Troubled Asset Relief Program: Status of GAO Recommendations
Published: 2015-09-04T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Emergency Economic Stabilization Act of 2008 (EESA) authorized the creation of TARP to address the most severe crisis that the financial system had faced in decades. Treasury has been the primary agency responsible for TARP programs. EESA provided GAO with broad oversight authorities for actions taken under TARP and included a provision that GAO report at least every 60 days on TARP activities and performance.
This 60-day report describes the status of GAO's TARP performance audit recommendations to Treasury as of August 2015. In particular, this report discusses Treasury's implementation of GAO's recommendations, focusing on two programs: CPP and MHA. GAO's methodologies included assessing relevant documentation from Treasury, interviewing Treasury officials, and reviewing prior TARP reports issued by GAO.
section_title: What GAO Found
paragraphs: As of August 2015, GAO's performance audits of the Troubled Asset Relief Program (TARP) activities have resulted in 72 recommendations to the Department of the Treasury (Treasury). Treasury has implemented 59 of the 72 recommendations (about 82 percent), some of which were aimed at improving transparency and internal controls of TARP. The status of the remaining recommendations is as follows:
Treasury has partially implemented four of the recommendations—that is, it has taken some steps toward implementation but needs to take more actions. All four recommendations are directed at the Making Home Affordable (MHA) program, a collection of housing programs designed to help homeowners avoid foreclosure. The recommendations call for Treasury to, for example, issue guidance and monitor servicer compliance on working with borrowers with limited English proficiency. Treasury issued applicable guidance and obtained the policies of the larger MHA servicers, but has not assessed the implementation of those policies at the servicers.
Three recommendations remain open—that is, Treasury has not taken steps to implement them. Among these open recommendations are one directed at the Capital Purchase Program (CPP), which provided capital to certain U.S. financial institutions, and two recommendations directed at the MHA housing programs. For example, in July 2015, GAO recommended that Treasury establish a standard process to better ensure that changes to TARP-funded MHA programs are based on comprehensive benefit-cost analyses. Treasury told GAO they would consider these recommendations at the time the recommendations were made.
Six recommendations have been closed but were not implemented. Four are related to CPP and MHA and two to other TARP activities. Generally, Treasury did not take action before the programs evolved or began to wind down, and therefore GAO determined that the recommendations were outdated and no longer applicable.
section_title: What GAO Recommends
paragraphs: GAO continues to maintain that Treasury should take action to fully implement the four partially implemented recommendations and three open recommendations.

section_title: Letter
paragraphs: The Emergency Economic Stabilization Act of 2008 (EESA) authorized  the creation of the Troubled Asset Relief Program (TARP) to address the  most severe crisis that the financial system had faced in decades. EESA  provided GAO with broad oversight authorities for actions taken under  TARP and incorporated a provision that we report at least every 60 days  on TARP activities and performance. Our oversight and reporting has  resulted in 72 performance audit recommendations to the U.S.  Department of the Treasury (Treasury), the primary agency responsible  for TARP programs. While Treasury has addressed most of our  recommendations, some remain outstanding.
This 60-day report describes the status of our TARP recommendations to  Treasury as of August 28, 2015. In particular, this report discusses  Treasury’s implementation of our recommendations, focusing on two  major TARP programs: the Capital Purchase Program (CPP), which  supports certain U.S. financial institutions, and Making Home Affordable  (MHA), which is a collection of housing programs designed to help  homeowners avoid foreclosure. Appendix I provides the status of the  recommendations that we have made since 2008 in our performance  audits (performance audit recommendations).
To determine the status of Treasury’s implementation of our TARP  recommendations, we assessed relevant documentation from Treasury,  interviewed Treasury officials, and reviewed prior TARP reports issued by  GAO. We conducted this performance audit from June 2015 through  September 2015 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Of the TARP performance audit recommendations we have made, some  have been program specific, while others have addressed crosscutting  issues such as staffing and communications. Our program-specific  recommendations have focused on the following TARP initiatives:
CPP was designed to provide capital to financially viable financial  institutions through the purchase of preferred shares and  subordinated debentures.
The Community Development Capital Initiative (CDCI)  provided capital to Community Development Financial Institutions  by purchasing preferred stock.
Capital Assessment Program (CAP) was created to provide  capital to institutions not able to raise it privately to meet  Supervisory Capital Assessment Program—or “stress test”— requirements. This program was never used.
