Mortgage Foreclosures:

Documentation Problems Reveal Need for Ongoing Regulatory Oversight

GAO-11-433: Published: May 2, 2011. Publicly Released: May 5, 2011.

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Mortgage servicers--entities that manage home mortgage loans--halted foreclosures throughout the country in September 2010, finding that documents required to be provided to courts in some states may have been improperly signed or notarized. In addition, academics and court cases are raising questions over whether foreclosures are being brought properly because of concerns over how loans were transferred into mortgage-backed securities (MBS). GAO was asked to examine (1) the extent to which federal laws address mortgage servicers' foreclosure procedures and federal agencies' past oversight, (2) federal agencies' current oversight and future oversight plans, and (3) the potential impact of these issues on involved parties. GAO reviewed federal laws, regulations, exam guidance, agency documents, and studies, and conducted interviews with federal agencies, mortgage industry associations, investor groups, consumer advocacy groups, and legal academics.

Federal laws do not specifically address the foreclosure process, and federal agencies' past oversight of servicers' foreclosure activities has been limited and fragmented. State laws primarily govern the foreclosure process and specify what, if any, documentation is required to foreclose on a property. Several federal laws include mortgage servicing provisions, but they largely are focused on consumer protection at mortgage origination, not specific foreclosure requirements. Although various federal agencies have authority to oversee most mortgage servicers, past oversight of their foreclosure activities has been limited, in part because banking regulators did not consider these practices as posing a high risk to banks' safety and soundness, and some servicers have not been under direct federal oversight. Federal housing and other agencies typically do not monitor servicers' foreclosure activities. In response to the disclosed documentation problems, federal agencies have recently increased attention to servicing activities. Banking regulators conducted a coordinated review of 14 mortgage servicers and identified pervasive problems with their document preparation and oversight of foreclosure processes, although they did not find widespread instances of foreclosures that should not have proceeded. The regulators issued enforcement actions requiring servicers to improve these practices and plan to assess their compliance, but have not fully developed plans for the extent of future oversight. Further, regulators are considering the need for uniform servicing standards, but whether such standards will address foreclosure activities is yet unclear. Federal housing and other agencies are also reviewing servicer foreclosure practices and considering corrective actions. In July 2011, the newly created CFPB also will have responsibility for mortgage servicing, including over certain nondepository firms currently without federal oversight. How regulators and CFPB will interact and share responsibility for ongoing oversight of servicers is yet unclear, leaving the potential for continued gaps and inconsistency in oversight until final plans are developed. Foreclosure documentation problems have slowed the pace of foreclosures across the United States, but most entities GAO interviewed indicated that such errors were correctable and that affected foreclosures would proceed. Delays in the pace of foreclosures as servicers correct and refile cases and implement more rigorous processes may benefit borrowers by providing more time to modify loans, but communities may be negatively affected as any vacant properties in foreclosure remain unoccupied for longer periods. Some foreclosures are also being delayed because of allegations that practices commonly used for transferring loans when creating MBS were not completed properly, which some commentators argue may affect whether servicers can prove legal authority to foreclose. Regulators did not always verify these transfer practices during their reviews or assess the potential risks of transfer problems to institutions. The potential financial costs resulting from these issues for investors, institutions that create MBS, and the overall financial system likely will remain uncertain until sufficient numbers of courts render decisions on the appropriateness of these practices. GAO recommends that banking regulators and the Bureau of Consumer Financial Protection (CFPB) develop plans for overseeing mortgage servicers and include foreclosure practices in any servicing standards that are developed. GAO also recommends that regulators assess the risks that documentation problems pose for their institutions. The agencies generally agreed with the recommendations.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should develop and coordinate plans to provide ongoing oversight and establish clear goals, roles, and timelines for overseeing mortgage servicers under their respective jurisdiction.

    Agency Affected: Federal Reserve System: Board of Governors

    Status: Closed - Implemented

    Comments: In May 2012, the Board of Governors of the Federal Reserve System, Bureau of Consumer Financial Protection, and the other banking regulators entered into a Memorandum of Understanding on supervisory coordination. The objective of the memo is to establish guidelines for coordination and cooperation between CFPB and the banking regulators on scheduling examinations and the roles of each agency in conducting examinations of supervised activities, including servicing.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should develop and coordinate plans to provide ongoing oversight and establish clear goals, roles, and timelines for overseeing mortgage servicers under their respective jurisdiction.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Closed - Implemented

    Comments: OCC has assumed oversight responsibility for savings associations from OTS. This recommendation is closed via action taken in June 2012 by OCC, the Federal Reserve, and the Consumer Financial Protection Bureau to coordinate examinations.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should develop and coordinate plans to provide ongoing oversight and establish clear goals, roles, and timelines for overseeing mortgage servicers under their respective jurisdiction.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Closed - Implemented

    Comments: In May 2012, the Office of the Comptroller of the Currency, Bureau of Consumer Financial Protection, and the other banking regulators entered into a Memorandum of Understanding on supervisory coordination. The objective of the memo is to establish guidelines for coordination and cooperation between CFPB and the banking regulators on scheduling examinations and the roles of each agency in conducting examinations of supervised activities, including servicing.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should develop and coordinate plans to provide ongoing oversight and establish clear goals, roles, and timelines for overseeing mortgage servicers under their respective jurisdiction.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Closed - Implemented

    Comments: In May 2012, the Federal Deposit Insurance Corporation, Bureau of Consumer Financial Protection, and the other banking regulators entered into a Memorandum of Understanding on supervisory coordination. The objective of the memo is to establish guidelines for coordination and cooperation between CFPB and the banking regulators on scheduling examinations and the roles of each agency in conducting examinations of supervised activities, including servicing.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should, if national servicing standards are created, include standards for foreclosure practices.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Open

