I

of 

O
 

 

   

Interagency Review 

of Foreclosure Policies 

and Practices
 

Federal Reserve System
 

Office of the Comptroller of the Currency
 

Offi ce of Thrift Supervision
 

W ashin g ton , D.C. • A pril 2011 
 
i

Contents

Executive Summary ................................................................................................................. 1
 

Review Scope and Objectives ............................................................................................. 1
 

Summary of Review Findings .............................................................................................. 2
 

Summary of Supervisory Response ................................................................................... 4
 

Part 1: Background and Risks Associated
 

with Weak Foreclosure Process and Controls ................................................................. 5
 

Impact on Borrowers ............................................................................................................. 5
 

Impact on the Industry and Investors ................................................................................. 6
 

Impact on the Judicial Process ........................................................................................... 6
 

Impact on the Mortgage Market and Communities ......................................................... 6
 

Part 2: Review Findings ......................................................................................................... 7
 

Foreclosure Process Governance ....................................................................................... 7
 

Organizational Structure and Availability of Staffing ........................................................ 8
 

Affidavit and Notarization Practices ................................................................................... 8
 

Documentation Practices ..................................................................................................... 8
 

Third-party Vendor Management ........................................................................................ 9
 

Arrangements with Outside Law Firms ..................................................................................... 9
 

Arrangements with Default Management Service Providers (DMSPs) ........................................ 10
 

Arrangements with Mortgage Electronic Registration Systems, Inc. .......................................... 10
 

Ineffective Quality Control (QC) and Audit ....................................................................... 11
 

Part 3: Supervisory Response ............................................................................................. 13
 

Part 4: Industry Reforms ...................................................................................................... 15
 

Governance and Oversight ................................................................................................. 15
 

Organizational Structure, Staffing, and Technology ....................................................... 15
 

Accountability and Responsiveness Dealing with Consumers .................................... 15
 
Executive Summary

The Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Federal Deposit

Insurance Corporation (FDIC), and the Office of

Thrift Supervision (OTS), referred to as the agencies,

conducted on-site reviews of foreclosure processing

at 14 federally regulated mortgage servicers during

the fourth quarter of 2010.1

This report provides a summary of the review findings and an overview of the potential impacts associated with instances of foreclosure-processing weaknesses that occurred industrywide. In addition, this

report discusses the supervisory response made public simultaneous with the issuance of this report, as

well as expectations going forward to address the

cited deficiencies. The supervisory measures

employed by the agencies are intended to ensure safe

and sound mortgage-servicing and foreclosureprocessing business practices are implemented. The

report also provides an overview of how national

standards for mortgage servicing can help address

specific industrywide weaknesses identified during

these reviews.

Review Scope and Objectives

The primary objective of each review was to evaluate

the adequacy of controls and governance over ser1	 Agencies conducted foreclosure-processing reviews at Ally Bank/

GMAC, Aurora Bank, Bank of America, Citibank, EverBank,

HSBC, JPMorgan Chase, MetLife, OneWest, PNC, Sovereign

Bank, SunTrust, U.S. Bank, and Wells Fargo. The reviews

included mortgage-servicing activities conducted by insured

banks and thrifts, as well as by several nonbank affiliates of

these organizations. The 14 servicers were selected based on the

concentration of their mortgage-servicing and foreclosureprocessing activities. The agencies typically do not disclose

examinations or examination findings regarding particular institutions. In light of the formal enforcement actions entered into

by these 14 servicers, which are being made public, the agencies

have determined that it is appropriate to identify the servicers

(whether a bank or a bank affiliate) that were reviewed. The

bank and thrift holding company parents of Ally Bank/GMAC,

Bank of America, Citibank, Everbank, HSBC, JPMorgan

Chase, MetLife, OneWest, PNC, SunTrust, U.S. Bank, and

Wells Fargo also entered into formal enforcement actions.

vicers’ foreclosure processes and assess servicers’

authority to foreclose. The reviews focused on issues

related to foreclosure-processing functions. While the

reviews uncovered significant problems in foreclosure

processing at the servicers included in the report,

examiners reviewed a relatively small number of files

from among the volumes of foreclosures processed

by the servicers. Therefore, the reviews could not provide a reliable estimate of the number of foreclosures

that should not have proceeded. The agencies, therefore, are requiring each servicer to retain an independent firm to conduct a thorough review of foreclosure actions that were pending at any time from January 1, 2009, through December 31, 2010, to, among

other things, 1) identify borrowers that have been

financially harmed by deficiencies identified in the

independent review and 2) provide remediation to

those borrowers where appropriate. These independent reviews will be subject to supervisory oversight

to ensure that the reviews are comprehensive and the

results are reliable.

For the reviews discussed in this report, examiners

evaluated each servicer’s self-assessments of their

foreclosure policies and processes; assessed each servicer’s foreclosure operating procedures and controls;

interviewed servicer staff involved in the preparation

of foreclosure documents; and reviewed, collectively

for all servicers, approximately 2,800 borrower foreclosure files that were in various stages of the foreclosure process between January 1, 2009, and December 31, 2010. 2

Examiners focused on foreclosure policies and procedures; quality control and audits; organizational

structure and staffing; and vendor management,

2	 Foreclosure files at each servicer were selected from the population of in-process and completed foreclosures during 2010. The

foreclosure file sample at each servicer included foreclosures

from both judicial states and nonjudicial states. Review teams

independently selected foreclosure file samples based on preestablished criteria (such as files for which consumer complaints

had been raised, or those in geographic areas with high volumes

of foreclosures) with the balance of the files selected based on

examiner judgment.
2 April 2011

including use of third-party vendors such as foreclosure attorneys, Lender Processing Services (LPS) and

other default-service providers, and MERSCORP

and its wholly owned subsidiary, Mortgage Electronic Registration Systems, Inc. (MERS). Based on

their reviews of the limited number of foreclosure-file

samples, examiners also assessed the accuracy of

foreclosure-related documentation, including note

endorsements and the assignments of mortgages and

deeds of trust, and loan document control.3 With

respect to those files, examiners also assessed whether

fees charged in connection with the foreclosures

exceeded the amounts reflected in the servicers’ internal records. In addition, the Federal Reserve and the

OCC solicited views from consumer groups to help

detect problems at specific servicers, and the Federal

Reserve expanded the file sample to include borrowers who were delinquent, but not yet in foreclosure.