Credit market programs:
Term Asset-backed Securities Loan Facility (TALF) provided  liquidity in securitization markets for various asset classes to  improve access to credit for consumers and businesses.
SBA 7(a) Securities Purchase Program provided liquidity to  secondary markets for government-guaranteed small business  loans in the Small Business Administration’s (SBA) 7(a) loan  program.
American International Group (AIG) Investment Program  (formerly Systemically Significant Failing Institutions Program)  provided support to AIG to avoid disruptions to financial markets  from its possible failure.
Automotive Industry Financing Program (AIFP) aimed to  prevent a significant disruption of the American automotive  industry through government investments in the major  automakers.
The Home Affordable Modification Program (HAMP) divides  the cost of reducing monthly payments on first-lien mortgages  between Treasury and mortgage holders/investors and provides  financial incentives to servicers, borrowers, and mortgage  holders/investors for loans modified under the program.
Principal Reduction Alternative (PRA) pays financial  incentives to mortgage holders/investors for principal reduction  in conjunction with a HAMP loan modification for homeowners  with a current loan-to-value ratio exceeding 115 percent.
The Second-Lien Modification Program (2MP) provides  incentives for second-lien holders to modify or extinguish a  second-lien mortgage when a HAMP modification has been  initiated on the first-lien mortgage for the same property.
Home Affordable Foreclosure Alternatives (HAFA) provides  incentives for short sales and deeds-in-lieu of foreclosure as  alternatives to foreclosure for borrowers who are unable or  unwilling to complete the HAMP first-lien modification process.
Housing Finance Agency Innovation Fund for the Hardest Hit  Housing Markets (Hardest Hit Fund or HHF) supports  innovative measures developed by state housing finance agencies  and approved by Treasury to help borrowers in states hit hardest  by the aftermath of the housing crisis.
Federal Housing Administration’s (FHA) Short Refinance  Program provides underwater borrowers—those with properties  that are worth less than the principal remaining on their  mortgage—whose loans are current and are not insured by FHA  with the opportunity to refinance into an FHA-insured mortgage.
section_title: Treasury Has Implemented Most of Our Performance Audit Recommendations, but a Few Related to CPP and MHA Have Not Been Fully Addressed
paragraphs: As of August 2015, our performance audits of the TARP programs have  resulted in 72 recommendations to Treasury. Of the 72 performance audit  recommendations, Treasury has implemented 59, or approximately 82  percent; partially implemented 4—that is, taken some steps toward  implementation but needs to take more actions; and not implemented 3— that is, Treasury has not taken steps to implement them (see fig.1).  Among the 7 recommendations that Treasury has taken some or no steps  to implement, 1 was directed at CPP and 6 directed at the MHA housing  programs. Finally, 6 performance audit recommendations have been  closed-not implemented. Due to Treasury’s inaction and the evolving  nature of the programs, we considered 3 of them to be outdated and no  longer applicable. Two of these 6 recommendations were related to CPP  and 2 were related to the MHA programs.
subsections: section_title: Treasury Has Implemented the Majority of Recommendations for CPP
paragraphs: Treasury has taken action on the majority of our recommendations for  CPP. Specifically, to date, Treasury has implemented six of our nine  recommendations for CPP. For example, Treasury implemented our  recommendation that it apply lessons learned from the implementation of  CPP to similar programs, such as the Small Business Lending Fund  (SBLF), by including a process for reviewing regulators’ viability  determinations for all eligible applicants for SBLF. Specifically, Treasury  included additional evaluation by a central application review committee  for all eligible applicants who had not been approved by their federal  regulator. Treasury also took steps to provide information from its  evaluation to the regulator when their views differ. These steps should  help ensure that applicants will receive consistent treatment in investment  decisions across different regulators.
However, Treasury has not implemented three of our CPP-related  recommendations—one remains open and two have been closed. In  2012, we recommended that Treasury consider analyzing and reporting  on remaining and former CPP participants separately. In particular, we  noted that the remaining CPP institutions tended to be less profitable and  hold riskier assets than other institutions of similar asset size. For  example, the remaining CPP institutions had significantly lower returns on  average assets and higher percentages of noncurrent loans than former  CPP and non-CPP institutions. They also held less regulatory capital and  reserves for covering losses. Although our analysis found differences in  the financial health of remaining and former CPP institutions, we noted  that Treasury’s quarterly financial analysis of CPP institutions did not  distinguish between them. By not distinguishing between remaining and  former CPP participants, Treasury misses an opportunity to provide  greater transparency about the financial health of institutions remaining in  CPP. Treasury stated that it would carefully consider our recommendation  and emphasized its ongoing commitment to keeping the public informed  of its progress in winding down CPP. While Treasury reported generally  on the results of its CPP auctions and the status of institutions remaining  in the program, as of August 2015, it had not yet considered analyzing  and reporting on remaining and former CPP participants separately and it  is not likely to do so, according to Treasury. Treasury believes that  providing information about the financial position of institutions remaining  in CPP is unnecessary because it is publicly available to interested  parties through regulatory filings or other sources.
