Mortgage Foreclosures: Regulatory Oversight of Compliance with Servicemembers Civil Relief Act Has Been Limited
Released: 2012-07-17T00:00:00

Letter

Background

Congress passed the Soldiers’ and Sailors’ Civil Relief Act in 1940 to provide servicemembers protections to help them meet the unique circumstances they face when serving their country. In response to the increased use of Reserve and National Guard military units in the Global War on Terrorism, Congress enacted SCRA in December 2003 as a modernized version of the Soldiers’ and Sailors’ Civil Relief Act. In addition to providing protections related to residential mortgages, the act covers other types of loans, such as credit card and automobile and a variety of other issues, such as rental agreements, eviction, installment contracts, civil judicial and administrative proceedings, motor vehicle leases, life insurance, health insurance, and income tax payments.

SCRA provides the following mortgage-related protections to servicemembers: Interest Rate Cap. Servicemembers who obtain mortgages prior to serving on active duty status are eligible to have their interest rate capped at 6 percent for the duration of their active duty status and for 12 months after returning from active duty service. Interest above 6 percent is to be forgiven by the servicer. Servicemembers are required to inform their servicer of their active duty status in order to avail themselves of this provision.

Foreclosure Proceedings. A servicer cannot sell, foreclose, or seize the property of a servicemember for breach of a pre-service obligation unless a court order is issued prior to the foreclosure on the property. This protection is effective until 9 months after the term of active duty service ends. If the servicer files an action in court to enforce the terms of the mortgage, the court may stay any proceedings or adjust the obligation to preserve the interests of the parties.

Mortgage prepayment penalties. A court may decide that servicemembers who have mortgages that impose penalties for paying off the balance early are not subject to these penalties if the servicemember incurs such fees due to military service and the ability of the servicemember to pay the fees is materially affected by military service. change-of-station order to relocate to another area may receive a court order that waives the penalty for selling his or her home and paying off the mortgage early.

For example, a servicemember who receives a permanent

Adverse credit reporting protections. A servicer may not report adverse credit information to a credit reporting agency solely because a servicemember exercises his or her SCRA rights, including a request to have his or her mortgage interest rate and fees be capped at 6 percent.

50 U.S.C. app. §523(b).

In addition to SCRA, the Housing and Urban Development Act of 1968 includes a requirement applicable to institutions that service mortgages. This act requires that all mortgage servicers that service home loans provide notification of the availability of homeownership counseling offered by the lender to eligible homeowners who fail to pay any amount by the due date. In 2006, changes were made to the homeownership counseling notice requirement. Mortgage servicers are required to alert borrowers of SCRA protections if they are in default on their mortgage, and the notice instructs borrowers to notify their servicer if they believe they are eligible for SCRA protections. Servicers must provide the notification within 45 days from the date a payment was missed by a borrower. The Department of Housing and Urban Development (HUD) developed and disseminated the format for this notice.

SCRA provides protections to active duty servicemembers in all five of the military services—Army, Navy, Air Force, Marine Corps, and Coast Guard—as well as members of each of these services’ reserve These components include the Army Reserve, Navy component. Reserve, Marine Corps Reserve, Air Force Reserve, Coast Guard Reserve, Army National Guard, and Air National Guard.

In 2010, active duty servicemembers comprised 63 percent of the military’s force, and the reserve components represented the remaining 37 percent of the military force. Figure 1 shows the distribution of the military population and shows that the Army constitutes the greatest percentage of both active duty servicemembers and the reserve forces.

While the Army Reserve, the Navy Reserve, the Marine Corps Reserve, and the Air Force Reserve are federal entities, the Army National Guard and the Air National Guard (known collectively as the National Guard) have both federal and state missions. Members of the National Guard who are eligible for SCRA protections are those who have been called into federal active duty service. In addition, members of the National Guard recalled for state duty are also eligible for SCRA protections under certain circumstances.

The responsibility of extending mortgage-related SCRA protections to eligible servicemembers often falls to mortgage servicers. While some institutions that originate home mortgage loans hold the loans as assets on their balance sheets, institutions generally sell them to other financial institutions or the enterprises—Fannie Mae or Freddie Mac. The enterprises purchase mortgages from primary mortgage lenders. They hold some of the mortgages they purchase in their portfolios, but they package the majority into mortgage-backed securities and sell them to investors in the secondary mortgage market. The enterprises guarantee these investors the timely payment of principal and interest. If a mortgage originator sells its loans to either an investor or to an institution that securitizes them, another financial institution or other entity is appointed as the mortgage servicer to manage payment collections and other activities associated with these loans. Mortgage servicers, which can be large mortgage finance companies, commercial banks, or small specialty companies unaffiliated with a larger financial institution, earn a fee for duties they perform, such as sending borrowers monthly account statements, answering customer-service inquiries, collecting monthly mortgage payments, maintaining escrow accounts for property taxes and hazard insurance, and forwarding proper payments to the mortgage owners. Other mortgage lenders that hold the mortgages they originate may service the loans internally or outsource this function.

In the event that a borrower becomes delinquent on loan payments, the mortgage servicer must decide whether to pursue a home retention workout or foreclosure alternative, such as a short sale, or proceed with foreclosure. If the mortgage servicer determines that foreclosure is the most appropriate option, it follows one of two foreclosure methods, depending on state law. In a judicial foreclosure, a judge presides over the process in a court proceeding. Mortgage servicers initiate a formal foreclosure action by filing a lawsuit with a court. A nonjudicial foreclosure process takes place outside the courtroom and is typically conducted by a trustee named in the deed-of-trust document that accompanied the mortgage. Trustees, and sometimes mortgage servicers, generally send a notice of default to the borrower and publish a notice of sale in area newspapers or legal publications.

Prudential regulators—FDIC, Federal Reserve, NCUA, and OCC—have the authority to conduct reviews of any aspect of banks’ activities, including compliance with applicable consumer protection laws, such as SCRA. OCC charters and supervises national banks and federal thrifts. The Federal Reserve supervises state-chartered banks that opt to be members of the Federal Reserve System, bank holding companies, thrift holding companies, and the nondepository institution subsidiaries of those institutions. FDIC supervises FDIC-insured state-chartered banks that are not members of the Federal Reserve System, as well as federally insured state savings banks and thrifts. NCUA charters and supervises federally chartered credit unions and insures savings in federal and most state- chartered credit unions. OCC regulates the vast majority of mortgage servicing in the United States. For example, OCC-regulated servicers accounted for close to 80 percent of the unpaid principal balance on serviced mortgages in the third quarter of 2011. The prudential regulators conduct risk-based examinations of the institutions they oversee on a routine basis. Because examinations are risk-based and there are a number of consumer compliance laws for which examiners assess compliance during an examination, SCRA compliance is not assessed during every examination.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) established CFPB and provided it with the authority to regulate mortgage servicers with respect to federal consumer financial law. Consumer financial protection functions from seven existing federal agencies were transferred to the new agency. For mortgage servicers that are depository institutions with more than $10 billion in assets or their affiliates, CFPB will have exclusive supervisory authority and primary enforcement authority to ensure compliance with federal consumer financial law. Additionally, if a mortgage servicer is a nondepository institution, CFPB will have both supervisory and enforcement authority to ensure compliance with federal consumer financial law. Finally, CFPB will have rulemaking authority with respect to mortgage servicers, including authority that transfers from other federal agencies such as the Federal Reserve and the Federal Trade Commission. SCRA, however, was not one of the enumerated laws for which oversight transferred to CFPB. The prudential regulators remain responsible for overseeing compliance with the law for any of the entities they supervise that are servicing mortgages.

Other federal agencies are involved in the mortgage market by operating mortgage programs aimed at expanding homeownership for populations who may encounter difficulties in obtaining mortgages. For example, FHA has played a large role in assisting minority, lower-income, and first-time homebuyers in obtaining mortgages. FHA’s program insures private lenders against losses from borrower defaults on mortgages that meet FHA criteria for properties with one to four housing units. As of September 2011, almost 3,700 lending institutions were approved to participate in FHA’s mortgage insurance programs for single-family homes. FHA also offers special protections for servicemembers who have FHA-insured loans. For example, FHA-approved lenders are authorized to postpone principal payments and foreclosure proceedings for servicemembers on active duty who have FHA-insured mortgages.

VA is also active in the mortgage market through its Home Loan Guaranty program, which provides lenders a guaranty on a portion of mortgage loans for eligible veterans, active duty servicemembers, surviving spouses, and members of the reserve components in recognition of their service. According to VA, the program operates by substituting the federal government’s guaranty for a down payment that might otherwise be required. VA guarantees a portion of the mortgage loan in the event that borrowers default, providing lenders with substantial financial protections against some of the losses that may be associated with extending such mortgage loans. In 2011, VA guaranteed over 350,000 loans to veteran borrowers.

The Housing and Economic Recovery Act of 2008 created the Federal Housing Finance Agency (FHFA) and gave it responsibility for, among other things, the supervision and regulation of the housing-related enterprises: Fannie Mae, Freddie Mac, and the 12 federal home loan banks.each of the regulated entities operates in a safe and sound manner, including maintenance of adequate capital and internal controls, and carries out its housing and community development finance mission. FHFA has no direct authority over mortgage servicers, but does have authority to ensure that the housing enterprises are being run safely and soundly, as well as the power to impose operational, managerial, and internal control standards on the companies.

SCRA Eligibility, Violations, and Compliance

SCRA Requirements Limit Eligibility for Mortgage Protections

The total number of servicemembers eligible for the mortgage protections provided by SCRA is not known, but the size of this population is likely limited because the act provides protections only to servicemembers who meet certain eligibility requirements. The maximum number of servicemembers potentially eligible for mortgage protections under SCRA at any one time includes those servicemembers on active duty service and those who have recently left it. According to DOD, between 2007 and 2010 about 2 million servicemembers, including those activated from the reserve components, were on active duty.servicemembers who may actually qualify for the SCRA mortgage protections is a smaller portion of this population because some of the act’s protections only extend to servicemembers who obtained their mortgages prior to entering active duty service or servicemembers whose military service materially affects their ability to pay their mortgage. However, representatives from all the mortgage servicers with whom we spoke stated that they do not assess whether a servicemember’s ability to pay has been materially affected by their active duty status and that they provide eligible servicemembers SCRA protections regardless of whether their ability to pay is materially affected or not.

However, the number of According to DOD officials, representatives from industry trade groups, SCRA experts, and military service organizations, the servicemembers most likely to be eligible for SCRA mortgage protections are members of the reserve components. These servicemembers are more likely to have had mortgages prior to entering active duty service and some may potentially experience a decline in their incomes as they leave their civilian employment and begin receiving their military pay. We have previously reported, however that servicemembers belonging to the reserve components on average earn more income while activated. According to DOD officials, the number of servicemembers activated from the reserve components from 2007 through 2010 was approximately 576,500.

