Foreclosure Review: Regulators Could Strengthen Oversight and Improve Transparency of the Process
Released: 2014-04-29T00:00:00

Letter

Background

Mortgage servicers are the entities that manage payment collections and other activities associated with home loans. Mortgage servicers can be large mortgage finance companies, commercial banks, or nondepository institutions. Servicing duties can involve sending borrowers monthly account statements, answering customer-service inquiries, collecting monthly mortgage payments, and maintaining escrow accounts for property taxes and insurance. In the event that a borrower becomes delinquent on loan payments, servicers also initiate and conduct foreclosures. Errors, misrepresentations, and deficiencies in foreclosure processing can result in a number of harms to borrowers ranging from inappropriate fees to untimely or wrongful foreclosure.

Several federal regulators share responsibility for regulating the banking industry in relation to the origination and servicing of mortgage loans. OCC has authority to oversee nationally chartered banks and federal savings associations (including mortgage banking activities). The Federal Reserve oversees insured state-chartered banks that are members of the Federal Reserve System, bank and thrift holding companies, and entities that may be owned by federally regulated depository institution holding companies but are not federally insured depository institutions. The Federal Deposit Insurance Corporation (FDIC) oversees insured state-chartered banks that are not members of the Federal Reserve System and state-chartered savings associations.

Finally, CFPB has the authority to regulate mortgage servicers with respect to federal consumer financial law.into a memorandum of understanding with prudential regulators— specifically the Federal Reserve, FDIC, OCC, and the National Credit Union Administration—that governs their responsibilities to share information and coordinate supervisory activities so as to effectively and efficiently carry out their responsibilities, decrease the risk of conflicting supervisory directives, and increase the potential for alignment of related supervisory activities.

OCC designates each national bank as a large, mid-size, or community bank. The designation is based on the institution’s asset size and whether other special factors affect its risk profile, such as the extent of asset management operations, international activities, or high-risk products and services. Large banks are the largest and most complex national banks and are designated by the Senior Deputy Comptroller for Large Bank Supervision. Mid-size banks may be designated as large banks at the discretion of the Deputy Comptroller for Midsize and Credit Card Banks. responsible Federal Reserve Bank, which in turn assigns a central point of contact to each servicer. The contact leads an examination team with responsibility for continually monitoring activities, conducting discovery examinations designed to improve understanding of a particular business activity or control process, and testing whether a control process is appropriately designed and achieving its objectives.

Original Consent Orders Required a Foreclosure Review

In September 2010, allegations surfaced that several servicers’ documents in support of judicial foreclosure may have been inappropriately signed or notarized. In response to this and other servicing issues, federal banking regulators—OCC, the Federal Reserve, the Office of Thrift Supervision, and FDIC—conducted a coordinated on- site review of 14 mortgage servicers to evaluate the adequacy of servicers’ controls over foreclosure processes and to assess servicers’ policies and procedures for compliance with applicable federal and state laws. Through this coordinated review, regulators found critical weaknesses in servicers’ foreclosure governance processes; foreclosure documentation preparation processes; and oversight and monitoring of third-party vendors, including foreclosure attorneys. On the basis of their findings from the coordinated review, OCC, the Office of Thrift Supervision, and the Federal Reserve issued in April 2011 formal consent orders against 14 servicers under their supervision (see fig. 1).

Subsequently, the Federal Reserve issued similar consent orders against two additional servicers. These consent orders were intended to ensure safe and sound mortgage-servicing and foreclosure-processing activities and help address weaknesses with mortgage servicing identified during the reviews. To comply with the consent orders, each of the 16 servicers is required to, among other things, enhance its vendor management, training programs and processes, and compliance with all applicable federal and state laws, rules, regulations, court orders, and servicing guidelines. In addition, as a result of the consent orders, the Federal Reserve issued civil money penalties against some of the servicers and provided that the penalty amounts could be remitted by federal payments made and borrower assistance provided under the National Mortgage Settlement or by providing funding to housing counseling organizations.OCC also considered civil money penalties against the servicers it regulates, and for four servicers that were also party to the National Mortgage Settlement, OCC reached an agreement that civil money penalties would be assessed if the servicer did not satisfy the requirements of the formal consent orders or their respective obligations under the National Mortgage Settlement.

The consent orders also required each servicer to retain an independent consultant to review certain foreclosure actions on primary residences from January 1, 2009, to December 31, 2010, to identify borrowers who suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure actions, and to recommend remediation for borrowers, as appropriate. In general, the consent orders identified seven areas for consultants to review: 1. whether the servicer had proper documentation of ownership of the 2. whether the foreclosure was in accordance with applicable state and 3. whether a foreclosure sale occurred while a loan modification was 4. whether nonjudicial foreclosures followed the terms of the loan and state law requirements;5. whether fees charged to the borrower were permissible, reasonable, 6. whether loss-mitigation activities were handled in accordance with program requirements and policies; and 7. whether any errors, misrepresentations, or other deficiencies resulted in financial injury to the borrower.

To review these areas, consultants generally segmented their file review activities to test for each area of potential error separately. As a result, a borrower’s loan file might have undergone multiple reviews for different potential errors before the results of each of the review segments were compiled and the file review was considered complete.

Loans were identified for review through a process by which eligible borrowers could request a review of their particular circumstances (referred to as the request-for-review process) and through a review of categories of files considered at high risk for errors (referred to as the look-back review). Regulators required servicers to establish an outreach process for eligible borrowers who believed they might have been harmed due to errors in the foreclosure process to request a review of their particular circumstances. Consultants were expected to review all of the loans received through the request-for-review process. For the look-back review, regulators required consultants to review 100 percent of all files in three categories—borrowers in bankruptcy in which a completed foreclosure took place, loans potentially subject to the protections provided by the Servicemembers Civil Relief Act (SCRA), and agency- referred foreclosure cases—that were identified as at high risk for servicing or foreclosure-related errors during the regulators’ 2010 coordinated reviews. Consultants for Federal Reserve-regulated servicers were also required to review 100 percent of files in two other categories determined to be high risk—borrowers with pending modification requests and borrowers current on a trial or permanent modification. In addition, as each servicer had a unique borrower population and servicing systems, consultants, with examination teams’ input, were expected to identify various high-risk loan categories appropriate to their servicer—such as loans in certain states or loans associated with certain foreclosure law firms—that could be associated with a higher likelihood of servicing or foreclosure-related errors and review a sample of those loans.

In 2013, the Foreclosure Review Was Replaced for Most Servicers with Cash Payments and Foreclosure Prevention Actions

Beginning in January 2013, OCC and the Federal Reserve announced that they had reached agreements with 15 of the 16 servicing companies to terminate the foreclosure reviews and replace the reviews with a payment agreement (as previously shown in fig. 1). Under these agreements, servicers agreed to provide compensation totaling approximately $10 billion, including $4 billion in cash payments to eligible borrowers and $6 billion in foreclosure prevention actions. These amounts were generally divided among the 15 participating servicers according to the number of borrowers who were eligible for the foreclosure review at the time the amended orders were negotiated such that the total per-servicer amount ranged from $16 million to $2.9 billion (see table 1). For the majority of servicers, the amended consent orders ended an approximately 20-month file review process. Although consultants were at various stages of completing the reviews when the work was discontinued, the amended consent orders underlined that regulators retained the right to obtain and access all material, records, or information generated by the servicer or the consultant in connection with the file review process. The amended consent orders did not affect the other aspects of the original consent orders—such as required improvements to borrower communication, operation of management information systems, and management of third-party vendors for foreclosure-related functions—and work to oversee servicer compliance with these other aspects continues.

According to regulatory staff and documents, the estimated time it would take for borrowers to receive remediation and mounting costs of completing the file reviews motivated the decision to amend the consent orders. As of December 2012, OCC staff estimated that remediation payments to borrowers would not start for many months and that completing the file review process could take, at a minimum, an additional 1 to 2 years, based on the number of files still to be reviewed and the extent of the work to be completed. The mounting costs of the file reviews also motivated the decision to terminate the file reviews for most servicers. As of August 2012, the collective costs for the consultants had reached $1.7 billion, according to OCC’s decision memorandum. Based on the results of the reviews conducted by consultants through December 2012, regulators estimated that borrower remediation amounts would likely be small while the consultant costs to complete the reviews would be significant. As a result, OCC and Federal Reserve staff determined that completing the reviews to determine precisely which borrowers had compensable errors due to harm would have resulted in long delays in providing remediation payments to harmed borrowers.

With the adoption of the amended consent orders, regulators and servicers moved away from identifying the types and extent of harm an individual borrower may have experienced and focused instead on issuing payments to all eligible borrowers based on identifiable characteristics. To determine the cash payment amount to be provided to each borrower, the majority of participating servicers categorized borrowers according to specific criteria. Fourteen of the servicers that participated in the amended consent order process, covering approximately 95 percent of the population of 4.4 million borrowers that were eligible for the foreclosure review process under the original consent orders, adopted this approach (see table 2). To categorize borrowers, regulators provided each servicer with a cash payment framework that included 11 categories of potential harms—including violation of SCRA protections and foreclosure on borrowers in bankruptcy—and generally ordered the categories by severity of potential harm. For each of the 11 categories in the cash payment framework, regulators identified specific borrower and loan characteristics that servicers then used to place all eligible borrowers into categories such that a borrower would be placed in the highest category for which he or she had the required characteristics. Regulators used the results of this categorization process as the basis for determining the payment amounts for each category. The payment amounts for all eligible borrowers for those 14 servicers ranged from several hundred dollars for a servicer that did not engage the borrower in a loan modification to $125,000, plus equity and interest, for a servicer that foreclosed on a borrower who was eligible for SCRA protection. One other servicer signed an amended consent order to terminate the file review process and provide cash payments to borrowers. In contrast to the other servicers that signed amended consent orders, this servicer had completed its initial file review activities and OCC used the preliminary file review results as the basis for determining payments to all eligible borrowers.

The amended consent orders also required all 15 servicers to undertake a specified dollar amount of foreclosure prevention actions and submit those actions for credit based on criteria established by regulators. For 13 of the servicers, these actions are to occur between January 2013 and January 2015. The amended orders provided two methods for servicers to receive credit for foreclosure prevention actions. First, servicers could conduct loss-mitigation activities for individual borrowers, by providing loan modifications or short sales, among other actions. Regulators also specified that the actions taken under this method could not be used to satisfy other similar requirements, such as the foreclosure prevention requirement of the National Mortgage Settlement (discussed later). Second, servicers could satisfy their obligation by making cash payments to approved housing counseling agencies, among other actions.

One servicer, OneWest Bank, did not elect to amend its consent order and terminate the file review process. The consultant for this servicer continues file review activities for a portion of the eligible population of 192,000 borrowers, as planned. According to OCC, in 2014, the servicer will provide remediation to borrowers based on findings of actual harm.

Other Mortgage Servicing Actions

In addition to the consent orders issued by OCC, the Office of Thrift Supervision, and the Federal Reserve, mortgage servicers have been subject to other actions designed to improve the provision of mortgage servicing by setting servicing standards. In February 2012, the Departments of Justice, Treasury, and Housing and Urban Development, along with 49 state Attorneys General, reached a settlement with the country’s five largest mortgage servicers. Under the settlement, the servicers will provide approximately $25 billion in relief to distressed borrowers and the servicers agreed to a set of mortgage servicing standards. This settlement, known as the National Mortgage Settlement, established nationwide servicing reforms for the participating servicers, including establishing a single point of contact for borrowers, standards for communication with borrowers, and expectations for fee amounts and the execution of foreclosure documentation. The settlement also established an independent monitor to oversee the servicers’ execution of the agreement, including their adherence to the mortgage servicing standards. CFPB also established new mortgage servicing rules that took effect in January 2014. Among other things, these rules established requirements for servicers’ crediting of mortgage payments, resolution of borrower complaints, and actions servicers are required to take when borrowers are late in their mortgage payments.

