Background

In September 2010, allegations surfaced that several servicers’  documents accompanying judicial foreclosures may have been  inappropriately signed or notarized. In response to this and other  servicing issues, federal banking regulators conducted a coordinated on- site review of 14 of the largest mortgage servicers to evaluate the  adequacy of the controls over servicers’ foreclosure processes and  assess servicers’ policies and procedures for compliance with applicable  federal and state laws. On the basis of their findings, the regulators  issued the April 2011 consent orders against these servicers that required   In  the servicers to conduct the foreclosure review, among other things.January 2013, OCC and the Federal Reserve reached agreements with  11 of the 14 mortgage servicing companies subject to the April 2011  consent orders to discontinue the foreclosure reviews and to provide  approximately $3.4 billion in direct payments to eligible borrowers. These  agreements were formalized in amended consent orders that the  regulators released in late February 2013. As shown in table 1, with this  change from the foreclosure review to an agreed-upon payment process,  regulators and servicers shifted from identifying the types and extent of  harm borrowers may have experienced to instead focus on assigning all  eligible borrowers into categories based on objective criteria. In addition,  under the amended consent orders, the servicers also will provide  approximately $5.4 billion in foreclosure prevention assistance to  borrowers, such as loan modifications. Consultants for the servicers that  did not reach agreements with the regulators continue their foreclosure  review activities.

	Complexities of the Foreclosure Review Process and Limitations in Regulators’ Guidance and Monitoring May Have Hindered Achievement of Goals

Complexity of the file reviews, overly broad guidance, and limited  monitoring for consistency may have impeded the ability of OCC and the  Federal Reserve to achieve the goals of the foreclosure review. These  goals were to ensure similar results for similarly situated borrowers,  identify as many harmed borrowers as possible, and restore public  confidence in the mortgage market. According to regulator staff and third- party consultants, coordinating the foreclosure review process was  challenging because of the large number of actors and borrowers eligible  for review, the size of the loan files, and the scope of the file reviews. In  addition, each servicer had a unique process for recording and storing  information on borrowers’ loan files, which made defining review  parameters and developing a uniform review structure that was  appropriate for all consultants challenging.
Regulators took a number of oversight steps to address the complexities  and challenges, including issuing nearly identical sections of the consent  orders outlining the purpose of the foreclosure reviews, providing third- party consultants with guidance to help frame the file review process, and  implementing regular communication mechanisms among the key actors  to help foster consistency in the reviews. However, broad guidance and  limited monitoring for consistency reduced the potential usefulness of  information being collected and increased risks of inconsistency.  According to third-party consultants, regulators’ guidance did not address  certain aspects of the foreclosure review, and consultants had to use  additional judgment and interpretation when applying certain guidance,  increasing the risk of inconsistency among review results. Third-party  consultants and their respective law firms we interviewed said that they  each developed their own test questions based on analyses of state  foreclosure laws, loan modification guidelines, and bank policies, among  other references. According to OCC staff, the state law references were  fairly straightforward and they had confidence that the consultants and  law firms would provide fairly consistent interpretations. However,  according to third-party consultants and law firms we interviewed,  compiling these references and using them to develop review questions  was challenging and time consuming and, in some cases, required  judgment or interpretation of the laws or guidelines.
See GAO/GGD/AIMD-99-69 and GAO/GGD-96-118. needing to re-do file reviews, which would have led to delays in  remediation.
Other guidance issued by regulators did not specify key sampling  parameters for the file reviews, and regulators lacked objective monitoring  measures, resulting in difficulty assessing the extent of borrower harm.  For example, our analysis of the May 2011 guidance on sampling found  that the guidance was ambiguous about a key sampling parameter that  resulted in variations in sample sizes used by the consultants and led  consultants to use different triggers to determine when to conduct  additional analysis. This ambiguity could have produced inconsistent  results for similarly situated borrowers. According to OCC staff, they  recognized that some consultants had not fully implemented the sampling  approach as expected, and OCC is taking steps to address these  differences for one of the servicers continuing the foreclosure review. In  addition, our analysis found that the May 2011 guidance did not include a  discussion of regulators’ expectations for reporting on sampling, and  variations among the sampling plans would have limited the types of  information that regulators could report.
Finally, the regulators’ sampling approach did not include key oversight  mechanisms to facilitate assessment of whether consultants’ reviews  were sufficient to realize the goal of identifying as many harmed  borrowers as possible, except in those cases where there were few or no  errors. The OMB standards for statistical surveys state that where  sampling is used, it should include protocols to monitor activities and  provide information on the quality of the analyzed data. Good planning  and objective data collection provide a basis for making sound  conclusions. In the absence of objective measures to compare review  methods among consultants or assess sampling, regulators did not have  an early warning mechanism to help identify problem areas that may have  hindered achievement of the foreclosure review goals.

