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

Letter

Background

Of the TARP performance audit recommendations we have made, some have been program specific, while others have addressed crosscutting issues such as staffing and communications. Our program-specific recommendations have focused on the following TARP initiatives:

CPP was designed to provide capital to financially viable financial institutions through the purchase of preferred shares and subordinated debentures.

The Community Development Capital Initiative (CDCI) provided capital to Community Development Financial Institutions by purchasing preferred stock.

Capital Assessment Program (CAP) was created to provide capital to institutions not able to raise it privately to meet Supervisory Capital Assessment Program—or “stress test”— requirements. This program was never used.

Credit market programs:

Term Asset-backed Securities Loan Facility (TALF) provided liquidity in securitization markets for various asset classes to improve access to credit for consumers and businesses.

SBA 7(a) Securities Purchase Program provided liquidity to secondary markets for government-guaranteed small business loans in the Small Business Administration’s (SBA) 7(a) loan program.

American International Group (AIG) Investment Program (formerly Systemically Significant Failing Institutions Program) provided support to AIG to avoid disruptions to financial markets from its possible failure.

Automotive Industry Financing Program (AIFP) aimed to prevent a significant disruption of the American automotive industry through government investments in the major automakers.

The Home Affordable Modification Program (HAMP) divides the cost of reducing monthly payments on first-lien mortgages between Treasury and mortgage holders/investors and provides financial incentives to servicers, borrowers, and mortgage holders/investors for loans modified under the program.

Principal Reduction Alternative (PRA) pays financial incentives to mortgage holders/investors for principal reduction in conjunction with a HAMP loan modification for homeowners with a current loan-to-value ratio exceeding 115 percent.

The Second-Lien Modification Program (2MP) provides incentives for second-lien holders to modify or extinguish a second-lien mortgage when a HAMP modification has been initiated on the first-lien mortgage for the same property.

Home Affordable Foreclosure Alternatives (HAFA) provides incentives for short sales and deeds-in-lieu of foreclosure as alternatives to foreclosure for borrowers who are unable or unwilling to complete the HAMP first-lien modification process.

Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (Hardest Hit Fund or HHF) supports innovative measures developed by state housing finance agencies and approved by Treasury to help borrowers in states hit hardest by the aftermath of the housing crisis.

Federal Housing Administration’s (FHA) Short Refinance Program provides underwater borrowers—those with properties that are worth less than the principal remaining on their mortgage—whose loans are current and are not insured by FHA with the opportunity to refinance into an FHA-insured mortgage.

Treasury Has Implemented Most of Our Performance Audit Recommendations, but a Few Related to CPP and MHA Have Not Been Fully Addressed

As of August 2015, our performance audits of the TARP programs have resulted in 72 recommendations to Treasury. Of the 72 performance audit recommendations, Treasury has implemented 59, or approximately 82 percent; partially implemented 4—that is, taken some steps toward implementation but needs to take more actions; and not implemented 3— that is, Treasury has not taken steps to implement them (see fig.1). Among the 7 recommendations that Treasury has taken some or no steps to implement, 1 was directed at CPP and 6 directed at the MHA housing programs. Finally, 6 performance audit recommendations have been closed-not implemented. Due to Treasury’s inaction and the evolving nature of the programs, we considered 3 of them to be outdated and no longer applicable. Two of these 6 recommendations were related to CPP and 2 were related to the MHA programs.

Treasury Has Implemented the Majority of Recommendations for CPP

Treasury has taken action on the majority of our recommendations for CPP. Specifically, to date, Treasury has implemented six of our nine recommendations for CPP. For example, Treasury implemented our recommendation that it apply lessons learned from the implementation of CPP to similar programs, such as the Small Business Lending Fund (SBLF), by including a process for reviewing regulators’ viability determinations for all eligible applicants for SBLF. Specifically, Treasury included additional evaluation by a central application review committee for all eligible applicants who had not been approved by their federal regulator. Treasury also took steps to provide information from its evaluation to the regulator when their views differ. These steps should help ensure that applicants will receive consistent treatment in investment decisions across different regulators.