In addition to the National Mortgage Settlement, other recent settlements have required servicers to provide foreclosure relief to borrowers as a component of the agreement. In November 2013, the Department of Justice along with state Attorneys General for four states announced a settlement with JPMorgan Chase to provide $4 billion in foreclosure relief, among other actions, to remediate harms allegedly resulting from unlawful conduct. The settlement identified specific actions for which JPMorgan Chase would receive credit towards its obligation, including certain types of loan modification actions, lending to low- to moderate- income borrowers and borrowers in disaster areas, and activities to support antiblight programs. Similarly, in December 2013, CFPB and 49 state Attorneys General and the District of Columbia announced a settlement with Ocwen Financial Corporation to provide $2 billion in relief to homeowners at risk of foreclosure by reducing the principal on their loans. Both settlements also assign an independent monitor to oversee the execution of the settlements, and the settlement with Ocwen requires the servicer to comply with the standards for servicing loans established in the National Mortgage Settlement.

Negotiations Were Largely Based on Projected Costs and Remediation Amounts and the Goals for the Cash Payments Were Generally Met

Regulators considered factors such as projected costs and potential remediation amounts associated with the file reviews to negotiate the $3.9 billion total cash payment under the amended consent orders. However, because the reviews were incomplete, these data were limited. According to Federal Reserve staff, OCC led the data analysis to inform negotiations, and the Federal Reserve relied on aspects of this work. Despite the uncertainty regarding the remaining costs and actual financial harm experienced by borrowers, regulators did not test the major assumptions used to inform negotiations. According to our prior work, testing major assumptions provides decision makers a range of best- and worst-case scenarios to consider and provides information to assess whether an estimate is reasonable. We compared the final negotiated cash payment amount to estimates we obtained by varying the key assumptions used in regulators’ analysis. Our analysis found that the final negotiated amount was generally within the range of different results based on alternative assumptions. Regulators established goals related to timeliness, the cash payment amounts, and the consistency of the treatment of borrowers and the distribution of payments. Regulators met their timeliness and amount goals and took steps to promote a consistent process, including providing guidance to examination teams and servicers.

Regulators Considered Projected Costs and Potential Remediation Amounts to Inform Negotiations

The cash payment agreement obligations under the amended consent orders were achieved through negotiations between regulators and participating servicers. According to OCC, staff engaged with six servicers in November 2012 to discuss a cash payment agreement. As previously discussed, the estimated time it would take for borrowers to receive remediation and mounting costs of completing the reviews motivated the cash payment agreement under the amended consent orders. Following initial discussions with these six servicers, regulators engaged in similar discussions with an additional eight servicers subject to the foreclosure review requirement, according to regulatory staff. The total negotiated cash payment amount for all 15 servicers that ultimately participated in amended consent orders was approximately $3.9 billion. Generally, each servicer’s share of the cash payment amount was determined based on its proportional share of the 4.4 million borrowers who were eligible for the foreclosure review.

Regulators considered factors such as projected costs to complete file reviews and potential remediation amounts associated with the file reviews to inform negotiations with servicers. According to Federal Reserve staff, OCC led negotiations with servicers and the initial analysis of estimates that informed these negotiations. According to Federal Reserve staff, they participated in negotiations and relied on certain elements of OCC’s analysis to inform the Federal Reserve’s decisions regarding a payment agreement for the institutions they oversee. To inform negotiations with servicers, OCC developed two estimates of servicers’ costs: an estimate of the projected cost to complete the reviews and an estimate for the potential remediation payout to borrowers. Specifically, OCC staff said they used the cost estimate as a means of estimating what servicers might be willing to pay and the potential remediation payout as an early attempt to estimate potential harm and understand how funds would be distributed among borrowers. The final amount of $3.9 billion was negotiated between regulators and servicers and was higher than the estimates regulators used to inform negotiations.

Projected cost to complete the reviews. According to regulatory staff and documents, OCC and the Federal Reserve relied on cost projections from consultants which estimated that the remaining expected fees for consultants to complete the reviews would be at least $2 billion. In November 2012, consultants reported cost projections based on time frames ranging from as short as 4 months for one servicer to as long as 13 months for other servicers—that is, 4 to 13 months beyond November 2012—to complete reviews. Regulatory staff told us they also considered the amounts servicers had reserved to pay for potential remediation. Specifically, OCC included an estimate of the amount servicers had reserved to pay for potential remediation ($859 million), bringing the total estimated cost to complete the reviews had they not been terminated to approximately $2.9 billion ($2 billion to complete the reviews plus the $859 in remediation reserves). According to regulatory staff and documents, the Federal Reserve relied on projected costs and remediation reserves provided by OCC to inform their decisions during negotiations.

Potential remediation payout to borrowers. Using the aggregate financial harm error rate—that is, the financial harm error rate for all completed files among all servicers—of 6.5 percent in December 2012, OCC estimated the potential remediation payout to borrowers from the reviews would be $1.2 billion, according to OCC documents. In this analysis, regulators used amounts listed in the foreclosure review remediation framework and added an additional $1,000 per borrower for borrowers who submitted a request-for-review and were in the process of foreclosure. For borrowers who submitted a request-for-review and had a completed foreclosure, OCC added an additional $2,000 per borrower.estimated the distribution of borrowers among the payment categories by extrapolating the results of one servicer’s initial categorization to all servicers. Specifically, they used one servicer’s preliminary distribution of borrowers to estimate the proportion of borrowers in each category. According to OCC staff and documents, they then applied these proportions to the borrower populations for other servicers and applied the 6.5 percent financial harm error rate to each category. According to OCC staff, they used the distribution of one servicer’s population because it provided retail servicing nationwide. OCC staff stated that they analyzed the distribution of borrowers for two additional servicers and reached similar results. Federal Reserve staff told us they did not rely on OCC’s financial harm error rate analysis to inform their decisions during negotiations; rather, as stated previously, they relied on cost projections and remediation reserves to inform their decisions during negotiations.

In addition, OCC staff told us they The data that were available to regulators to inform negotiations for the cash payment amount were limited. Because the reviews were incomplete in November 2012 when negotiations began, data were limited due to uncertainty about the (1) costs associated with completing the reviews and (2) error rate for the entire population of 4.4 million borrowers eligible for review. First, given the incomplete state of the reviews in November 2012 when negotiations began, regulators had limited information about costs associated with completing the reviews. For example, cost projections available to regulators prior to the negotiations did not account for additional requests-for-review submitted in December 2012. The period for eligible borrowers to submit requests- for-review did not expire until December 31, 2012—after negotiations between regulators and servicers began. Between November 29, 2012, and December 27, 2012, the number of requests-for-review increased by more than 135,000 requests (44 percent). In addition, for most consultants, the cost projections did not account for the planned second phase of reviews, known as deeper dives, in which consultants would have conducted additional reviews based on errors identified in the first phase of reviews. Among the servicers that participated in the payment agreements, all consultants we spoke with anticipated that they would conduct deeper dives. In its decision memorandum for the amended consent orders, OCC estimated an additional 1 to 2 years to complete the reviews. OCC staff stated based on the scope and complexity of the remaining reviews, they believed the reviews would have taken longer than consultants projected in November 2012.

Second, the incomplete nature of the reviews in December 2012 limited the extent to which regulators could estimate the financial harm error rate and potential remediation. The remediation reserves established by some servicers were based on reviews that had been conducted by consultants thus far. Similarly, the extent to which OCC could use the preliminary error rate of 6.5 percent for the completed reviews to reliably estimate the prevalence of harm in the population and potential remediation was limited. According to data provided to regulators, third-party consultants of servicers that had agreed to the payment agreement in January 2013 had completed final reviews for approximately 14 percent of the files slated for review, and none of the consultants had completed their sampled file reviews, making it difficult for OCC to reliably estimate the prevalence of harm or potential remediation payout for the entire 4.4 million borrowers eligible for the reviews. In addition, reports provided to regulators by consultants of the servicers who agreed to the payment agreement in January 2013 showed variation in progress and financial harm error rates across servicers (see table 3). For example, servicer “K” reported over 90 percent of the sampled file reviews complete for foreclosures in progress and foreclosures complete, with error rates of about 26.7 percent and 15.6 percent, respectively. In contrast, servicer “A” reported it had not completed any final reviews. Further, the segments and types of reviews that were completed varied among consultants. For example, one consultant told us they prioritized sampled files for review over requested file reviews, while another consultant told us they focused on completing requested reviews. Another consultant stated they prioritized requested reviews and pending foreclosures.

Although Regulators Conducted Limited Analysis, the Final Cash Payment Amount Generally Fell within a Reasonable Range

The final negotiated cash payment amount of $3.9 billion exceeded the two separate cost estimates of $2.9 billion and $1.2 billion that OCC generated to inform negotiations. However, OCC performed only limited analyses. For example, OCC did not vary key assumptions about costs and error rates used in its estimates, which would have been appropriate given the limitations of the available data. The Federal Reserve did not conduct any additional analyses to inform negotiations, but relied, in part, on data and analysis provided by OCC pertaining to projected costs and remediation reserves to inform its decisions regarding the payment agreement. As part of our review, we conducted a sensitivity analysis to test changes to major assumptions associated with the data regulators used to inform negotiations. Specifically, we tested assumptions related to projected costs, error rate, and borrower categorization. Further, to assess the reasonableness of the final negotiated amount, we used the results of our sensitivity analysis to compare the final negotiated cash payment amount to the amounts calculated when we varied key assumptions. We found that the final negotiated amount of $3.9 billion was generally more than amounts suggested under various scenarios we analyzed. (See app. I for more detail on this analysis.)

Projected costs. In its analysis using consultants’ reported projected costs, OCC estimated that the cost to complete the reviews would have been $2.9 billion. However, as we noted earlier, cost projections were limited and did not take into account the additional requests for review submitted by borrowers in December 2012 or the time associated with anticipated deeper dives. We calculated monthly costs using consultants’ reports that were available from September 2012 through December 2012 and estimated the projected total cost to complete reviews under several alternative scenarios. Our analysis showed that the total costs could have been either higher or lower than the estimates OCC used in its analysis, depending on how long the reviews would have taken if they had continued. For example, we estimated that if the reviews had taken an additional 13 months to complete (the longest projected time reported by consultants in November 2012), the cost would have been nearly $2.5 billion—about $460 million (23 percent), more than the regulators’ estimate of $2 billion. Conversely, if the reviews had taken less time to complete than the consultants projected, regulators’ analyses may have overestimated costs. We then added OCC’s remediation reserve estimate of $859 million to our cost estimates. Including the remediation reserves, our estimate for projected costs based on 13 additional months of review was $3.3 billion (see fig. 2). Both our estimated amount at 13 months and OCC’s estimation of $2.9 billion are less than the actual final negotiated amount of $3.9 billion. Because OCC stated the reviews could take up to an additional 2 years, we included an additional 24 months in our analyses, which resulted in an estimate of $4.6 billion. OCC staff stated that, based on the experience of the servicer that continued with the reviews and had a relatively small number of borrowers eligible for review, an additional 2 years or more to complete the reviews was a likely scenario for other servicers had they not participated in the amended consent orders.