	Limited Communication Hindered Transparency for Individual Borrowers and the General Public

OCC and the Federal Reserve acknowledged the importance of  transparency in the foreclosure review process and publicly released  more information than is typically disclosed in connection with a consent  order. For example, regulators released redacted engagement letters  between servicers and third-party consultants and the remediation  framework for consultants to use that provided examples of situations in  which compensation or other remediation is required for financial injury  due to servicer errors, misrepresentations, or other deficiencies.  However, the absence of useful and timely communications at certain  stages of the process—for the general public as well as individual  borrowers—hindered transparency and public confidence in the  processes and results.
Some stakeholders perceived gaps in key information about how the file  reviews were being conducted. Regulators did not release any additional  guidance documents, nor did they publicly disclose consultants’ test  questions. To increase the transparency and credibility of the foreclosure  review, consumer groups recommended that regulators release such  information. According to consumer groups, without such information, the  public would have questions and doubts about how the reviews were  being executed. OCC and the Federal Reserve staff said that they  considered releasing additional guidance to the public, but both  expressed concerns that releasing detailed information risked disclosure  of confidential or proprietary information. Moreover, test questions  developed by consultants were numerous and complex, and Federal  Reserve staff stated that review processes were too dissimilar to provide  a comprehensive summary.
Borrowers who requested reviews under the foreclosure review process  initially received limited information about the status of their individual file  review. Borrowers received a letter acknowledging their request was  received, but some did not receive updates until almost a year after the  outreach program was first launched, when they received a letter  informing them of the continuing nature of the review. In letters to OCC  and the Federal Reserve, consumer groups indicated that these  borrowers were frustrated by the lack of information on their particular file  review. Regulators indicated that additional status letters and information  would be sent to borrowers with outstanding requests-for-review.  However, regulators were still uncertain about specific information they  would require servicers to share with both borrowers who would receive  remediation and those who would not. Regulators have acknowledged  the importance of transparency, but after announcing the agreements that  led to the amended consent orders, they had not yet determined what  information to convey beyond that which was included in their press  releases and public websites and whether additional information would be  provided to borrowers who submitted a request-for-review.
During the foreclosure review process, OCC released two interim reports  that provided the public with information on the organization and conduct  of the file review process and preliminary results, such as the number of  requests-for-review received, for institutions it supervises. These reports,  according to OCC, were intended to build transparency into the process.  The Federal Reserve did not issue interim reports on the foreclosure  review process for institutions it supervised. According to Federal  Reserve staff, they did not do so because their public release of servicers’  action plans provided sufficient information about how servicers were  addressing the requirements of the consent orders and their public  release of servicers’ engagement letters provided sufficient information  about how the foreclosure review would be conducted. Prior to the  announcement of the agreements that led to the amended consent orders  and ended the foreclosure review for most servicers, OCC staff told us  they had planned to release a final report on the results of the foreclosure  review, and Federal Reserve staff indicated they expect to publish  additional relevant information related to the foreclosure review and the  agreements. However, as of February 2013, regulators had not decided  what information on the work conducted under the foreclosure review  prior to the agreements will be made available.

	The Foreclosure Review Experience Could Offer Lessons for the Amended Consent Order Activities and Continuing Reviews