    Comments: As of July 2011, regulatory responsibility for federal savings associations was transferred to the Office of the Comptroller of the Currency. Work by this organization in conjuction with other regulators to develop national servicing standards is still underway.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should, if national servicing standards are created, include standards for foreclosure practices.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Open

    Comments: In January 2013, the Bureau of Consumer Financial Protection issued a final rule on national mortgage servicing standards that, among other things, restricts dual tracking of loss mitigation and foreclosure processes and establishes policies, procedures, and requirements that that servicers provide accurate and timely information to courts and facilitate the transfer of information during servicing transfers. In addition, servicers are required to maintain certain documents and information for each mortgage loan in a manner that enables the servicers to compile it into a servicing file within five days. The rule goes into effect in January 2014. In addition, in April 2013 OCC issued guidance applicable to large and midsize national banks and federal savings associations that requires mortgage servicers to review foreclosures prior to their completion to ensure the servicer is complying with applicable laws and regulations and that appropriate foreclosure prevention efforts have been made.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should, if national servicing standards are created, include standards for foreclosure practices.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Open

    Comments: As of April 2012, the interagency process to develop mortgage servicing standards is still ongoing.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should, if national servicing standards are created, include standards for foreclosure practices.

    Agency Affected: Federal Reserve System: Board of Governors

    Status: Open

    Comments: In January 2013, the Bureau of Consumer Financial Protection issued a final rule on national mortgage servicing standards that, among other things, restricts dual tracking of loss mitigation and foreclosure processes and establishes policies, procedures, and requirements that that servicers provide accurate and timely information to courts and facilitate the transfer of information during servicing transfers. In addition, servicers are required to maintain certain documents and information for each mortgage loan in a manner that enables the servicers to compile it into a servicing file within five days. The rule goes into effect in January 2014. In addition, in April 2013 the Federal Reserve issued guidance applicable to all state member banks, bank and savings and loan holding companies (including their non-bank subsidiaries), and U.S. branches and agencies of foreign banking organizations that service residential mortgage loans requiring them to review foreclosures prior to their completion to ensure compliance with applicable laws and regulations and that appropriate foreclosure prevention efforts have been made.

    Recommendation: To reduce the likelihood that problems with mortgage transfer documentation problems could pose a risk to the financial system, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, and the Chairman of the Federal Deposit Insurance Corporation should assess the risks of potential litigation or repurchases due to improper mortgage loan transfer documentation on institutions under their jurisdiction and require that the institutions take action to mitigate the risks, if warranted.

    Agency Affected: Department of the Treasury: Office of the Comptroller of the Currency

    Status: Open

    Comments: As of June 2012, no update on the status of this recommendation was available.

    Recommendation: To reduce the likelihood that problems with mortgage transfer documentation problems could pose a risk to the financial system, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, and the Chairman of the Federal Deposit Insurance Corporation should assess the risks of potential litigation or repurchases due to improper mortgage loan transfer documentation on institutions under their jurisdiction and require that the institutions take action to mitigate the risks, if warranted.

    Agency Affected: Federal Reserve System: Board of Governors

    Status: Open

    Comments: As of June 2012, no update on the status of this recommendation was available.

    Recommendation: To reduce the likelihood that problems with mortgage transfer documentation problems could pose a risk to the financial system, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, and the Chairman of the Federal Deposit Insurance Corporation should assess the risks of potential litigation or repurchases due to improper mortgage loan transfer documentation on institutions under their jurisdiction and require that the institutions take action to mitigate the risks, if warranted.

    Agency Affected: Department of the Treasury: Office of Thrift Supervision

    Status: Open

    Comments: As of July 2011, regulatory responsibility for federal savings associations was transferred to the Office of the Comptroller of the Currency. As of June 2012, the status of this recommendation is pending any OCC action.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should develop and coordinate plans to provide ongoing oversight and establish clear goals, roles, and timelines for overseeing mortgage servicers under their respective jurisdiction.

    Agency Affected: Consumer Financial Protection Bureau

    Status: Closed - Implemented

    Comments: In May 2012, the Bureau of Consumer Financial Protection and the other banking regulators entered into a Memorandum of Understanding on supervisory coordination. The objective of the memo is to establish guidelines for coordination and cooperation between CFPB and the banking regulators on scheduling examinations and the roles of each agency in conducting examinations of supervised activities, including servicing.

    Recommendation: To help ensure strong and robust oversight of all mortgage servicers, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, the Chairman of the Federal Deposit Insurance Corporation, and the Bureau of Consumer Financial Protection should, if national servicing standards are created, include standards for foreclosure practices.

    Agency Affected: Consumer Financial Protection Bureau

    Status: Open

    Comments: In January 2013, the Bureau of Consumer Financial Protection issued a final rule on national mortgage servicing standards that, among other things, restrict dual tracking of loss mitigation and foreclosure processes and to establish policies, procedures, and requirements that that ensure providing accurate and timely information to courts and facilitate the transfer of information during servicing transfers. In addition, servicers are required to maintain certain documents and information for each mortgage loan in a manner that enables the servicers to complie it into a servicing file within five days. The rule goes into effect in January 2014.

    Recommendation: To reduce the likelihood that problems with mortgage transfer documentation problems could pose a risk to the financial system, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Director of the Office of Thrift Supervision, and the Chairman of the Federal Deposit Insurance Corporation should assess the risks of potential litigation or repurchases due to improper mortgage loan transfer documentation on institutions under their jurisdiction and require that the institutions take action to mitigate the risks, if warranted.

    Agency Affected: Federal Deposit Insurance Corporation

    Status: Open

    Comments: As of June 2012, no update on the status of this recommendation was available.

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