Financial harm error rate. As an alternative measure, OCC estimated remediation payouts based on a preliminary financial harm error rate of 6.5 percent for file reviews completed as of December 2012 across all servicers. On the basis of that analysis, OCC estimated that remediation payouts from the file reviews could be $1.2 billion.

However, as discussed above, the progress and findings of errors and financial harm among servicers varied significantly. We analyzed the projected remediation payments using the lowest, median, and highest preliminary error rates for the 13 servicers that participated in the payment agreement in January 2013. Our analysis generated a range of estimated remediation payouts between 71 percent below and almost 206 percent above the amount generated by OCC’s analysis using the average error rate of 6.5 percent (see fig. 3). However, the final, negotiated cash payment of $3.9 billion was higher than the payment of $3.7 billion that we calculated at the highest reported servicer error rate.

Borrower categorization. As stated previously, OCC estimated the distribution of borrowers among the payment categories in its error rate analysis by extrapolating the results of one servicer’s initial borrower categorization to all servicers. OCC and the Federal Reserve told us that each servicer’s borrower population was unique. As such, different servicers could have different borrower distributions among the payment categories. We analyzed the distribution of borrowers for the other five servicers involved in initial amended consent order negotiations based on preliminary data servicers provided to regulators. Our analysis showed that the final, negotiated cash payment of $3.9 billion was higher than the estimates that would have resulted from using any of the other five servicers’ borrower distributions (see fig. 4).

Prior to agreeing on a final cash payment amount, both the Federal Reserve and OCC conducted additional analyses to corroborate that the negotiated cash payment amount was acceptable. For example, the Federal Reserve estimated payment amounts to borrowers by category under the tentative agreement to confirm that the negotiated amount would not result in trivial payments to borrowers. This analysis showed that a $3.8 billion total cash payment would provide payments to borrowers in each category ranging from several hundred dollars up to $125,000. Therefore, after considering these cost estimates as well as the timelines for project completion, the Federal Reserve determined that the negotiated amount was acceptable because it exceeded the combined expected fees and remediation reserve estimates of completing the reviews and would allow for nontrivial payment amounts to borrowers in each category. OCC staff stated they conducted similar, informal analyses of the tentative settlement agreement. Specifically, OCC staff stated they considered the error rate for proposed cash payment amounts during negotiation. For example, staff estimated that the actual error rate from completed reviews would have had to exceed nearly 26 percent before remediation payments under the reviews would exceed the negotiated cash payment amount. Therefore, according to this analysis, OCC determined that the negotiated amount was acceptable. Staff also stated they believed the negotiated amount would be more than sufficient to cover the total amount servicers would have paid to harmed borrowers under the foreclosure review.

Regulators stated that both the limited nature of the information available during the negotiation and the process for determining the amounts paid by servicers under the amended consent orders were not typical. According to Federal Reserve staff, in a typical process, they would conduct investigations to determine actual harm and perform analyses to determine compensation amounts. For example, for a recent enforcement order against a subprime mortgage lender, which involved a much smaller population of potentially harmed borrowers than the foreclosure review, the Federal Reserve required the servicer to analyze individual files to determine the specific amount of harm. OCC staff stated that because the negotiated payment agreement involved the discontinuation of the reviews required by the original consent orders, they did not have data that would otherwise typically have been available. Both OCC and Federal Reserve staff told us there are no prior enforcement actions that are comparable to the payment agreement under the amended consent orders. OCC staff stated that the amended consent orders are atypical in terms of the number of borrowers eligible for reviews (over 4 million), the number of projected file reviews (over 739,000), and the extensive nature of each review. In addition, regulators stated that, given the limited progress of the file reviews, they did not believe extensive analysis was possible. While regulators did have more analytical methods available to them, we recognize that they had limited data available.

Regulators Generally Met Their Goals for the Cash Payments

Generally, regulators set three goals for the process of categorizing and distributing cash payments to borrowers: 1. provide compensation to a large number of borrowers before 2014, 2. provide cash payments to borrowers of between several hundred dollars and $125,000, and 3. reduce the possibility of inconsistent treatment of borrowers among servicers, when compared with the file review results.

Regulators took steps to meet their goal for the timeliness of distribution of cash payments to a large number of borrowers. As of December 2013, checks had been distributed to approximately 4 million borrowers covered by the 13 servicers that were part of the January 2013 amended consent order announcements. As shown in figure 5, California and Florida were the states with the largest number of checks issued as well as the largest Specifically, borrowers in California and total amount paid to borrowers.Florida received about 32 percent of the total issued checks (1.3 million checks collectively worth approximately $1.2 billion). In addition, borrowers in seven states (Arizona, Georgia, Illinois, Michigan, Nevada, Ohio, and Texas) received checks worth a total of between $100 million and $200 million per state. Although the checks were sent to the mailing address of the borrower rather than the property address of the affected property, according to our analysis of Mortgage Bankers Association data, these states correspond to some of the states with the highest foreclosure inventories in 2009 and 2010. In comparison, borrowers in five states and the District of Columbia received checks worth a total of less than $5 million per state (Alaska, District of Columbia, North Dakota, South Dakota, Vermont, and Wyoming).

To facilitate meeting the goal of a timely borrower categorization process, regulators defined specific loan and borrower characteristics—such as extent of delinquency, forbearance or repayment plan start date, foreclosure sale date, or bankruptcy filing date—for each cash payment category in advance. They expected servicers to use these characteristics to categorize borrowers based on the data in servicers’ computer systems—review of files by hand to make a judgment about a borrower’s category was generally not permitted.expected servicers to conduct an internal review of their categorization results—for example, several servicers engaged their internal audit department, which are separate from the servicers’ mortgage servicing operations, to conduct a preliminary validation of the results to identify problems or weaknesses with categorization activities. According to several examination staff that we spoke with, they met regularly with the staff responsible for internal reviews to discuss their approach and review their results. This step contributed to a more timely verification process by the examination teams as they were already familiar with the servicer’s internal review procedures and results. Finally, regulators asked servicers to select one third-party payment administrator to facilitate issuance of checks. According to OCC staff, regulators worked closely with this payment administrator concurrently with the categorization process to define the work processes for check distribution to help facilitate a timely distribution of checks to borrowers once the categorization process was complete.

The cash payment categorization process was largely completed by April 2013 for the 13 servicers, and the payment administrator began issuing checks to each of the approximately 4.2 million eligible borrowers serviced by the 13 servicers that were part of the January 2013 amended consent order announcements. As figure 6 shows, the payment administrator issued approximately 89 percent of checks to borrowers in April 2013 with the majority of the remaining checks issued by July 2013. As of early January 2014, approximately 193 payments remained to be issued. The payment administrator had not issued these checks because of borrower-specific challenges, including problems with the borrower’s taxpayer identification number or the need to issue multiple checks for the same loan. The payment administrator issued approximately 96,000 checks for amounts that were less than the borrower should have received. Supplementary checks worth about $45 million were issued to the affected borrowers in May 2013. As of the beginning of January 2014, approximately 81 percent of the issued checks had been cashed. According to OCC staff, to help promote check cashing, regulators instructed the payment administrator to conduct additional research on a borrower’s address and re-issue checks to borrowers whose initial checks had expired and had not been cashed to try and increase the check- cashing rate.

Under the cash payment process, borrowers generally received cash payments of between $300 and $125,000, in line with regulators’ goal of providing those amounts to borrowers. In general, the amounts paid to borrowers in the same category varied depending on whether the borrower had submitted a request-for-review—those borrowers received a higher payment amount than other borrowers—and whether the foreclosure was in process, had been rescinded, or was complete as of December 31, 2011. In addition, those borrowers serviced by two servicers that signed the original consent orders after April 2011 and therefore had not participated in the request-for-review process were generally paid at the same level or at a higher level—24 percent to 30 percent more—than a borrower who did not submit a request-for-review. As seen in figure 7, the largest number of borrowers (1.2 million borrowers, or 29 percent of the eligible population) were placed in the category for approved modification requests, which provided payments of between $300 and $500, depending on whether the borrower was considered to have submitted a request-for-review. About 1,200 borrowers were paid at the maximum rate of $125,000, including approximately 1,100 SCRA-eligible borrowers. Approximately 11 percent (439,000 borrowers) were paid an additional amount designated for borrowers who had submitted requests-for-review.

Although regulators met their cash payment amount goal, they recognized that some borrowers might have received more or less through the foreclosure review process. According to regulators, as part of their process to determine the cash payment amounts to be paid to borrowers in each category, they considered the amount that borrowers would have been paid for errors in that category under the file review process, among other considerations. Under the cash payment framework, borrowers in the highest paid categories—SCRA-eligible borrowers and borrowers foreclosed upon who were not in default— received the same amounts as they would have under the file review process. For the other categories, the final cash payment amounts were generally less than the amounts that would have been paid for an error in that category under the file review process for borrowers who did not submit a request-for-review. According to regulators, they decided to pay higher amounts to borrowers who submitted requests-for-review— generally double the amounts paid to borrowers who did not submit requests-for-review—because they felt that those borrowers had an expectation of receiving a file review and should be compensated for that expectation. According to regulators, in adopting the cash payment process, they recognized that some borrowers would fare better or worse that they might have under the file review process. For example, some borrowers who might not have received remediation under the file review process, either because a file review did not identify harm or the file was not reviewed, would receive a cash payment. However regulators said the converse was also true, that is, borrowers who through the file review could have been found to have been harmed and therefore eligible for remediation could potentially receive a lower amount through the cash payment process. OCC and Federal Reserve staff also stated that under the amended consent orders, borrowers were not required to waive or release any rights or claims against the servicer to receive a cash payment.

According to regulators, in recognition of challenges in achieving consistent results among servicers during the file review process, they took steps to promote a consistent approach to the cash payment categorization process—one of their goals—such that similarly situated borrowers would have similar results. For example, regulators held weekly meetings with OCC and Federal Reserve examination team staff as well as with servicers to discuss the categorization process. In addition, they provided guidance to examination teams and servicers for the categorization process, including examination teams’ oversight activities. According to examination teams, the guidance provided was timely, and given the limited time to complete the categorization process, they generally worked closely with the servicer to ensure any resulting changes were incorporated. OCC headquarters staff also conducted on- site visits to each servicer and examination team to review the categorization process and activities. According to OCC staff, these on- site visits allowed for a comparison of servicers’ categorization processes and the oversight processes used by the examination teams to help ensure these activities were done according to the guidance and as a result would be largely consistent. Similarly, the Federal Reserve examination teams and Federal Reserve Board staff met in person to discuss the categorization process and oversight activities as part of their efforts to promote consistent results. Finally, according to a few servicers we spoke with, to promote consistent results some servicers met early in the process, with regulators’ input, to discuss the regulators’ categorization guidance and mentored other servicers as they conducted their initial categorization activities to help ensure there was a shared interpretation of the guidance among servicers.

However, there were some differences in the categorization results for borrowers among servicers as a result of flexibilities in the categorization process, as well as limitations with some servicers’ data systems. For example, servicers were given the option of retaining the third-party consultant hired to work on the foreclosure reviews to complete file reviews for borrowers who were categorized into the first two categories—SCRA-eligible borrowers and borrowers not in default at the time of foreclosure—rather than relying on the loan and borrower characteristics regulators’ specified for those categories. Based on the file review results, servicers were required to provide remediation to borrowers whom the file reviews determined had been harmed and re- categorize the remaining borrowers into the next highest payment category for which they qualified according to other loan and borrower characteristics. Based on our review of regulators’ documents, 12 of the 13 servicers used this option and directed consultants to complete file reviews for borrowers who were placed in some of these categories.

