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

Letter

Background

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

Bank investment programs:

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

Community Development Capital Initiative provided capital to Community Development Financial Institutions by purchasing preferred stock.

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

Credit market programs:

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

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

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

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

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

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

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

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

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

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

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

As of August 22, 2016, our performance audits of the TARP programs resulted in 74 recommendations to Treasury.

Treasury implemented 62, or approximately 84 percent. Three of the implemented recommendations were closed based on actions taken by Treasury since we last reported on the status of our TARP recommendations in September 2015—all three recommendations were MHA-related.

Five recommendations remain open. Treasury partially implemented three of the recommendations (that is, took some steps toward implementation) and had not taken any steps to implement the remaining two recommendations. Each of the five recommendations for which Treasury took some or no implementation steps were directed at MHA housing programs.

Seven recommendations have been closed as not implemented because we determined that they were outdated and no longer applicable due to the evolving nature of the programs. Of these recommendations, one was closed since September 2015 and was directed at CPP. Three of these seven recommendations were related to CPP and two to MHA programs.

Treasury Implemented the Majority of Recommendations Related to CPP

As of August 22, 2016, Treasury implemented six of nine recommendations for CPP. For example, we recommended that Treasury apply lessons learned from CPP implementation to similar programs, such as the Small Business Lending Fund (SBLF)—specifically, by including a process for reviewing regulators’ viability determinations of eligible applicants. Treasury changed the SBLF process to include additional evaluation by a central application review committee for all eligible applicants who had not been approved by their federal regulator. Treasury also took steps to provide information from its evaluation to the regulator when their views differed. These steps should help ensure that applicants will receive consistent treatment across different regulators.

Since August 2015, one of our CPP-related recommendations was closed without being implemented by Treasury. In March 2012, we recommended that the Secretary of the Treasury consider analyzing and reporting on remaining and former CPP participants separately. In particular, we noted that remaining CPP institutions tended to be less profitable and held riskier assets than other institutions of similar asset size. We analyzed financial data on 352 remaining CPP institutions and 256 former CPP institutions that exited CPP and found that the remaining CPP institutions had significantly lower returns on average assets and higher percentages of noncurrent loans than former CPP and non-CPP institutions. They also held less regulatory capital and reserves for covering losses. Although our analysis found differences in the financial health of remaining and former CPP institutions, we noted that Treasury’s quarterly financial analysis of CPP institutions did not distinguish between them. Treasury said it is not likely to consider analyzing and reporting on remaining and former CPP participants separately. Treasury believes that providing information about the financial position of institutions in CPP was unnecessary because it is publicly available to interested parties through regulatory filings or other sources.

We closed this recommendation as not implemented because circumstances have changed significantly since we made the recommendation. Specifically, 363 institutions were in CPP around the time we made the recommendation, and the analysis we recommended was intended to provide Treasury useful information about the relative likelihood of remaining institutions repaying their investments and exiting CPP. However, Treasury has been winding down CPP. When we last conducted an analysis of the financial condition of the 16 institutions that remained in CPP as of February 2016, most of them continued to exhibit signs of financial weakness. Treasury officials recognized that the remaining CPP firms generally have weaker capital levels and worse asset quality than firms that exited the program. They further noted that this situation was a function of the life cycle of the program, because stronger institutions had greater access to new capital and were able to exit, while the weaker institutions have been unable to raise the capital needed to exit the program. Treasury believes that the remaining institutions likely will not be able to repay their investments in full. Consequently, we determined that the recommendation was no longer applicable.

Treasury Implemented the Majority of Recommendations for MHA

As of August 22, 2016, Treasury implemented 22 of our 29 MHA-related recommendations. Three of the 22 recommendations were implemented after our September 2015 report on the status of TARP recommendations: In February 2014, we recommended that Treasury ensure that its MHA compliance agent assess servicer compliance with Limited English Proficiency (LEP) relationship management guidance, once it was established. Treasury issued clarifying LEP guidance to MHA program servicers in April 2014. In June 2016, Treasury provided us with copies of the final report on the results of the compliance reviews of the larger MHA program servicers’ implementation of LEP guidance. Treasury also provided specific examination policies and procedures used by MHA Compliance agent in its reviews of program servicers’ implementation of LEP requirements.

In October 2014, we recommended that Treasury conduct periodic evaluations to help explain differences among MHA servicers in the reasons for denying applications for trial modifications. Since the issuance of that report, Treasury conducted two denial reason rate reviews in 2015—one looking at 11 MHA servicers with a high concentration of various denial reasons and the other looking at 7 MHA servicers—to understand the prevailing reasons for their use of specific denial reason codes (ineligible mortgage, request incomplete, and offer not accepted/withdrawn). According to Treasury officials, the results of these and other evaluations helped inform Treasury’s decision to implement Streamline HAMP to help address the most common denial reason (i.e., failure to submit required documentation). Treasury also began conducting quarterly compliance reviews at the largest MHA servicers to verify the accuracy of denial reasons reported.