The file reviews did not include a complete analysis

of the payment history of each loan prior to foreclosure or potential mortgage-servicing issues outside of

the foreclosure process. Accordingly, examiners may

not have uncovered cases of misapplied payments or

unreasonable fees, particularly when these actions

occurred prior to the default that led to the foreclosure action. The foreclosure-file reviews also may not

have uncovered certain facts related to the processing

of a foreclosure that would lead an examiner to conclude that a foreclosure otherwise should not have

proceeded, such as undocumented communications

between a servicer employee and the borrower in

which the employee told the borrower he or she had

to be delinquent on the loan to qualify for a modification. In addition, the reviews did not focus on

loan-modification processes, but when reviewing

individual foreclosure files, examiners checked for

evidence that servicers were in contact with borrowers and had considered alternative loss-mitigation

efforts, including loan modifications.

To ensure consistency in the reviews, the agencies

used standardized work programs to guide the

assessment and to document findings pertaining to

each servicer’s corporate governance process and the

individual foreclosure-file reviews. The work programs were organized into the following categories:

‰	 Policies and procedures. Examiners reviewed the

servicers’ policies and procedures to see if they

3	 For purposes of this report, default management services generally include administrative support and services provided to the

servicers by third-party vendors to manage and perform the

tasks associated with foreclosures.

provided adequate controls over the foreclosure

process and whether those policies and procedures

were sufficient for compliance with applicable laws

and regulations.

‰	 Organizational structure and staffing. Examiners

reviewed the functional unit(s) responsible for foreclosure processes, including their staffing levels,

their staff’s qualifications, and their training

programs.

‰	 Management of third-party service providers.

Examiners reviewed the servicers’ oversight of key

third parties used throughout the foreclosure process, with a focus on foreclosure attorneys, MERS,

and default-service providers such as LPS.

‰	 Quality control and internal audits. Examiners

assessed quality-control processes in foreclosures.

Examiners also reviewed internal and external

audit reports, including government-sponsored

enterprise (GSE) and investor audits and reviews

of foreclosure activities as well as servicers’

self-assessments.

‰	 Compliance with applicable laws. Examiners

checked the adequacy of the governance, audits,

and controls that servicers had in place to ensure

compliance with applicable laws.

‰	 Loss mitigation. Examiners determined if servicers

were in direct communication with borrowers and

whether loss-mitigation actions, including loan

modifications, were considered as alternatives to

foreclosure.

‰	 Critical documents. Examiners evaluated servicers’

control over critical documents in the foreclosure

process, including the safeguarding of original

loan documentation. Examiners also determined

whether critical foreclosure documents were in the

foreclosure files that they reviewed, and whether

notes were endorsed and mortgages assigned.

‰	 Risk management. Examiners assessed whether

servicers appropriately identified financial, reputational, and legal risks and whether these risks were

communicated to the board of directors and

senior management of the servicer.

Summary of Review Findings

The reviews found critical weaknesses in servicers’

foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure

attorneys. While it is important to note that findings
Executive Summary 3

varied across institutions, the weaknesses at each servicer, individually or collectively, resulted in unsafe

and unsound practices and violations of applicable

federal and state law and requirements.4 The results

elevated the agencies’ concern that widespread risks

may be presented—to consumers, communities, various market participants, and the overall mortgage

market. The servicers included in this review represent more than two-thirds of the servicing market.

Thus, the agencies consider problems cited within

this report to have widespread consequences for the

national housing market and borrowers.

Based on the deficiencies identified in these reviews

and the risks of additional issues as a result of weak

controls and processes, the agencies at this time are

taking formal enforcement actions against each of

the 14 servicers subject to this review to address those

weaknesses and risks. The enforcement actions

require each servicer, among other things, to conduct

a more complete review of certain aspects of foreclosure actions that occurred between January 1, 2009,

and December 31, 2010. The specific supervisory

responses are summarized in Part 3 of this report.

The loan-file reviews showed that borrowers subject

to foreclosure in the reviewed files were seriously

delinquent on their loans. As previously stated, the

reviews conducted by the agencies should not be

viewed as an analysis of the entire lifecycle of the

borrowers’ loans or potential mortgage-servicing

issues outside of the foreclosure process. The reviews

also showed that servicers possessed original notes

and mortgages and, therefore, had sufficient documentation available to demonstrate authority to foreclose. Further, examiners found evidence that servicers generally attempted to contact distressed borrowers prior to initiating the foreclosure process to

pursue loss-mitigation alternatives, including loan

modifications. However, examiners did note cases in

which foreclosures should not have proceeded due to

an intervening event or condition, such as the borrower (a) was covered by the Servicemembers Civil

Relief Act, (b) filed for bankruptcy shortly before the

foreclosure action, or (c) qualified for or was paying

in accordance with a trial modification. 5

The interagency reviews identified significant weaknesses in several areas.

4	 This report captures only the significant issues found across the

servicers reviewed, not necessarily findings at each servicer. 5 Servicemembers Civil Relief Act, 50 USC App. sections. 501–

596, Public Law 108-189.