The maximum number of servicemembers who are eligible for SCRA mortgage protections is also a smaller portion of the total military population because many do not own homes for which they have taken out mortgage loans. According to the Census Bureau, the U.S. homeownership rate was about 67 percent in 2010. However, research shows that servicemembers are generally less likely to own their own homes. surveys—surveys that DOD sends annually to active duty servicemembers and members of the reserve components to evaluate various programs and policies and their impact on servicemembers—only 34 percent of active duty servicemembers and 55 percent of reserve component servicemembers reported that they owned or made mortgage payments on a home in the previous 12 months. However, even those military families who have mortgages may not be eligible for SCRA protections. First, some SCRA mortgage protections only apply to servicemembers who took out their mortgage before being placed on active duty. Also, given that mortgage interest rates have been at historic lows in recent years, servicemembers who took out mortgage loans during this period before being placed on active duty may be likely to have loans with rates lower than the SCRA-mandated level of 6 percent.

Census computes the homeownership rate by dividing the number of owner-occupied housing units by the number of occupied housing units or households.

Thousands of Mortgage- Related SCRA Violations Have Been Identified to Date

Although the total number of SCRA violations is not known, thousands of SCRA violations have been identified from a number of sources. First, DOJ—which is responsible for enforcing SCRA—settled investigations in 2011 with two mortgage servicers and identified 165 instances of active duty servicemembers who had their homes foreclosed upon without the mortgage servicer seeking the proper court order as required by the act. Second, in July 2011, as part of its investigation into SCRA violations, the U.S. House of Representatives Committee on Oversight and Government Reform sent letters to 10 large mortgage servicers requesting them to identify the total number of improper foreclosures and interest-rate and fee violations they had committed. In their responses, 6 mortgage servicers reported having conducted a total of at least 148 improper foreclosures against servicemembers and failing to reduce interest rates or fees on the mortgages for over 14,000 servicemembers since 2005. Third, as the result of a class-action lawsuit filed by several servicemembers, as of January 2012, Chase Home Finance, LLC had issued refunds to approximately 13,500 borrowers for interest and fees charged in excess of SCRA protections since 2005. Many of the mortgage servicers involved in these investigations are among the largest in the industry and service millions of loans. Table 1 summarizes the various SCRA violations identified by these sources to date.

Through their compliance examinations, prudential regulators identified 251 instances of SCRA compliance problems at depository institutions between 2007 and 2011. FDIC identified the vast majority—230—of these issues, with Federal Reserve staff identifying 16, OCC staff identifying 4, and NCUA staff identifying 1 instance. However, these SCRA compliance issues may not specifically concern mortgages—for example, they may have involved non-mortgage-loan products, such as credit card loans.

A more complete picture of the extent of SCRA violations may result from three large-scale federal agency reviews that are ongoing. Recent enforcement actions taken by DOJ, Federal Reserve, and OCC require mortgage servicers to conduct historical reviews of their mortgage loan files to determine if servicemembers who were eligible for the SCRA mortgage protections received them, among other things. If violations are identified, the mortgage servicers are required to provide compensation to the servicemembers. Appendix II contains a detailed explanation of these reviews.

In the wake of identified SCRA violations, some mortgage servicers have implemented procedures to enhance their compliance with SCRA. Some large mortgage servicers have instituted several military status checks during the foreclosure process. For example, one large mortgage servicer now requires its foreclosure counsel to check a customer’s military status prior to the initiation of foreclosure proceedings, 1 week prior to a foreclosure sale, and 1 day prior to the scheduled sale date. Some mortgage servicers have also created dedicated customer service support for military servicemembers, including telephone hotlines and websites. For example, representatives from one mortgage servicer told us that they had developed a dedicated team that is staffed with former servicemembers to assist customers with SCRA requests. These customer-support representatives also receive training on military financial issues and serve as the points of contact for any problems with delinquency, remediation, and foreclosure.

Finally, as a result of identified violations and SCRA investigations, some servicemembers will be receiving SCRA protections that go beyond those stated in the act. For example, three mortgage servicers that responded to the House Committee on Oversight and Government Reform letters noted that they have reduced the interest rate they charge on servicemembers’ mortgages to 4 percent—which is below the 6 percent required in SCRA. Additionally, the National Mortgage Settlement between the federal government, 49 state attorneys general, and five large mortgage servicers that occurred in February 2012 requires the five mortgage servicers to implement new mortgage servicing standards. These new standards expand protections to certain servicemember customers of these five mortgage servicers beyond those provided in SCRA. For example, the new standards extend foreclosure protections to any servicemember— regardless of whether their mortgage was obtained prior to active duty status—who is receiving Hostile Fire/Imminent Danger Pay or is serving at a location more than 750 miles away from their home. This means that any servicemember meeting these conditions and living in a nonjudicial state who obtained a mortgage after obtaining active duty status could not be foreclosed upon without a court order. More information on the National Mortgage Settlement is contained in appendix II.

Mortgage Servicers and Others Cited Challenges to Complying with SCRA

Representatives from some mortgage servicers and industry associations cited challenges that make complying with SCRA difficult. First, mortgage servicers may not know at the time a mortgage is originated whether a borrower will be eligible for SCRA protections in the future. For example, a borrower would become eligible for SCRA mortgage protections after obtaining his or her mortgage by joining the active duty military or being called into active duty service while serving as a member of the reserve components. Therefore, mortgage servicers may not be able to flag loans at origination that could potentially become eligible for SCRA protections at a later date. Second, representatives from some mortgage servicers and industry associations also noted that military orders, which servicemembers must provide to their mortgage servicers in order to receive the SCRA interest rate protection, can be difficult to interpret. In particular, a representative from one mortgage servicer noted that the orders do not always clearly specify the start and end dates of active duty service and that the format and content of these orders can vary considerably across services, which may lead to mistakes by mortgage servicer personnel responsible for determining eligibility. Further, a DOD official explained that in some instances, military orders may not be available in a timely manner. For example, he stated that members of the reserve components may be alerted that their unit is being mobilized on a certain date; however, the servicemembers may not get the actual military orders until weeks later. This delay could lead to problems for both a servicemember and a mortgage servicer. For example, if a servicemember has been deployed, he or she may encounter difficulties sending orders to his or her mortgage servicer. Without the orders, a mortgage servicer may encounter difficulties verifying the servicemember’s active duty start date in order to appropriately adjust their payment amounts.

One of the primary tools mortgage servicers use to comply with SCRA is a website operated by DOD’s Defense Manpower Data Center (DMDC) that allows mortgage servicers and others to query DMDC’s database to determine the active duty status of a servicemember. DMDC collects, archives, and maintains DOD personnel data. Representatives from mortgage servicers indicated that they use this website to confirm if a borrower is an active duty servicemember and may be eligible for SCRA protections and that they rely on the site to confirm if a servicemember is on active duty status prior to conducting a foreclosure. Representatives from one mortgage servicer also noted that they use the website to confirm the period of time that borrowers are eligible for the SCRA interest rate protections. The website is an important compliance tool because servicemembers are eligible for the foreclosure protections even if they do not notify their mortgage servicers that they are serving on active duty.

However, many representatives from mortgage servicers and industry associations with whom we spoke cited challenges with the usability of the website. Moreover, confusion appears to exist in the mortgage servicing industry about the availability of information in the database. For example, prior to April 2012, the website only allowed mortgage servicers to inquire about borrowers’ active duty status one individual at a time. The inability to test large numbers of borrowers simultaneously—known as batch testing—made confirming borrowers’ SCRA eligibility difficult given the large volumes of mortgages that some institutions service. Representatives from some mortgage servicers also indicated that sometimes the personnel information available from DMDC is not complete or accurate and that the database may produce a false-negative result. That is, it will indicate that servicemembers were not on active duty status when in fact they were. DMDC officials explained that information contained in the database depends on information provided to DMDC by the various services. Therefore, if a service has not reported a servicemember to DMDC as being on active duty status, the database will report that the servicemember is not on active duty. Additionally, representatives from mortgage servicers told us that they believe some servicemembers are not listed in the database. For example, one explained that, in some instances they have received orders from servicemembers, but when they query the database to confirm the active duty status, the servicemembers are not listed as on active duty. Other mortgage servicer representatives believed that some servicemembers may not be listed in the database for national security reasons, such as those serving in the Special Forces. However, DMDC officials told us that active duty status is updated for all servicemembers, including those on special operations.

To help address these challenges, DOD is working with the mortgage servicing industry and industry associations to improve both the usability of the website and the readability of military orders. First, to aid mortgage servicers’ ability to query the database, DMDC has developed and implemented a way for mortgage servicers and others to conduct batch queries of the database from the website for up to 250,000 servicemembers at a time.to develop the capability of the database to query historical information and also to distinguish between those active duty periods for servicemembers in the National Guard that provide SCRA protections and those that do not.

DOD officials also noted that they are trying Second, DOD has collaborated with the financial industry through the Financial Services Roundtable’s Housing Policy Council—a consortium of financial institutions that provide mortgage credit—to develop an alternative military order form that servicemembers can attach to or provide in lieu of their military orders when requesting relief under SCRA from their mortgage servicers. This form is intended to be easier for mortgage servicers to interpret as it is shorter and more standardized than official orders, which can vary by service. According to DOD officials, this alternative form was approved by DOD in December 2011 and has been distributed to the military services as well as to financial institutions and is being used by servicemembers.

Federal Regulators’ Oversight of SCRA Compliance Has Been Limited

Prudential Regulators Examine for SCRA Compliance Based on Risk Factors

Prudential regulators—FDIC, Federal Reserve, NCUA, and OCC—are responsible for supervising depository institutions’ compliance with various federal consumer laws including SCRA. Consumer compliance examinations are one of the primary tools regulators use to assess this compliance. Prudential regulators all use a risk-based approach to consumer compliance examinations to determine which areas to target, with areas of higher risk receiving greater focus during examinations. For example, according to the FDIC consumer compliance examination manual, riskier areas may include ones that involve regulatory changes or complex products. Regulatory officials also told us that because of this risk-based approach, SCRA may not be included or fully addressed within the scope of an examination. For example, officials from one regulator told us that when deciding to include SCRA in an examination they may consider, among other things, consumer complaints, internal audit results of the institution’s compliance management system, and problems raised in the media. Regulators also use the risk-based approach to determine the specific examination procedures they use to assess compliance. Areas of higher risk would be subject to more extensive review procedures, while areas of lower risk would receive less extensive review. For example, according to OCC’s examination manual, areas of greater risk may involve more extensive testing of loan transactions for compliance.