According to OCC staff and one servicer we spoke with, some consultants had already completed or were near completion of the file reviews for SCRA-eligible borrowers.

Similarly, missing or unreliable data in servicers’ systems resulted in some servicers being unable to categorize borrowers according to the cash payment framework criteria and instead placing borrowers in the highest category for which they had data. According to our review of examination teams’ conclusion memorandums and interviews with examination teams, at least 5 of the 13 servicers were unable to place some borrowers into the most appropriate category of the framework because servicers’ systems did not have the data necessary to categorize borrowers according to the loan and borrower characteristics provided by regulators. For the majority of these servicers, the percentage of affected borrowers was relatively small. For example, in one case data limitations affected roughly 4 percent of borrowers at that servicer, whereas in another case, they impacted approximately 8 percent of that servicer’s borrowers. However, for one servicer, data limitations were extensive enough that regulators required the servicer to stop the categorization process for approximately 74 percent of eligible borrowers and categorize those borrowers into higher categories than their characteristics might have indicated if data had been available in the servicer’s system. According to regulators, they mitigated the impact of these limitations on individual borrowers by instructing servicers to place borrowers in the highest possible category from which they could not be excluded due to missing or unreliable data. Figure 8 illustrates an example of how the same borrower might have had different results depending on the servicer.

Placing borrowers in higher categories when data were unavailable potentially had a distributional impact on other borrowers. Where there is a set sum of money, as in this case, making changes by placing more borrowers than anticipated in higher categories could result in either (1) lower payment amounts per borrowers in those categories or (2) lower- than-anticipated amounts for borrowers in lower categories. According to Federal Reserve staff the relatively small number of borrowers affected by these changes meant that the distributional impact was minimal.

Regulators Did Not Establish Specific Objectives for Foreclosure Prevention Actions, and Oversight Is Limited

Regulators did not establish specific objectives for the $6 billion obligation they negotiated with servicers to provide foreclosure prevention actions. However, they communicated the expectation that the actions be meaningful, and they set forth broad principles for servicers’ entire portfolio of foreclosure prevention actions. To negotiate the amount and determine the design of the foreclosure prevention component of the amended orders, regulators did not follow their typical practices to inform supervisory actions, which include analysis of information. For example, analysis of the volume of servicers’ recent foreclosure prevention actions might have helped regulators assess the sufficiency and feasibility of the required obligation, among other things. According to most servicers we spoke with, they would be able to meet the required volume of activities using their existing foreclosure prevention activities. Regulators did collect data to inform oversight of servicers’ financial obligations, and OCC and the Federal Reserve are requiring examination teams to oversee servicers’ policies and monitoring controls related to the principles. However, according to Federal Reserve staff, most of the Federal Reserve examination teams have not conducted their oversight activities related to the foreclosure prevention principles and regulators’ guidance for oversight of the principles does not identify actions examination teams should take to evaluate or test implementation of these principles. According to regulators’ supervisory guidance as well as federal internal control standards, establishing specific monitoring activities, including testing, is important to effective supervision. In the absence of such monitoring activities, regulators may not know if a key element of the amended consent orders is being realized.

Regulators Negotiated Foreclosure Prevention Obligations without the Benefit of Specific Objectives or Analysis

The $6 billion foreclosure prevention action obligation amount was negotiated by regulators and servicers and was not framed by specific objectives or informed by any data or analysis. According to OCC’s and the Federal Reserve’s supervisory manuals, enforcement actions, including consent orders, are used to address specific problems, concerns, violations of laws or agreements, and unsafe or unsound practices, among other things, that are identified through supervisory examinations. Further, federal internal control standards highlight the importance of establishing clear objectives for activities undertaken by agencies as a means of ensuring that agency outcomes are achieved.

The foreclosure prevention component of the amended consent orders, however, was not intended to address specific problems, violations, or unsafe or unsound practices. According to the Federal Reserve, the $6 billion required foreclosure prevention actions represent additional remediation, above and beyond the $3.9 billion cash payment required of servicers in lieu of finishing the reviews. OCC staff stated that the foreclosure prevention component of the amended consent orders mirrored the requirement that servicers provide loss mitigation options to harmed borrowers under the file review process. Although regulators negotiated the foreclosure prevention action obligations in the amendment that terminated the foreclosure review for most servicers, the foreclosure prevention obligations were not related to preliminary findings from the reviews. In addition, the actions were not specifically intended to assist only borrowers who were eligible for the reviews; servicers can count foreclosure prevention actions performed to assist any borrower in their portfolio toward their obligation under the amended consent order provided the action meets the criteria in the orders. The amended consent orders, however, directed servicers to attempt to prioritize these borrowers for assistance to the extent practicable. Regulators stated that they included the foreclosure prevention component in the amended consent orders because the National Mortgage Settlement had a similar component.component in the amended consent orders was intended to convey to servicers the importance of foreclosure prevention activities.

Thomas J. Curry, Comptroller of the Currency, remarks before Women in Housing and Finance (Washington, D.C.: Feb. 13, 2013). keep borrowers in their homes and ensuring that foreclosure prevention actions are nondiscriminatory such that actions to not disfavor a specific geography, low- or middle-income borrowers, or a protected class. According to regulators, these principles were to be applied to servicers’ broad portfolio of foreclosure prevention activities (not just those undertaken as part of the $6 billion obligation under the amended consent orders).

Although regulators stated they considered other similar settlements, they did not collect or analyze relevant data to inform the amount or structure of the foreclosure prevention component of the amended consent orders. According to regulators’ supervisory manuals, regulators typically analyze information to inform enforcement actions. Despite the absence of identified problems and specific objectives to guide the analysis, a variety of data were available to regulators that could potentially have informed negotiations. In addition, while it is typical for regulators and their supervised institutions to negotiate consent orders, regulators stated that the negotiations for the amended consent orders did not follow the typical enforcement action process. According to OCC staff, the decision to significantly amend the consent orders by replacing the foreclosure review with a cash payment agreement and a foreclosure prevention component was unprecedented. We recognize the atypical nature of the negotiations and regulators’ desire to distribute timely payments to eligible borrowers. However, we believe some data collection and analysis would have been feasible and useful to inform the amount and structure of the foreclosure prevention component. Regulators, in particular OCC, had access to loan-level data about some servicers’ foreclosure prevention actions through the data they collect from servicers for the quarterly OCC Mortgage Metrics reports and that servicers report to Treasury’s Making Home Affordable program, which includes Treasury’s Home Affordable Modification Program (HAMP), that they could have used to inform negotiations. Other useful data were available from servicers. The following are examples of types of analyses that could be useful to inform such negotiations.

Analysis of the value of various types of foreclosure actions undertaken by servicers. Analysis of the value of various foreclosure actions undertaken by servicers may have provided information for regulators to consider in assessing the sufficiency of the negotiated amount to provide meaningful relief to borrowers. For example, data on servicers’ recent volume of foreclosure prevention actions, measured by the unpaid principal balance of loans at the time these actions were taken, as well as an average or range of unpaid principal balances for various types of actions undertaken by servicers, may have provided a basis for gauging the number of borrowers who might be helped with various amounts of foreclosure prevention obligations under the amended consent orders. Our analysis of HAMP data shows that the average unpaid principal balance for loans that received a modification through HAMP was approximately $235,000. As such, in a hypothetical scenario in which a servicer was obligated to provide $100 million in foreclosure prevention actions and reached the obligation by providing only loan modifications, it could be estimated that 425 borrowers would be assisted by the obligation as measured by the unpaid principle balance of the loans.

Analysis of the volume of servicers’ typical foreclosure prevention actions. Analysis of the volume of servicers’ typical foreclosure prevention actions might have provided insight into the potential impact, if any, of the foreclosure prevention actions and informed the feasibility of the negotiated amounts—that is, the extent to which servicers could reach the required amounts within the 2-year period using their existing programs. Four of the seven servicers we interviewed that participated in amended consent orders indicated that they anticipated they would be able to meet the required volume of activity using their existing foreclosure prevention activities. Of these four servicers, two indicated they could achieve the required volume of foreclosure prevention actions within the first year, and one servicer indicated it would be easy to meet the requirement given that they regularly provide much larger amounts of foreclosure prevention assistance than their negotiated obligation. One servicer that we did not interview reported large volumes of activities using their existing programs and policies during the first 6 months of the eligible period. Specifically, between January and June 2013, the servicer reported short sale activities that were approximately 87 percent of the required obligation. During this same period, the servicer reported it had also undertaken loan modification activities that were valued at about 7 times more than their total required foreclosure prevention obligation.stated they opted to make payments to housing counseling agencies to fulfill the amended consent order requirement because they determined they would not be able to meet the obligation with their existing portfolio since the loans in the portfolio were not highly delinquent.

In contrast, officials from one servicer we interviewed

Analysis of alternative crediting approaches. Analysis of the results of alternative crediting approaches may have provided insight into the sufficiency of the negotiated amount—that is, the extent to which the required obligations would reach an appropriate number of borrowers as determined by regulators. The amended consent orders provide credit based on the unpaid principal balance of the loan. On the basis of this methodology, a loan with an unpaid principal balance of approximately $235,000, for example, would result in a credit of approximately $235,000 toward the servicer’s obligation, regardless of the action taken. However, alternative crediting structures exist. For example, the National Mortgage Settlement, which includes a similar foreclosure prevention component, uses an alternative approach that generally provides credit based on the amount of the principal forgiven or assistance provided. Using this methodology, for a loan modification with the same unpaid principal balance of approximately $235,000, where the principal forgiven was 29 percent of that balance (the average amount of principal forgiveness for first-lien HAMP loan modifications), a servicer would receive a credit towards their obligation of $68,855. Thus, in a hypothetical scenario in which a servicer was required to provide $100 million in foreclosure prevention actions and met the obligation by using only principle forgiveness, our analysis estimated 425 borrowers would receive assistance under the amended consent orders compared to about 1,452 borrowers under the National Mortgage Settlement.

Further, analysis of the mix of servicers’ typical activities might have provided baseline information for regulators to consider in assessing whether creating incentives for certain actions by crediting them differently might be warranted to help achieve the stated expectation of keeping borrowers in their homes. consent orders, the methodology for determining credit for foreclosure prevention actions is the same for all actions, regardless of the type of action or characteristics of the loan. However, some actions are designed to keep borrowers in their homes (loan modifications, for Alternatively, some actions are designed to help avoid example).

In contrast to the amended consent orders, the National Mortgage Settlement provides varying amounts of credit depending on the type of action and certain loan characteristics. Under the National Mortgage Settlement approach, a loan modification, for example, would be credited at a higher ratio than a short sale. Regulators stated they considered the National Mortgage Settlement structure in defining the types of creditable activities under the amended consent orders and the methodology for determining how the activities would be credited towards each servicer’s obligation. Foreclosure prevention actions for which servicers can receive credit under the amended consent orders are generally the same as the actions for which servicers can receive credit under the National Mortgage Settlement. However, OCC staff said they adopted a different crediting approach for the amended consent orders because it is more transparent than the approach used for the National Mortgage Settlement. foreclosure but borrowers lose their homes (e.g., short sales or deeds-in-lieu).