The foreclosure review revealed three key lessons related to planning,  monitoring, and communication that could help inform regulators’  implementation of the amended consent orders and the continuing  foreclosure reviews. These key lessons could help contribute to an  effective process for distributing direct payments and other assistance as  prescribed by the amended consent orders. Based on the foreclosure  review experience, we found that (1) designing project features during the  process’s initial stages influences the efficiency of file reviews, (2)  monitoring progress helps ensure achievement of goals, and (3)  promoting transparency enhances public confidence.
Our prior work shows that assessing and using lessons learned from  previous experiences can provide a powerful method of ensuring that  beneficial information is factored into the planning and work processes of  future activities. Key practices of assessing lessons learned include  collecting and analyzing information on prior activities and applying that  information to future activities. Assessing lessons learned by using project  critiques and discussions with key participants and stakeholders—such  as local examination team staff, third-party consultants and law firms, and  external groups—could identify the root causes of strengths and  weaknesses of the foreclosure review that could apply to the amended  consent order activities.
The foreclosure review experience suggests that a planning process to  determine key project features, such as guidance and necessary data  elements, for activities conducted under the amended consent orders  could lessen the risk of changes to planned activities, future delays, or  rework. Our work on designing evaluations, including financial audits, has  found that systematic and comprehensive planning enhances the quality,  credibility, and usefulness of the results and contributes to a more  effective use of time and resources. As regulators prepare to implement the amended consent orders, they risk having to make changes in the  planned activities or publicly announced timelines if they miss  opportunities to make key project planning decisions, including issuing  clear guidance.
The foreclosure review experience also suggests that using mechanisms  to monitor the amended consent order activities and the continuing  foreclosure reviews may help ensure achievement of goals. The  regulators’ process for monitoring the activities of third-party consultants,  servicers, and examination teams during the foreclosure review process  could provide a useful model for monitoring activities under the amended  consent orders. In addition, regulators’ experience with the foreclosure  review suggests that identifying comparative oversight mechanisms to  centrally promote consistency and monitor activities under the amended  consent orders could help achieve consistent results for borrowers.  GAO’s internal control standards state that agencies should take steps to  comprehensively identify and analyze program operations to determine if  risks exist to achieving goals—such as risks to the regulators’ goal of  providing similar results for similarly situated borrowers. In our prior  work, we found that using a horizontal review mechanism is an option to  help mitigate risks of inconsistent results for activities conducted by   Using mechanisms to  multiple entities, such as multiple servicers.centrally monitor the consistency of servicers’ activities under the  amended consent orders may lessen the risk of inconsistent results or  delays in providing direct payments to borrowers. Similarly, monitoring  potential inconsistencies for the servicers that are continuing the  foreclosure reviews will provide regulators with information to assess  whether there is a risk of those borrowers being treated inconsistently.
Finally, lessons from the foreclosure review activities conducted to date  suggest that developing and implementing an effective communication  strategy that includes public reporting goals could enhance the  transparency of the activities under the amended consent orders. GAO’s  internal control standards emphasize the importance of relevant, reliable,  and timely communications both within an organization and with external  stakeholders. In addition, our work on the Troubled Asset Relief  Program (TARP) has underscored the importance of a communication  strategy to strengthen communication with external stakeholders and  improve transparency and accountability. Experiences with current  government initiatives that are aimed at assisting struggling homeowners  and involve institutions and mortgage-related issues similar to those of  the foreclosure review highlight the benefits of regular performance  reporting. Specifically, periodic reports on the performance of and  participation in TARP programs and scheduled reports on servicers’  compliance with requirements of the National Mortgage Settlement are  intended to promote transparency and build public confidence. Like  TARP and the National Mortgage Settlement, the foreclosure review and  the subsequent activities under the amended consent orders are part of  the larger governmental response to the housing and mortgage crises. As  a result, a communication strategy which incorporates plans for periodic  public reporting may enhance transparency in the distribution of direct  payments and other assistance and help restore confidence in mortgage  markets.
Regulators announced the agreements that led to the amended consent  orders without a clear communication strategy. As a result, what  information will be provided to individual borrowers and the general public  about processes, progress, and results of activities under the amended  consent orders is unclear. OCC and the Federal Reserve have provided  some information on the amended consent orders, and planned to  release additional information, such as details on payment categories that  were publicly released in April 2013. However, we found that as of March  2013, regulators had not made key decisions on communicating directly  with individual borrowers and the extent to which they would report on  activities related to the amended consent orders and continuing  foreclosure reviews. While the amended consent orders terminate the  foreclosure review for most of the servicers, transparency of past and  current efforts continues to be important to stakeholders, including  Congress and consumer groups. In the absence of a clear  communication strategy to direct external communications, including  public reporting and direct communication with individual borrowers,  regulators face risks to transparency and public confidence similar to  those experienced in the foreclosure review process.
In our March 2013 report, we recommended that OCC and the Federal  Reserve improve oversight of sampling and identify and apply lessons  from the foreclosure review process, such as enhancing planning and  monitoring activities, to better ensure that the goals of the foreclosure  review and amended consent orders are realized. In addition, to better  ensure transparency, we recommended that OCC and the Federal  Reserve develop and implement a communication strategy to regularly  inform borrowers and the public. In commenting on the report, OCC and  the Federal Reserve both identified actions that they have taken or  planned to take to implement the recommendations.
Chairman Menendez, Ranking Member Moran, and Members of the  Subcommittee, this concludes my prepared statement. I would be happy  to answer any questions that you may have at this time.