In 2009, the regulators developed interagency examination procedures related to SCRA through the Federal Financial Institutions Examination Council (FFIEC), including a specific checklist that examiners can use in their examinations. The interagency SCRA procedures and checklist indicate that examiners should determine whether depository institutions applied and properly calculated interest-rate reductions, whether any foreclosures were conducted without a court order, and whether any servicemember requests for SCRA protection were inappropriately reported as adverse information to a credit reporting agency. Additionally, the interagency procedures suggest, among other things, that examiners (1) consider reviewing SCRA policies, procedures, and account documentation when assessing the adequacy of the institution’s internal controls and (2) review whether the depository institution’s compliance reviews and audit materials include transaction testing of samples covering relevant product types. The checklist contains a series of questions related to different sections of SCRA, including the ones that apply to residential mortgages.

In addition to routine risk-based consumer compliance examinations, prudential regulators conduct targeted reviews of areas of high concern.

For example, FDIC, Federal Reserve, and OCC conducted an interagency review of the foreclosure policies and practices of 14 mortgage servicers in late 2010, in response to the large number of foreclosures since 2007 and continued weaknesses in the mortgage market. The examiners evaluated the adequacy of each mortgage servicer’s operating procedures and controls and preparation of foreclosure documentation, among other things. Although the interagency review was not intended to directly assess SCRA compliance, during the course of this effort, two mortgage servicers nonetheless identified SCRA compliance problems. Additionally, in June 2011, OCC issued guidance to all of its regulated institutions that required them to conduct self-assessments of their foreclosure management practices. OCC examiners will review the self-assessments in the subsequent examination of the institutions.

Oversight of SCRA Compliance Varied by Institution, Year, and Regulator

The extent to which SCRA was reviewed varied by the size of the depository institution, the year in which the examination took place, and the regulator that conducted the examination from 2007 through 2011. Based on our review, we estimate that from 2007 through 2011, prudential regulators reviewed SCRA compliance in at least one examination for 48 percent of all the institutions they oversaw that serviced mortgages. This estimate includes documentation of an SCRA review for any type of loan product (e.g., residential mortgage, credit card, automobile, and other types of products). Some of the reasons bank examiners cited for including SCRA in the scope of an examination included the need to follow up on previous violations and deficiencies, changes in regulatory requirements, and identification of SCRA loans being serviced. To determine the extent to which SCRA compliance was included in examinations of depository institutions and the procedures examiners used to assess SCRA compliance, we reviewed workpapers for examinations conducted by FDIC, Federal Reserve, NCUA, and OCC. We reviewed the workpapers for examinations from 2007 to 2011 for a sample of 152 institutions that service mortgages they hold in their loan portfolios or service mortgages for other institutions. The 152 institutions represented a stratified random sample of institutions based on size and regulator examined from 2007 through 2011. Because officials from some regulators told us that they may not conduct an examination for every institution every 12 months, and because SCRA might not be covered in each risk-based examination, we looked at examinations spanning a 5- year period.

Based on our sample, we found that prudential regulators included a review of SCRA compliance in at least one examination for a greater percentage of large institutions than all other institutions. In this report, the 40 large institutions are comprised of the 10 largest mortgage servicers regulated by each of the four prudential regulators. Specifically, we found that about 70 percent of these large institutions were reviewed for SCRA compliance at least once from 2007 through 2011 compared with an estimated 48 percent of all other institutions for the same period. Officials from one regulator indicated that one reason for this difference might be that the larger institutions conducted more mortgage lending than smaller institutions; therefore, examiners may be more likely to review SCRA compliance at larger institutions.

We reviewed examinations for all 40 of the large institutions, and therefore the percentage presented is the percentage of these 40 large institutions, and is not an estimate. For our estimates of the remaining institutions, we are 95 percent confident that the actual population of these institutions that were examined for SCRA is between 45 percent and 52 percent. occurred in an estimated 26 percent of all institutions, compared with 2007 when about 4 percent of all institutions were reviewed for SCRA. Figure 2 shows the distribution in the percentage of institutions examined for SCRA compliance for each year from 2007 through 2011. Some of the regulatory officials told us that reasons for the differences by year may include the adoption of SCRA interagency examination procedures in 2009 and increased attention to the impacts of the financial crisis on servicemembers in recent years.

We also found that among just the 40 large institutions, a greater percentage had an SCRA compliance review in 2010 and 2011 compared with earlier years: in 2010 and also in 2011, about 40 percent of the institutions had an SCRA review, about 13 percent of these institutions were reviewed for SCRA about 23 percent of these institutions were reviewed for SCRA compliance in 2008, and in 2007, 10 percent were reviewed for SCRA compliance.

Our analysis also revealed differences by regulator in the extent to which SCRA was reviewed for compliance. Figure 3 shows that both FDIC and Federal Reserve reviewed a significantly higher percentage of institutions for SCRA compliance compared with NCUA and OCC. It also shows that OCC reviewed a greater percentage of institutions than NCUA. NCUA officials explained that the agency does not have a separate consumer compliance examination function and that consumer compliance is part of its overall evaluation of the safety and soundness of institutions. The officials said that given the recent economic crisis, the agency has placed more focus on the safety and soundness of credit unions than on compliance with consumer regulations. They said that this is part of the reason the percentage of credit unions that received an SCRA compliance review is so low. However, our prior work has found that mortgage servicing problems, including inadequate controls over foreclosure processes, have led to risks to the safety and soundness of depository institutions.

For the estimated 52 percent of institutions that were not examined for SCRA compliance from 2007 through 2011, examiners did not document their reasons for excluding SCRA for at least 95 percent of these institutions. In our review, we found four examinations for which examiners had documented in the workpapers a reason for not including SCRA compliance. For three of these examinations, the reason cited was that examiners had recently examined for SCRA compliance and found no violations, deficiencies, or other concerns. The fourth examination reviewed the depository institutions’ progress in addressing consumer compliance issues identified in the previous examination and because SCRA compliance was not one of the issues of concern identified in the previous examination, it was excluded from the examination we reviewed.

Regulatory officials offered a few reasons to explain why an examiner may not include SCRA compliance in an examination. For example, officials from one regulator said that some depository institutions might not serve large military populations. Therefore, examiners might not consider compliance with SCRA mortgage protections a substantial risk to these institutions. Additionally, officials from one prudential regulator indicated that examiners may choose to exclude SCRA compliance from an examination if the institution had received few complaints concerning SCRA-related issues. The regulators indicated that they had received very few SCRA complaints related to residential mortgages between 2007 and 2011 compared with the number of consumer complaints they received overall during this period.

Examiners Generally Used Limited Loan Testing

As part of our review of examination workpapers for the 152 institutions in our sample, we collected information on the procedures examiners used to assess compliance with SCRA if an examination reviewed residential mortgage loans or if the workpapers did not specify the loan product being addressed. We included examinations in which the loan product was not specified to help ensure that we reviewed any examination procedures that may have addressed residential mortgages. Our review found a total of 83 institutions for which examiners either reviewed SCRA compliance for residential mortgage loans or did not specify the loan product being reviewed. The figures presented for this analysis are not generalizable to the population of institutions that service mortgages. After reviewing examination guidance and auditing standards, we grouped examiners’ documented examination procedures into three categories based on our professional judgment as to the extent that each type of procedure would provide assurance that financial institutions were complying with SCRA: Interviews with depository institution personnel. This category includes activities in which examiners interviewed staff at the depository institution for information on, among other things, their compliance management systems and whether the institution services loans to servicemembers eligible for SCRA protections.

Assessments of depository institutions’ compliance management systems. This category includes instances in which examiners documented that they reviewed the quality of depository institutions’ compliance management systems, such as reviewing institutions’ SCRA policies and procedures, internal controls, and training programs.

Testing loan files for SCRA compliance. This category includes activities such as testing a limited number of loan files the institution identified as SCRA-eligible or conducting more comprehensive testing, such as reviewing a statistical sample of loan files.

Of these categories, the first category—interviews with depository institution personnel—provides the least assurance of SCRA compliance because the examiner would be relying primarily on assertions provided by institution personnel rather than an independent assessment or verification of these assertions. The second category—assessments of institutions’ compliance management systems—provides greater assurance of SCRA compliance because these procedures require examiners to independently assess the quality of the depository institutions’ procedures and internal controls. The final category—testing of loan files—provides even greater assurance of SCRA compliance because examiners can independently verify whether the institution’s personnel provided all necessary SCRA protections.

Although in many examinations examiners documented that they used an assortment of examination procedures from different categories to assess compliance with SCRA, we categorized each of the 83 institutions whose SCRA compliance was assessed during the 5-year period of our review by the highest assurance level of the examination procedures that were used in any of the examinations done of that institution from 2007 through 2011. Based on this analysis, we found that only about half of these institutions had any testing conducted during this 5-year period. Specifically, of these 83 institutions, we found that

6 institutions had examinations during this period that relied on interviews of depository institution staff to assess SCRA compliance as their highest category of examination procedure,

36 institutions had examinations in which the highest category of examination procedure used to assess SCRA compliance was to review the institution’s compliance management system, and

41 institutions had examinations that involved testing of loan files as the highest category of examination procedure—the examination procedure category that provides a greater level of assurance for SCRA compliance than the previous two categories.

However, at the 41 institutions at which examiners tested loan files, we found that the type of testing conducted was limited. Examiners can choose from different types of testing methods that provide differing levels of assurance that an institution is complying with SCRA. For example, within the testing category, testing a limited sample of loan files that depository institutions identified as SCRA-eligible provides less assurance of compliance because it relies on assertions by depository institutions of SCRA eligibility, whereas testing a statistical sample of loans provides greater assurance because it allows examiners to independently select files for testing, and the results would be representative of the institution’s compliance. In the examinations we reviewed, the examiners mostly tested a limited sample of loans that the depository institution had identified as SCRA-eligible and, therefore, provided less assurance that the institution was complying with SCRA. We found no instances between 2007 and 2011 in which examiners tested a statistical sample of either loans in foreclosure or mortgage loan files in general, which would have provided the greatest assurance of an institution’s SCRA compliance. By testing only foreclosure files or mortgage loan files that the depository institution had identified as SCRA- eligible, examiners cannot fully determine if the institution has appropriately identified all eligible servicemembers. By expanding the scope of testing to include a larger sample of foreclosure and mortgage loan files, beyond just those files that the depository institution had identified as SCRA-eligible, examiners could better ensure that institutions are appropriately identifying eligible servicemembers and providing them all of the protections to which they are entitled. To minimize the burden on institutions and examiners, such reviews could be conducted as part of samples of loans drawn for examining compliance with other regulatory requirements.

