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OIG Faults FHFA Oversight of Law Firms

by devteam October 5th, 2011 | Share

The Office of Inspector Generalrn(OIG) for the Federal Housing Finance Agency (FHFA) has released critical preliminaryrnfindings from an audit conducted on FHFA’s oversight of Fannie Mae’srndefault-related legal services. The audit was requested by RepresentativernElijah Cummings (D-MD) to examine “widespread allegations of abuse by …lawrnfirms hired to process foreclosures.”  </p

Fannie Mae established a RetainedrnAttorney Network (RAN) in 1997 to perform default-related legal services for foreclosures,rnbankruptcies, loss mitigation, eviction, and REO closings.  Fannie Mae, which delegates to its servicersrnthe management of individual law firms working on its loans, states that RANrnallows it to control expenses through negotiated rates with the law firms andrnprovides for consistent actions and control of timelines and efficiency.  </p

In August 2008 Fannie Maernexpanded the RAN to 140 law firms in 31 jurisdictions and has subsequentlyrnexpanded it again to 190 firms within 45 states.  After the initial expansion Fannie Maernrequired that servicers refer all foreclosure and bankruptcy cases to thernnetwork.</p

When it assumed conservatorshiprnof Fannie Mae and Freddie Mac (the Enterprises) FHFA did not consider the RANrnto be a high risk area and focused instead on areas such as credit risks.  During the time covered by the audit it alsornfocused on evaluating loan modifications and loss mitigation proposals from thernEnterprises and scaled back scheduled examinations. The agency viewedrnforeclosures as the responsibility of servicers.</p

As early as December 2003 FanniernMae heard of foreclosure abuse allegations in Florida and hired an outside lawrnfirm to investigate.  In May of 2006 thernfirm issued a report which stated, “Foreclosure attorneys in Florida arernroutinely filing false pleadings and affidavits…. The practice could be occurringrnelsewhere.”  While Fannie Mae claims tornhave notified OFHEO, its regulator at the time, of the findings, FHFA couldrnfind no record of the communication.</p

In 2008, news stories began torncirculate about “foreclosure mills” managing defaulted loans for the Enterprises.  The NewrnYork Times reported on complaints that firms used improper or duplicativernforeclosure and bankruptcy pleadings and levied inappropriate fees onrnborrowers.  In mid-2009 FHFA also beganrnreceiving consumer complaints about foreclosure practices involving Fannie Maernloans but an earlier OIG examination found that FHFA did not assess overallrntrends related to consumer complaints.</p

In June 2010 FHFA staff met withrn17 representatives from the mortgage industry, legal community, and federal andrnstate governments in Florida and reported to the Acting Director that servicers,rnattorneys, and other supporting personnel were overloaded by foreclosures, thernaverage timeline had increased from 150 to 400 days, documentation problemsrnwere evident and law firms (referred to as “foreclosure mills“) were notrndevoting adequate time to their cases due to Fannie Mae’s flat fee structurernand volume-based processing model.  FHFArnstaff submitted a list of five actionable items for the agency.</p

Two months later a news articlernasserted that the Enterprises had failed to oversee their networks of law firmsrnand that some of those firms had filed forged documents in judicial foreclosurernprocedures.  Other media followed withrnsimilar reports and federal and state regulators and law enforcement initiatedrnprobes into whether banks and law firms had improperly seized homes usingrnfraudulent or incomplete paperwork. rnShortly thereafter the robo-signing scandal became nationwide news.</p

In November 2010, FHFA initiatedrnconcurrent reviews of RAN and Freddie Mac’s Designated Counsel Program (DCP) torndetermine whether they met safety and soundness standards.  Examiners concluded that Fannie Mae couldrnhave reacted to foreclosure deficiencies sooner based on warning signals andrnthat its existing control structure for RAN did not meet standards in areasrnsuch as a cost benefit analysis of the program, and having adequate controls, trainingrnand monitoring of RAN firms in place. rnWhile FHFA briefed the OIG on its review, it has never published itsrnfindings or reported them to the Enterprise.</p

Fannie Mae also took steps tornaddress reports of foreclosure abuse. rnThey conducted audits and reviews of RAN law firms to assess compliancernwith engagement letters, fees and costs charged, the accuracy of the languagernused in pleadings to describe the standing of the servicer, and compliance withrnstate laws.  Through the end of Junern2011, Fannie Mae contractors have conducted 49 on-site reviews of RAN lawrnfirms.  Fannie Mae also sent questionnairesrnto all firms to assess the adequacy of their policies and procedures to ensurerncompliance with applicable laws and their employees and/or third partiesrnadherence to procedures.  Fannie Mae alsornstated that it worked with several firms that reported problems and appointed itsrnstaff to oversee remediation.</p

The OIG audit reached thernfollowing conclusions: </p

1.         rn Variousrnindicators could have led FHFA to identify and address the heightened riskrnposed by foreclosure abuses prior to late 2010. rnThese included the deteriorating financial conditions of the Enterprisesrnthat led to conservatorship, consumer complaints and public court filings allegingrnimproper foreclosures; and contemporaneous media reports about foreclosurernabuses.  Based on the evidence regardingrnthese indicators and the FHFA response, FHFA needs to develop procedures tornidentify and assess new or heightened risks.</p

2.         rnFHFA’s supervisory planning and guidance do notrnadequately address default-related legal services.  To date, the OIG says FHFA has neither anrnongoing risk-based supervisory plan for examination and supervision of default relatedrnneither legal services nor guidance for use in performing targeted examinationsrnand monitoring of such services.  Itsrnexisting handbooks are general in nature and not specific to operational riskrnareas nor do they address specific third-party vendor risks.</p

3.         rnFHFA does not have a formal process for thernEnterprises to share information about problem law firms.  The agency needs to address concerns such asrnpoor or inappropriate performance associated with third-party vendors that dornbusiness with both Enterprises and ensure that dismissal and other disciplinaryrnactions by one Enterprise are communicated to the other.</p

The OIG concludes:</p

“The Agency’srnspecial review of the RAN framework is a positive step and the Agency shouldrncontinue with undertaking such reviews. rnFHFA-OIG contends however that the Agency should have paid closerrnattention to the highly dynamic housing foreclosure environment between 2008rnand 2010 and, in the future, should become more proactive in its oversight ofrnthe RAN in particular and the foreclosure process in general.  The Agency needs to apply a proactivernapproach going forward to identify and assess new and emerging risks and torndevelop detailed guidance on conducting targeted examinations of thernEnterprises’ operational risks associated with their vendors.  This guidance should incorporate continuousrnsupervision, special reviews, and targeted examinations and address crossover issuesrnthat affect both of the Enterprises and their relationships with third-partyrnvendors.”

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About the Author

devteam

Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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