Analysis of eligible borrowers still in their homes and in need of assistance. Analysis of the number of borrowers eligible for the foreclosure review who were still in their homes and in need of assistance might have informed the relevance of the method for allocating of the negotiated amount. Regulators generally divided the $6 billion obligation among servicers based on their share of the 4.4 million borrowers eligible for the foreclosure review, with servicers responsible for amounts that ranged from about $10 million to $1.8 billion. In addition, in the amended consent orders, regulators directed servicers to prioritize these borrowers, even though the foreclosure prevention actions were not restricted to borrowers eligible for review. However, the number of borrowers who were eligible for the foreclosure review and might benefit from the foreclosure prevention action obligations is potentially limited. Specifically, according to information on regulators’ websites covering 13 of the 15 servicers that participated in amended consent orders, 41 percent of the borrowers who were eligible for the foreclosure review had completed foreclosures as of December 31, 2011. Further, according to two servicers we interviewed, the number of borrowers who were eligible for the reviews and still able to receive foreclosure prevention actions was relatively small. For example, one servicer noted that approximately 50 percent of these borrowers were no longer being serviced by them. They added that of the remaining population, about 50 percent had already received at least one foreclosure prevention action. As such, many of the borrowers who were eligible for the foreclosure review because of a foreclosure action in 2009 and 2010 might not have been able to benefit from the foreclosure prevention actions required under the amended consent orders.

Evaluation and Testing of Servicers’ Implementation of Foreclosure Prevention Principles Is Limited

To oversee the foreclosure prevention component of the amended consent orders, regulators are considering both servicers’ actions to meet the monetary obligations and the foreclosure prevention principles included in the amended orders. Regulators collected data from servicers and regulators provided guidance to examination teams to facilitate oversight activities. OCC and the Federal Reserve established reporting requirements to collect information from servicers on the foreclosure prevention actions they were submitting for crediting to meet the monetary obligations specified in the amended consent orders. To meet those obligations, servicers could either provide foreclosure prevention actions to borrowers or make cash payments to borrower counseling or education or into the cash payment funds used to pay borrowers based on categorization results. Eight of the servicers opted to meet their obligation by providing foreclosure prevention actions, and the remaining seven made cash payments.

To facilitate verification of servicers’ crediting requests for foreclosure prevention actions, regulators required servicers to submit periodic reports, which all of the servicers have done. Servicers were required to submit loan-level information, such as the loan number, foreclosure status, and unpaid principal balance before and after the action, on each loan the servicers submit for crediting towards their obligation. In addition, servicers were required to state if the borrower was part of the eligible population for the foreclosure review—to respond to the expectation in the amended consent orders that, to the extent practicable, servicers prioritize eligible borrowers from the foreclosure review. According to regulators, they are in the process of hiring a third-party to evaluate the servicers’ reported data to validate that the reported actions meet the requirements of the amended consent orders and facilitate regulators’ crediting approval decisions. Servicers have begun reporting on their foreclosure prevention actions, and according to OCC staff, early submissions from servicers meeting their obligation through provision of foreclosure prevention actions to borrowers suggest they will meet their foreclosure prevention requirements quickly. The actions submitted for crediting varied, with some servicers primarily submitting short sale activities for crediting and others reporting loans that received loan modification actions.

The reporting requirements also include information related to the principles established in the amended consent orders, although this information is not representative of servicers’ complete portfolio of foreclosure prevention actions. For example, servicers are required to report information on the types of assistance provided, which provides information on the extent to which the actions servicers are reporting for crediting are helping borrowers keep their homes—such as by providing a loan modification as compared to a short sale, in which a borrower would still lose his or her home. According to servicers we spoke with, the information they are reporting to regulators on their foreclosure prevention activities for crediting is not representative of their full portfolio of foreclosure prevention activities and would not provide information on how well their overall program is meeting the principles established for the assistance. For example, some servicers are submitting loans for crediting review that focus primarily on certain segments of their servicing population, such as only proprietary (in-house) loans. Another servicer had submitted all of its loss mitigation activities that may qualify for crediting according to the definitions in the amended consent orders, but this still does not represent all of their activities. Overall, the reporting requirements associated with the foreclosure prevention actions in the amended consent orders provide information to assess crediting but not to evaluate servicers’ application of the foreclosure prevention principles to their broader portfolio of loans.

Regulators also issued guidance to examination teams for oversight of the foreclosure prevention principles. The guidance identifies procedures examination teams were expected to take to oversee a servicer’s application of the foreclosure prevention principles to their broad portfolio of foreclosure prevention actions. Those procedures included steps related to each of the key elements in the principles. However, the guidance does not identify actions examination teams should take to evaluate or test servicers’ application or implementation of the steps. For example, the guidance requires examination teams to describe the policies and monitoring controls servicers have in place to help ensure that their foreclosure prevention activities are nondiscriminatory, but does not set an expectation that teams will evaluate how well servicers are applying those policies and controls to their mortgage servicing practices. Similarly, the guidance requires examination teams to identify the performance measures servicers use to assess the principle related to the sustainability of foreclosure prevention actions, but the guidance does not require examination teams to evaluate how well a servicer’s programs are providing sustainable actions.foreclosure prevention actions are meaningful—one of the principles— examination teams are to collect data on the servicers’ foreclosure prevention actions, including the extent to which those actions resulted in higher or lower monthly payments, but the guidance does not require Finally, to assess whether servicers’ examination teams to evaluate the data to understand what it indicates about servicers’ actions.

In contrast, other sections of the same guidance provided to examination teams for oversight of the other articles of the consent orders specify regulators’ expectations that examination teams will evaluate and test certain policies, monitoring controls, and data. For example, OCC’s guidance to oversee compliance—which is intended to assess whether servicers’ mortgage practices comply with all applicable legal requirements and supervisory guidance—identifies specific areas where examination teams should test policies and controls as well as performance measures. For instance, examination teams are expected to evaluate the servicer’s performance measures to determine the servicer’s ability to complete timely foreclosure processing, to identify and evaluate controls for preventing improper charging of late fees, and to evaluate the servicer’s staff model for certain criteria. Similarly, the Federal Reserve’s guidance specifies testing procedures for most elements of the original consent orders, such as third-party management, servicer’s compliance program, and risk management. For instance, to ensure that documents filed in foreclosure-related proceedings are appropriately executed and notarized—one of the requirements in the original consent orders—the guidance states that examination teams should review servicers’ policies, procedures, and controls to ensure that the documents are handled appropriately and then test a sample of documents to verify that notarization occurred according to the applicable requirements.

According to regulators’ supervisory manuals, effective supervision requires defining examination activities, including determining clear objectives and describing the specific procedures to evaluate and test that policies and procedures are implemented. In addition, federal internal control standards require individuals responsible for reviewing management controls—such as servicers’ policies and procedures for the foreclosure prevention principles—to assess whether the appropriate policies and procedures are in place, whether those policies and procedures are sufficient to address the issue, and the extent to which the policies and procedures are operating effectively.

Some examination teams are close to completing the oversight procedures related to the foreclosure prevention principles, but others have not begun, and the extent to which regulators plan to evaluate or test information collected is unclear. According to OCC staff, examination teams completed their initial oversight of these principles in December 2013, as part of their other consent order validation activities. OCC staff told us they are reviewing the results of each of the examination teams’ procedures and may identify the need for additional activity. OCC staff stated they also plan to conduct an additional review of each servicer’s foreclosure prevention actions, which will include consideration of the principles in the amended consent orders, but they do not have specific procedures to evaluate or test servicers’ implementation of those principles. According to Federal Reserve staff, most Federal Reserve examination teams have not yet conducted their oversight activities related to the foreclosure prevention principles. Federal Reserve staff told us that examination teams generally are conducting these reviews during the second quarter of 2014 and that the Federal Reserve would consider conducting additional follow-up activities related to the principles. According to federal internal control standards, management control activities should provide reasonable assurance that actions are being taken to meet requirements, such as the requirements related to the foreclosure prevention principles. not yet completed their oversight activities for the foreclosure prevention principles, the extent to which this oversight will incorporate additional evaluation or testing of servicer’s implementation of the principles is unclear.

See GAO/AIMD-00-21.3.1. procedures are effective—an assessment OCC examination teams are required to make—or assessing how well the principles guide servicer behavior. For example, although servicers may have policies that explicitly forbid disfavoring low- or moderate-income borrowers during foreclosure prevention actions, without reviewing data, such as a sample of transactions from various programs, it is difficult to determine whether the policy is functioning as intended. Without these procedures, regulators may miss opportunities to determine how well servicers’ foreclosure prevention actions provide meaningful relief and help borrowers retain their homes.

Regulators Are Sharing Findings of Servicing Weaknesses Confirmed through File Reviews and Cash Payment Process

According to regulators we spoke with, the initial review of borrowers’ 2009 and 2010 foreclosure-related files and cash payment categorization process confirmed past servicing weaknesses—such as documentation weaknesses that led to errors in foreclosure processing—that they suspected or discovered through the 2010 coordinated review that was done in advance of the original consent orders. Regulators have taken steps to share these findings across examination teams. Continued supervision of servicers and information sharing about the experiences and challenges encountered help ensure that these weaknesses are being corrected. Recent changes to regulators’ requirements for mortgage servicing also help to address some of the issues.

File Review and Cash Payment Activities Confirmed Previously Identified Servicing Weaknesses

Although consultants generally did not complete the review of 2009 and 2010 foreclosure-related files through the file review process, consultants, servicers, and regulators were able to describe some of the servicing weaknesses they identified based on the work that was completed. According to OCC staff, these preliminary findings from consultants’ review of 2009 and 2010 foreclosure-related files were consistent with issues discovered through the earlier coordinated review of foreclosure policies and practices conducted by examination teams in 2010 that led to the consent orders. As we noted previously, the file reviews were retrospective assessments and were designed to identify and remediate the harms suffered by borrowers due to 2009 and 2010 servicing practices.practices from these file reviews, regulators asked consultants to complete an exit questionnaire and held exit interviews with each consultant to discuss the file review process and preliminary observations and findings. In addition, while consultants did not prepare final reports with their findings, regulators we spoke with said they had shared some preliminary findings with examination teams through weekly updates as the file reviews progressed. Examples of weaknesses identified during the coordinated review and confirmed during the review of files from the same period, included the following: To collect information on what was learned about servicers’

Failure to halt foreclosures during bankruptcy. The report from the regulators’ 2010 coordinated review noted that servicers’ quality controls were not adequate to ensure that foreclosures were halted during bankruptcy proceedings. These concerns were validated during the subsequent review of 2009 and 2010 foreclosure files during which consultants found some instances of foreclosures taking place after borrowers had filed for bankruptcy.

Failure to halt foreclosures during loss mitigation procedures. The report from the 2010 coordinated review also expressed concern that servicers’ quality control processes did not ensure that foreclosures were stopped during loss mitigation procedures, such as loan modifications. During the subsequent file reviews, one consultant found that in some cases, a servicer had foreclosed on borrowers who were in the midst of applying for loan modifications. In addition, the file reviews identified some borrowers who were wrongfully denied loan modifications, did not receive loan modification decisions in a timely manner, or were not solicited for HAMP modifications in accordance with HAMP guidelines.

Failure to apply SCRA protections. The coordinated review report also noted that a lack of proper controls could have affected servicers’ determinations of the applicability of SCRA protections. Some consultants identified issues such as servicers failing to verify a person’s military status prior to starting foreclosure proceedings and failing to consistently perform data checks to determine military status.

Failure to maintain sufficient documentation of ownership. Although the 2010 coordinated reviews found that servicers generally had sufficient documentation authority to foreclose, examiners noted instances where documentation in the foreclosure file may not have been sufficient to prove ownership of the mortgage note. Likewise, during the subsequent consent order file reviews, some consultants found cases of insufficient documentation to demonstrate ownership.