Coordination of SCRA Oversight Lacking

In addition to the prudential regulators, other federal agencies conduct oversight of SCRA compliance. SCRA authorizes DOJ to commence a civil action against any person who engages in a pattern or practice of violating the act or if a violation of the act raises an issue of significant public importance. DOJ staff indicated that they consider military attorneys to be the most likely staff to help ensure that a servicemember is afforded their SCRA protections. For cases in which a military attorney is unable to obtain voluntary compliance from a mortgage servicer or other person or entity doing business with a servicemember, DOJ has a system in place to receive referrals for these cases and to open investigations. DOJ officials told us and military attorneys confirmed that, in most cases, military attorneys are able to resolve SCRA matters without referring them to DOJ. DOJ also receives referrals for SCRA investigations from private attorneys and individual servicemembers and their families. When DOJ receives an SCRA referral, officials investigate the matter and determine if a full investigation should be opened.Investigations can result in DOJ filing a civil action against the party in court for alleged SCRA violations, or a resolution with the party may be reached without filing the case in court.

DOJ filed a total of five cases in court from 2007 through 2011 for SCRA violations. Two of these cases—BAC Home Loans Servicing, LP and Saxon Mortgage Services, Inc.—involved SCRA violations regarding servicemembers’ mortgages. In May 2011, DOJ took enforcement actions against both mortgage servicers for wrongfully foreclosing upon active duty servicemembers without obtaining court orders. DOJ alleged that both mortgage servicers did not consistently check the military status of borrowers on whom they foreclosed, resulting in 165 improper foreclosures between 2006 and December 2010 (as listed previously in table 1). In its enforcement actions, DOJ required each of these mortgage servicers to pay damages to servicemembers and conduct a variety of remedial actions. For example, BAC Home Loans Servicing agreed to pay at least $20 million to resolve the lawsuit, and Saxon Mortgage Services agreed to pay at least $2.35 million. The mortgage servicers were also required to, among other things, (1) implement revised SCRA policies and procedures for using the DMDC website, (2) implement a foreclosure monitoring program, (3) provide SCRA compliance training to all applicable employees, and (4) conduct reviews to identify additional servicemembers who may have had their SCRA rights violated and compensate them. Appendix II discusses these reviews in more detail. In addition to the 5 SCRA cases DOJ filed in court, DOJ opened 45 additional SCRA investigations from referrals it received between 2007 and 2011, 9 of which involved servicemembers’ mortgages. One of these referrals involved a servicemember’s request to waive the prepayment penalty on her mortgage when she received a permanent change-of-station order and sold her home to move closer to the new base. DOJ was able to reach a resolution with the mortgage servicer without trying the case in court. Another investigation involved allegations of a mortgage servicer charging interest in excess of the SCRA maximum of 6 percent. DOJ officials stated that this investigation was resolved in favor of the servicemember. Finally, in February 2012, DOJ settled with five of the nation’s largest mortgage servicers for a variety of improper mortgage servicing procedures, including allegations of SCRA violations. More information on the National Mortgage Settlement is contained in appendix II.

Other federal agencies that operate mortgage programs also oversee certain aspects of SCRA compliance. For example, to participate in FHA’s mortgage programs, mortgage servicers must comply with the agency’s program requirements, which include complying with all applicable laws and regulations, including SCRA. FHA officials explained that they use a risk-based approach to monitor the institutions that service the loans the agency insures. Officials told us that from 2007 through 2011, FHA conducted about 200 mortgage servicer monitoring reviews. They explained that each review consists of a sample of the mortgage servicer’s loan files and FHA staff use a checklist to help ensure that the mortgage servicer is in compliance with a variety of servicing requirements for each loan in the sample. One of the requirements reviewed for each loan is the distribution of the HUD counseling notice that includes information on SCRA eligibility to borrowers who are at least 45 days delinquent. Agency officials explained that a more thorough review of SCRA compliance is conducted if a mortgage servicer has identified that the borrower is an active duty servicemember. For loans that a mortgage servicer has marked with a code to indicate that the borrower is an active duty servicemember, FHA staff conduct additional steps to better ensure that the mortgage servicer has provided the servicemember appropriate SCRA protections, as well as additional protections that FHA provides to active duty servicemembers who have FHA-insured loans. These steps include ensuring that the interest rate has been appropriately adjusted and that foreclosure was postponed. FHA officials stated that they rely on mortgage servicers to appropriately identify active duty servicemembers. Although they may review SCRA compliance on specific loans, FHA officials told us that their reviews are not intended to assess the adequacy of the mortgage servicers’ SCRA compliance policies and procedures or to determine whether these policies are functioning for all of a servicer’s activities. As a result of FHA’s servicer monitoring reviews, some SCRA compliance problems have been identified. For example, FHA officials told us that between 2007 and 2011 the agency found two instances of SCRA noncompliance during its mortgage servicer monitoring reviews. One of these instances involved a mortgage servicer failing to send the HUD counseling notice that includes information on SCRA eligibility to borrowers delinquent 45 or more days, and the other violation involved a mortgage servicer failing to verify a borrower’s active duty status prior to foreclosure.

Although VA interacts with mortgage servicers as part of its Home Loan Guaranty Program, VA officials explained that the program currently does not conduct in-depth reviews of mortgage servicers’ policies and procedures and loan files to review overall compliance with SCRA mortgage protections. The officials explained that they are in the process of finalizing a program that will conduct on-site audits of mortgage servicers’ functions and that they expect the program to be implemented in late 2012. VA officials explained that this program will include reviews of servicers’ loan files and policies and procedures for monitoring and identifying SCRA-eligible borrowers to determine servicers’ overall compliance with SCRA mortgage protections. Officials explained that in the wake of recently identified SCRA violations, they conducted a review of all VA loan files that were in foreclosure from October 2009 to January 2011 to determine if any of the borrowers were possibly eligible for SCRA mortgage protections. The officials said that they identified approximately 30,000 borrowers in foreclosure during that period and that they conducted an in-depth review of 47 loans that were potentially eligible for SCRA mortgage protections. VA determined that none of these borrowers were improperly foreclosed upon. They have recently expanded this review to include a longer time period, but as of June 2012, they had not completed the review to determine if any borrowers were improperly foreclosed upon.

VA officials explained that they do conduct reviews of the adequacy of servicing being conducted by servicers. These reviews—Adequacy of Servicing reviews—are conducted on all loans over 120 days delinquent to determine if servicers have provided adequate servicing to borrowers, but according to VA officials, they are intended to explore loss mitigation options and not to examine for SCRA compliance. The officials explained that during these reviews, VA reviews mortgage servicers’ notes on the account to determine if they have provided adequate servicing to the borrower. Specifically, they check to see if the mortgage servicer has contacted the borrower, if a reason for default has been determined, if loss mitigation options have been considered, and why any loss mitigation options that were considered were not completed. Officials explained that if the mortgage servicer has taken the appropriate steps, VA would determine that the servicing provided was adequate. If VA determines that the servicing being provided was not adequate, or if the servicer was unable to contact the borrower, it conducts supplemental servicing on the loan and works with the borrower directly to explore loss mitigation options. According to VA officials, they may learn during these reviews that the loan involves an active duty servicemember. However, the Adequacy of Servicing reviews currently do not evaluate the extent to which servicers have assessed whether borrowers are eligible for SCRA mortgage protections. They also explained that while their procedures for conducting these reviews do not address reviewing for compliance with SCRA mortgage protections, VA loan technicians encourage borrowers to review their SCRA mortgage protections with military attorneys. Additionally, VA officials explained that they do not have a mechanism for tracking if these reviews have identified SCRA-eligible borrowers. As part of VA’s mission to serve servicemembers, VA officials told us that they try to ensure that servicemembers have received every opportunity to keep their homes and avoid foreclosure. VA officials explained that they rely on federal regulators to investigate and enforce statutory requirements, such as SCRA. However, given that VA staff also oversee servicers’ activities, they do have the opportunity to review servicers’ efforts to determine SCRA eligibility, such as by making an inquiry with the servicer of the loan or consulting DOD records to determine if the borrower is an active duty servicemember. Without such a review, the extent to which the agency is ensuring servicemembers are receiving all protections to which they are entitled is not clear.

The enterprises—Fannie Mae and Freddie Mac—also conduct SCRA compliance monitoring at the mortgage servicers that service loans on their behalf. This monitoring focuses on enforcing contractual requirements between the enterprises and mortgage servicers to ensure that mortgage servicers are following the servicing guidelines issued by the enterprises. The servicing guidelines outline mortgage servicers’ compliance obligations for several different laws and regulations, including SCRA. The SCRA components of the guidelines include information for mortgage servicers on, among other things, how SCRA relief is initiated and how interest rates are reduced, as well as foreclosure proceedings and credit reporting. Enterprise officials explained that SCRA compliance is not included in each review conducted. If it is included, Fannie Mae officials explained that examiners seek to understand how a mortgage servicer checks for SCRA compliance and conducts testing of the servicers accounting methods for SCRA compliance. For example, if a servicemember has an interest rate that is greater than 6 percent, examiners test to ensure that interest rate and payment amounts have been properly reduced. Freddie Mac officials told us they assess the mortgage servicer’s understanding of SCRA and the procedures in place to ensure compliance. The enterprises’ SCRA compliance monitoring efforts have identified some instances of noncompliance. For example, Fannie Mae identified 13 instances of noncompliance with its SCRA guidelines between 2007 and 2011, and Freddie Mac has identified 2 instances. These instances of noncompliance involved issues such as mortgage servicers not having comprehensive SCRA compliance policies and procedures and mortgage servicers not properly verifying the active duty status of servicemembers. Officials from FHFA—the enterprises’ regulator—stated that its supervisory focus for SCRA compliance is to confirm that the enterprises are taking steps to ensure that the mortgage servicers with which they have contracts comply with the contracts’ requirements which include compliance with applicable laws.

Although the prudential regulators, FHA, VA, and FHFA all have a role in helping ensure that mortgage servicers provide appropriate SCRA protections to eligible servicemembers, currently none of these entities share information related to SCRA compliance with one another. While the extent of oversight conducted by these entities varies, they do review for some of the same SCRA provisions, such as those related to interest rate reductions and foreclosures. Furthermore, some of the mortgage servicers that participate in FHA’s and VA’s loan programs and service loans on behalf of the enterprises are also subject to oversight by one of the prudential regulators, which review for SCRA compliance during their examinations. Although these agencies obtain SCRA-related information about many of the same institutions, FHA, VA, and FHFA officials stated that they have not coordinated with the prudential regulators on SCRA compliance issues. Further, FHFA officials stated that while they participate in some forums with the prudential regulators to coordinate on various issues, they were not aware of any coordination related to SCRA compliance.

