Mortgage servicers are the entities that manage payment collections and other activities associated with loans. Servicing duties can involve sending borrowers monthly account statements, answering customer- service inquiries, collecting monthly mortgage payments, and maintaining escrow accounts for property taxes and insurance. In the event that a borrower becomes delinquent on loan payments, servicers also initiate and conduct foreclosures. Several federal regulators share responsibility for regulating the banking industry in relation to the origination and servicing of mortgage loans. OCC has authority to oversee nationally chartered banks and federal savings associations. The Federal Reserve oversees insured state-chartered banks that are members of the Federal Reserve System, bank holding companies, and entities that may be owned by federally regulated depository institution holding companies but are not federally insured depository institutions. The Federal Deposit Insurance Corporation (FDIC) oversees insured state-chartered banks that are not members of the Federal Reserve System and state-chartered savings associations. The Bureau of Consumer Financial Protection oversees many of these institutions, as well as all mortgage originators and servicers that are not affiliated with banking organizations, with respect to federal consumer financial law. Beginning in September 2010, several servicers announced that they were halting or reviewing their foreclosure proceedings throughout the country after allegations that the documents accompanying judicial foreclosures may have been inappropriately signed or notarized and after completion of self-assessments of their foreclosure processes that federal banking regulators directed them to conduct. In response, the banking regulators—OCC, the Federal Reserve, OTS, and FDIC—conducted a coordinated on-site review of 14 mortgage servicers to evaluate the adequacy of controls over servicers’ foreclosure processes and to assess servicers’ policies and procedures for compliance with applicable federal and state laws. Regulatory staff told us that as part of these reviews, their examiners evaluated internal controls and procedures for processing foreclosures and reviewed samples of individual loan files to better ensure the integrity of the document preparation process and to confirm that files contained appropriate documentation. Examiners reviewed more than 2,800 loan files comprising approximately 200 foreclosure loan files with a variety of characteristics from each servicer to test the institutions’ controls and governance processes with respect to foreclosures. Generally, the examinations revealed severe deficiencies in three primary areas: shortcomings in the preparation of foreclosure documentation; inadequate policies, staffing, or oversight of foreclosure processes; and insufficient oversight of third-party service providers, particularly foreclosure attorneys. On the basis of their findings from the coordinated review, OCC, the Federal Reserve, and OTS issued formal consent orders against each of the 14 servicers under their supervision in April 2011 (see fig. 1). According to bank regulatory staff and these consent orders, each of the 14 servicers is required to enhance its compliance, vendor management, and training programs and processes. In addition, because examiners reviewed a relatively small number of foreclosure files, the consent orders require each servicer to retain an independent firm to conduct a review of foreclosure actions on primary residences from January 1, 2009, to December 31, 2010, to identify borrowers who suffered financial injury as a result of errors, misrepresentations, or other deficiencies in foreclosure actions, and to recommend remediation for borrowers, as appropriate. Servicers proposed third-party consultants to conduct the foreclosure review and submitted engagement letters outlining their foreclosure review processes to the regulators by July 2011 as required by the orders. OCC reviewed and approved the engagement letters for banks under its supervision in late September 2011 and released the engagement letters in November 2011 on the OCC website. With the exception of one institution, the Federal Reserve approved the engagement letters for servicers under its jurisdiction by February 2012. As required in the consent orders, the foreclosure review process has two components, a file review (look-back review) and a process for eligible borrowers to request a review of their particular circumstances (borrower outreach process). For the look-back review, the consent orders require the third-party consultant to submit an engagement letter outlining their plan for review subject to the regulators’ approval. Consultants are required to review various categories of loans, pursuant to regulators’ guidance and approval. These categories may vary by servicer but include, for example, files in every state where the institution conducted foreclosures, foreclosures where the borrower had a loan modification in place, or files that were handled by certain law firms where documentation errors have previously been found. The consent orders allow third-party consultants to use statistical techniques to select samples of files from some categories of loans for review. As required in the consent orders, the engagement letters describe procedures consultants will use to increase the size of samples depending on the results of the initial reviews. Consultants are not allowed to use sampling, but instead must review 100 percent of files in some high-risk categories, including certain bankruptcy cases and files involving