‰	 Foreclosure process governance. Foreclosure governance processes of the servicers were underdeveloped and insufficient to manage and control

operational, compliance, legal, and reputational

risk associated with an increasing volume of foreclosures. Weaknesses included:

‰	 inadequate policies, procedures, and independent control infrastructure covering all aspects

of the foreclosure process;

‰	 inadequate monitoring and controls to oversee

foreclosure activities conducted on behalf of

servicers by external law firms or other thirdparty vendors;

‰	 lack of sufficient audit trails to show how information set out in the affidavits (amount of

indebtedness, fees, penalties, etc.) was linked to

the servicers’ internal records at the time the

affidavits were executed;

‰	 inadequate quality control and audit reviews to

ensure compliance with legal requirements, policies and procedures, as well as the maintenance

of sound operating environments; and

‰	 inadequate identification of financial, reputational, and legal risks, and absence of internal

communication about those risks among boards

of directors and senior management.

‰	 Organizational structure and availability of staffing. Examiners found inadequate organization and

staffing of foreclosure units to address the

increased volumes of foreclosures.

‰	 Affidavit and notarization practices. Individuals

who signed foreclosure affidavits often did not personally check the documents for accuracy or possess the level of knowledge of the information that

they attested to in those affidavits. In addition,

some foreclosure documents indicated they were

executed under oath, when no oath was administered. Examiners also found that the majority of

the servicers had improper notary practices which

failed to conform to state legal requirements.

These determinations were based primarily on servicers’ self-assessments of their foreclosure processes and examiners’ interviews of servicer staff

involved in the preparation of foreclosure

documents.

‰	 Documentation practices. Examiners found some—

but not widespread—errors between actual fees

charged and what the servicers’ internal records

indicated, with servicers undercharging fees as frequently as overcharging them. The dollar amount
4 April 2011

of overcharged fees as compared with the servicers’ internal records was generally small.
 

‰	 Third-party vendor management. Examiners generally found adequate evidence of physical control

and possession of original notes and mortgages.

Examiners also found, with limited exceptions,

that notes appeared to be properly endorsed and

mortgages and deeds of trust appeared properly

assigned.6 The review did find that, in some cases,

the third-party law firms hired by the servicers

were nonetheless filing mortgage foreclosure complaints or lost-note affidavits even though proper

documentation existed.

‰	 Quality control (QC) and audit. Examiners found

weaknesses in quality control and internal auditing

procedures at all servicers included in the review.

Summary of Supervisory Response

The agencies recognize that a number of supervisory

actions and industry reforms are required to address

these weaknesses in a way that will hold servicers

accountable for establishing necessary governance

and controls. Measures that the servicers are being

required to implement are designed to ensure compliance with applicable laws, promote foreclosure processing in a safe and sound manner, and establish

responsible business practices that provide accountability and appropriate treatment to borrowers.

6	 The agencies expect federally regulated servicers to have the necessary policies and procedures in place to ensure that notes are

properly endorsed and mortgages are properly assigned, so that

ownership can be determined at the time of foreclosure. Where

federally regulated servicers serve as document custodians for

themselves or other investors, the agencies require controls and

tracking systems to properly safeguard the physical security and

maintenance of critical loan documents.

At this time, the agencies are taking formal enforcement action against each of the 14 servicers and parent bank holding companies because the deficiencies

and weaknesses identified during the reviews represent unsafe or unsound practices and violations of

applicable law. The foreclosure-file reviews showed

that borrowers in the sampled pool were seriously

delinquent. The reviews also showed that the appropriate party brought the foreclosure action. However,

a limited number of mortgages should not have proceeded to foreclosure because of an intervening event

or condition. Nevertheless, the weaknesses in servicers’ foreclosure processes, as confirmed by the

reviews, present significant risk to the safety and

soundness of mortgage activities. The failures and

deficiencies identified as part of the reviews must be

remedied swiftly and comprehensively.

The agencies will continue to assess and monitor corrective actions and will address servicers’ failures to

correct identified deficiencies where necessary.

Going forward, servicers must develop and demonstrate effective risk management of servicing operations to prevent a recurrence of deficiencies cited in

this report. The agencies are currently engaged in an

effort to establish national mortgage-servicing standards to promote the safe and sound operation of

mortgage-servicing and foreclosure processing,

including standards for accountability and responsiveness to borrower concerns. Such an effort will

include engaging the Government Sponsored Enterprises, private investors, consumer groups, the servicing industry, and other regulators. Part 4 of this

report provides a general overview of the core principles that should be included in future national

mortgage-servicing standards.
Part 1: Background and Risks Associated

with Weak Foreclosure Process and Controls

Mortgage servicing plays a central role in the management of mortgage loans from origination to final

disposition. The mortgage servicer is the intermediary between borrowers and their lenders. When the

borrower is paying as agreed, the servicer’s duties are

ministerial: collecting payments, distributing payments to investors, managing cash and administering

funds in escrow, and reporting to investors. When a

loan is in default, the demands on the servicer necessarily expand, requiring additional resources and

much more sophisticated risk management. A necessary consequence of the growth in foreclosures since

2007 is increased demands on servicers’ foreclosure

processes.

The residential mortgage-servicing market is highly

concentrated among a few servicers. The five largest

mortgage servicers by activity volume—included

among the 14 servicers subject to the reviews

addressed in this report—account for 60 percent of

the industry’s total servicing volume.7 The 14 servicers included in the interagency review collectively

represent more than two-thirds of the servicing

industry (see figure 1), or nearly 36.7 million

mortgages.8

Figure 1. Concentration of the mortgage-servicing Industry

32% 

68% 14 examined servicers 

All other servicers 

Source: Federal Reserve staff estimates of the concentration of servicing volume,

based on data from Inside Mortgage Finance.