GAO, Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can Strengthen Performance Measurement and Collaboration, GAO-07-154 (Washington, D.C.: Mar. 15, 2007). information about their fair lending oversight programs. For example, the agencies established the Interagency Fair Lending Task Force to develop a coordinated approach to address discrimination in lending and adopted a policy statement on how the various agencies were to conduct oversight and enforce the fair lending laws. At that time, federal officials said that coordinating on fair lending issues allows the agencies to exchange information on a range of common issues, informally discuss fair lending policy, and confer about current trends or challenges in fair lending oversight and enforcement. FHFA officials explained that the agency has existing memorandums of understanding with prudential regulators and HUD that establish the protocols they use to discuss trends, risks, and other emerging issues on a variety of topics with these other agencies, but that SCRA has not been a topic during these discussions. FHFA does not currently have a memorandum of understanding with VA to share information, but the officials explained that they have worked with the agency in the past on issues such as appraisals and that they have done so through letter arrangements that allow them to share information. These existing arrangements could provide a mechanism for SCRA information to be shared between FHFA and the prudential regulators, FHA, and VA. However, currently no such sharing arrangements exist between the prudential regulators, FHA, and VA. Although FHA, VA, and the enterprises that FHFA oversees have identified limited instances of SCRA violations in recent years, the sharing of information related to SCRA trends, emerging risks, or types of weaknesses found in mortgage servicers’ policies among all agencies that play a role in SCRA compliance oversight could increase awareness of potential problems and improve their ability to identify SCRA violations.

Challenges in Ensuring Servicemembers’ Awareness of SCRA Protections

DOD and DHS Education Efforts

Under SCRA, DOD services’ Secretaries and the Secretary of Homeland Security have the primary responsibility for ensuring that servicemembers receive information on their SCRA rights and protections. Servicemembers are informed of their SCRA rights in a variety of ways. For example, briefings are provided on military bases and during deployment activities; legal assistance attorneys provide counseling; and a number of outreach media, such as publications and websites, are aimed at informing servicemembers of their SCRA rights. According to DOD officials, the legal assistance attorneys are primarily responsible for leading the military’s SCRA education efforts. Each of the military services, including the Coast Guard under DHS, operates a number of legal assistance offices throughout the country. Legal assistance offices are operated by military and civilian legal assistance attorneys who are responsible for providing support to servicemembers on a variety of legal issues, including family law and estate planning. As part of their responsibilities, they inform servicemembers about their rights and benefits under SCRA.

Legal assistance attorneys provide SCRA support to servicemembers using various methods. We spoke with legal assistance attorneys at six military installations across the five services. They told us that they provide servicemembers with information on SCRA during routine briefings on military installations, in handouts, and during one-on-one sessions with individual servicemembers. Two legal assistance attorneys told us that they alert installation staff, including unit commanders, to direct servicemembers to their legal assistance offices if they have a problem. Legal assistance attorneys also told us that they will contact depository institutions on behalf of servicemembers to help them receive their SCRA protections. Some legal assistance attorneys also told us that they provide templates of letters for servicemembers to send to their mortgage servicer to request a reduction in their mortgage interest rate. Additionally, legal assistance attorneys told us that they will refer servicemembers to the American Bar Association’s (ABA) Military Pro Bono Project if they are unable to resolve an SCRA matter for a servicemember. ABA’s program connects active duty servicemembers to pro bono attorneys who assist them with civil legal problems.

SCRA requires that servicemembers be informed of the rights and protections available under SCRA upon entry into the military, during initial orientation training, and, in the cases of members of the reserve components, when called to active duty for a period of more than 1 Predeployment briefings generally occur at the military installation year. that deploys the servicemember and, in addition to SCRA, cover a range of other legal and financial issues, such as the preparation of wills and powers of attorney. According to DOD officials, members of the reserve components may receive this briefing numerous times at their home station prior to deployment. Servicemembers are also provided with an additional opportunity to learn about their rights under SCRA upon returning from deployment. According to DOD officials, because some SCRA protections extend for a 9- or 12-month period beyond servicemembers’ active duty service, obtaining information at the end of deployment is critical for those servicemembers who will no longer be on active duty and will lose access to military-provided legal assistance. As a result, the Army reserve component—which includes the Army Reserve and Army National Guard and is the largest portion of the reserve components—requires that members receive standardized post- deployment training on SCRA.

DOD and DHS use a number of other methods to deliver SCRA information to servicemembers, including military training courses, publications, websites, and other family support services. For example, DHS officials told us that all Coast Guard members are informed of their SCRA rights during basic training. Some others may receive additional SCRA training during their initial officer training at the Coast Guard Academy or other advanced classes. DOD also publishes general articles in newsletters and installation publications explaining servicemembers’ SCRA rights and more specific articles on the relationship between mortgage difficulties and SCRA. Additionally, several military websites contain information on SCRA, including websites for individual services and military installations and sites such as Military OneSource—a DOD online resource that is staffed with counselors who offer assistance to servicemembers on a variety of topics, including financial counseling. DOD also provides financial management and family support services through the family readiness centers located at military installations. These centers provide general financial management counseling on topics such as reducing debt and saving for college to servicemembers’ families during periods of deployment and also share information on SCRA and refer family members to the legal assistance office if they have an SCRA issue.

Other SCRA Outreach Efforts

Other federal agencies also provide SCRA outreach and support to servicemembers and financial institutions in a variety of ways, including oral briefings, written notifications, and websites. For example, VA officials told us that some servicemembers who leave active duty service participate in a multiday briefing conducted in partnership with VA, DOD, and the Department of Labor. This briefing discusses reentering civilian life, SCRA protections, and veterans’ benefits. Additionally, both VA and FHA provide SCRA-related outreach to the institutions that participate in their mortgage programs. For example, VA periodically sends written notifications to all of its loan servicers reminding them of their compliance responsibilities and alerts them to changes in the act when they occur. FHA also provides information to its mortgage servicers on SCRA. Its website contains a list of questions and answers for mortgage servicers on SCRA, servicemembers’ eligibility criteria, and FHA policies with respect to servicing FHA-insured mortgages in compliance with SCRA.

The Consumer Financial Protection Bureau (CFPB) has an Office of Servicemember Affairs that also plays a role in providing SCRA outreach to servicemembers and mortgage servicers responsible for complying with the act. As of May 30, 2012, CFPB officials had conducted 37 visits to military installations and National Guard units and met with legal assistance attorneys to discuss consumer protection issues servicemembers have been facing, including SCRA. CFPB also sent letters to 25 large mortgage servicers in 2011 alerting them of servicemembers’ rights under SCRA and their responsibilities to comply with the act. The letters specifically urged mortgage servicers to educate their employees about SCRA and review their loan files to ensure compliance with the law. Additionally, CFPB has held meetings in which representatives from DOD and DHS and other federal agencies, financial institutions, and trade associations discussed issues related to SCRA compliance. CFPB officials also held a forum in which financial institutions discussed activities—some that go beyond those required by SCRA— they were undertaking to assist servicemembers’ with their mortgages. In July 2011, CFPB and the Judge Advocate Generals of the Army, Marine Corps, Navy, Air Force, and Coast Guard developed a joint statement of principles to provide stronger protections for servicemembers in connection with consumer financial products and services. Finally, through its consumer response function, CFPB also works directly with servicemembers by collecting consumer complaints against depository institutions and coordinating those complaints with servicemembers’ depository institutions and if necessary, the appropriate legal assistance offices.

Finally, military servicemember groups also assist servicemembers with SCRA issues. Organizations such as the National Military Family Association, the Military Officers Association of America, the Reserve Officers Association, and others provide information on SCRA to their members in a variety of ways. A representative from one military servicemember group explained that its website—which contains background information on SCRA and legal reviews of specific SCRA provisions—is the group’s primary means of providing information to servicemembers and the public on SCRA issues. Other representatives with whom we spoke said that they provide information to their members when changes to SCRA have occurred. For example, one military servicemember group highlights applicable legislative changes in weekly electronic notifications to its members.

Servicemembers Face Challenges Asserting Their SCRA Protections, Raising Questions about Training Effectiveness

DOD officials, legal assistance attorneys, and representatives of military servicemember groups with whom we spoke noted a number of challenges with ensuring that servicemembers are aware of their SCRA protections. One main challenge cited was servicemembers’ retention of the SCRA information they receive from DOD and DHS. Attorneys at each of the six legal assistance offices told us that servicemembers are not aware of the full extent of their SCRA rights. In addition, several military servicemember group representatives, a National Guard Bureau official, and an SCRA expert told us that despite available information on SCRA, servicemembers are not adequately prepared to invoke their rights when needed.

According to DOD officials, the bulk of the SCRA education provided to servicemembers occurs at military installations that focus on regular active duty servicemembers. However, members of the reserve components—those most likely to qualify for SCRA’s mortgage protections—may not be located at military installations and, therefore, have less access to these services and trainings. One DOD official told us that members of the reserve components may receive SCRA briefings at their home station. However, legal assistance attorneys at five of the six legal assistance offices with whom we spoke told us that members of the reserve components have limited access to legal assistance offices on military installations when they are not on active duty. Having this limited access to legal assistance could affect reserve components members’ ability to avail themselves of their SCRA protections when needed. Additionally, some members of the reserve components face geographic challenges with accessing legal assistance offices due to their distance from military installations. About half of the military installations in the United States are located in just 10 states, while members of the reserve components live throughout the country. For example, the Chief Legal Assistant for the Ninth Coast Guard District explained that the legal assistance office for that district is located in Cleveland, Ohio, but the office provides legal services to the entire Great Lakes Region.

Another challenge in ensuring that servicemembers are aware of their SCRA protections when needed is the effectiveness of the educational briefings provided by DOD and DHS. As discussed above, SCRA requires that servicemembers receive SCRA training upon entry into the military, during initial orientation training, and, for members of the reserve components, when called to active duty for a period of more than 1 year. However, legal assistance attorneys who conduct this training and military servicemember groups explained that its effectiveness is diminished because of the volume of information presented, the timing of the training, and the availability of legal assistance resources. For example, four military officials told us that during predeployment activities and annual National Guard weekend training activities, servicemembers attend multiple, back-to-back briefings, which cover a variety of legal and financial issues that are focused on a number of important topics, such as family law and estate planning. One military attorney referred to these briefings as “baptism by a fire hose” when trying to illustrate the volume of information provided to servicemembers at these critical times. Further, military attorneys with whom we spoke told us that the amount of time legal assistance attorneys are able to spend with servicemembers during pre- and postdeployment activities is limited due to the volume of servicemembers deploying and returning from deployment. For example, one military attorney told us that legal assistance attorneys might assist 250 deploying servicemembers with their legal affairs prior to deployment and that during deployment there is limited time available to provide legal assistance. Another legal assistance attorney stated that it would be beneficial for members of the reserve components to have more time to access military legal assistance resources when they return from deployment because of concerns that they do not retain the information they receive during postdeployment briefings. One legal assistance attorney that assists members of the reserves specifically explained that when he provides SCRA-related briefings to deployed servicemembers who should have received SCRA briefings prior to deployment; many seem like they are hearing the information for the first time. He suggested that servicemembers’ retention of information could be improved if deploying servicemembers receive more comprehensive briefings with smaller groups of servicemembers. Additionally, a National Guard Bureau official told us that predeployment briefings contain too much information for servicemembers to absorb, including the relatively small portions of the briefings that include information on SCRA. These methods of providing SCRA information to servicemembers raise concerns about their ability to retain the information they receive during these trainings.