borrowers protected by the Servicemembers Civil Relief Act (SCRA). The Federal Reserve is also requiring 100 percent review of files in several additional high-risk categories, including foreclosure-related complaints filed before the borrower outreach process was launched, foreclosure actions where a complete request for a loan modification was pending at the time of the foreclosure, and foreclosure actions that occurred when the borrower was not in default. The second component of the foreclosure review, the borrower outreach process, is intended to complement the look-back review and help identify borrowers who may have suffered financial injury. According to regulatory documents and staff, the purpose of the outreach is to provide a robust process so that eligible borrowers who believe they suffered financial injury within the scope of the consent orders have a fair opportunity to request an independent review of their circumstances and, potentially, to obtain remediation. Regulatory staff noted that requiring institutions to hire a consultant to review files to identify the harmed pool of consumers as part of an enforcement action is typical. They said that including an outreach component in addition to a file review is unique and unprecedented in their experience. They also emphasized that the two components are intended to work together to provide a full and fair opportunity to identify as many financially injured borrowers as possible and the final results could not be fully evaluated until both the look-back file review and request-for-review process are completed. A Federal Reserve official testified that the borrower outreach process was critical to helping ensure that borrowers who suffered financial injury are identified and appropriately compensated. Acting Comptroller Walsh stated in a speech that the two processes combined are intended to maximize identification of and remediation for borrowers who have suffered financial injury as a result of the deficiencies identified in the orders. Consultants are required to review all eligible requests for review submitted through the borrower outreach process. To make eligible borrowers aware of the opportunity to request a foreclosure review, regulators required servicers to develop an outreach process. The servicers’ borrower outreach plan includes multiple methods, including direct mail, print advertising, a toll-free phone number, a website, online marketing, and engaging a third party for community outreach. Since the servicers had contact information for all of the eligible borrowers, direct mail was the primary outreach method chosen. On behalf of the participating servicers, a third-party administrator began mailing uniform outreach letters on November 1, 2011, to 4.3 million These outreach letters describe the request-for-review borrowers. process and include a request-for-review form for borrowers to complete and submit if they believe they suffered financial injury as described in the outreach letter (see fig. 2). The third-party administrator took steps to update addresses of the eligible borrowers who may have lost their homes to foreclosure. A single, coordinated website, toll-free phone number, and national advertising campaign were launched in January and February 2012, to provide information about the request-for-review process. The regulators directed the servicers to develop their outreach plan in consultation with the third-party consultants and approved the plan. As of March 2012, borrowers may also submit requests for review The original deadline via the independent foreclosure review website.for submitting requests for review was April 30, 2012, but regulators decided in February to extend the deadline to July 31, 2012. On June 21, 2012, regulators extended the deadline again to September 30, 2012. A second round of national advertising occurred in April and May 2012, and a third round is planned before the deadline. Additionally, a second mailing to eligible borrowers who have not responded is scheduled for June 2012. The mailing directs borrowers to call the toll-free phone number or access the independent foreclosure review website for information or to submit a request-for-review form. In addition to the servicers’ coordinated efforts, regulators also have posted information about the foreclosure review on their agencies’ websites and issued press releases. Further, OCC has distributed public service announcements to small publications and radio stations, and the Federal Reserve developed a video to inform borrowers about the review process. As part of the outreach approach, the servicers formed a consortium to develop the initial outreach letter and request-for-review form with input from third-party consultants and approval from the regulators. The servicers and regulators did not test these communication materials with the borrowers or their community group advisers. Regulators consulted with and incorporated feedback from consumer groups on subsequent advertising and mailings to improve the format and clarity of current materials. However, according to representatives of these groups and our readability tests, the initial materials and the independent foreclosure website may be difficult for some borrowers to understand. In addition, the materials did not include specific information about the type of potential remediation borrowers could receive, which could affect borrowers’ motivation to respond and submit a request for review. Servicers formed a consortium to develop the initial communication materials, including the outreach letter and request-for-review form mailed to eligible borrowers.