However, Treasury has not implemented three of our CPP-related recommendations—one remains open and two have been closed. In 2012, we recommended that Treasury consider analyzing and reporting on remaining and former CPP participants separately. In particular, we noted that the remaining CPP institutions tended to be less profitable and hold riskier assets than other institutions of similar asset size. For example, the remaining CPP institutions had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although our analysis found differences in the financial health of remaining and former CPP institutions, we noted that Treasury’s quarterly financial analysis of CPP institutions did not distinguish between them. By not distinguishing between remaining and former CPP participants, Treasury misses an opportunity to provide greater transparency about the financial health of institutions remaining in CPP. Treasury stated that it would carefully consider our recommendation and emphasized its ongoing commitment to keeping the public informed of its progress in winding down CPP. While Treasury reported generally on the results of its CPP auctions and the status of institutions remaining in the program, as of August 2015, it had not yet considered analyzing and reporting on remaining and former CPP participants separately and it is not likely to do so, according to Treasury. Treasury believes that providing information about the financial position of institutions remaining in CPP is unnecessary because it is publicly available to interested parties through regulatory filings or other sources.

We closed two recommendations for Treasury to periodically collect and review certain information from the bank regulators on the analysis and conclusions supporting their decisions on CPP repayment requests to help ensure consistency of the CPP repayment process. Treasury did not take actions that would address the recommendations because it believed these recommendations raised questions about how to balance the goals of consistency with the need to respect the independence of regulators. Although we disagreed with Treasury’s position, we closed these two recommendations as not implemented because Treasury officials stated that since it is winding down the program, only a few remaining CPP participants are likely to make full repayments. Thus we determined that implementation of these recommendations is not as critical as it was at the time we made them.

Treasury Has Implemented the Majority of Recommendations for MHA

Since 2009, we have made 27 recommendations aimed at improving MHA’s TARP-funded housing programs. As of August 2015, Treasury had implemented 19 of them. Examples of more recent actions Treasury has taken to implement these recommendations include the following: In June 2010, we recommended that Treasury expeditiously finalize and implement benchmarks for performance measures under the first- lien modification program, as well as develop measures and benchmarks for the recently announced HAMP-funded homeowner assistance programs. Since June 2011, Treasury has been reporting in its MHA program performance reports on the performance of the largest MHA servicers in three categories: (1) identifying and contacting homeowners, (2) homeowner evaluation and assistance, and (3) program management and reporting. Treasury established quantitative and qualitative benchmarks for each of the three performance categories for HAMP first-lien modifications and other TARP-funded MHA programs. In the same report, we recommended that Treasury expeditiously implement a prudent design for the remaining TARP-funded housing programs. In July 2013, Treasury’s MHA risk assessment included measuring internal control activities for 2MP, PRA, and HAFA.

In June 2012, we recommended that Treasury and FHA update their estimates of participation in the FHA Short Refinance Program and use the updated estimates to reassess the terms of the letter of credit facility to help ensure that the program is cost-effective. After FHA provided Treasury with updated participation estimates, Treasury amended the letter of credit facility in March 2013, reducing the authorized amount by $7 billion to $1 billion. Treasury also reduced the cap on administrative fees that could be charged by $92 million (from $117 million to $25 million). In March 2015, Treasury amended the purchase agreement for the letter of credit facility for a second time, reducing the amount by an additional $900 million ($1 billion to $100 million). As a result of these two actions, Treasury deobligated approximately $7.9 billion in total, disallowing its use for future obligations.

In July 2012, we recommended that Treasury expeditiously conduct a comprehensive risk assessment of HAMP Tier 2, using the standards for internal control in the federal government as a guide. In April 2013, Treasury conducted a risk assessment of MHA programs, including HAMP Tier 2, based on internal control standards. The risk assessment included identifying the types and potential impacts of risks on the MHA program and appropriate mitigating steps taken to address those risks.

In February 2014, we recommended that Treasury issue clarifying guidance to servicers on providing effective relationship management to borrowers with limited English proficiency (LEP). Treasury had previously issued guidance to servicers requiring them to develop and implement a policy to identify the requirements and appropriate caseload for the relationship manager position, including a provision for providing effective relationship management to borrowers whose primary language is a language other than English. In April 2014, Treasury issued guidance requiring servicers to ensure that staff are able to effectively communicate with all borrowers, including LEP borrowers, by either employing multilingual individuals or engaging an outside vendor to provide interpretation services.

Treasury has not implemented 8 of the 27 recommendations related to MHA’s TARP-funded programs. Six of these recommendations remain open, including 4 of which Treasury has taken some action. Finally, we closed the remaining 2 TARP-funded housing program recommendations as not implemented.