At the end of the fourth quarter of 2010, nearly

54 million first-lien mortgage loans were outstand

ing, 2.4 million of which were at some point in the

foreclosure process. Additionally, two million mort

gages were 90 or more days past due and at an

elevated risk of foreclosure. New foreclosures are on

pace to approach 2.5 million by the end of 2011. In

light of the number of foreclosures and continued

weakness in overall mortgage performance, the agen

cies are concerned that the deficiencies in foreclosure

­

­

­

7	 The five largest mortgage servicers in order are Bank of

America, Wells Fargo, JPMorgan Chase, Citibank, and Ally

Bank/GMAC. 8	 Federal Reserve staff estimates 54 million first-lien mortgages

outstanding as of December 31, 2010.

processing observed among these major servicers

may have widespread consequences for the housing

market and borrowers.

Impact on Borrowers

Weaknesses in foreclosure processes and controls

present the risk of foreclosing with inaccurate documentation, or foreclosing when another intervening

circumstance should intercede. Even if a foreclosure

action can be completed properly, deficiencies can

result (and have resulted) in violations of state foreclosure laws designed to protect consumers. Such

weaknesses may also result in inaccurate fees and

charges assessed against the borrower or property,

which may make it more difficult for borrowers to

bring their loans current. In addition, borrowers can

find their loss-mitigation options curtailed because of

dual-track processes that result in foreclosures even

when a borrower has been approved for a loan modification. The risks presented by weaknesses in foreclosure processes are more acute when those processes are aimed at speed and quantity instead of

quality and accuracy.
6 April 2011

Impact on the Industry and Investors

Weaknesses in foreclosure processes pose a variety of

risks to the financial services industry and investors.

These risks extend beyond the financial cost of remedying procedural errors and re-filing affidavits and

other foreclosure documents. Servicers may also bear

legal costs related to disputes over note ownership or

authority to foreclose, and to allegations of procedural violations through the use of inaccurate affidavits and improper notarizations. Servicers may be

subject to claims by investors as a result of delays or

other damages caused by the weaknesses. Furthermore, concerns about the prevalence of irregularities

in the documentation of ownership may cause uncertainty for investors of securitized mortgages. Servicers and their affiliates also face significant reputational risk with their borrowers, with the court system, and with regulators.

Impact on the Judicial Process

Weaknesses in foreclosure processes have resulted in

increased demands on judicial resources to resolve a

variety of foreclosure-related matters, including note

ownership. In addition, courts rely extensively on

affidavits (usually affidavits of indebtedness) submitted by servicers to decide foreclosure actions on a

summary basis without requiring in-person testimony.9 If such affidavits were not properly prepared

or executed, courts may lose confidence in the reliability of the affidavits as persuasive evidence filed

on behalf of servicers.10

9	 The basic affidavit of indebtedness typically sets forth the name

of the party that owns the loan, the default status, and the

amounts due for principal, interest, penalties (such as late

charges), and fees. This affidavit is frequently the principal basis

upon which a court is permitted to order a foreclosure without

requiring in-person testimony. Similar documentation may be

required in bankruptcy proceedings. 10 Mortgage foreclosures occur under either a judicial or a nonjudicial process. Judicial foreclosures are court-supervised and

require the lender to bring a court action to foreclose. Nonjudicial foreclosures (also known as “power of sale”) involve little or

Impact on the Mortgage Market and

Communities

Weaknesses in foreclosure processes led several servicers to slow, halt, or suspend foreclosure proceedings in late 2010, and, in many cases, re-file foreclosure documents. Delays in foreclosure processing,

which averaged 450 days in the fourth quarter of

2010, slow the clearing of excess inventory of foreclosed properties and lead to extended periods of

depressed home prices.11

11	 See Lender Processing Services Applied Analytics (December 2010, www.lpsvcs.com/RiskMgmt). Current time frames to

move a property to foreclosure sale have increased from an average of 250 days in first quarter 2008 to 450 days by fourth quarter 2010.

Such delays also impede the

efficient disposition of foreclosed homes and the

clearing of seriously delinquent mortgages, particularly in geographic regions with greater concentrations of vacant and abandoned properties. This outcome acts as an impediment for communities working to stabilize local neighborhoods and housing

markets.12

12	 Industry data show approximately four million properties currently listed that have been foreclosed in the past few years. See

Mortgage Bankers Association, National Delinquency Survey,

(November 18, 2010, www.mbaa.org/NewsandMedia/

PressCenter/74733.htm).

Moreover, local property values may be adversely

affected if foreclosed homes remain vacant for

extended periods, particularly if such homes are not

properly maintained.13

13	 Campbell, John Y., Stefano Giglio and Parag Pathak (July 2010)

Forced Sales and House PricesManuscript, Harvard University

Department of Economics (kuznets.fas.harvard.edu/~campbell/

papers/forcedsales072410.pdf).

Widely publicized weaknesses

in foreclosure processes also adversely affect home

buyer and investor confidence. Assuring robust and

credible remedial programs for mortgage servicers so

that foreclosure processes can operate and markets

can clear without impediments or interventions contributes to attaining a stable national housing market.

no court oversight and generally are governed by state statutes.

Even foreclosures that are instituted outside the judicial process

can be challenged in court, however, and then become subject to

court actions.
Part 2: Review Findings

The reviews found critical weaknesses in foreclosure

governance processes, foreclosure document preparation processes, and oversight and monitoring of

third-party law firms and other vendors. These weaknesses involve unsafe and unsound practices and violations of applicable federal and state laws and

requirements, and they have had an adverse effect on

the functioning of the mortgage markets. By emphasizing speed and cost efficiency over quality and

accuracy, examined servicers fostered an operational

environment contrary to safe and sound banking

practices.