Weaknesses related to oversight of external vendors and documentation of borrower fees. The coordinated file review report noted weaknesses in servicers’ oversight of third-party vendors, and OCC staff stated that the subsequent file review found errors related to fees charged to borrowers, many of which occurred when servicers relied on external parties. Staff explained that servicers often did not have controls in place to ensure that services were performed as billed and that the fees charged to customers were reasonable and customary.

In addition, the process of categorizing borrowers for cash payments— which relied on servicers’ data about those borrowers from 2009 and 2010—found issues that were consistent with weaknesses identified during the 2010 coordinated reviews, particularly in servicers’ data systems. For example, one examination team noted that a servicer’s data weaknesses related to servicemembers and others became more apparent during the cash payment categorization process. In addition, as noted earlier, at least 5 of the 13 servicers were unable to categorize some borrowers according to the framework criteria because of system limitations. Federal Reserve staff noted that problems with one servicer’s data related to loan modifications led the servicer to place everyone in the highest category possible rather than rely on the system. Further, another examination team told us that while reviewing the categorization of borrowers for cash payments, the servicer’s internal audit department found a high rate of borrowers incorrectly categorized in the loan modification categories due to weaknesses in the quality of the servicer’s data. The examination team explained that after reviewing the servicer’s initial categorization, regulators determined that the servicer did not have sufficiently reliable system data to categorize borrowers in the lowest categories, and therefore those borrowers were categorized in a higher category.

OCC and the Federal Reserve Are Taking Steps to Leverage and Share Results to Inform Future Supervision

After terminating the reviews of 2009 and 2010 foreclosure-related files, regulators instructed examination teams to identify deficiencies and monitor servicers’ actions to correct them. For example, OCC required examination teams to complete conclusion memorandums on deficiencies consultants identified. The conclusion memorandums were to include information on the deficiencies consultants identified in the servicer’s policies, procedures, practices, data, systems, or reporting. The guidance for the memorandums also asks examination teams to discuss steps servicers took to correct these deficiencies. In one conclusion memorandum, the examination team noted that the servicer was in the process of addressing issues, such as technological impediments to efficient and accurate servicing and the accurate identification of borrowers eligible for SCRA protections and borrowers in bankruptcy, but that not all issues had yet been addressed. According to Federal Reserve staff, they are not planning to do a broad analysis of the results from the file reviews, but they have asked the examination teams to consider issues that emerged from them and whether additional corrective action is needed. OCC and Federal Reserve staff also told us that examination teams are continuing their oversight activities to determine whether servicers are addressing all aspects of the consent order, which includes the areas highlighted by the preliminary file reviews. OCC staff said that the examination work is intended to determine what issues have been addressed and what issues continue to exist.

Some examination teams told us that they are leveraging the results of the reviews and the cash payment categorization process by following up on some of the issues identified for the servicers they oversee in their future oversight. For example, one team said that it was following up on findings related to bankruptcy, fees, notices of loan modifications, and income calculations associated with loan modification applications. In particular, they noted that they have done subsequent testing related to borrowers in bankruptcy and will continue to assess the servicer’s efforts in this area. Another team stated that in light of challenges with an aspect of the cash payment categorization process, they identified weaknesses with the servicer’s staffing, project management, and problem resolution processes. To try to prevent repetition of these mistakes, the examination team required the servicer to identify and implement changes to their mortgage servicing practices.

However, some examination teams said that little additional information was learned from the file review or cash payment activities that they could leverage in future oversight. For example, one examination team noted that because few files had gone through complete reviews, they could not determine how widespread the problems found were. They said that because the file reviews were terminated before the reviews were completed, they did not have sufficient information to interpret the initial findings. Another examination team told us that no new information was learned from the file reviews and all of the issues raised during them were known issues. A third examination team told us that they would incorporate some aspects of the consultant’s processes into their review process, but the reviews were not far enough along to draw conclusions about any additional substantive weaknesses with the servicer’s practices. In addition, Federal Reserve staff noted that because the file reviews were terminated before many data points were collected, what could be learned from them is limited. Similarly, one examination team noted that while weaknesses were identified with the servicer’s operations during both the file review and cash payment processes, they were specific to systems and activities from 2009 and 2010 that were no longer in place or operational. Additionally, OCC staff explained that because the files that were reviewed were from 2009 and 2010, the findings may no longer be applicable, particularly given changes in servicing operations since that time.

Because examination teams learned different information from their oversight of the file review and cash payment processes, sharing each others’ experiences could be instructive for ongoing oversight of mortgage servicing. As we noted earlier, the completion rates for the file review process varied from no files with a completed review to 57 percent of the planned files reviewed. In addition, the areas that were reviewed varied among servicers. For example, several of the consultants reported completing at least initial reviews of the majority of files in the bankruptcy category. Another consultant stated that the only category of review completed was the SCRA category, and therefore, it only had findings related to the retention of SCRA data. A third consultant had completed its review of a majority of the initial files planned for review, and had found several different types of errors, including errors with fees charged, loan modification decisions, and documentation of ownership. Although, as regulators have noted, each servicer has unique operations and data systems, servicing standards and other requirements defined by regulators are generally broadly applied and insight from one servicer’s approach to meet these standards—or problems meeting these standards—can be instructive for another examination team responsible for overseeing these same standards.

According to our analysis of examination teams’ conclusion memorandums, some servicers encountered similar challenges in the cash payment process. In contrast to the file review process, the borrower categorization process was completed for 14 of the servicers and servicers had to place borrowers into the same categories. Several examination teams and a servicer noted that merging data from multiple servicing systems posed particular challenges for completing the borrower categorization process. Other examination teams we spoke with described challenges servicers encountered with their data systems to record information on bankruptcy and other foreclosure-related actions. Understanding what caused similar types of challenges and their prevalence among servicers may help regulators identify future areas for oversight activities.

According to regulators, they have taken steps to share information among examination teams about issues encountered during the file review and cash payment process and OCC planned to take additional steps. For example, regulators told us that during the file review and cash payment categorization process, OCC and Federal Reserve examination teams held weekly phone meetings. According to several examination teams we spoke with, during these meetings they would highlight challenges they were encountering, such as issues related to missing data in a servicer’s systems. In addition, Federal Reserve staff stated that Federal Reserve examination teams met during the cash payment categorization process to share information on their approach to the activities and discuss approaches different teams were taking to address challenges. To further facilitate information sharing among examination teams, Federal Reserve staff told us that examination teams posted to a shared website their conclusion memorandums for the cash payment activities, which included information on the approach servicers used to categorize borrowers. According to OCC staff, they are also writing a consolidated conclusion memorandum that will summarize examination teams’ findings from the foreclosure review process, including information on specific challenges identified at individual institutions that may be instructive for other examination teams.

According to regulators, examination teams also have offered to share information with CFPB about issues encountered during the file review process. Banking regulators and CFPB have entered into a Memorandum of Understanding, which states that CFPB and the regulators will endeavor to inform each other of issues that may impact the supervisory interests of the other agencies. According to regulators we spoke with, there has been limited sharing of findings from the foreclosure review process with CFPB. According to OCC staff, in some cases, they have shared information with CFPB about servicers’ compliance with the original consent orders and, in other instances, they offered to provide CFPB information on the file review process, but CFPB had not requested follow-up information. Federal Reserve staff said two of its examination teams have provided information to CFPB on the Federal Reserve’s monitoring activities related to the original consent orders, including the file reviews, and amended consent orders.

Recent Servicing Requirements May Address Identified Weaknesses

Recent servicing requirements, some of which apply to a broader group of mortgage servicers than those included in the file review process, may also address some of the weaknesses found during the 2010 coordinated review and confirmed during the review of foreclosure-related files from 2009 and 2010 and the borrower categorization process. Since the 2009 and 2010 period of the file reviews, regulators have issued several guidelines and standards related to mortgage servicing:

April 2011 Consent Orders. In addition to the requirement to conduct file reviews of borrowers who were in foreclosure or had completed foreclosure any time in 2009 or 2010, the original consent orders issued by OCC and the Federal Reserve to 16 servicers also included other requirements, such as submitting a plan for improving the operation of servicers’ management information systems for foreclosure and loss mitigation activities. Regulators’ examination teams will continue to monitor these requirements and ensure that the aspects of the consent orders that apply are met.

National Mortgage Settlement. Five servicers are covered by the National Mortgage Settlement, which includes requirements such as preforeclosure notices to borrowers, procedures to ensure the accuracy of borrower accounts, and quarterly reviews of foreclosure documents.

CFPB Mortgage Servicing Rules. These rules were issued in January 2013, became effective January 10, 2014, and apply to all servicers, The rules cover several with some exemptions for small servicers.major topics that address many aspects of mortgage servicing, including specific requirements related to communication with delinquent borrowers and loss mitigation procedures.

OCC and Federal Reserve Imminent Foreclosure Standards. In April 2013, OCC and the Federal Reserve issued checklists to the servicers they supervise to establish minimum standards for handling and prioritizing of borrower files that are subject to imminent foreclosure sales. For example, both sets of standards require that once the date of foreclosure is established, the servicer must confirm that the loan’s default status is accurate.

These requirements address issues identified during the file reviews and cash payment process. For example, to address issues related to borrowers being foreclosed upon while in the process of a loan modification application, OCC and Federal Reserve’s Minimum Standards for Prioritization and Handling of Borrower Files Subject to Imminent Foreclosure Sales require servicers to take steps to verify a borrower’s status once a foreclosure date has been established. Specifically, servicers must promptly (1) determine whether the borrower has requested consideration for, is being considered for, or is currently in an active loss mitigation program; and (2) determine whether the foreclosure activities should be postponed, suspended, or cancelled. As another example, to address issues related to communicating loan modification decisions to borrowers, CFPB’s rules state that servicers must provide the borrower with a written decision, including an explanation of the reasons for denying the loan modification, on an application submitted within the required time frame.

The guidelines also address issues related to servicers’ data systems. For example, CFPB’s rules require that servicers are able to compile a complete servicing file in 5 days or less. CFPB officials noted that this requirement was specifically included to address weaknesses in servicers’ data systems that might still exist. In addition, as previously noted, the OCC and Federal Reserve consent orders required servicers to submit a plan for the operation of their management information systems. The plan needed to include a description of any changes to monitor compliance with legal requirements; ensure the accuracy of documentation of ownership, fees, and outstanding balances; and ensure that loss mitigation, foreclosure, and modification staff have sufficient and timely access to information.

Regulators Communicated the Status of Activities, but Information on Processes Has Been Limited

Regulators took steps to promote transparency through efforts to keep borrowers and the general public informed about the status and progress of amended consent order and continuing review activities and through posting information publicly on their websites. Regulators also plan to issue public final reports on the cash payment process and foreclosure prevention actions as well as the results of the one file review that continued. These actions, however, have included limited information on processes, such as specific information about the category in which borrowers were placed or how those determinations were made.

Regulators Promoted Transparency about the Status and Results of Cash Payments and Plan to Issue Public Reports

In our March 2013 report, we found that transparency on how files were reviewed under the foreclosure review was generally lacking and that borrowers and the general public received limited information about the progress of reviews.implement a communication strategy to regularly inform borrowers and We recommended that regulators develop and the public about the processes, status, and results of the activities under the amended consent orders and continuing foreclosure reviews.