The four recommendations that Treasury has taken some action to address are as follows: In June 2010, we recommended that Treasury expeditiously report activity under PRA, including the extent to which servicers determined that principal reduction was beneficial to investors but did not offer it, to ensure transparency in the implementation of this program feature across servicers. Starting with the monthly MHA performance report for the period through May 2011, Treasury began reporting summary data on the PRA program. Specifically, Treasury provides information on PRA trial modification activity as well as median principal amounts reduced for active permanent modifications. In addition, Treasury’s public MHA loan-level data files include information on the results of analyses of borrowers’ net present value under PRA and indicate whether principal reduction was part of the modification. While this information would allow interested users with the capability to analyze the extent to which principal reduction was beneficial but not offered overall, it puts the burden on others to do the analysis and report the results publicly. Also, the publicly available data do not identify individual servicers and thus cannot be used to assess the implementation of this program feature across servicers.

Treasury officials stated that they believe they have implemented this recommendation through the reporting described previously. Moreover, the officials stated that it would be neither useful nor helpful to provide these data broken out by specific identified servicer. Because servicers may choose to implement the PRA program under individually developed terms, Treasury officials stated that broken out data would not permit a proper comparison. However, our recommendation was intended to ensure transparency in the implementation of this program feature across servicers, which would require that information be reported on an individual servicer basis to allow comparison between servicers and highlight differences in the policies and practices of individual servicers. As such, we maintain that Treasury has partially implemented this recommendation and should take action to fully implement it.

In February 2014, we recommended that Treasury ensure that the compliance agent assess servicers’ compliance with LEP relationship management guidance, once it was established. Treasury issued clarifying LEP guidance to MHA program servicers in April 2014. In July 2015, Treasury officials stated that they had reached out to the seven largest MHA servicers to obtain their policies on implementing the guidance and confirmed that such written policies are consistent with MHA guidance on LEP.

In October 2014, we recommended that Treasury conduct periodic evaluations using analytical methods, such as econometric modeling, to help explain differences among MHA servicers in redefault rates. Such analyses could help inform compliance reviews, identify areas of weaknesses and best practices, and determine the need for additional program policy changes. Treasury conducted an analysis to compare redefault rates among servicers and to determine whether servicers’ portfolio of HAMP-modified loans performed at, above, or below expectations for the metrics analyzed.

Despite these analyses, Treasury officials maintained that such an analysis is inherently challenging and limited and therefore would not repeat it. Treasury officials gave several reasons for not periodically repeating this analysis. First, they cited data limitations, including a lack of loan origination and current credit profile data. However, Treasury does have access to variables that both it and we have identified in the past as being important for predicting redefault, including the size of any change in payments, delinquency duration, and credit scores and loan-to-value ratios at origination.

Second, Treasury indicated that excluding loans due to missing observations could lead to unintended consequences. However, such limitations are not unusual when researchers conduct this type of analysis and researchers can employ measures to correct for or identify biases in the data. In addition, Treasury conducted such analyses when designing the program. Further, Treasury has relied on this dataset to identify factors that they believe influence redefault. And finally, we determined that the existing data are sufficiently reliable to allow for more sophisticated analytical methods such as an econometric analysis that could control for certain differences among servicers.

Third, Treasury noted that it can rely on compliance reviews, including a review of sampled loans at individual servicers, to ensure that servicers followed program guidance. However, more rigorous analytical methods are a useful tool to supplement and inform ongoing compliance efforts, which by themselves may not detect significant variations in performance across servicers. Such methods would also be useful in identifying areas of weaknesses and best practices and the potential need for additional program policy changes. Treasury disagreed and for the reasons discussed above, questioned the usefulness of such analysis with regard to informing compliance efforts or identifying best practices or areas of weakness. However, in our October 2014 report, we identified large differences among some servicers both with and without controls for certain loan, borrower, and property characteristics. We determined that the existing data are sufficiently reliable to allow for more sophisticated analytical methods such as an econometric analysis that could control for certain differences among servicers. By not capitalizing on the information these methods provide, Treasury risks making policy decisions based on potentially incomplete information and may miss opportunities to identify best practices to assist the greatest number of eligible borrowers. Thus, we continue to maintain that Treasury should take action to fully implement this recommendation.

