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## Interagency Review of Foreclosure Policies         and Procedures      

##### Sections of this Page

      - Executive Summary
      - Part 1: Background and Risks Associated with Weak Foreclosure             Process and Controls
      - Part 2: Review Findings
      - Part 3: Supervisory Response
      - Part 4: Industry Reforms

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## 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 foreclosure-processing            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 servicers' 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, 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 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 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.         
      -  **Foreclosure process governance.** Foreclosure governance                  processes of the servicers were under-developed 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 third-party                     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 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.         

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.        

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## 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

Source: Federal Reserve staff estimates of the concentration of               servicing volume, based on data from Inside Mortgage Finance.       
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At the end of the fourth quarter of 2010, nearly 54 million first-lien            mortgage loans were outstanding, 2.4 million of which were at some            point in the foreclosure process. Additionally, two million mortgages            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 agencies are concerned that the            deficiencies in foreclosure 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.         

### 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

### 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 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

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 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.         

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## 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 intervening 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.         

### 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' self-assessments. 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 traveled 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 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 RetentionWeaknesses 

 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 servicer 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 mortgage-servicing            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.        

 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 mortgage-servicing            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 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' quality-control processes            pertaining to MERS were insufficient. In some cases, servicers lacked            any quality-assurance 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 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.         

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## 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, 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 corrected,            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.         

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## 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 enterprise-wide policies               and procedures to govern and control mortgage-servicing and foreclosure               processes               
      -  develop quality controls for effective management of third-party               vendors who support mortgage-servicing 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 loss-mitigation 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               

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### Footnotes

1. 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 foreclosure-processing            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. Return to text

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 pre-established 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. Return to text

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. Return to text

4. This report captures only            the significant issues found across the servicers reviewed, not necessarily            findings at each servicer. Return to text

5. Servicemembers Civil Relief            Act, 50 USC App. sections. 501–596, Public Law 108-189. Return to text

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. Return to text

7. The five largest mortgage servicers in order are Bank of            America, Wells Fargo, JPMorgan Chase, Citibank, and Ally Bank/GMAC. Return to text

8. Federal Reserve staff estimates            54 million first-lien mortgages outstanding as of December 31, 2010. Return to text

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. Return to text

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 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. Return to text

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. Return to text

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). Return to text

13. Campbell, John Y., Stefano Giglio            and Parag Pathak (July 2010) *Forced Sales and House Prices**Manuscript*, Harvard University Department of Economics (kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdf). Return to text

14. 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.  Return to text

15. 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. Return to text

16. Only in rare instances were custodians unable            to produce original 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. Return to text

17. Not all of the servicers engaged the services of third-party vendor            DMSPs to perform document execution services. Return to text

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. Return to text

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