	Contact and Staff Acknowledgments

If you or your staff have any questions about this testimony, please  contact Lawrance L. Evans, Jr. at (202) 512-8678 or evansl@gao.gov.  Contact points for our Offices of Public Affairs and Congressional  Relations may be found on the last page of this statement. Other staff  who made key contributions to this testimony include: John Karikari; Jill  Naamane; Anna Maria Ortiz; Karen Tremba (Assistant Directors);  Bethany M. Benitez; Charlene J. Lindsay; Patricia MacWilliams; Marc  Molino; Robert Rieke; Jennifer Schwartz; Andrew Stavisky; Sonya  Vartivarian; James Vitarello; and Monique Williams.
This is a work of the U.S. government and is not subject to copyright protection in the  United States. The published product may be reproduced and distributed in its entirety  without further permission from GAO. However, because this work may contain  copyrighted images or other material, permission from the copyright holder may be  necessary if you wish to reproduce this material separately.

Summary:
Why GAO Did This Study

This testimony discusses the Independent Foreclosure Review process. In April 2011, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Office of Thrift Supervision (OTS) issued consent orders against 14 mortgage servicers. These orders required the servicers to engage third-party consultants to review servicers' loan files to identify borrowers who had suffered financial harm due to errors, misrepresentations, or other deficiencies in foreclosure processing and recommend remediation for the harms these borrowers suffered. Roughly 4.3 million borrowers who were in some stage of foreclosure in 2009 and 2010 were eligible for the foreclosure review. As of December 2012, consultants had more than 800,000 loans slated for review. In January 2013, the regulators announced agreements that led to amended consent orders with 11 of the 14 servicers to discontinue foreclosure reviews and replace the reviews with a compensation framework that does not rely on determinations of whether borrowers suffered financial harm. The remaining 3 servicers, covering 450,000 borrowers (10 percent), are continuing with the foreclosure review work.
The remarks are based on our March 2013 report on the implementation of the foreclosure review and lessons learned that can be applied to the activities required by the amended consent orders and ongoing foreclosure reviews. The statement addresses (1) challenges to the achievement of the goals of the foreclosure review, (2) the extent of transparency in the foreclosure review process, and (3) lessons that could be useful for the activities under the amended consent orders and continuing reviews. As noted in our report, we were in the process of reviewing other aspects of the foreclosure review when OCC and the Federal Reserve announced the agreements. Neither our report nor this statement assesses the regulators' rationale for accepting the agreements nor any trade-offs involved in the regulators' choice to amend the consent orders with the servicers.

What GAO Found

GAO found the following:
Regulators' ability to achieve the goals of the foreclosure review was affected by the complexity of the reviews, as well as by overly broad regulator-issued guidance and limited monitoring for the consistency and sufficiency of consultants' review activities. For example, regulators' statistical sampling approach did not include mechanisms to allow the regulators to monitor consultants' progress toward finding as many harmed borrowers as possible. Our prior work has identified practices, such as assessing progress toward goals and designing monitoring during the planning stage of a project, as effective management practices. In addition, the Office of Management and Budget (OMB) has found that in planning data analysis activities, such as sampling, agencies should take necessary steps to ensure that they have collected the appropriate data from which to draw conclusions. Without using objective measures to compare review methods or assess sampling among consultants, regulators' ability to monitor progress toward achievement of foreclosure review goals was hindered.
Although regulators publicly released more information on the foreclosure review process than is typically disclosed in connection with a consent order, the absence of timely and useful communication to the general public and individual borrowers at certain stages of the process impacted transparency and public confidence. To promote transparency, OCC and the Federal Reserve released redacted engagement letters between servicers and consultants, among other documents. However, some stakeholders felt there were gaps in the publicly released information, including the lack of detailed information on how the reviews were to be carried out. In addition, although borrowers who requested reviews under the foreclosure review process received an acknowledgement letter, some borrowers did not receive updates on their request for almost a year after the program was launched.
The foreclosure review experience revealed lessons related to planning, monitoring, and communication that could help inform regulators' implementation of the amended consent orders and the remaining foreclosure reviews. In our prior work, we found that assessing lessons learned from previous experiences, such as through discussions with key participants and stakeholders, and applying these lessons can help strengthen future activities. Without assessing and applying relevant lessons learned, regulators might not address similar challenges in activities under the amended consent orders or in the continuing reviews. In particular, regulators announced the agreements that led to the amended consent orders without a clear communication strategy, including determining what information to provide to borrowers. GAO's internal control standards and our work related to best practices indicate that an effective communication strategy and timely reporting can enhance transparency and public confidence. Absent a clear strategy to guide regular communications with individual borrowers and the general public, regulators face risks to transparency and public confidence similar to those experienced in the foreclosure review.
Based on our findings, we recommended that OCC and the Federal Reserve improve oversight of sampling and consistency in the continuing reviews; apply lessons in planning and monitoring, as appropriate, to the activities of the amended consent orders and continuing reviews; and implement a communication strategy to keep stakeholders informed. The regulators agreed to take steps to implement these recommendations.