Troubled Asset Relief Program: Status of Prior GAO Recommendations
Published: 2016-09-06T00:00:00

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 prior TARP performance audit recommendations to Treasury as of August 2016. 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 2016, GAO's performance audits of the Troubled Asset Relief Program (TARP) activities have resulted in 74 recommendations to the Department of the Treasury (Treasury). Treasury has implemented 62 of the 74 recommendations, some of which were aimed at improving the transparency and internal controls of TARP. Five recommendations remain open, all pertaining to the Making Home Affordable (MHA) program, a collection of housing programs designed to help homeowners avoid foreclosure. Of the five:
Treasury has partially implemented three open MHA recommendations—that is, it has taken some steps toward implementation but needs to take more actions. For example, in March 2016, GAO recommended that Treasury deobligate funds that its review showed would likely not be expended. Treasury's most recent estimates identified $4.7 billion in potential excess funds, of which Treasury has deobligated $2 billion as of August 2016.
Two additional MHA recommendations remain open—that is, Treasury has not taken steps to implement them. GAO recommended that Treasury take steps to assess the extent to which servicers have established internal control programs that monitor compliance with fair lending laws applicable to MHA programs. GAO also recommended that Treasury establish a standard process to better ensure that changes to TARP-funded MHA programs are based on comprehensive cost-benefit analyses. Treasury told GAO they would consider this recommendation but has noted that it plans no major program policy changes given the December 30, 2016, application deadline for the MHA program.
Seven recommendations have been closed but were not implemented. Five were related to the Capital Purchase Program (CPP) and MHA and two to other TARP activities. Generally, these recommendations were closed because GAO determined that the recommendations were no longer applicable.
section_title: What GAO Recommends
paragraphs: GAO continues to maintain that Treasury should take action to fully implement the three partially implemented and two open MHA recommendations. GAO will continue to assess the status of these recommendations considering new program activity and any further actions taken by Treasury.

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 included a provision that we report at least every 60 days on  TARP activities and performance. Our oversight and reporting have  resulted in 74 performance audit recommendations to the 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 progress Treasury made as of August  22, 2016, in implementing TARP-related recommendations since our  2015 status report. In particular, this report focuses 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 made since 2008 in our performance audits.
To identify the progress Treasury has made in implementing 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 April 2016 to August  2016 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: Some of the TARP performance audit recommendations we made were  program-specific, while others addressed crosscutting issues such as  staffing and communications. Our program-specific recommendations  focused on the following TARP initiatives:
Bank investment programs:
CPP was designed to provide capital to financially viable financial  institutions through the purchase of preferred shares and  subordinated debentures.
Community Development Capital Initiative 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 AIG’s possible failure.
Automotive Industry Financing Program aimed to prevent a  significant disruption of the American automotive industry through  government investments in the major automakers.
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 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 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 Implemented Most of Our Recommendations, but a Few Related to CPP and MHA Have Not Been Fully Addressed
paragraphs: As of August 22, 2016, our performance audits of the TARP programs  resulted in 74 recommendations to Treasury.
Treasury implemented 62, or approximately 84 percent. Three of the  implemented recommendations were closed based on actions taken  by Treasury since we last reported on the status of our TARP  recommendations in September 2015—all three recommendations  were MHA-related.
Five recommendations remain open. Treasury partially implemented  three of the recommendations (that is, took some steps toward  implementation) and had not taken any steps to implement the  remaining two recommendations. Each of the five recommendations  for which Treasury took some or no implementation steps were  directed at MHA housing programs.
Seven recommendations have been closed as not implemented  because we determined that they were outdated and no longer  applicable due to the evolving nature of the programs. Of these  recommendations, one was closed since September 2015 and was  directed at CPP. Three of these seven recommendations were related  to CPP and two to MHA programs.
subsections: section_title: Treasury Implemented the Majority of Recommendations Related to CPP
paragraphs: As of August 22, 2016, Treasury implemented six of nine  recommendations for CPP. For example, we recommended that Treasury  apply lessons learned from CPP implementation to similar programs,  such as the Small Business Lending Fund (SBLF)—specifically, by  including a process for reviewing regulators’ viability determinations of  eligible applicants. Treasury changed the SBLF process to include  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 differed. These steps should help ensure that  applicants will receive consistent treatment across different regulators.