We closed two recommendations for Treasury to periodically collect and  review certain information from the bank regulators on the analysis and  conclusions supporting their decisions on CPP repayment requests to  help ensure consistency of the CPP repayment process. Treasury did  not take actions that would address the recommendations because it  believed these recommendations raised questions about how to balance  the goals of consistency with the need to respect the independence of  regulators. Although we disagreed with Treasury’s position, we closed  these two recommendations as not implemented because Treasury  officials stated that since it is winding down the program, only a few  remaining CPP participants are likely to make full repayments. Thus we  determined that implementation of these recommendations is not as  critical as it was at the time we made them.
section_title: Treasury Has Implemented the Majority of Recommendations for MHA
paragraphs: Since 2009, we have made 27 recommendations aimed at improving  MHA’s TARP-funded housing programs. As of August 2015, Treasury  had implemented 19 of them. Examples of more recent actions Treasury  has taken to implement these recommendations include the following:  In June 2010, we recommended that Treasury expeditiously finalize  and implement benchmarks for performance measures under the first- lien modification program, as well as develop measures and  benchmarks for the recently announced HAMP-funded homeowner  assistance programs. Since June 2011, Treasury has been  reporting in its MHA program performance reports on the performance  of the largest MHA servicers in three categories: (1) identifying and  contacting homeowners, (2) homeowner evaluation and assistance,  and (3) program management and reporting. Treasury established  quantitative and qualitative benchmarks for each of the three  performance categories for HAMP first-lien modifications and other  TARP-funded MHA programs. In the same report, we recommended  that Treasury expeditiously implement a prudent design for the  remaining TARP-funded housing programs. In July 2013, Treasury’s  MHA risk assessment included measuring internal control activities for  2MP, PRA, and HAFA.
In June 2012, we recommended that Treasury and FHA update their  estimates of participation in the FHA Short Refinance Program and  use the updated estimates to reassess the terms of the letter of credit  facility to help ensure that the program is cost-effective. After FHA  provided Treasury with updated participation estimates, Treasury  amended the letter of credit facility in March 2013, reducing the  authorized amount by $7 billion to $1 billion. Treasury also reduced  the cap on administrative fees that could be charged by $92 million  (from $117 million to $25 million). In March 2015, Treasury amended  the purchase agreement for the letter of credit facility for a second  time, reducing the amount by an additional $900 million ($1 billion to  $100 million). As a result of these two actions, Treasury deobligated  approximately $7.9 billion in total, disallowing its use for future  obligations.
In July 2012, we recommended that Treasury expeditiously conduct a  comprehensive risk assessment of HAMP Tier 2, using the standards  for internal control in the federal government as a guide. In April  2013, Treasury conducted a risk assessment of MHA programs,  including HAMP Tier 2, based on internal control standards. The risk  assessment included identifying the types and potential impacts of  risks on the MHA program and appropriate mitigating steps taken to  address those risks.
In February 2014, we recommended that Treasury issue clarifying  guidance to servicers on providing effective relationship management  to borrowers with limited English proficiency (LEP). Treasury had  previously issued guidance to servicers requiring them to develop and  implement a policy to identify the requirements and appropriate  caseload for the relationship manager position, including a provision  for providing effective relationship management to borrowers whose  primary language is a language other than English. In April 2014,  Treasury issued guidance requiring servicers to ensure that staff are  able to effectively communicate with all borrowers, including LEP  borrowers, by either employing multilingual individuals or engaging an  outside vendor to provide interpretation services.
Treasury has not implemented 8 of the 27 recommendations related to  MHA’s TARP-funded programs. Six of these recommendations remain  open, including 4 of which Treasury has taken some action. Finally, we  closed the remaining 2 TARP-funded housing program recommendations  as not implemented.