Since the announcement of the amended consent orders and our March 2013 report, regulators have taken steps to keep borrowers and the general public informed about the status of activities under the amended consent orders and continuing foreclosure reviews. For example, regulators directed that the payment administrator for 14 of the 15 servicers subject to amended consent orders send postcards to approximately 4.4 million borrowers informing them that they would receive a cash payment from their servicer. In addition, regulators directed the administrator to send communications to borrowers subject to the continuing file review to inform them that their reviews were ongoing. OCC staff noted that they anticipated requiring a final communication to borrowers when the review is completed. Regulators also kept the general public informed about the status of activities. For example, regulators conducted two webinars to provide details on the amended consent order activities and published answers to frequently asked questions on their websites. Regulators also used mass media such as press releases and public service announcements to communicate the status of activities. In addition, regulators updated their websites with information on the number and amount of checks issued and cashed under the amended consent orders, and in May 2013, regulators reported this information by state. Finally, regulators also made the cash payment frameworks and borrower categorization results publicly available on their websites. The frameworks list the payment categories and amounts and also include the overall results of the cash payment process by including the number of borrowers in each payment category.

Regulators plan to issue publicly final reports on the direct payment process and foreclosure prevention actions as well as information from the reviews that were terminated and the results of the review that continued. We noted the importance of public reporting to enhancing transparency in our March 2013 report. At that time, regulators planned to release reports on the foreclosure review and cash payment process, but the content of the reports had not been determined. Since our report, regulators have taken additional steps toward making reporting decisions. However, they are still considering the content and timing of these reports. Federal Reserve staff stated that they have worked with OCC to reach out to community groups to get their input on the information to include in public reports, and they are reviewing the types of information on foreclosure prevention actions reported for the National Mortgage Settlement and HAMP. Federal Reserve staff also stated that they anticipate the final report would include information on the terminated reviews. OCC staff said they are conducting examinations to assess the extent to which servicers addressed all aspects of the consent orders, including weaknesses highlighted by the preliminary file reviews, and they anticipate reporting on conclusions of the foreclosure reviews, including the reviews that were terminated. OCC staff stated they are waiting on the results of the continuing review and reports on servicers’ foreclosure prevention actions before making final reporting decisions.

Additional Information on Cash Payment Processes May Enhance Transparency

Although regulators have taken steps to promote transparency, these actions included limited information on the data regulators considered in negotiating the cash payment obligations and the processes for determining cash payment amounts. Our March 2013 recommendation to implement a communication strategy included not only keeping borrowers informed about the status and results of amended consent order and continuing review activities, but it also included keeping borrowers and the public informed about processes to determine those results. In our March 2013 report, we found that more publicly disclosed information about processes could have increased transparency and thereby public confidence in the reviews, given that one of the goals regulators articulated for the foreclosure review was to restore public confidence in the mortgage market. Federal internal control standards state the importance of relevant, reliable, and timely communications within an organization as well as with external stakeholders. In addition, our prior work on organizational transformation suggests that policymakers and stakeholders demand transparency in the public sector, where stakeholders are concerned not only with what results are to be achieved, but also with which processes are to be used to achieve those results.

Regulators released limited information on the process used to determine cash payment amounts. Regulators’ joint press release announcing the payment agreement stated that the amounts of borrowers’ payments depended on the type of possible servicer error, and regulators’ websites and webinars provided information on the roles of regulators, servicers, and the payment administrator. However, regulators did not release publicly information on the criteria for borrower placement in each category, such as the specific loan and borrower characteristics associated with each category. In addition, information about the process for determining cash payment amounts for each category was not communicated to individual borrowers. Borrowers subject to the amended consent orders received postcards informing them they would receive a cash payment. The postcards, however, did not include information about the process by which their payment amounts would be determined. Moreover, the letter accompanying the cash payment does not include information about the category in which a borrower was placed. Consumer groups we interviewed maintained that borrowers should have been given information about the category into which they were placed and an explanation of how they were categorized.

Regulators said that borrowers could obtain additional information from other sources. Federal Reserve staff explained that the letter to borrowers does not include information on the borrower’s cash payment category, but they said that a borrower may be able to figure out this information using the publicly issued cash payment framework, which includes cash payment amounts for each category. Regulators also told us that borrowers could call the payment administrator with questions or complaints related to the cash payment process under the amended consent orders. However, according to the payment administrator’s protocol, staff were instructed to provide general information on the cash payment process, but did not have specific information about the category in which borrowers were placed or how those determinations were made. Federal Reserve staff stated that borrowers who have complaints about their servicer could also write to their servicer’s regulator directly, but consumer groups said that very few borrowers would file a formal complaint with the regulators because they never received an explanation of what category they were placed in and regulators did not establish an appeals process. Further, letters sent to borrowers stated that the payments were final and there was no appeals process. Regulators told us they did not establish an appeals process because borrowers did not waive their rights to take legal action by accepting the payment. Federal Reserve staff stated that although there was not a process for borrowers to appeal their payments, borrowers who are not satisfied with the payment amounts can pursue any legal claims they may have.

With additional information on processes, regulators have opportunities to enhance transparency and public confidence with the amended consent order activities. The majority of cash payments have been deposited. As such, regulators have missed key opportunities to provide information that would have enhanced transparency of the cash payment process for individual borrowers. Further, since borrowers cannot obtain further information by formally appealing the results of the direct payment process, the lack of information about the criteria for placement in the various categories may hinder public confidence in the process. The final reports that regulators plan to issue represent an important opportunity to provide additional information on processes to clarify for borrowers and the general public how payment decisions were made.

Conclusions

The amended consent order process—with the distribution of cash payments to 4.4 million borrowers and requirements that servicers provide $6 billion in foreclosure prevention actions—terminated the review of 2009 and 2010 foreclosure-related files for 15 servicers prior to completion. This process addressed some of the challenges identified by regulators with the file review process—for example, it provided cash payments to borrowers more quickly than might have occurred had the file reviews continued. In addition, through the foreclosure prevention component of the amended orders, regulators were able to convey their commitment to specific principles to guide loss mitigation actions— including that servicers’ foreclosure prevention activities provide meaningful relief to borrowers and not disadvantage a specific group. While views varied on the usefulness of the file review process, regulators are taking steps to use what was learned to inform future supervisory activities.

While regulators used the amended consent orders to establish principles for foreclosure prevention activities, they did not require examination teams to evaluate or test servicers’ activities related to these principles. In particular, they did not require evaluation or testing of servicers’ policies, monitoring controls, and performance measures, to determine the extent to which servicers are implementing these principles to provide meaningful relief to borrowers. In contrast, other parts of the guidance provided to examination teams for oversight of the consent orders do require evaluation and testing, and the requirements in regulators’ supervisory manuals and federal internal control standards also include such requirements. For OCC examination teams, which have completed reviews of servicers’ activities related to the foreclosure prevention principles, additional planned supervisory activities, such as a review of servicers’ foreclosure prevention actions, may help identify concerns with servicers’ implementation of aspects of the foreclosure prevention principles. However, the specific procedures to conduct these additional planned activities have not been established. In comparison, for Federal Reserve examination teams that have not yet completed the reviews, there is an opportunity to implement a more robust oversight process that includes evaluation and testing, but the extent to which the Federal Reserve will take these steps is unclear. In the absence of specific expectations for evaluating and testing servicers’ actions to meet the foreclosure prevention principles, regulators risk not having enough information to determine whether servicers are implementing the principles and protecting borrowers.

Finally, although regulators communicated information about the status and results of the cash payment component of the amended consent orders, they missed opportunities to communicate additional information to borrowers and the public about key amended consent order processes. One of the goals that motivated the original file review process was a desire to restore public confidence in the mortgage market. In addition, federal internal control standards and our prior work highlight the importance of providing relevant, reliable, and timely communications, including providing information about the processes used to realize results, to increase the transparency of activities to stakeholders—in this case, borrowers and the public. Without making information about the processes used to categorize borrowers available to the public, such as through forthcoming public reports, regulators may miss a final opportunity to address questions and concerns about the categorization process and increase confidence in the results.

Recommendations for Executive Action

We are making the following three recommendations: 1. To help ensure that foreclosure prevention principles are being incorporated into servicers’ practices, we recommend that the Comptroller of the Currency direct examination teams to take additional steps to evaluate and test servicers’ implementation of the foreclosure prevention principles. 2. To help ensure that foreclosure prevention principles are being incorporated into servicers’ practices, we recommend that the Chairman of the Board of Governors of the Federal Reserve System ensure that the planned activities to oversee the foreclosure prevention principles include evaluation and testing of servicers’ implementation of the principles. 3. To better ensure transparency and public confidence in the amended consent order processes and results, we recommend that the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System include in their forthcoming reports or other public documents information on the processes used to determine cash payment amounts, such as the criteria servicers use to place borrowers in various payment categories.

Agency Comments and Our Evaluation

We provided a draft of this report to OCC, the Federal Reserve, and CFPB for comment. We received written comments from OCC and the Federal Reserve; these are presented in appendixes III and IV. CFPB did not provide written comments. We also received technical comments from OCC, the Federal Reserve, and CFPB and incorporated these as appropriate. In their comments on this report, the Federal Reserve agreed with our recommendations and OCC did not explicitly agree or disagree. However, OCC and the Federal Reserve identified actions they will take or consider in relation to the recommendations.

For the two recommendations on assessing servicer implementation of foreclosure prevention principles, OCC stated that it included this requirement in its examination plans. OCC added that foreclosure prevention principles will be used as considerations when assessing the effectiveness of servicer actions. We continue to believe that identifying specific procedures for testing and evaluating servicers’ application of the foreclosure prevention principles to their mortgage servicing practices will help regulators determine how effectively servicers’ policies and procedures are protecting borrowers and providing meaningful relief. The Federal Reserve noted that examination teams plan to use testing during their servicer assessments. The Federal Reserve plans to conduct the assessments in 2014, as we noted in the report.

For the recommendation on improving the transparency of the consent order processes, OCC stated that it will consider including additional detail about the categorization of borrowers in its public reports. The Federal Reserve said it will consider the recommendation as it finalizes reporting and other communication strategies. Both regulators also noted that they had made information about the foreclosure review and amended consent order processes available on their public websites. As we discussed in our report, regulators have taken steps to communicate information about the status of activities and results of the amended consent orders, and communicating information on the processes for determining borrowers’ cash payment amounts provides an additional opportunity for regulators to realize their goal of increasing public confidence in these processes.

We are sending copies of this report to interested congressional committees, the Board of Governors of the Federal Reserve System, the Consumer Financial Protection Bureau, and the Office of the Comptroller of the Currency. 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 evansl@gao.gov. 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 V.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to assess: (1) the factors regulators considered in negotiating servicers’ cash payment obligations under the amended consent orders and the extent to which regulators achieved their stated goals for the cash payments; (2) the objectives of the foreclosure prevention actions in the amended consent orders and how well regulators designed and oversaw the actions to achieve those objectives; (3) the extent to which regulators are sharing information from the file review and amended consent order processes; and (4) the extent to which regulators have promoted transparency of the amended consent orders and remaining review. The scope of our work covered the 16 servicers that were issued consent orders in 2011 and 2012 requiring they conduct file reviews.

To address the factors the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) considered in negotiating servicers’ cash payment obligations, we interviewed regulatory staff about the factors they considered and analyses they conducted to inform the negotiations. We also asked staff about the extent to which the factors and analyses differed from typical enforcement action negotiations. We reviewed the analyses regulators’ used to inform the negotiations and other documentation on the decision to replace the foreclosure review with a cash payment agreement, such as OCC’s decision memorandum. We also reviewed data consultants provided to regulators on incurred and remaining costs, progress of reviews, and findings of error. In addition, we conducted a sensitivity analysis to test the impact of changes to major assumptions and a reasonableness review of the final negotiated cash payment amount. According to Office of Management and Budget guidance, a sensitivity analysis examines the effects of changing assumptions and ground rules on estimates. Further, our Cost Estimating and Assessment Guide states that a sensitivity analysis provides a range of results that span a best and worst case spread and also helps identify factors that could cause an estimate to vary. To conduct our sensitivity analysis, we followed three key steps outlined in our Guide: (1) identify the key drivers and assumptions to test, (2) estimate the high and low uncertainty ranges for significant input variables, and (3) conduct this assessment independently for each input variable. We identified and tested major assumptions related to projected costs, error rates, and borrower categorizations. We also used the results of our analysis to test the reasonableness of the final negotiated cash payment amount. Our Cost Estimating and Assessment Guide describes a reasonableness review as a process to independently test whether estimates are reasonable with regard to the validity of major assumptions.

