The now defunct independent foreclosure reviews launched by federal regulators to detect mortgage servicing issues became tainted by a lack of clarity, transparency and consistency, the Government Accountability Office says in a new report.
Federal regulators finalized a multi-billion deal with more than a dozen mortgage servicing companies this year to compensate eligible borrowers harmed by the foreclosure crisis.
The objective of the settlement was to effectively replace the independent foreclosure review process with a one-time deal to compensate distressed homeowners.
Although the settlement proved to bode well, lawmakers have joined forces, demanding further transparency, documentation and information into the review process. And the GAO report seems to mirror some of the lawmakers concerns.
In fact, lawmakers called for the Government Accountability Office to examine the process, which led to the GAO's less-than-stellar conclusions on Thursday. One of the big issues raised about foreclosure reviews was the selection of contractors to assist in the process.
Congresswoman Maxine Waters. D-Calif., who was among those who requested the study, said she plans to introduce legislation to address the problem of relying on outside contractors for enforcement actions.
"The report confirms that the Independent Foreclosure Review process was poorly designed and executed," Waters said.
She added, "The GAO demonstrates that the projected error rates which were used to negotiate a settlement had littler bearing in fact. The report should serve as a wake-up call."
The foreclosure review process was ordered in 2011 by the Office of the Comptroller of the Currency and the Federal Reserve to compensate borrowers, some whom lost their homes through foreclosures as a result of poor documentation. This process was replaced by a $9.3 billion settlement with banks including JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC).
"Ultimately, the complexity of the foreclosure reviews and limitations in regulators’ guidance and monitoring of the foreclosure review challenged their ability to achieve the stated goals," the GAO report noted.
Additionally, "Other efforts related to guidance and monitoring may have exacerbated the challenges and complexities inherent in the process. In particular, existing guidance on sampling was ambiguous, leading to inconsistent sampling methodologies used by consultants, and did not include key oversight mechanisms to facilitate assessment of the extent to which consultants had identified as many harmed borrowers as possible."
With servicing issues continuing to be contentious, the California Reinvestment Coalition issued a statement, saying the organization believes banks are violating several consumer protections that were mandated by the $26 billion National Mortgage Settlement as well as the California Homeowners Bill of Rights.
"Client's requests are denied for missing documentation that has already been provided, and sometimes referred back to foreclosure without ever getting a return call from their single points of contract (SPOC)," said Cheyenne Martinez-Boyette of Mission Economic Development Agency. "The SPOC has been completely ineffective in creating a basic and fundamental avenue of communication between the servicer and their customer."
Third-party consultants and law firms told the GAO that the size of the loan files and the scope of the file review made the process 'complicated and time-consuming.'
For instance, some files contained as many as 50 documents, comprising more than 2,000 pages.
As a result of unclear foreclosure review guidance, third-party consultants had to use additional judgment and interpretation when applying certain guidance, which increased the risks of inconsistency among review results, the GAO report alleged.
Consultants also said that regulators would issue critical guidance throughout the review process and frequently update regulations, expanding the scope of the reviews, which contributed to delays, according to the agency's review of the data.
To potentially reduce the number of foreclosure errors that were hampered by poor planning from the regulators, the GAO has provided three recommendations to the OCC and the central bank.
The revisions include improving oversight of sampling methodologies and mechanism to produce better consistency and to identify and apply lessons from the foreclosure review process and development as well as implement a communication strategy to better ensure transparency.
"In commenting on the report, OCC and the Federal Reserve both identified actions that they have taken or planned to implement the recommendations," the report stated.