The four recommendations that Treasury has taken some action to  address are as follows:  In June 2010, we recommended that Treasury expeditiously report  activity under PRA, including the extent to which servicers determined  that principal reduction was beneficial to investors but did not offer it,  to ensure transparency in the implementation of this program feature  across servicers. Starting with the monthly MHA performance report  for the period through May 2011, Treasury began reporting summary  data on the PRA program. Specifically, Treasury provides information  on PRA trial modification activity as well as median principal amounts  reduced for active permanent modifications. In addition, Treasury’s  public MHA loan-level data files include information on the results of  analyses of borrowers’ net present value under PRA and indicate  whether principal reduction was part of the modification. While this  information would allow interested users with the capability to analyze  the extent to which principal reduction was beneficial but not offered  overall, it puts the burden on others to do the analysis and report the  results publicly. Also, the publicly available data do not identify  individual servicers and thus cannot be used to assess the  implementation of this program feature across servicers.
Treasury officials stated that they believe they have implemented this  recommendation through the reporting described previously.  Moreover, the officials stated that it would be neither useful nor helpful  to provide these data broken out by specific identified servicer.  Because servicers may choose to implement the PRA program under  individually developed terms, Treasury officials stated that broken out  data would not permit a proper comparison. However, our  recommendation was intended to ensure transparency in the  implementation of this program feature across servicers, which would  require that information be reported on an individual servicer basis to  allow comparison between servicers and highlight differences in the  policies and practices of individual servicers. As such, we maintain  that Treasury has partially implemented this recommendation and  should take action to fully implement it.
In February 2014, we recommended that Treasury ensure that the  compliance agent assess servicers’ compliance with LEP relationship  management guidance, once it was established. Treasury issued  clarifying LEP guidance to MHA program servicers in April 2014. In  July 2015, Treasury officials stated that they had reached out to the  seven largest MHA servicers to obtain their policies on implementing  the guidance and confirmed that such written policies are consistent  with MHA guidance on LEP.
In October 2014, we recommended that Treasury conduct periodic  evaluations using analytical methods, such as econometric modeling,  to help explain differences among MHA servicers in redefault rates.  Such analyses could help inform compliance reviews, identify areas of  weaknesses and best practices, and determine the need for additional  program policy changes. Treasury conducted an analysis to  compare redefault rates among servicers and to determine whether  servicers’ portfolio of HAMP-modified loans performed at, above, or  below expectations for the metrics analyzed.
Despite these analyses, Treasury officials maintained that such an  analysis is inherently challenging and limited and therefore would not  repeat it. Treasury officials gave several reasons for not periodically  repeating this analysis. First, they cited data limitations, including a  lack of loan origination and current credit profile data. However,  Treasury does have access to variables that both it and we have  identified in the past as being important for predicting redefault,  including the size of any change in payments, delinquency duration,  and credit scores and loan-to-value ratios at origination.
Second, Treasury indicated that excluding loans due to missing  observations could lead to unintended consequences. However, such  limitations are not unusual when researchers conduct this type of  analysis and researchers can employ measures to correct for or  identify biases in the data. In addition, Treasury conducted such  analyses when designing the program. Further, Treasury has relied  on this dataset to identify factors that they believe influence redefault.   And finally, we determined that the existing data are sufficiently  reliable to allow for more sophisticated analytical methods such as an  econometric analysis that could control for certain differences among  servicers.
Third, Treasury noted that it can rely on compliance reviews, including  a review of sampled loans at individual servicers, to ensure that  servicers followed program guidance. However, more rigorous  analytical methods are a useful tool to supplement and inform ongoing  compliance efforts, which by themselves may not detect significant  variations in performance across servicers. Such methods would also  be useful in identifying areas of weaknesses and best practices and  the potential need for additional program policy changes. Treasury  disagreed and for the reasons discussed above, questioned the  usefulness of such analysis with regard to informing compliance  efforts or identifying best practices or areas of weakness. However, in  our October 2014 report, we identified large differences among some  servicers both with and without controls for certain loan, borrower, and  property characteristics. We determined that the existing data are  sufficiently reliable to allow for more sophisticated analytical methods  such as an econometric analysis that could control for certain  differences among servicers. By not capitalizing on the information  these methods provide, Treasury risks making policy decisions based  on potentially incomplete information and may miss opportunities to  identify best practices to assist the greatest number of eligible  borrowers. Thus, we continue to maintain that Treasury should take  action to fully implement this recommendation.