Since August 2015, one of our CPP-related recommendations was closed  without being implemented by Treasury. In March 2012, we  recommended that the Secretary of the Treasury consider analyzing and  reporting on remaining and former CPP participants separately. In  particular, we noted that remaining CPP institutions tended to be less  profitable and held riskier assets than other institutions of similar asset  size. We analyzed financial data on 352 remaining CPP institutions and  256 former CPP institutions that exited CPP and found that 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. Treasury said it is not likely to consider analyzing and reporting on  remaining and former CPP participants separately. Treasury believes that  providing information about the financial position of institutions in CPP  was unnecessary because it is publicly available to interested parties  through regulatory filings or other sources.
We closed this recommendation as not implemented because  circumstances have changed significantly since we made the  recommendation. Specifically, 363 institutions were in CPP around the  time we made the recommendation, and the analysis we recommended  was intended to provide Treasury useful information about the relative  likelihood of remaining institutions repaying their investments and exiting  CPP. However, Treasury has been winding down CPP. When we last  conducted an analysis of the financial condition of the 16 institutions that  remained in CPP as of February 2016, most of them continued to exhibit  signs of financial weakness. Treasury officials recognized that the  remaining CPP firms generally have weaker capital levels and worse  asset quality than firms that exited the program. They further noted that  this situation was a function of the life cycle of the program, because  stronger institutions had greater access to new capital and were able to  exit, while the weaker institutions have been unable to raise the capital  needed to exit the program. Treasury believes that the remaining  institutions likely will not be able to repay their investments in full.  Consequently, we determined that the recommendation was no longer  applicable.
section_title: Treasury Implemented the Majority of Recommendations for MHA
paragraphs: As of August 22, 2016, Treasury implemented 22 of our 29 MHA-related  recommendations. Three of the 22 recommendations were implemented  after our September 2015 report on the status of TARP  recommendations:  In February 2014, we recommended that Treasury ensure that its  MHA compliance agent assess servicer compliance with Limited  English Proficiency (LEP) relationship management guidance, once it  was established. Treasury issued clarifying LEP guidance to MHA  program servicers in April 2014. In June 2016, Treasury provided us  with copies of the final report on the results of the compliance reviews  of the larger MHA program servicers’ implementation of LEP  guidance. Treasury also provided specific examination policies and  procedures used by MHA Compliance agent in its reviews of program  servicers’ implementation of LEP requirements.
In October 2014, we recommended that Treasury conduct periodic  evaluations to help explain differences among MHA servicers in the  reasons for denying applications for trial modifications. Since the  issuance of that report, Treasury conducted two denial reason rate  reviews in 2015—one looking at 11 MHA servicers with a high  concentration of various denial reasons and the other looking at 7  MHA servicers—to understand the prevailing reasons for their use of  specific denial reason codes (ineligible mortgage, request incomplete,  and offer not accepted/withdrawn). According to Treasury officials, the  results of these and other evaluations helped inform Treasury’s  decision to implement Streamline HAMP to help address the most  common denial reason (i.e., failure to submit required documentation).  Treasury also began conducting quarterly compliance reviews at the  largest MHA servicers to verify the accuracy of denial reasons  reported.
In March 2016, we recommended that Treasury review potential  unexpended balances by estimating future expenditures of the MHA  program, which would impact its lifetime cost estimate for the  program. Treasury stated that it historically assumed that all funds  obligated for MHA would be spent in furtherance of its mandate under  EESA to preserve homeownership and protect home prices. In  February 2016, following the enactment of legislation that terminates  MHA on December 31, 2016, Treasury lowered the lifetime cost  estimate for MHA, from $29.8 billion to $25.1 billion, which Treasury  said would continue to be reflected in its public reports on TARP.
