Watchdog Addresses Problems With Foreclosure Review Payments

The Office of Inspector General (OIG) ofrnthe Federal Reserve System released a report on Thursday critical of the way inrnwhich the Board (and by extension the Office of Comptroller of the Currencyrn(OCC)), managed amendments to the controversial Independent Foreclosure Reviewrn(IFR).   IFR was established by a series of consentrnorders issued by the two regulators and the now defunct Office of ThriftrnSupervision in 2010 and 2011.  Thernconsent orders were issued to 13 mortgage servicers to address deficientrnmortgage loan servicing and foreclosure processing practices. </p

The IFR, which was ultimately expandedrnto 16 servicers, required that the servicers retain independent consultants tornreview foreclosure activities of the servicers in 2009 and 2010 to determine ifrnborrowers suffered financial injury due to servicer errors or deficiencies.  The Board and the OCC attempted to implementrnthis through a borrower level file review for more than 4.4 million borrowersrnacross multiple financial institutions. rnThe review ultimately proved to be a cumbersome, slow, and costly processrnand by November 2012, 18 months into the review, no money had been given to anyrnof the borrowers but the independent consultants had billed servicers $1.8rnbillion and there were estimates that another two years and $2 billion would bernneeded to complete the reviews which had also attracted a good deal ofrnCongressional attention.  </p

InrnJanuary the Board and the OCC agreed to replace the consent orders and the IFRrnwith payments to borrowers of approximately $367 billon and additionalrnforeclosure prevention services.  Borrowers were “slotted” in payment categories according tornwaterfall definitions established by regulators according to extent of the harmrnthey suffered. .</p

ThernOIG conducted their assessment of the amendments to the consent orders to (1) evaluate the Board’s overall approach to oversight ofrnthe amended orders, (2) determine the effectiveness of the Board’s oversight ofrnthe slotting process, and (3) determine the effectiveness of the Board’srnoversight of the servicers’ paying agent, Rust Consulting, Inc. </p

Five of the services affected by thernpayment agreement were supervised by the Federal Reserve and these servicersrnbegan slotting borrowers into the waterfall categories and were supervised byrnthe responsible reserve bank.  In Aprilrn2013 after servicers finalized their waterfalls the Board and OCC publishedrnpayment plans for most of the servicers; payment amounts ranged from $300 torn$125,000 with a few borrowers eligible for addition payments.  </p

All servicers selected RustrnConsulting to function as their paying agent and beginning in March 2013 therncompany mailed postcards to borrowers alerting them that checks would be mailedrnand commenced those mailings in April.</p

OIG found that the Federal Reservernstaff’s advance preparation and planning efforts for the payment agreement were<bnot commensurate with the agreement's complexity.  The project entailed oversight of correctivernaction at the borrower level for 4 million loans involving several agencies,rnmultiple mortgage servicers, and three regional Reserve Banks.  Yet the Board engaged in only limited planningrnactivities which did not include submission of a detailed implementation plan suchrnas it typically requires of the financial institutions it supervises.</p

The report also criticizes the lackrnof project management resources made available to support the initiative sayingrnthat support from senior Board officials may have limited the need for dailyrnoversight during plan implementation. </p

While the audit did not seek tornvalidate the results of slotting at an individual borrower level OIG found somerndata integrity issues that impacted the reliability and consistency of thernresults for at least two servicers and may have resulted in inconsistencies inrnpayments.  </p

OIG also found that the Board has notrnselected an approach with which to end the payment agreement and to distributernany remaining funds.  The lack of anrnapproved plan creates uncertainty about the disposition of these monies and mayrnsubject the Board to further stakeholder criticism.</p

OIG said it attributes the limitedrnplanning to the compressed time frame involved in transitioning to the paymentrnagreement and the aggressive deadlines imposed in order to get payments to borrowersrnwithout further delays.  </p

The OIG report concludes that thernlimited planning activities were a missed opportunity to assess the feasibilityrnof implementing the agreement, to define the success measures such as thernpercentage of borrowers cashing or depositing a check, to assess whether thernBoard had the requisite skills and capabilities to oversee the exercise; tornconsider the possible risks associated with its course of action includingrnpossible risk mitigation measures, and to vet fully any alternative courses ofrnaction.  </p

“Despite these challenges andrnlimitations,” OIG says, “as of August 15, 2014, borrowers of the 13 servicersrnthat joined the payment agreement in January 2013 had cashed or depositedrnchecks representing about $3.15 billion, or approximately 86 percent, of therntotal $3.67 billion. </p

OIG made five recommendations to thernBoard:</p<ul class="unIndentedList"<liDevelop a framework for planning,rnvetting, and approving activities for large, complex enforcement actions thatrnmay involve multiple participants on several levels.</li<liIdentify the circumstances in whichrnproject management resources should be used and a staffing plan to include suchrnresources with appropriate specific expertise for the situation.</li<liAssess the potential impact of datarnreliability issues</li<liFinalize an approach to ending thernpayment agreement and to allocate any remaining funds.</li<liIdentify potential options forrndistributing residual amounts as part of the planning process for any futurernpayment agreements.</li

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