In connection with the reviews of sampled files and

assessments of servicers’ custodial activities, examiners found that borrowers whose files were reviewed

were seriously delinquent on their mortgage payments at the time of foreclosure and that servicers

generally had sufficient documentation available to

demonstrate authority to foreclose on those borrowers’ mortgages.14 Nevertheless, examiners noted

instances where documentation in the foreclosure file

alone may not have been sufficient to prove ownership of the note at the time the foreclosure action

commenced without reference to additional information. When additional information was requested and

provided to examiners, it generally was sufficient to

determine ownership.

In addition, review of the foreclosure files showed

that servicers were in contact with the delinquent

borrowers and had considered loss-mitigation alternatives, including loan modifications. Examiners also

noted a small number of foreclosure sales, however,

that should not have proceeded because of an inter14 As previously noted, examiners were limited to the documents

in the foreclosure files. Those documents may not have disclosed certain facts that might have led examiners to conclude

that a foreclosure should not have proceeded, such as misapplication of payments that could have precipitated a foreclosure

action or oral communications between the borrower and servicer staff that were not documented in the foreclosure file.

vening event or condition, such as the borrower:

(a) was covered by the Servicemembers Civil Relief

Act, (b) filed bankruptcy shortly before the foreclosure action, or (c) was approved for a trial

modification.

A summary of the major findings identified during

the reviews is set forth below.

Foreclosure Process Governance

Examiners found governance at each examined servicer in need of substantial improvement, and often

cited the absence of sound controls and ineffective

management of foreclosure processes. Foreclosure

policies and procedures at many of the servicers were

either weak or needed substantial expansion to provide effective guidance, control, and ongoing monitoring. As noted above, examiners concluded that the

majority of servicers reviewed had inadequate affidavit and notary-signing processes that did not ensure

proper attestation (or verification) of the underlying

documents.

Examiners found that most servicers had inadequate

staffing levels and training programs throughout the

foreclosure-processing function and that a large percentage of the staff lacked sufficient training in their

positions. The reviews also revealed that all of the

servicers relied heavily on outsourcing arrangements

with outside counsel and other third-party vendors

to carry out foreclosure processes without adequate

oversight of those arrangements. Some servicers

failed to enter into contracts with the foreclosure law

firms performing critical steps in the foreclosure process, including affidavit- and notary-preparation and

signing processes. Audit and quality-assurance controls and self-assessment reviews at all of the examined servicers lacked comprehensiveness and failed to

identify specific weaknesses and process gaps. Details

on these areas of weakness are included below.
8 April 2011

Organizational Structure and

Availability of Staffing

At the time of the review, a majority of the servicers

had inadequate staffing levels or had recently added

staff with limited servicing experience. In most

instances, servicers maintained insufficient staff to

appropriately review documents for accuracy, and

provided inadequate training for affidavit signers,

notaries, and quality-control staff. Examiners also

noted weak controls, undue emphasis on quantitative

production and timelines, and inadequate workload

monitoring.

Affidavit and Notarization Practices

Deficiencies in servicers’ processes, procedures, controls, and staffing resulted in numerous inaccurate

affidavits and other foreclosure-related documents.

Examiners found that most servicers had affidavit

signing protocols that expedited the processes for

signing foreclosure affidavits without ensuring that

the individuals who signed the affidavits personally

conducted the review or possessed the level of knowledge of the information that they attested to in those

affidavits. Examiners confirmed these deficiencies

through interviews with individuals who signed documents, as well as through a review of servicers’ selfassessments. Examiners also found the majority of

the servicers had improper notary practices that

failed to conform to state legal requirements. Examiners noted some servicers failed to maintain an accurate list of approved and acceptable notaries that

individuals signing documents did not do so in the

presence of a notary when required, and that documents often were executed in a manner contrary to

the notary’s acknowledgement and verification of

those documents. In addition, some foreclosure

documents indicated they were executed under oath

when no oath was administered. Again, examiners

confirmed these deficiencies by interviewing notaries

and reviewing servicers’ self-assessments.

At the examined servicers, anywhere from 100 to

more than 25,000 foreclosure actions occurred per

month between January 1, 2009, and December 31,

2010, with the quantity depending upon the size of

the servicer’s operations. It was common to find an

insufficient number of staff assigned to review, sign,

and notarize affidavits. At some of the servicers,

examiners found that insufficient staff—or the lack

of specified guidance to staff or external law firms on

affidavit completion—contributed to the preparation

and filing of inaccurate affidavits. In the sample of

foreclosure files reviewed, examiners compared the

accuracy of the amounts listed on affidavits of

indebtedness to the documentation in the paper foreclosure file or computerized loan servicing systems.

Although borrowers whose foreclosure files were

reviewed were seriously in default at the time of the

foreclosure action, some servicers failed to accurately

complete or validate itemized amounts owed by those

borrowers. At those servicers, this failure resulted in

differences between the figures in the affidavit and

the information in the servicing system or paper file.

In nearly half of those instances, the differences—

which were typically less than $500—were adverse to

the borrower. While the error rates varied among the

servicers, the percentage of errors at some servicers

raises significant concerns regarding those servicers’

internal controls governing foreclosure-related

documentation.

Documentation Practices

During the foreclosure-file reviews, examiners compared the accuracy of amounts listed on the servicers’ affidavits of indebtedness with documentation

on file or maintained within the electronic servicing

system of record. For most of the servicers, examiners cited the lack of a clear auditable trail in reconciling foreclosure filings to source systems of record. In

some cases, examiners directed servicers to further

audit foreclosure filings to verify the accuracy of

information and compliance with legal requirements.