Treasury has taken some actions to address three of the open  recommendations directed at the MHA programs:  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 analyze 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.
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. We maintain that  Treasury partially implemented this recommendation and should take  action to fully implement it.
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 subsequently 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.
Although they performed these analyses, Treasury officials  maintained that such analyses are inherently limited and therefore  they did not intend to repeat them. However, by not periodically  conducting analyses of differences in servicer redefault rates and  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. This will continue to be important after December  2016, when the HAMP program is closed to new entrants, since  borrowers are eligible for up to 6 years of pay-for-performance  incentives if they are able to maintain good standing on their modified  loan payments.
In March 2016, we recommended that Treasury deobligate funds that  its review showed likely would not be expended. Treasury’s most  recent estimates identified $4.7 billion in potential excess funds, of  which Treasury has deobligated $2 billion as of August 22, 2016.  For the additional $2.7 billion in potential excess funds Treasury  identified, Treasury stated that once servicers report all final  transactions to the MHA system of record in late 2017, it plans to  calculate the maximum potential expenditures under MHA and  deobligate any estimated excess funds at that time, as appropriate.  Given the uncertainties in estimating future participation and the  associated expenditures—in particular, the effect of Streamline HAMP  which was not fully implemented at the time of Treasury’s last  program estimate—it will be important for Treasury to update its cost  estimates as additional information becomes available and take timely  action to deobligate likely excess funds.
Finally, Treasury has not taken action to address two open  recommendations directed at MHA:  In February 2014, we recommended that Treasury require its MHA  compliance agent to take steps to assess the extent to which  servicers established internal control programs that effectively  monitored compliance with fair lending laws applicable to MHA  programs. 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 and fair lending laws. In April 2014, Treasury  officials stated that they planned to continue efforts to promote fair  lending policies. However, they noted that they believed that the  federal agencies with supervisory authority remain in the best position  to monitor servicer compliance with fair lending laws and that they did  not plan to implement this recommendation. 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 have  implemented MHA programs in compliance with fair lending laws.
In July 2015, we recommended that Treasury develop and implement  policies and procedures to better ensure that changes to TARP- funded housing programs are based on evaluations that  comprehensively and consistently met the key elements of benefit- cost analysis. Treasury agreed that it is important to assess the  benefits and costs of proposed program improvements, and that it  would continue to consider the costs of program enhancements and  balance those considerations with the overall objective of helping  struggling homeowners. Treasury also noted that, given the  scheduled application deadline for MHA on December 30, 2016, it did  not anticipate making significant policy changes to the MHA  programs.
Although the deadline for new MHA program applicants is December 30,  2016, elements of the MHA program will remain in effect after the  application deadline. For example, in the case of a HAMP loan  modification, borrowers are eligible for program benefits for up to 6 years.  As such, we continue to maintain that Treasury should take action to fully  implement the partially implemented and open recommendations. We will  continue to assess the status of these recommendations considering  program activity and actions taken by Treasury.
section_title: Agency Comments
paragraphs: We provided a draft of this report to Treasury for comment. Treasury had  no formal or technical comments on the draft report.
We are sending copies of this report to the appropriate congressional  committees. In addition, the report is available at no charge on the GAO  website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on   the last page of this report. GAO staff who made key contributions 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 22, 2016
paragraphs: The following table summarizes the status of our TARP performance  audit recommendations as of August 22, 2016. We classify each  recommendation as implemented, partially implemented (the agency took  steps to implement the recommendation but more action would be  required to fully implement it), open (the agency had not taken steps to  implement the recommendation), and closed, not implemented (the  agency decided not to take action to implement the recommendation and  we no longer consider the recommendation relevant). The  recommendations are listed by report.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgements
paragraphs: In addition to the contact named above, Harry Medina (Assistant  Director), Jason Wildhagen (Analyst-in-Charge), Anne Akin, Bethany  Benitez, John Karikari, Barbara Roesmann, Mathew J. Scirè, Jena  Sinkfield, and Karen Tremba made key contributions to this report.