Without adequate awareness, servicemembers may not take full advantage of their protections under SCRA. As discussed above, the methods of SCRA training and outreach provided by DOD and DHS to regular active duty servicemembers and members of the reserve components may not be adequate to ensure that these servicemembers are aware of and benefiting from the full protections provided by the act.

In 2008, DOD asked in its annual Status of Forces Surveys if active duty servicemembers and members of the reserve components had received SCRA trainings. Forty-seven percent of members of the reserve components—including those who had been activated in 2008—reported in the survey that they had received SCRA training and only 35 percent of regular active duty servicemembers reported that they had received training. While these numbers may not reflect the number of servicemembers who received SCRA training, they do provide an indication as to the number of servicemembers who recalled receiving such training. DOD also surveys servicemembers on a variety of issues related to their benefits; however, according to DOD officials who conduct these surveys, servicemembers have not been surveyed on the effectiveness of DOD’s SCRA educational efforts. DHS officials also told us they have not evaluated the effectiveness of their SCRA education methods to members of the Coast Guard and Coast Guard Reserve. In addition to surveying servicemembers on the effectiveness of SCRA- related education methods, DOD and DHS could use other techniques to assess the effectiveness of their education efforts. For example, servicemembers could be tested after a period of time to determine how much information they retained from the SCRA component of their predeployment briefings. Additionally, focus groups could be held with servicemembers to review the understandability of written materials provided on SCRA. Without understanding the extent to which existing SCRA educational efforts are effective, DOD and DHS are not able to determine if their methods are adequate to ensure that servicemembers avail themselves of the benefits to which they are entitled.

Conclusions

Ensuring that mortgage servicers fully comply with SCRA can protect servicemembers from undue financial harm. Our analysis of risk-based compliance examinations conducted by the four prudential regulators estimated that about half of all the depository institutions that serviced mortgages were reviewed for SCRA compliance from 2007 through 2011. However, during these examinations, examiners only conducted testing of loan files at 41 of the 83 institutions for which we reviewed the procedures used by examiners over the 5-year period to verify that mortgage servicers’ SCRA compliance processes and controls were functioning properly. For these 41 institutions, examiners did not use the testing procedures most likely to detect instances of noncompliance. Examination guidance and auditing standards suggest that testing is a part of effective monitoring. Furthermore, additional testing of loan files using methods that provide greater assurance of compliance is warranted given that thousands of violations at some large mortgage servicers have been documented through federal agencies’ targeted reviews and mortgage servicers’ own internal reviews, but not through the prudential regulators’ routine compliance examinations. Without additional testing of foreclosure files and, as appropriate, other mortgage loan files not identified by the depository institution as SCRA-eligible, and without employing testing methods that provide greater assurance of compliance, prudential regulators may not be able to determine whether these institutions are extending protections to all eligible servicemembers.

Although not a direct regulator of financial institutions that service mortgages, VA does interact with mortgage servicers as part of its Home Loan Guaranty program and therefore has an interest in ensuring that these institutions are complying with SCRA. However, the current level of monitoring that VA conducts of mortgage servicers that participate in its program provides little assurance that eligible servicemembers with VA- guaranteed loans are receiving their full SCRA mortgage protections. By not routinely reviewing mortgage servicers’ overall compliance with SCRA mortgage protections, the agency cannot be assured that mortgage servicers participating in its program have policies and procedures that function properly to provide these protections. The agency’s development of a new program to conduct on-site audits of mortgage servicers’ overall operations provides a good opportunity for the agency to expand its efforts related to SCRA compliance. Further, if VA determines that servicers’ loss mitigation efforts have either not been successful or adequate during its Adequacy of Servicing reviews, it provides supplemental servicing on loans. During its Adequacy of Servicing reviews and while conducting supplemental servicing, VA would have the opportunity to take steps to determine if servicers assessed whether borrowers were eligible for SCRA protections. Because the agency’s entire mission is dedicated to benefiting individuals who have served the country through military service, expanding its procedures to review for SCRA compliance at mortgage servicers that participate in its mortgage program could help the agency achieve its mission and better ensure that servicemembers are receiving all benefits to which they are entitled.

Because multiple federal agencies’ play a role in ensuring that mortgage servicers provide SCRA protections to eligible servicemembers, sharing information on SCRA compliance could benefit these agencies’ respective SCRA oversight efforts. Most agencies responsible for SCRA oversight conduct risk-based reviews and therefore do not always include SCRA compliance in their reviews. Sharing information on SCRA compliance issues could alert agencies to potential problems and improve agencies’ ability to identify SCRA violations. We have previously found that collaboration among supervisory agencies can lead to more effective supervision and that such collaboration does occur for certain consumer compliance laws. However, no such sharing of information related to SCRA compliance information currently takes place routinely between the prudential regulators, FHA, VA, and FHFA. Further, because these entities monitor SCRA compliance at many of the same institutions, the sharing of information could help them to more quickly identify compliance problems that may adversely affect servicemembers. Many of these agencies already have existing mechanisms for sharing information that could be used or expanded to periodically share information on SCRA compliance.

The Secretaries of the Army, Navy, Air Force, and Homeland Security are responsible for educating servicemembers on their SCRA rights. DOD and DHS provide this information through a variety of methods throughout servicemembers’ military careers. However, servicemembers may often be unaware of their SCRA rights for a variety of reasons, such as the volume and variety of information they must retain from educational briefings. Members of the reserve components in particular face unique challenges that can affect whether they learn of and are able to obtain assistance with SCRA protections because they have more limited access to military legal assistance locations and to SCRA-related training opportunities. Additionally, the recently created CFPB’s Office of Servicemember Affairs has been working with DOD and DHS to identify opportunities to increase servicemembers’ awareness of SCRA protections and its results could provide useful information to assist in this effort. While DOD has surveyed servicemembers on whether they had received SCRA training, neither DOD nor DHS has assessed the effectiveness of their educational methods to determine if better ways exist to ensure that servicemembers retain the information they receive on SCRA and can recall it when they need it. Without such an assessment, such as by using focus groups of servicemembers or testing to reinforce retention of SCRA information, DOD and DHS may not be able to ensure they are reaching servicemembers in the most effective manner.

Recommendations for Executive Action

To better ensure SCRA compliance oversight, we recommend that the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, and Chairman of the National Credit Union Administration take steps to increase the frequency with which examiners (1) conduct testing of foreclosure files and as applicable, other mortgage loan files; and (2) employ testing methods that provide greater assurance that mortgage servicers are complying with SCRA.

To help ensure that VA assists servicemembers with remaining in their homes and avoiding foreclosure, the Secretary of Veterans Affairs should ensure that a review for SCRA compliance is included in the department’s new mortgage servicer monitoring program and that additional steps to assess SCRA compliance are taken by VA staff during its Adequacy of Servicing reviews and while conducting supplemental servicing.

Additionally, to increase agencies’ awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight.

Finally, the Secretary of Defense—through the Secretaries of the Army, Air Force, and Navy—and the Secretary of Homeland Security should assess the effectiveness of their efforts to educate servicemembers on SCRA to determine better ways for making servicemembers aware of their SCRA rights and benefits, including improving the ways in which members of the reserve components obtain such information.

Agency Comments and Our Evaluation

We requested comments on a draft of this report from CFPB, DHS, DOJ, DOD, FDIC, Federal Reserve, FHFA, HUD, NCUA, OCC, and VA. We received formal written comments from DHS, DOD, FDIC, Federal Reserve, FHFA, HUD, NCUA, OCC, and VA; these are presented in appendixes III through XI, respectively. We also received technical comments from CFPB, DOJ, DOD, FDIC, Federal Reserve, FHFA, OCC, and VA, which we incorporated as appropriate.

Federal Reserve, NCUA, and OCC agreed to take actions in response to our recommendations that they increase the frequency with which their examiners conduct testing of mortgage and foreclosure files and employ testing methods that will provide greater assurance of mortgage servicers’ compliance with SCRA.

The Federal Reserve’s Director of the Division of Consumer and Community Affairs noted that Federal Reserve examiners apply interagency examination procedures to test the sufficiency of a depository institution’s program for ensuring its employees provide appropriate protections to active duty servicemembers, and that it will work with the other federal financial regulators to consider appropriate ways to update the interagency SCRA examination procedures. The Director’s letter notes that Federal Reserve considers interviews with bank staff and reviews institutions’ compliance management systems to be types of examiner testing. Although our report acknowledges that such steps can provide useful information regarding an institution’s SCRA compliance, we recommended that the regulators provide greater assurance of SCRA compliance by increasing the frequency of loan file testing.

NCUA’s Executive Director agreed that additional testing of loan files would provide greater assurance of SCRA compliance. His letter also notes that NCUA has made recent changes to its examination process to raise the importance of consumer protection issues, noting that beginning with its 2011 examinations, staff separate from safety and soundness examiners review the lending practices of federal credit unions to ensure compliance with SCRA. Further, NCUA noted that it has also incorporated reviews for SCRA compliance into its analysis and investigations of complaints.

The Comptroller of the Currency noted that OCC will update its examination guidelines to ensure that a review of SCRA compliance is conducted during each supervisory cycle for its regulated institutions, and that such reviews will include the testing of loan files selected using an appropriate methodology to assess compliance with SCRA.

FDIC’s Director of their Division of Depositor and Consumer Protection did not comment on our recommendation but agreed that testing a representative sample of loans for compliance with SCRA is an effective tool to assess compliance with SCRA for large mortgage servicers. However, his letter also noted that having examiners interview bank employees also serves as an effective tool for assessing compliance with consumer protection laws and regulations, and that such interviews are often used to verify that the depository institution is conducting sufficient employee training and is enforcing its policies and procedures. We agree that conducting interviews of depository institution personnel can be a useful procedure to examine for SCRA compliance, but supplementing such actions with increased testing of loan files provides an even greater level of assurance that an institution is complying with SCRA.

VA concurred with our recommendation that they ensure that a review for SCRA compliance is included in its new mortgage servicer monitoring program and also indicated their staff would be taking additional steps to assess SCRA compliance during Adequacy of Servicing reviews and while conducting supplemental servicing. In a written response, VA’s Chief of Staff noted several activities the agency conducts to help ensure that veterans are aware of their SCRA protections. He stated that VA will revalidate and, as necessary, revise its focus and procedures to ensure veteran borrowers are receiving all SCRA protections to which they are entitled. Additionally, he noted that VA will include in its mortgage servicer monitoring program a review to ensure that servicers’ appropriately afford SCRA-eligible borrowers their mortgage protections as part of their loss mitigation efforts. Finally, he said that VA will incorporate additional steps into its Adequacy of Servicing reviews to assess whether the servicer appropriately provided SCRA mortgage protections to eligible borrowers.

