Mortgage servicing foreclosure review faults subpar regulation

Cash payouts and foreclosure prevention fund based on "incomplete information"

The Government Accountability Office released the results of its study of the Independent Foreclosure Review, conducted by the Office of the Comptroller of the Currency and the Federal Reserve in 2011 and 2012, and the results show that the foreclosure process is lacking in oversight and transparency.

According to the GAO review, which can be read in full here, the OCC and Fed signed consent orders with 16 mortgage servicers in 2011 and 2012 that required the servicers to hire consultants to review foreclosure files for efforts and remediate harm to borrowers.

In 2013, regulators amended the consent orders for all but one servicer, ending the file reviews and requiring servicers to provide $3.9 billion in cash payments to about 4.4 million borrowers and $6 billion in foreclosure prevention actions, such as loan modifications. The list of impacted mortgage servicers can be found here, as well as any updates. It should be noted that the entire process faced controversy before, as critics called the IFR cumbersome and costly.

The GAO found that the $3.9 billion payment to the distressed borrowers was negotiated based on an incomplete review of the foreclosure process, and based on such factors as projected costs for completing the file reviews and estimated remediation payment amounts for borrowers.

The GAO evaluated the final cash payment amount and found that the negotiated amount “generally fell within a reasonable range.” The GAO report also said that the OCC and Fed “generally” met their goals for timeliness and amount of the cash payments and that by December 2013, cash payments of between $300 and $125,000 had been distributed to “most eligible borrowers.”

When it came to the $6 billion set aside for foreclosure prevention actions, the GAO found that the Fed and OCC did not define specific objectives for what was to be done with the money. Instead, the regulators negotiated with the servicers and identified broad objectives, including “that actions be meaningful and that borrowers be kept in their homes.”

The GAO found that the regulators did not analyze available data, such as servicers’ recent volume of foreclosure prevention actions and did not analyze various approaches by which servicers’ actions could be credited toward the total of $6 billion.

“Most servicers GAO spoke with said they anticipated they would be able to meet their obligation using their existing level of foreclosure prevention activity,” the report says. “In their oversight of the principles, OCC and the Federal Reserve are verifying servicers’ foreclosure prevention policies, but are not testing policy implementation.”

The GAO report also notes that most Fed foreclosure examination teams, which are designated to oversee the servicers’ foreclosure process and aid homeowners, have not begun their verification activities and that “the extent to which these activities will incorporate additional evaluation or testing of servicers’ implementation of the principles is unclear.”

The GAO cautions that without specific procedure, the regulators cannot assess the implementation of the foreclosure prevention principles established by the Independent Foreclosure Review and may “miss opportunities to protect borrowers.”

According to the GAO, the regulators have promoted transparency by publicly releasing information on the status on cash payments, but the GAO discovered a lack of transparency into the process on how the cash payouts were determined.

“According to regulators, borrowers could obtain information from other sources, such as the payment administrator, but information on how decisions were made is not available from these sources,” the GAO report states. “In the absence of information on the processes, regulators face risks to public confidence in the mortgage market, the restoration of which was one of the goals of the file review process.”

The GAO shared its findings with the OCC and the Fed and offered recommendations to address the weaknesses it identified. The GAO recommended that the OCC and Fed direct its examination teams take additional steps to evaluate and test the servicers’ implementation of the foreclosure prevention procedures.

The GAO also recommends that the OCC and Fed provide more information to the public about the cash payout process and the criteria used to determine the payouts.

The GAO report notes that the regulators responded to the report and “agreed to consider the recommendations.”

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