Report Finds Fault with Freddie Mac, FHFA Handling of Servicer Complaint Process

Freddie Mac owned or guaranteed 10.6 million mortgagesrnthat were being serviced by third parties at the end of 2012.  Servicer responsibilities include handing ofrnconsumer complaints but if these complaints become serious enough to fall intornthe category of “escalated cases” there are special procedures tornhandle them.  According to the FederalrnHousing Finance Agency’s (FHFA) Servicing Alignment Initiative (SAI) servicers are required to report on the escalated casesrnthey receive and resolve those cases within 30 days. Additionally, FreddiernMac’s Servicing Guide specifically requires servicers to report monthly on thernescalated cases they receive. </p

During the 14 month period ended November 30, 2012rnFreddie Mac received 34,000 and FHFA received 565 consumer complaints about thernservicers that fell into the category of “escalated cases” involving:</p<ul class="unIndentedList"<liForeclosure actionsrninitiated or continued in violation of Fannie Mae or Freddie guidelines;</li<liAllegations of fraudulent servicing practices;</li<liComplaints that the borrower was not appropriately evaluated for or inappropriately denied a foreclosure alternative;</li<liThreats of litigation; or</li<liViolations of Fannie Mae or Freddie Mac policy timeframes for borrower outreach,rnevaluation, or response.</li</ul

Inrnaddition to the requirement that servicers must handle escalated cases withinrn30 days, servicers must also satisfy the following requirements when handingrnescalated cases:</p<ul class="unIndentedList"<liEnsure that staff resolving an escalated case are independent from the personnel that initially handledrnthe borrower's request forrnassistance;</li<liHave written procedures and sufficient, adequately trained staff to track and respond tornescalated cases;</li<liRegularly review and assess the adequacy of internal controls and procedures in connectionrnwith servicing activities; and</li<liTake remedial steps if any deficiencies are identified as a result of their review ofrninternal controls, and formally documentrnthe results and make them available to the enterprise upon request.</li</ul

According to the SAI, an escalated case is consideredrnresolved when the complaint has been resolved in accordance with thernguidelines, has been evaluated to require no change to the originalrndetermination or a proposed solution has been identified and the proposedrnsolution appropriately documented and the first action taken to implement thernresolution.</p

FHFA’srnOffice of Inspector General (OIG) recently undertook a performance audit to assessrnFreddie Mac’s controls over servicer handing of escalated cases.  OIG found that most of Freddie Mac’srnservicers have not complied with escalated case reporting requirements.  </p

Among Freddie Mac’s eight largest servicers-which serviced nearlyrn70% of Freddie Mac’s 10.6 million mortgages-four (Bank of America, CitiMortgage,rnProvident, and Wells Fargo Bank) did not report any escalated cases to Freddie Mac despite handling more than 20,000 such cases during the 14-month period between October 2011 and November 2012. </p

Further, Freddie Mac data on all of its servicers reveals that about 98% (1,179 of 1,207)rnincluding four of the largest did notrnreport any escalated cases as of December 2012. Although Freddie Mac officials told us thatrnreports are only required of servicers with escalated cases-and, thus, the lack of reporting mayrnindicate that there were no escalated cases to report-it is highly unlikely that 98% of its servicers had no escalated cases to report given the 6.6 millionrnloans that they manage. </p

Reasons for not reporting given by the four large non-reporting servicers includedrnbeing unaware of the requirement or that the information had not beenrnrequested.  One servicer stated it had informed Freddie Mac of internal issues that were delaying thernservicer’s implementationrnof the SAI.</p

Freddie Mac’s eight largest servicers handled 26,196 escalatedrncases during the 14 monthrnperiod and resolved 25,528rnof them during this periodrnbut 21% of the resolved cases exceeded the 30-day time limit. rnIn addition, of the 668 unresolvedrncases as of November 30, 2012,rn398 (or 60%) had notrnbeen resolved within the required 30 days.</p

Among the eight largest servicers, only Branch Banking & Trust Corporation (BB&T) resolved all of its escalated cases within 30 days, but that bank had significantly fewer cases to process. The worst performing servicer, Bank of America, handled 4,404 escalated cases and resolvedrn3,950 of them. Bank of America took an average of 52 days to resolve its cases, and the longest casernrequired 392 days to resolve. </p

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Servicers are required to report the resolution of escalated cases, using 13rnresolution categories</bthat include bankruptcy, initiation of some type of modification, or a final resolutionrnsuch as a short sale, completed foreclosure, or loan payoff.  </p