Federal Reserve, FHFA, HUD, NCUA, OCC, and VA agreed with our recommendation that the federal agencies involved in overseeing mortgage servicers’ SCRA compliance should explore using existing mechanisms or developing new ones to share information related to SCRA compliance oversight.

Federal Reserve Division of Consumer and Community Affairs Director noted that additional interagency collaboration related to SCRA compliance trends and emerging risks may be appropriate and useful in improving supervisory practices related to SCRA compliance, and she agreed to explore other opportunities to share information related to SCRA compliance with other federal agencies. She stated that their staff are currently planning an interagency servicemember financial protection webinar for financial industry participants that is to include panelists from the federal supervisory agencies, as well as representatives from other agencies with SCRA oversight responsibility.

FHFA’s Deputy Director for the Division of Enterprise Regulation also agreed that increased information sharing among supervisors of mortgage lending industry participants could assist in identifying potential compliance problems and in some cases could improve the identification of SCRA violations. He noted that FHFA’s supervision function will consider whether the agency’s existing memorandums of understanding are sufficient or should be expanded to cover more types of information or more agencies to broaden information sharing on issues of supervisory concern, including SCRA compliance. He also noted that the supervision function would consider whether compliance oversight would be improved by developing processes for more frequent routine communications with supervisors of other market participants subject to mortgage lending compliance requirements.

HUD’s Acting Assistant Secretary for Housing-Federal Housing Commissioner agreed that HUD should participate in agencies’ discussions to explore options to share information related to SCRA compliance, noting that HUD’s should be a participatory role rather than a leadership one because it does not have responsibility for overseeing SCRA. Her letter also notes they believe that the scope of such collaboration should be broadened beyond just SCRA compliance to include all agencies’ mutual interests in single family housing issues, which we agree could be useful.

The NCUA Executive Director’s letter notes that NCUA will use its participation in FFIEC and other interagency working groups to share information regarding the supervision of financial institutions and compliance concerns, and that it currently shares information with CFPB regarding consumer compliance oversight and is working with federal financial regulators to develop tools to facilitate information sharing.

The Comptroller of the Currency stated in his response that OCC will continue to be an active member of the FFIEC Task Force on Consumer Compliance, which is an interagency organization that works collectively to develop examiner guidance and examination procedures and to discuss emerging risks or trends regarding new products and services. He also noted that OCC, the other prudential regulators, and CFPB have signed a memorandum of understanding on supervisory coordination that outlines the coordination of examinations and the sharing of compliance oversight information, including information on SCRA.

VA’s Chief of Staff noted that VA will collaborate with the agencies involved in SCRA compliance oversight to share information related to SCRA compliance.

FDIC did not comment on this recommendation.

DHS concurred and DOD partially concurred with our recommendation that they assess the effectiveness of their efforts to educate servicemembers on SCRA to determine better ways for making servicemembers aware of their SCRA rights and benefits, including improving the ways in which members of the reserve components obtain such information. DHS’s Director of Departmental GAO-OIG Liaison Office noted that the Coast Guard strives to keep all its members fully aware of SCRA benefits and rights and that it will explore measures to assess the effectiveness of these efforts in the future. DOD’s Office of Legal Policy Director stated that the education and protection of servicemembers is DOD’s highest priority and that it continuously evaluates the effectiveness of training to servicemembers on their protections under SCRA and that it will continue to do so bearing our recommendation in mind. His letter also notes that DOD recently testified before Congress on efforts to conduct a survey on financial issues affecting servicemembers which will further inform DOD’s efforts.

We are sending copies of this report to appropriate congressional committees, the Chairman of the Board of Governors of the Federal Reserve System, the Secretary of Defense, the Chairman of the Federal Deposit Insurance Corporation, the Acting Director of the Federal Housing Finance Agency, the Secretary of Homeland Security, the Secretary of Housing and Urban Development, the Chairman of the National Credit Union Administration, the Comptroller of the Currency, the Secretary of Veterans Affairs, the Director of the Consumer Financial Protection Bureau, and the U.S. Attorney General. The report also 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 sciremj@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 major contributions to this report are listed in appendix XII.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to examine (1) what is known about Servicemembers Civil Relief Act (SCRA) eligibility, the number of violations that have occurred, and practices financial institutions use to comply with SCRA; (2) what oversight financial regulators and other federal agencies have taken to help ensure depository institutions’ compliance with the act; and (3) actions the Department of Defense (DOD), Department of Homeland Security (DHS), Department of Veterans Affairs (VA), and others have taken to ensure that servicemembers and others are informed of protections provided under the act. With the exception of our regulatory compliance review, the scope of our review includes only SCRA protections related to servicemembers’ residential mortgages.

SCRA Compliance

To describe what is known about the practices depository institutions use to comply with SCRA, we interviewed representatives from a non- generalizable sample of four large mortgage servicers and one national consumer credit reporting agency about their SCRA compliance practices and challenges and reviewed relevant policies and procedures. We selected 4 mortgage servicers that were among the 10 largest based on data from the Consolidated Reports of Condition and Income (Call Reports) on the unpaid principal balance of residential mortgages institutions own and service, plus mortgage loans they service on behalf of other institutions, and mortgage servicers that had participated in either the prudential regulators’ interagency review of foreclosure policies and practices or the U.S. House of Representatives Committee on Oversight and Government Reform’s investigation. We interviewed representatives of financial industry trade associations, including those that represent the mortgage industry, depository institutions with a large military customer base, and the credit reporting industry. We also interviewed officials from DOD’s Defense Manpower Data Center, which operates the website that depository institutions and others use to verify the active duty status of servicemembers. To determine what is known about SCRA violations that have occurred we reviewed letters from 10 large mortgage servicers written in response to a House of Representatives Committee on Oversight and Government Reform investigation on mortgage servicers’ SCRA compliance history and practices. We also reviewed data on SCRA violations found during bank and credit union examinations conducted from 2007 through 2011 by the prudential regulators—the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC). We also reviewed available information from legal actions taken by the Department of Justice (DOJ) against two mortgage servicers for SCRA violations and a class action settlement against a large mortgage servicer for SCRA violations. Finally, we reviewed DOJ, Federal Reserve, and OCC enforcement actions against mortgage servicers for, among other things, foreclosure documentation problems that require the mortgage servicers to conduct reviews, which are currently ongoing, to determine historical SCRA violations.

SCRA Compliance Oversight

To assess the oversight prudential regulators have taken to help ensure depository institutions’ compliance with SCRA, we reviewed their examination policies and procedures and interviewed agency officials about their oversight activities related to SCRA. We also reviewed interagency examination procedures and checklists the regulators developed in 2009 to aid their oversight of SCRA. To assess the extent to which prudential regulators examined for SCRA, we selected a stratified random sample of 160 institutions from the population of all depository institutions that serviced mortgages as of November 2011 for institutions regulated by FDIC, Federal Reserve, and OCC, and September 2011 for institutions regulated by NCUA. We developed a certainty stratum composed of the 10 largest institutions regulated by each of the four prudential regulators—FDIC, Federal Reserve, NCUA, and OCC—for a total of 40 institutions. The remaining 120 institutions comprised an additional four strata of institutions of varying sizes—one stratum per prudential regulator. We used the Call Reports to identify mortgage servicers based on data the institutions reported on the unpaid principal balance of residential mortgages they own and service, plus mortgage loans they service on behalf of other institutions. We selected credit unions that service mortgage loans using data from the SNL Financial Database on the unpaid principal balance of real estate loans owned and serviced, plus those serviced on behalf of other institutions. We confirmed our use of the relevant mortgage variables with the SNL Financial Database with NCUA. We excluded any depository institutions that did not service mortgages. We then used these data to select a stratified random sample from the population of depository institutions that service mortgages. While we initially selected a sample of 160 institutions (40 for each regulator), we excluded 8 of the selected institutions from our analysis. Three institutions regulated by the Federal Reserve were excluded because they were recently chartered and therefore had not had an examination. We also excluded five credit unions because they were state-chartered, meaning that state supervisory authorities and not NCUA served as the primary regulator for these institutions. Table 2 provides more detail on the population, sample, and sample disposition by stratum.

To determine the extent to which prudential regulators included SCRA compliance within the scope of their examinations, we requested SCRA- related examination workpapers, as well as documents examiners prepare to determine the scope of their examinations for all consumer compliance examinations the prudential regulators conducted from 2007 through 2011. We reviewed examinations conducted over a 5-year period because regulatory officials told us that they may not conduct an examination for a particular institution every 12 months, and because SCRA might not be covered in each risk-based examination. We relied on the examination documentation provided to us by the prudential regulators to represent the full universe of examinations that were conducted for each institution in our sample between 2007 and 2011. We did not independently verify that the examination documentation they provided to us represented the full universe of examinations they conducted over this period. We reviewed the documents we received and developed a data collection instrument (DCI) to capture the information we found in the examination documentation in a consistent manner. We determined that a depository institution had received an SCRA compliance review if examination workpapers revealed an SCRA compliance review for any type of loan product covered by the act (for example, residential mortgages, automobile loans, or credit cards loans). We aggregated this examination-level data to the institution level and used the data to produce estimates of the percentage of all institutions for which the prudential regulators included an SCRA compliance review within an examination at least once during the 5-year period. Because we followed a probability procedure based on random selections, our sample of institutions is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (for example, plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. For estimates used in this report, we report the 95 percent confidence intervals along with the estimates themselves. We also report percentages based on the 10 largest institutions per regulator. Since these percentages are based on the total population of such institutions, they have no sampling error and consequently confidence intervals are not reported for these percentages.

We reviewed examination workpapers and used our DCI to document the procedures examiners indicated they used to assess SCRA compliance. We only noted the examination procedures for SCRA compliance reviews that involved residential mortgage loans or did not specify the type of loan product covered. Eighty-three institutions in our sample met these criteria. SCRA examination procedures for exams that solely focused on other loan products, such as credit cards and automobile loans, were outside the scope of our review. We then grouped the data we collected on examination procedures into four categories:

Requests for information from depository institutions. This includes activities such as requests for institutions’ internal audit results, policies and procedures, SCRA complaints, and lists of SCRA loans.

Interviews with depository institution personnel. This includes activities in which examiners interviewed staff at the depository institution for information on, among other things, their compliance management systems and whether the institution services SCRA loans.

Assessments of depository institutions’ compliance management systems. This category includes instances in which examiners documented that they reviewed the quality of depository institutions’ compliance management systems, such as reviewing institutions’ SCRA policies and procedures, internal controls, and training programs.

Testing loan files for SCRA compliance. This category includes activities such as testing a limited or statistical sampling of loans the institution identified as SCRA-eligible or conducting more comprehensive testing, such as reviewing a statistical sample of loan files.