Likewise, in connection with the file review, examiners also determined whether critical foreclosure documents were in the foreclosure files, and whether notes

appeared properly endorsed and mortgages appeared

properly assigned. Examiners noted instances where

documentation in the foreclosure file alone may not

have been sufficient to prove authority to foreclose

without reference to additional information. 15 When

more information was requested and provided, it

generally was sufficient to determine authority. With

some exceptions, examiners found that notes

appeared properly endorsed, and mortgages

appeared properly assigned.16 Examiners also trav15 Servicers frequently maintained custody of original mortgage

documents, although in some cases third-party trustees or custodians held original documents. Custodians are entrusted to

manage the original documents that establish note ownership,

and, when necessary, produce the original documents for a foreclosure action. 16 Only in rare instances were custodians unable to produce origi­
Part 2: Review Findings 9

eled to servicers’ document repository locations to

assess custodial activities. Examiners found that servicers generally had possession and control over critical loan documents such as the promissory notes and

mortgages. The review did find that, in some cases

prior to 2010, the third-party law firms hired by the

servicers were nonetheless filing lost-note affidavits

or mortgage foreclosure complaints in which they

claimed that the mortgage note had either been lost

or destroyed, even though proper documentation

existed.

Third-party Vendor Management

The agencies found that the servicers reviewed generally did not properly structure, carefully conduct, or

prudently manage their third-party vendor relationships with outside law firms and other third-party

foreclosure services providers. Failure to effectively

manage third-party vendors resulted in increased

reputational, legal, and financial risks to the

servicers.

Arrangements with Outside Law Firms

Servicers typically used third-party law firms to prepare affidavits and other legal documents, to file

complaints and other pleadings with courts, and to

litigate on their behalf in connection with foreclosure

and foreclosure-related bankruptcy proceedings. The

servicers reviewed generally showed insufficient guidance, policies, or procedures governing the initial

selection, management, or termination of the law

firms that handled their foreclosures. Many servicers,

rather than conducting their own due diligence, relied

on the fact that certain firms had been designated as

approved or accepted by investors. Servicers often

did not govern their relationships with these law

firms by formal contracts. Instead, servicers frequently relied on informal engagements with law

firms, at times relying on investors’ business relationships with the law firms or the law firms’ contractual

relationships with default management service

providers.

Inadequate Oversight

Servicers also did not provide adequate oversight of

third-party vendor law firms, including monitoring

for compliance with the servicers’ standards. Several

nal loan documentation, and in those instances the servicers

generally were able to provide adequate explanations, including

that copies in the possession of the custodian were acceptable

under applicable law.

servicers exempted third-party law firms from the

servicers’ vendor management programs or did not

identify them as third-party vendors subject to those

programs. In some cases, servicers assumed that

investors performed such oversight, in which case

oversight was limited to ensuring that the law firms

were on the investors’ lists of approved or accepted

providers. Where monitoring of law firms was conducted, it was often limited to things such as responsiveness and timeliness, checking for liability insurance, or determining if any power of attorney given

to the firm remained valid rather than assessing the

accuracy and adequacy of legal documents or compliance with state law or designated fee schedules.

Document Retention Weaknesses

Examiners also found that the servicers did not

always retain originals or copies of the documents

maintained by the third-party law firms that conducted their foreclosures. Instead, the servicers relied

on the firms to maintain those documents. The

absence of central and well-organized foreclosure

files by the servicers and the consequent need for the

examiners to collect foreclosure documentation

derived from numerous sources made it difficult at

times for examiners to conduct full foreclosure-file

reviews while on-site.

Inadequate guidance, policies, procedures, and

contracts

In addition, examiners generally found an absence of

formal guidance, policies, or procedures governing

the selection, ongoing management, and termination

of law firms used to handle foreclosures. This deficiency resulted in a lack of clarity regarding roles,

responsibilities, and performance parameters. Examiners also observed an absence of written contracts

between certain servicers and law firms, which left

those servicers with no contractual recourse for liability against the firms for performance issues. These

deficiencies, coupled with the overall lack of

adequate oversight, contributed to instances in which

servicers and law firms failed to identify problems

with the firms’ foreclosure practices, thereby exposing the servicers to a variety of significant risks.

Those problems include instances in which law firms

signed documents on behalf of servicers without having the authority to do so, or they changed the format and content of affidavits without the knowledge

of the servicers. These defects could, depending upon

the circumstances, raise concerns regarding the legality and propriety of the foreclosure even if the ser­
10 April 2011

vicer had sufficient documentation available to demonstrate authority to foreclose.

Arrangements with Default Management

Service Providers (DMSPs)

In connection with the on-site reviews of servicers,

the agencies also conducted an on-site review of

Lender Processing Services, Inc. (LPS), which provides significant services to support mortgageservicing and foreclosure processing across the industry. The review of LPS involved a number of issues

that are similar to those raised in the reviews of the

servicers, and the LPS review covered issues that are

unique to the operations, structure and corporate

governance of LPS. During the review of LPS, the

agencies found deficient practices related primarily to

the document execution services that LPS, through

its DocX, LLC, and LPS Default Solutions, Inc. subsidiaries had provided to servicers in connection with

foreclosures. To address these issues, the agencies are

taking formal enforcement action against LPS under

section 7(d) of the Bank Service Company Act, 12

USC § 1867(d), and section 8(b) of the Federal

Deposit Insurance Act, 12 USC § 1818(b).

Inadequate Contracts

During the review of servicers, examiners assessed

servicers’ relationships with third-party vendor

DMSPs, focusing primarily on DMSPs that supported the execution of foreclosure-related documents, such as affidavits of indebtedness, lost-note

affidavits, and assignments of mortgages. 17 Examiners found that contracts between the servicers and

DMSPs generally were inadequate, often omitting

significant matters such as service-level agreements.

