of foreclosures in Illinois as well until this situation can be remedied," a spokeswoman said.
Iowa, North Carolina and Texas have also opened investigations into Ally's lending practices as well as those at other large mortgage companies, officials said.
The announcement by California is especially significant because it had previously been thought to be unaffected. Last week, Ally announced it would halt evictions in 23 states where a court order is needed to evict a homeowner. California - as well as Virginia, Maryland and the District - was not included on that list.
The actions taken by state officials are illuminating an overburdened foreclosure system that relied on shoddy or fabricated paperwork to deal with the massive pile of cases.
Now criminal and civil inquires are widening to other major companies who might have engaged in similar conduct.
"This has the potential to be an industry-wide issue," said Patrick Madigan, an assistant attorney general in Iowa who is chairman of a national foreclosure prevention group that includes law enforcement officials and bank regulators, among others.
The moves by California and Connecticut come a week after Ally said it found a "technical" problem with documents it submitted in support of foreclosures across the country.
An employee of Ally's GMAC mortgage unit, Jeffrey Stephan, admitted in sworn depositions that he signed off on 10,000 foreclosure documents a month without reviewing them. Hundreds of other mortgage companies, including Fannie Mae and Freddie Mac, used Ally's processing services. Many of these firms say they are conducting internal investigations of their foreclosure processes.
Beyond the Stephan case, homeowner attorneys and consumer advocates are uncovering other examples of questionable practices - forged signatures, faked documents and confusion among lenders over who has ownership of a loan.
The problems drew the attention of Capitol Hill on Monday.
House Financial Services Committee Chairman Barney Frank (D-Mass.) vowed to "take steps to make sure these practices stop."
"These practices are reprehensible and any bank or mortgage lender engaged in them should end them immediately. . . . And they are particularly unacceptable when they are engaged in by institutions in which the government is a shareholder, including Ally, Fannie and Freddie," Frank's spokesman, Tom Kiley, said.
Rep. Alan Grayson (D-Fla.), who has been spearheading efforts to help distressed homeowners in Florida, one of the hardest hit states, called for an end to illegal foreclosures.
"Big banks and Wall Street have contracted out document fraud to the lowest bidder. The average court hearing takes something like 90 seconds, and the documents used by the bank to foreclose are often forged or fraudulent," Grayson said.
Ally, the nation's fourth-largest mortgage lender, is majority owned by the Treasury Department after it saved the firm with a $17 billion bailout. It has said in previous statements that "preserving the integrity of the foreclosure process is of the utmost importance" and that it is "confident that the processing errors did not result in any inappropriate foreclosures.
Spokesman James Olecki declined to comment Monday on the pending litigation.
Treasury spokesman Mark Paustenbach said the agency has "discussed the current situation with GMAC and expect them to take prompt action to correct any errors."
While legal experts consider some of the problems as merely technical, others argue that the practices by lenders are giving homeowners the grounds to challenge their foreclosures.
Philip A. Lehman, an assistant attorney general in North Carolina, warned Ally Monday in a letter that the "use of unverified affidavits to obtain judicial relief could constitute a fraud upon the court."
Ally confirmed Sept. 20 that it had initiated a temporary moratorium on evictions and sales of repossessed homes in 23 states, including Connecticut. The announcement by Connecticut officials Monday expanded that moratorium to all foreclosure proceedings.
The District of Columbia and 27 other states were not included in Ally's moratorium. But The Washington Post reported Friday that Stephan had also signed off on foreclosure files in the other 27 states and that in those places documents are surfacing that appear to be forged or faulty.
California represents a significant amount of Ally's business. In the first half of 2010, the state's mortgages accounted for nearly a quarter of the $26 billion in home loans that Ally originated.