In March 2016, we recommended that Treasury review potential unexpended balances by estimating future expenditures of the MHA program, which would impact its lifetime cost estimate for the program. Treasury stated that it historically assumed that all funds obligated for MHA would be spent in furtherance of its mandate under EESA to preserve homeownership and protect home prices. In February 2016, following the enactment of legislation that terminates MHA on December 31, 2016, Treasury lowered the lifetime cost estimate for MHA, from $29.8 billion to $25.1 billion, which Treasury said would continue to be reflected in its public reports on TARP.

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

Our recommendation was intended to ensure transparency in the implementation of this program feature across servicers, which would require that information be reported on an individual servicer basis to allow comparison between servicers and highlight differences in the policies and practices of individual servicers. We maintain that Treasury partially implemented this recommendation and should take action to fully implement it.

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

Although they performed these analyses, Treasury officials maintained that such analyses are inherently limited and therefore they did not intend to repeat them. However, by not periodically conducting analyses of differences in servicer redefault rates and capitalizing on the information these methods provide, Treasury risks making policy decisions based on potentially incomplete information and may miss opportunities to identify best practices to assist the greatest number of eligible borrowers. Thus, we continue to maintain that Treasury should take action to fully implement this recommendation. This will continue to be important after December 2016, when the HAMP program is closed to new entrants, since borrowers are eligible for up to 6 years of pay-for-performance incentives if they are able to maintain good standing on their modified loan payments.

In March 2016, we recommended that Treasury deobligate funds that its review showed likely would not be expended. Treasury’s most recent estimates identified $4.7 billion in potential excess funds, of which Treasury has deobligated $2 billion as of August 22, 2016. For the additional $2.7 billion in potential excess funds Treasury identified, Treasury stated that once servicers report all final transactions to the MHA system of record in late 2017, it plans to calculate the maximum potential expenditures under MHA and deobligate any estimated excess funds at that time, as appropriate. Given the uncertainties in estimating future participation and the associated expenditures—in particular, the effect of Streamline HAMP which was not fully implemented at the time of Treasury’s last program estimate—it will be important for Treasury to update its cost estimates as additional information becomes available and take timely action to deobligate likely excess funds.

Finally, Treasury has not taken action to address two open recommendations directed at MHA: In February 2014, we recommended that Treasury require its MHA compliance agent to take steps to assess the extent to which servicers established internal control programs that effectively monitored compliance with fair lending laws applicable to MHA programs. As we noted in the report, both the MHA Servicer Participation Agreement and MHA Handbook require that servicers have an internal control program to monitor compliance with relevant consumer protection and fair lending laws. In April 2014, Treasury officials stated that they planned to continue efforts to promote fair lending policies. However, they noted that they believed that the federal agencies with supervisory authority remain in the best position to monitor servicer compliance with fair lending laws and that they did not plan to implement this recommendation. Representatives of the federal regulators said that their fair lending reviews have a broader overall focus that may not specifically focus on MHA activities. Moreover, our analysis identified some statistically significant differences among four large MHA program servicers in the number of denials and cancellations of trial modifications and in the potential for redefault of permanent modifications for certain protected groups. Evaluating the extent to which servicers have developed and maintained internal controls to monitor compliance with fair lending laws could give Treasury additional assurances that servicers have implemented MHA programs in compliance with fair lending laws.

In July 2015, we recommended that Treasury develop and implement policies and procedures to better ensure that changes to TARP- funded housing programs are based on evaluations that comprehensively and consistently met the key elements of benefit- cost analysis. Treasury agreed that it is important to assess the benefits and costs of proposed program improvements, and that it would continue to consider the costs of program enhancements and balance those considerations with the overall objective of helping struggling homeowners. Treasury also noted that, given the scheduled application deadline for MHA on December 30, 2016, it did not anticipate making significant policy changes to the MHA programs.

Although the deadline for new MHA program applicants is December 30, 2016, elements of the MHA program will remain in effect after the application deadline. For example, in the case of a HAMP loan modification, borrowers are eligible for program benefits for up to 6 years. As such, we continue to maintain that Treasury should take action to fully implement the partially implemented and open recommendations. We will continue to assess the status of these recommendations considering program activity and actions taken by Treasury.

Agency Comments

We provided a draft of this report to Treasury for comment. Treasury had no formal or technical comments on the draft report.

We are sending copies of this report to the appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact me at (202) 512-8678 or garciadiazd@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix II.

Appendix I: Status of Troubled Asset Relief Program (TARP) Performance Audit Recommendations, as of August 22, 2016

The following table summarizes the status of our TARP performance audit recommendations as of August 22, 2016. We classify each recommendation as implemented, partially implemented (the agency took steps to implement the recommendation but more action would be required to fully implement it), open (the agency had not taken steps to implement the recommendation), and closed, not implemented (the agency decided not to take action to implement the recommendation and we no longer consider the recommendation relevant). The recommendations are listed by report.

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgements

In addition to the contact named above, Harry Medina (Assistant Director), Jason Wildhagen (Analyst-in-Charge), Anne Akin, Bethany Benitez, John Karikari, Barbara Roesmann, Mathew J. Scirè, Jena Sinkfield, and Karen Tremba made key contributions to this report.