In the same report, we recommended that Treasury conduct periodic  evaluations to help explain differences in MHA servicers’ reasons for  denying applications for trial modifications. Such evaluations could  help inform compliance reviews of individual servicers, identify areas  of weaknesses and best practices, and determine the potential need  for programmatic changes. Treasury put together a list of servicers  with reporting anomalies that had been identified and sent them  questionnaires asking them to explain the rationale behind using  certain codes to report denials (denial codes) of applications for trial  modifications. Treasury expects to have answers back by October  2015. Beyond that, Treasury stated that it and the MHA Program  Administrator planned to continue to collect data and monitor trends in  the data on an ongoing basis and reach out to servicers on an as- needed basis to collect more information. Treasury’s compliance  agent has also added procedures for testing denial codes that  servicers report. According to Treasury officials, Treasury has used  the prevalence of certain denial codes to inform certain policy  changes. For example, they said that the most common reason that  applications for HAMP were denied is that borrowers did not submit  the documentation necessary to evaluate their eligibility for HAMP. In  response, Treasury has simplified documentation requirements where  appropriate several times. In addition, Treasury told us that they use  the denial code information to form the basis for discussions with  individual servicers to ensure compliance with program guidelines and  reporting practices. Although these are examples of Treasury’s  analysis of overall denial rates, Treasury’s actions do not address  differences in individual MHA servicers’ reasons for denial.  Additionally, it is not clear whether Treasury plans to conduct periodic  evaluations of differences in denial rates or how Treasury will use the  information it gathers to identify areas of weaknesses and best  practices and determine whether additional policy changes are  needed. Thus, we continue to maintain that Treasury should take  action to implement this recommendation.
The two recommendations that Treasury has not implemented are as  follows:  In February 2014, we recommended that Treasury require its MHA  compliance agent to take steps to assess the extent to which  servicers had established internal control programs that effectively  monitored compliance with fair lending laws applicable to MHA  programs. In April 2014, Treasury officials stated that they planned  to continue efforts to promote fair lending policies. However, as of  August 2015, they did not plan to implement our recommendation. As  we noted in the report, both the MHA Servicer Participation  Agreement and MHA Handbook require that servicers have an  internal control program to monitor compliance with relevant  consumer protection laws. According to Treasury officials, the federal  agencies with supervisory authority over fair lending remain in the  best position to monitor servicers in this area. Representatives of the  federal regulators said that their fair lending reviews have a broader  overall focus that may not specifically focus on MHA activities.
Moreover, our analysis identified some statistically significant  differences among four large MHA program servicers in the number of  denials and cancellations of trial modifications and in the potential for  redefault of permanent modifications for certain protected groups.  Evaluating the extent to which servicers have developed and  maintained internal controls to monitor compliance with fair lending  laws could give Treasury additional assurances that servicers are  implementing the MHA program in compliance with fair lending laws.
In July 2015, we recommended that Treasury develop and implement  policies and procedures that established a standard process to better  ensure that changes to TARP-funded housing programs were based  on evaluations that comprehensively and consistently met the key  elements of benefit-cost analysis. In its written comments on the  draft report, Treasury agreed that it was important to assess the  benefits and costs of proposed program modifications and noted that  it would seriously consider the extent to which it could apply our  recommendation going forward. Treasury officials said that they  planned to provide an update on actions taken or planned in a  required response to Congress in September 2015.
section_title: Agency Comments
paragraphs: We provided Treasury a draft copy of this report for review and comment.  Treasury provided technical comments that we have incorporated as  appropriate.
We are sending copies of this report to the appropriate congressional  committees. This report will also be available at no charge on our web  site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov for  questions about nonmortgage-related TARP programs, or Mathew Scirè  at (202) 512-8678 or sciremj@gao.gov for questions about mortgage- related TARP programs. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix II.
section_title: Appendix I: Status of Troubled Asset Relief Program (TARP) Performance Audit Recommendations, as of August 2015
paragraphs: The following table summarizes the status of our TARP performance  audit recommendations as of August 28, 2015. We classify each  recommendation as implemented, partially implemented (the agency took  steps to implement the recommendation but more work remains), open  (the agency has not taken steps to implement the recommendation), and  closed, not implemented (the agency decided not to take action to  implement the recommendation). The recommendations are listed by  report.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Harry Medina and Karen Tremba  (Assistant Directors), Anne A. Akin (Analyst-in-Charge), Bethany Benitez,  Emily Chalmers, John Karikari, and Jena Sinkfield made key contributions  to this report.