Projected costs. To test assumptions related to the projected remaining costs to complete the reviews as reported by consultants, we calculated monthly costs for each consultant using consultants’ cost reports that were available from September 2012 through December 2012. We then selected the shortest, median, and longest projected additional months of review across servicers to calculate the projected costs under these scenarios (see table 4). We compared our calculated costs in these scenarios to regulators’ cost analyses and the final negotiated cash payment amount.

Error rate. To test assumptions related to the error rate, we reviewed error rates in status reports consultants provided to regulators for the 13 servicers that agreed to the payment agreement in the January 2013. The amended consent orders implementing the payment agreement required the consultants of the participating servicers to submit data on the progress of the file reviews as of December 31, 2012. We used these data, which the consultants submitted to regulators in the months following the payment agreement, to select the lowest, median, aggregate, and highest error rates reported by consultants and calculated the potential remediation payments under these scenarios (see table 5). We compared our calculated remediation payments under these scenarios to the payment calculated in regulators’ analyses and the final negotiated cash payment amount.

Borrower categorization. To test assumptions related to the categorization of borrowers across the payment categories used in OCC’s error rate analysis, we analyzed borrower distributions for the other five servicers involved in the initial amended consent order negotiations. We used categorizations servicers provided to the regulators during the negotiation process in December 2012. We then calculated the potential remediation, using the 6.5 percent financial harm error rate used in regulators’ analysis, under each scenario (see table 6). We compared our calculated remediation payments under these scenarios to the payment calculated in regulators’ analyses and the final negotiated cash payment amount.

We verified the accuracy of regulators’ analyses by performing some logic tests and recreating the tables and formulas they used for their calculations. To assess the reliability of data on the status and preliminary financial harm error rates we used in our analyses, we collected information from exam team staff for all servicers that participated in the amended consent order payment agreement. Because exam team staff were responsible for the day-to-day oversight of consultants’ work, we collected information on the steps they took to determine whether the data were reasonably complete and accurate for the intended purposes. All exam team staff stated they conducted data reliability activities such as observing data entry procedures and controls, participating in or observing training for the systems used to generate status reports, conducting logic tests, or reviewing status reports. Exam team staff did not note any limitations related to the results of the final reviews completed by consultants as of December 2012 that would affect our use of these data. As such, we determined the data to be sufficiently reliable for the purposes of this report.

We were unable to assess the reliability of data on consultants’ incurred costs or servicers’ initial borrower categorization results used in our analyses. Because most consultants had terminated their work on the foreclosure review during our data collection, we had limited access to the underlying cost data reported by consultants to regulators, and regulatory staff told us they did not assess these data. In addition, the initial borrower categorizations performed by servicers during negotiations represented preliminary results that were intended to provide regulators with information about how the cash payment amount might be distributed. These data were described as preliminary by servicers, and neither servicers nor regulatory staff validated the accuracy of the information used during negotiations. Given that limited information was available from the sources and users of these data, we were not able to assess their reliability. As such, we determined that the data related to consultants’ costs and servicers’ initial borrow categorizations are of undetermined reliability. However, because our use of these data is consistent with regulators’ intended use to inform negotiations we determined that the risk of using data of undetermined reliability was low, and we concluded that the data were appropriate for our purposes in this report.

To determine the stated goals for the cash payments and assess the extent to which regulators took steps to ensure servicers achieved them, we reviewed the amended consent orders, OCC’s and the Federal Reserve’s decision memorandums, and statements made by regulators about the amended consent orders, including press releases and speeches or testimony. We then assessed achievement of these goals using data we collected and analyzed and information from interviews we conducted with regulators. Specifically, we reviewed regulators’ instructions to servicers and examination teams for the categorization process and subsequent oversight activities and interviewed OCC headquarters and Federal Reserve Board staff about implementation of these activities and their oversight actions. In addition, we analyzed regulators’ reports on the results of the servicers’ categorization process, in particular information on the number of borrowers placed into each category by servicer and any subsequent changes to categorization results. We also reviewed examination teams’ conclusion memorandums describing their oversight activities to verify and validate servicers’ cash payment categorization activities, and 10 of the 11 examination teams we interviewed or received written responses from provided information about their specific approach. We also interviewed three consultants responsible for categorizing borrowers into some categories—for example, borrowers eligible for protections under the Servicemembers Civil Relief Act (SCRA), Pub. L. No. 108-189, 117 Stat. 2835 (2003) (codified at 50 U.S.C. app. §§ 501-597b)—about their methodology and regulators’ oversight, and of the eight servicers we interviewed seven provided information about their process to categorize borrowers for cash payments and regulators’ role in this process. To identify the examination teams and servicers to interview, we selected examination teams and servicers that were overseen by each regulator and also considered a range of sizes of eligible populations for the file reviews, including some of the largest servicers. To identify the consultants to interview, we considered those consultants that supplemented information gathered from consultants in prior work on the file review process. Finally, we assessed the reliability of these data by reviewing related documentation and interviewing payment administrator officials knowledgeable about the data. We determined that these data were sufficiently reliable for the purposes of this report.

To assess the objectives for the foreclosure prevention actions and how well regulators designed the actions to realize those objectives, we reviewed the amended consent orders to understand the parameters and requirements for foreclosure prevention actions, reviewed regulators’ decision memorandums, and reviewed regulators’ statements about the foreclosure prevention actions in press releases and speeches or testimony. We also interviewed regulators about their intentions for the actions and the analysis they conducted to support the negotiations of the design and amounts. We compared this process with regulators’ typical processes for issuance of enforcement actions, as described in their supervisory manuals and in interviews with regulators’ staff. We also interviewed three experts familiar with negotiations and the design of settlements, including staff from the National Mortgage Settlement, to understand elements typically considered in the design of settlements. We selected these experts based on their familiarity with similar mortgage servicing settlements or their recognized expertise in the field of settlements involving potential financial harm or where cash payments were to be made to victims. In addition, we interviewed staff from one regulatory agency, the Bureau of Consumer Financial Protection (commonly known as the Consumer Financial Protection Bureau, or CFPB), about their policies and procedures for negotiating enforcement actions, in particular related to mortgage servicing. Finally, we reviewed two settlements that included foreclosure prevention components—the National Mortgage Settlement and the separate California Agreement in the National Mortgage Settlement—to help identify various factors to consider in the design of foreclosure prevention actions in enforcement orders or settlements.

Further, to address how regulators oversaw achievement of the objectives of the foreclosure prevention component in the amended consent orders, we considered both regulators’ activities to oversee servicers’ financial obligations and actions to oversee the foreclosure prevention principles in the amended consent orders. To facilitate this process, we reviewed regulators’ instructions to servicers for reporting on their foreclosure prevention obligations and servicers’ reporting submissions for May, July, September, and December 2013. We also reviewed OCC’s and the Federal Reserve’s instructions to its examination teams for oversight of the foreclosure prevention principles. To further understand regulators’ oversight of the financial obligations and foreclosure prevention principles, we interviewed OCC and Federal Reserve staff, including headquarters and Federal Reserve Board staff and staff from 10 of the 11 examination teams we interviewed— representing both OCC and the Federal Reserve and a mix of larger and smaller servicers (determined by the number of eligible borrowers from the foreclosure review)—about their oversight activities. We compared these instructions and their implementation with the supervisory expectations in regulators’ supervisory manuals, the supervisory instructions for the other articles of the original consent orders, and federal internal control standards. To supplement our understanding of the foreclosure prevention reporting and oversight activities, we interviewed representatives from six of the eight mortgage servicers we spoke with (representing servicers overseen by both OCC and the Federal Reserve of various sizes based on the size of the eligible population from the foreclosure review) about their activities to comply with the foreclosure prevention requirement and regulators’ oversight activities. We also interviewed staff from the National Mortgage Settlement, which requires five mortgage services to provide foreclosure prevention actions, to understand their experience and approach.

To assess the extent to which regulators are leveraging and sharing information from the file review process, we analyzed consultants’ preliminary findings from the file review process, in particular information they reported to regulators in exit surveys and during exit interviews with regulators. We also reviewed OCC’s examination teams’ conclusion memorandums from their oversight of the file review process. We compared these with publicly available information on regulators’ findings from the 2010 coordinated file review conducted by OCC, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision to identify the extent to which the findings were similar. We also interviewed staff from OCC headquarters and Federal Reserve Board and 10 of the 11 examination teams, and representatives from 8 mortgage servicers about what they learned about mortgage servicing from the preliminary file reviews and cash payment categorization processes and changes in mortgage servicing practices since the 2009 and 2010 period covered by the file review process. In addition, we asked regulator staff, including the examination teams, about steps they had taken or were planning to take to share this information among examination teams or with other regulators, such as CFPB, or to use this information for future oversight. We also interviewed CFPB staff about information they had requested or received about the preliminary file review results. We compared regulators’ plans to share and leverage information with federal internal control standards for recording and communicating information to help management and others conduct their responsibilities.

To assess regulators’ efforts to promote transparency of the amended consent orders and remaining review, we reviewed press releases and documents from regulators related to the amended consent orders and the remaining review. In particular, we reviewed what documents were available about the amended consent orders and the remaining review on the regulators’ websites, such as frequently asked questions, webinars, press releases, and status updates related to check issuance, and analyzed the content of these materials. We also reviewed the payment administrator’s telephone instructions to respond to questions about the amended consent order process. In addition, we reviewed examples of the postcards and letters sent to borrowers to communicate about the amended consent order payments and to provide cash payments. We also interviewed regulator staff about the steps they took to promote transparency and their plans for future reporting. We compared this documentation to federal internal control standards on communications and our work on organizational transformation to identify any similarities or differences. Further, we considered our prior recommendation about lessons learned about transparency of the foreclosure review for the amended consent order process. Finally, we also conducted interviews with representatives of consumer groups.

We conducted this performance audit from May 2013 through April 2014 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.

Appendix II: Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) Actions in Response to GAO’s Recommendations on the Independent Foreclosure Review

We have issued two prior reports on the foreclosure review process. In our first report on the outreach component of the foreclosure review, we found that the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) and servicers had gradually improved the communication materials for borrowers, but that regulators could make further enhancements to the outreach efforts. In our second report, we identified lessons learned from the file review process that could be used to enhance the activities under the amended consent orders and the continuing reviews. Below we list the recommendations made in each report and the actions taken by regulators in response.

Appendix III: Comments from the Office of the Comptroller of the Currency

Appendix IV: Comments from the Board of Governors of the Federal Reserve System

Appendix V: GAO Contact and Staff Acknowledgements

GAO Contact

Staff Acknowledgments

In addition to the contact named above, Jill Naamane (Assistant Director), Bethany M. Benitez, Maksim Glikman, DuEwa Kamara, John Karikari, Charlene J. Lindsay, Patricia MacWilliams, Marc Molino, Jennifer Schwartz, Andrew Stavisky, Winnie Tsen, and James Vitarello made key contributions to this report.