Contracts did not provide for an appropriate level of

oversight of third-party vendor law firms in situations where the servicers relied on the DMSPs to

conduct such oversight.

Inadequate Oversight

Examiners also observed that servicers generally

demonstrated an overall lack of adequate oversight

of DMSPs. At times, the servicers failed to identify

DMSPs as vendors subject to the servicers’ vendor

management programs and demonstrated an inability to provide the examiners with sufficient evidence

of due diligence. Examiners found no evidence that

servicers conducted audits of the document execution operations of their DMSPs.

17	 Not all of the servicers engaged the services of third-party

vendor DMSPs to perform document execution services.

The lack of sufficient oversight of DMSPs, coupled

with the contractual deficiencies, led to instances in

which employees of those DMSPs signed foreclosure

affidavits without personally conducting the review

or possessing the level of knowledge of information

that they attested to in those affidavits. Employees of

DMSPs, like the employees of the servicers themselves, executed documents in a manner contrary to

the notary’s acknowledgement and verification of

those documents. In addition, in limited instances,

employees of DMSPs signed foreclosure-related

documents on behalf of servicers without proper

authority. Because some of the servicers relied on

DMSPs to oversee their third-party vendor law

firms, the contractual deficiencies and lack of oversight of DMSPs contributed to the weaknesses identified above regarding the oversight of third-party

vendor law firms.

Arrangements with Mortgage Electronic

Registration Systems, Inc.

In connection with the on-site reviews of servicers,

the agencies, together with the Federal Housing

Finance Agency (FHFA), also conducted an on-site

review of MERSCORP and its wholly owned subsidiary, Mortgage Electronic Registration Systems, Inc.

(collectively, MERS), which, as detailed below, provides significant services to support mortgageservicing and foreclosure processing across the industry. The review of MERS involved a number of

issues that are similar to those raised in the reviews of

the servicers, and the MERS review covered issues

that are unique to the operations, structure and corporate governance of MERS. During the review of

MERS, the agencies and FHFA found significant

weaknesses in, among other things, oversight, management supervision and corporate governance. To

address these issues, the agencies, together with

FHFA, are taking formal enforcement action against

MERS under section 7(d) of the Bank Service Company Act, 12 USC § 1867(d), and section 8(b) of the

Federal Deposit Insurance Act, 12 USC § 1818(b).

MERS streamlines the mortgage recording and

assignment process in two ways. First, it operates a

centralized computer database or registry of mortgages that tracks the servicing rights and the beneficial ownership of the mortgage note. Each mortgage

registered in the database is assigned a Mortgage

Identification Number (MIN). Second, MERS can

be designated by a member (and its subsequent

assignees) to serve in a nominee capacity as the mortgagee of record in public land records. Designating
Part 2: Review Findings 11

MERS as the mortgagee is intended to eliminate the

need to prepare and record successive assignments of

mortgages each time ownership of a mortgage is

transferred. Rather, changes in beneficial ownership

of the mortgage note (and servicing rights) are

tracked in the MERS registry using the MIN.18 All

of the examined servicers had relationships with

MERS.

Inadequate Oversight

Servicers exercised varying levels of oversight of the

MERS relationship, but none to a sufficient degree.

Several of the servicers did not include MERS in

their vendor management programs. In these

instances, the servicers failed to conduct appropriate

due diligence assessments and failed to monitor,

evaluate, and appropriately manage the MERS contractual relationship. Deficiencies included failure to

assess the internal control processes at MERS, failure

to ensure the accuracy of servicing transfers, and failure to ensure that servicers’ records matched MERS’

records.

Inadequate Quality Control

Examiners also determined that servicers’ qualitycontrol processes pertaining to MERS were insufficient. In some cases, servicers lacked any qualityassurance processes and relied instead on the infrequent and limited audits that MERS periodically

conducted. Other deficiencies included the failure to

conduct audit reviews to independently verify the

adequacy of and adherence to quality-assurance processes by MERS, and the need for more frequent and

complete reconciliation between the servicers’ systems and the MERS registry. Several servicers did

not include MERS activities in the scope of their

audit coverage.

Ineffective Quality Control (QC) and

Audit

Examiners found weaknesses in quality-control procedures at all servicers, which resulted in servicers not

18 While MERS maintains a registry of the beneficial ownership

of the mortgage note, this registry is not a system of legal

record. The ownership of the note is determined by the Uniform Commercial Code, and, if a change in ownership of a note

is not recorded in MERS or is recorded incorrectly, the transfer

is still valid.

performing one or more of the following functions at

a satisfactory level:

‰	 ensuring accurate foreclosure documentation,

including documentation pertaining to the fees

assessed;

‰	 incorporating mortgage-servicing activities into

the servicers’ loan-level monitoring, testing, and

validation programs;

‰	 evaluating and testing compliance with applicable

laws and regulations, court orders, pooling and

servicing agreements, and similar contractual

arrangements; and

‰	 ensuring proper controls to prevent foreclosures

when intervening events or conditions occur that

warrant stopping the foreclosure process (e.g.,

bankruptcy proceedings, applicability of the Servicemembers Civil Relief Act, or adherence to a

trial or permanent loan modification program).

Examiners also found weaknesses in internal auditing

procedures at all the servicers included in the review.

When performed, the few internal audits conducted

by servicers failed to identify fundamental control

issues that led to the foreclosure process breakdowns.