Table 3 provides additional detail on the individual examination activities that comprise each of these categories.

We reviewed prudential regulators’ examination guidance and government auditing standards, which note that various activities can provide increasing levels of assurance that reviewed entities are following their stated policies and procedures and that internal controls are functioning. Based on this review, we grouped examiners’ documented examination procedures into four categories based on our professional judgment as to the extent to which the examination activities involved verification of assertions made by the depository institution regarding compliance with SCRA. For example, based on our categories, category 1—requests for information from depository institutions—provides the least assurance of SCRA compliance because it does not involve an assessment of compliance, but rather the collection of information. Category 2—interviews with depository institution personnel—also provides less assurance because it relies primarily on assertions provided by the institution. Whereas category 4—testing of loan files—provides the greatest assurance of SCRA compliance within our categories because testing loan files allows examiners to independently verify whether an institution’s compliance procedures are functioning properly and whether SCRA protections are being appropriately extended to eligible borrowers. Examination guidance from three of the four prudential regulators cite the testing of individual loan transactions as the most extensive level of review for assurance that a depository institution is complying with laws and regulations. They also indicate that testing a larger sample of loans, including a statistical sample, provides a fuller assessment of compliance than testing a limited sample. We placed institutions in each of the four categories based on the highest level of examination activity conducted from 2007 through 2011. The figures presented for this analysis are not generalizable to the population of institutions that service mortgages.

To describe the SCRA compliance oversight activities of other federal agencies, we reviewed DOJ’s policies and procedures for receiving SCRA referrals and investigating SCRA cases and interviewed agency officials. We also reviewed DOJ enforcement actions and investigations that DOJ was able to resolve without filing a court case related to servicemembers’ mortgages from 2007 through 2011. We also reviewed the SCRA compliance monitoring activities and policies and procedures of other federal agencies that play a role in the mortgage market. These agencies include the Federal Housing Administration (FHA), the Federal Housing Finance Agency (FHFA), and VA. We also reviewed the SCRA compliance monitoring efforts of two government-sponsored enterprises—Fannie Mae and Freddie Mac. We reviewed the guidance these agencies and enterprises provide to mortgage servicers participating in their programs and interviewed agency officials.

Servicemember Education and Awareness

To determine what actions DOD, DHS, VA, and others have taken to ensure servicemembers are informed of their SCRA rights, we reviewed the act to determine what it requires agencies to do and interviewed two SCRA experts. To describe what actions individual agencies were taking to inform servicemembers of their rights, we reviewed DOD and DHS policies and procedures and SCRA training materials and publications, and interviewed representatives from these agencies, including officials from DOD’s Office of Legal Policy, DHS, and the National Guard Bureau. We also reviewed DOD’s Status of Forces surveys to active duty servicemembers and members of the reserve components to determine efforts DOD has taken to assess the effectiveness of its methods of educating servicemembers about SCRA benefits. We selected six military installation legal assistance offices (one for the Army, Navy, Marine Corps, and Coast Guard and two for the Air Force) based on a geographic distribution of states with high numbers of foreclosures and large active duty and reservist populations and interviewed legal assistance attorneys who work in these offices to learn how the attorneys teach servicemembers about their SCRA protections and discuss the challenges servicemembers face asserting those protections. The six installations were: Fort Drum, New York; Randolph Air Force Base, San Antonio, Texas; Fort Sam Houston, San Antonio, Texas; Marine Corps Recruit Depot, San Diego, California; Coast Guard 9th District Command Center, Ohio; and Naval Air Station Pensacola, Florida. We reviewed examples of SCRA training and outreach that these offices develop and distribute to servicemembers. To learn about the specific challenges that members of the reserve components face, we also spoke with legal assistance attorneys from the Naval Reserves and the Ohio National Guard who were recommended to us by legal assistance attorneys with whom we spoke.

To determine what actions other agencies, including VA, the Consumer Financial Protection Bureau, and FHA were taking to inform servicemembers and others of SCRA protections, we reviewed notifications they provide to mortgage servicers on SCRA compliance and interviewed officials at these agencies. We also interviewed representatives from the American Bar Association’s Legal Assistance for Military Personnel program to learn how they coordinate with legal assistance attorneys and assist servicemembers with SCRA issues. Finally, we interviewed representatives from seven military servicemember groups whose memberships represent a broad population of servicemembers and their families. These groups included the Reserve Officers Association, National Military Family Association, Military Officers Association of America, Air Force Sergeants Association, National Guard Association of the United States, Naval Enlisted Reserve Association, and Retired Enlisted Association.

We conducted this performance audit from August 2011 to July 2012 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: Oversight of Mortgage Servicers’ Servicemembers Civil Relief Act Compliance

As of June 2012, three federal agency reviews were under way to determine if servicemembers who were eligible for SCRA mortgage- related protections received them. A total of 14 mortgage servicers are involved in these reviews as a result of recent enforcement actions taken by the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Department of Justice (DOJ). While each review is separate, some overlap exists in the institutions and timeframes being reviewed. However, officials from DOJ told us they are coordinating the reviews to eliminate unnecessary duplication and overlap at institutions. DOJ also completed one review of a mortgage servicer—Saxon Mortgage Services—in May 2012.

Federal Reserve and OCC Enforcement Actions

In response to deficiencies in the foreclosure process that various mortgage servicers publicly announced beginning in September 2010, OCC and the Federal Reserve conducted a coordinated (interagency) on- site review of 14 mortgage servicers to evaluate the adequacy of controls over their foreclosure processes and their policies and procedures for compliance with applicable federal and state laws. This review identified various weaknesses and deficiencies in these mortgage servicers’ foreclosure operations, including violations of SCRA. As a result of these reviews, OCC and the Federal Reserve issued consent orders to the 14 mortgage servicers and their affiliates in April 2011, requiring these institutions to make various corrective actions. One of these actions required each of the mortgage servicers to retain a third-party consultant to conduct independent reviews of foreclosure actions that were initiated, pending, or completed on primary residences from January 1, 2009 through December 31, 2010, to identify borrowers who suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure actions, and to remediate those borrowers, as appropriate. As part of these independent reviews, the consultants are required to review 100 percent of the foreclosure actions during 2009 and 2010 that involved servicemembers who may have been protected under SCRA.

Because examiners reviewed a relatively small number of foreclosure files during the original interagency review, the reviews required by the consent orders are intended to be more comprehensive. The consent orders require the third-party consultants to develop detailed sampling methodologies for identifying foreclosure actions to include in the review. These methodologies are subject to OCC’s and the Federal Reserve’s approval. OCC officials told us that, in conjunction with DOD and DOJ, they have worked with the third-party consultants to develop a process to access the Department of Defense’s Defense Manpower Data Center’s database with custom queries in order for the third-party consultants to accurately identify the pool of potential SCRA-eligible borrowers. To supplement the independent reviews, the regulators also required mortgage servicers and consultants to establish an outreach process for borrowers, including servicemembers, who believe they were financially harmed by improper foreclosure practices to request a review of their foreclosure case. These requests for review must be submitted to the mortgage servicers by September 30, 2012. According to officials from OCC and the Federal Reserve, as of May 2012, preliminary results from this review on instances of SCRA noncompliance were not available.

DOJ Enforcement Actions

On May 26, 2011, DOJ settled two cases against Saxon Mortgage Services and BAC Home Loans Servicing for allegations of violations of SCRA’s foreclosure provision.cases dictated that damages be paid to affected servicemembers and remedial actions be taken by the mortgage servicers. BAC Home Loans Servicing agreed to pay at least $20 million to resolve the lawsuit, and Saxon Mortgage Services agreed to pay at least $2.35 million. The consent orders also required the mortgage servicers to, among other things, (1) implement revised SCRA policies and procedures specifically about querying the Department of Defense’s Defense Manpower Data Center database that contains information on servicemembers’ active duty status, (2) implement a foreclosure monitoring program, (3) provide SCRA compliance training to all applicable employees, and (4) conduct reviews to identify additional servicemembers who may have had their SCRA rights violated and compensate them. The reviews required by the consent orders included the following: The consent orders for each of these

Saxon Mortgage Services was required to review all nonjudicial foreclosures conducted from January 1, 2006, through December 31, 2010, to determine compliance with SCRA. This review was completed in May 2012 and a total of 22 servicemembers were identified as having been improperly foreclosed upon.

BAC Home Loans Servicing is required to conduct reviews for both the foreclosure and interest-rate provisions of SCRA. Specifically, BAC Home Loans Servicing is to review all nonjudicial foreclosures it conducted from January 1, 2006, through December 31, 2010, for SCRA compliance. For the interest-rate review, the consent order required BAC Home Loans Servicing to retain an independent accounting firm to review a statistically valid sample of home mortgage files from January 1, 2008, through December 31, 2010, and issue a report on whether the mortgage servicer appropriately applied interest rates and fees to servicemembers’ mortgages as required by SCRA.

DOJ officials told us that, as of June 2012, the BAC Home Loans Servicing review is ongoing.

National Mortgage Settlement

In February 2012, DOJ and 49 state attorneys general settled with five of the largest national mortgage servicers for a variety of improper mortgage servicing procedures, including allegations of SCRA violations. The $25 billion settlement was one of the largest financial recoveries obtained by the attorneys general in history and contains a number of provisions related to SCRA designed to protect servicemembers’ rights and to provide them additional benefits. To resolve allegations of liability that have not previously been settled, five mortgage servicers—Ally Financial Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase Bank, N.A., and Wells Fargo & Company—agreed to conduct a full review, overseen by DOJ’s Civil Rights Division, to determine whether any servicemembers were foreclosed on in violation of SCRA since January 1, 2006. Additionally, four of the mortgage servicers— Ally Financial Inc., Bank of America Corp., Citigroup Inc., and Wells Fargo & Company—agreed to conduct a thorough review of mortgage loans to determine whether any servicemember, since January 1, 2008, was charged interest in excess of 6 percent after submitting a valid request to lower the interest rate. The agreement also specifies compensation above the $25 billion settlement amount for any SCRA foreclosure or interest-rate violations. Compliance with the SCRA provisions of the settlement will be overseen by DOJ’s Civil Rights Division. Table 4 summarizes these three reviews.

Appendix III: Comments from the Department of Homeland Security

Appendix IV: Comments from the Department of Defense

Appendix V: Comments from the Federal Deposit Insurance Corporation

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

Appendix VII: Comments from the Federal Housing Finance Agency

Appendix VIII: Comments from the Department of Housing and Urban Development

Appendix IX: Comments from the National Credit Union Administration

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

Appendix XI: Comments from the Department of Veterans Affairs

Appendix XII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Cody Goebel, Assistant Director; Meghana Acharya; Rachel Batkins; Rudy Chatlos; Christine Houle; John McGrail; Mark Ramage; and Jennifer Schwartz made key contributions to this report.