In the same report, we recommended that Treasury conduct periodic evaluations to help explain differences in MHA servicers’ reasons for denying applications for trial modifications. Such evaluations could help inform compliance reviews of individual servicers, identify areas of weaknesses and best practices, and determine the potential need for programmatic changes. Treasury put together a list of servicers with reporting anomalies that had been identified and sent them questionnaires asking them to explain the rationale behind using certain codes to report denials (denial codes) of applications for trial modifications. Treasury expects to have answers back by October 2015. Beyond that, Treasury stated that it and the MHA Program Administrator planned to continue to collect data and monitor trends in the data on an ongoing basis and reach out to servicers on an as- needed basis to collect more information. Treasury’s compliance agent has also added procedures for testing denial codes that servicers report. According to Treasury officials, Treasury has used the prevalence of certain denial codes to inform certain policy changes. For example, they said that the most common reason that applications for HAMP were denied is that borrowers did not submit the documentation necessary to evaluate their eligibility for HAMP. In response, Treasury has simplified documentation requirements where appropriate several times. In addition, Treasury told us that they use the denial code information to form the basis for discussions with individual servicers to ensure compliance with program guidelines and reporting practices. Although these are examples of Treasury’s analysis of overall denial rates, Treasury’s actions do not address differences in individual MHA servicers’ reasons for denial. Additionally, it is not clear whether Treasury plans to conduct periodic evaluations of differences in denial rates or how Treasury will use the information it gathers to identify areas of weaknesses and best practices and determine whether additional policy changes are needed. Thus, we continue to maintain that Treasury should take action to implement this recommendation.

The two recommendations that Treasury has not implemented are as follows: In February 2014, we recommended that Treasury require its MHA compliance agent to take steps to assess the extent to which servicers had established internal control programs that effectively monitored compliance with fair lending laws applicable to MHA programs. In April 2014, Treasury officials stated that they planned to continue efforts to promote fair lending policies. However, as of August 2015, they did not plan to implement our recommendation. As we noted in the report, both the MHA Servicer Participation Agreement and MHA Handbook require that servicers have an internal control program to monitor compliance with relevant consumer protection laws. According to Treasury officials, the federal agencies with supervisory authority over fair lending remain in the best position to monitor servicers in this area. Representatives of the federal regulators said that their fair lending reviews have a broader overall focus that may not specifically focus on MHA activities.

Moreover, our analysis identified some statistically significant differences among four large MHA program servicers in the number of denials and cancellations of trial modifications and in the potential for redefault of permanent modifications for certain protected groups. Evaluating the extent to which servicers have developed and maintained internal controls to monitor compliance with fair lending laws could give Treasury additional assurances that servicers are implementing the MHA program in compliance with fair lending laws.

In July 2015, we recommended that Treasury develop and implement policies and procedures that established a standard process to better ensure that changes to TARP-funded housing programs were based on evaluations that comprehensively and consistently met the key elements of benefit-cost analysis. In its written comments on the draft report, Treasury agreed that it was important to assess the benefits and costs of proposed program modifications and noted that it would seriously consider the extent to which it could apply our recommendation going forward. Treasury officials said that they planned to provide an update on actions taken or planned in a required response to Congress in September 2015.

Agency Comments

We provided Treasury a draft copy of this report for review and comment. Treasury provided technical comments that we have incorporated as appropriate.

We are sending copies of this report to the appropriate congressional committees. This report will also be available at no charge on our web site at http://www.gao.gov.

If you or your staffs have any questions about this report, please contact Daniel Garcia-Diaz at (202) 512-8678 or garciadiazd@gao.gov for questions about nonmortgage-related TARP programs, or Mathew Scirè at (202) 512-8678 or sciremj@gao.gov for questions about mortgage- related TARP programs. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II.

Appendix I: Status of Troubled Asset Relief Program (TARP) Performance Audit Recommendations, as of August 2015

The following table summarizes the status of our TARP performance audit recommendations as of August 28, 2015. We classify each recommendation as implemented, partially implemented (the agency took steps to implement the recommendation but more work remains), open (the agency has not taken steps to implement the recommendation), and closed, not implemented (the agency decided not to take action to implement the recommendation). The recommendations are listed by report.

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contacts

Staff Acknowledgments

In addition to the contact named above, Harry Medina and Karen Tremba (Assistant Directors), Anne A. Akin (Analyst-in-Charge), Bethany Benitez, Emily Chalmers, John Karikari, and Jena Sinkfield made key contributions to this report.