Failures to perform internal audits effectively resulted

in servicers’ inability to identify, address, and internally communicate foreclosure-processing risks. The

failures to identify and communicate these risks

resulted in servicers not strengthening the quality of

risk-management processes to a level consistent with

the nature, increasing size, and complexity of the servicer’s foreclosure activities. Moreover, failure to conduct comprehensive audits to identify weaknesses in

foreclosure processes resulted in servicers not taking

sufficient corrective action to strengthen policy and

procedural gaps, increase staffing levels, and improve

training in response to sharply rising foreclosure volumes prior to the agencies’ foreclosure reviews. The

failure to identify the risks associated with foreclosure processing also resulted in servicers not taking

action to improve foreclosure documentation-related

processes ranging from custody and control of documents to proper notarization processes, or to enhance

oversight of third parties managing foreclosure

activities on their behalf.
This page left intentionally blank.
Part 3: Supervisory Response

At this time, the agencies are taking formal enforcement actions against each of the 14 servicers under

the authority of section 8(b) of the Federal Deposit

Insurance Act, 12 USC § 1818(b). The deficiencies

and weaknesses identified by examiners during their

reviews involved unsafe or unsound practices and

violations of law, which have had an adverse impact

on the functioning of the mortgage markets. Furthermore, the mortgage servicers’ deficient foreclosure

processes confirmed during the reviews have compromised the public trust and confidence in mortgage

servicing and have consequences for the housing

market and borrowers. The formal enforcement

actions will require servicers, among other things, to:

‰	 Compliance program: Establish a compliance program to ensure mortgage-servicing and foreclosure

operations, including loss mitigation and loan

modification, comply with all applicable legal

requirements and supervisory guidance, and assure

appropriate policies and procedures, staffing,

training, oversight, and quality control of those

processes.

‰	 Foreclosure review: Retain an independent firm to

conduct a review of residential foreclosure actions

that were pending at any time from January 1,

2009, through December 31, 2010, to determine

any financial injury to borrowers caused by errors,

misrepresentations, or other deficiencies identified

in the review, and to remediate, as appropriate,

those deficiencies.

‰	 Dedicated resources for communicating with

borrowers/single point of contact: Ensure the following: effective coordination of communication

with borrowers related to foreclosure, loss mitigation, and loan modification activities; assurance

that communications are timely and appropriate

and designed to avoid borrower confusion; continuity in the handling of borrower cases during the

loan modification and foreclosure processes; reasonable and good faith efforts, consistent with

applicable law and contracts, to engage in loss

mitigation and foreclosure prevention for delinquent loans where appropriate; and assurances

that decisions concerning loss mitigation or loan

modifications will be made and communicated in a

timely manner.

‰	 Third-party management: Establish policies and

procedures for outsourcing foreclosure or related

functions to ensure appropriate oversight and that

activities comply with all applicable legal requirements, supervisory guidance, and the servicer’s

policies and procedures, including the appropriate

selection and oversight of all third-party service

providers, including external legal counsel,

DMSPs, and MERS.

‰	 Management information systems: Improve management information systems for foreclosure, loss

mitigation, and loan modification activities that

ensure timely delivery of complete and accurate

information to facilitate effective decision making.

‰	 Risk assessment: Retain an independent firm to

conduct a written, comprehensive assessment of

risks in servicing operations, particularly in the

areas of foreclosure, loss mitigation, and the

administration and disposition of other real estate

owned, including but not limited to operational,

compliance, transaction, legal, and reputational

risks.

In addition to the actions against the servicers, the

Federal Reserve and the OTS have issued formal

enforcement actions against the parent holding companies to require that they enhance on a consolidated

basis their oversight of mortgage-servicing activities,

including compliance, risk management, and audit.

The agencies will monitor and assess, on an ongoing

basis, the corrective actions taken by the servicers

and holding companies that are required by the

enforcement actions and take further action, when

necessary, to address failures. Enforcement actions

and more frequent monitoring will remain in place at

each servicer until that servicer has demonstrated

that its weaknesses and deficiencies have been cor­
14 April 2011

rected, including that adequate policies, procedures,

and controls are in place. The agencies will continue

to explore ways to improve their supervisory frameworks to identify more promptly and effectively the

potential risks in mortgage-servicing and other banking operations.
Part 4: Industry Reforms

Financial regulatory agencies are developing standards within their authority to improve the transparency, oversight, and regulation of mortgage-servicing

and foreclosure processing and to set additional

thresholds for responsible management and operation of mortgage-servicing activities. Moreover, a

uniform set of national mortgage-servicing and

foreclosure-processing standards would help promote

accountability and appropriateness in dealing with

consumers and strengthen the housing finance

market.

Industry reforms that could improve the oversight

and regulation of mortgage-servicing and foreclosure

processing should generally include standards that

require servicers to address major areas of weaknesses highlighted in the review, including in the following general areas:

Governance and Oversight

‰	 implement and routinely audit sound enterprisewide policies and procedures to govern and control

mortgage-servicing and foreclosure processes

‰	 develop quality controls for effective management

of third-party vendors who support mortgageservicing and foreclosure processing

‰	 strengthen the governance standards intended to

ensure compliance with applicable federal and

state laws and company policies and procedures

‰	 develop company standards that emphasize accuracy and quality in the processing and validation

of foreclosure and other servicing-related documents throughout the entire foreclosure process

Organizational Structure, Staffing,

and Technology

‰	 increase staffing to adequate levels and provide

them with requisite training to effectively manage

the volume of default loans and foreclosures

‰	 upgrade information systems and practices to better store, track, and retrieve mortgage-related

documents

Accountability and Responsiveness

Dealing with Consumers

‰	 ensure borrowers are offered appropriate lossmitigation options

‰	 ensure proper custody and control of borrower

documents related to the servicing of the mortgage

‰	 increase coordination between loss mitigation and

foreclosure-processing units to prevent inappropriate foreclosures

‰	 improve communication with borrowers and establish measurable goals and incentives for delivering

accurate information and responsive assistance

‰	 develop complaint-resolution processes that are

routinely monitored and measured for quality

assurance