Mortgage Foreclosures:

Documentation Problems Reveal Need for Ongoing Regulatory Oversight

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

Additional Materials:

Contact:

Angela N. Clowers
(202) 512-3000
contact@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

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.

Recommendations for Executive Action

  1. 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: Federal Reserve System: Board of Governors

  2. 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 Thrift Supervision

  3. 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: Department of the Treasury: Office of the Comptroller of the Currency

  4. 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 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

  5. Status: Closed - Implemented

    Comments: As of July 2011, regulatory responsibility for federal savings associations was transferred to the Office of the Comptroller of the Currency.

    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

  6. Status: Closed - Implemented

    Comments: In January 2014, rules from the Bureau of Consumer Financial Protection on national mortgage servicing standards became effective. These rules, among other things, restrict dual tracking of loss mitigation and foreclosure processes and establish policies, procedures, and requirements 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 them to compile it into a servicing file within five days. 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. These actions take the place of previous interagency discussions to create national servicing standards.

    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

  7. Status: Closed - Implemented

    Comments: In January 2014, rules from the Bureau of Consumer Financial Protection on national mortgage servicing standards became effective. These rules, among other things, restrict dual tracking of loss mitigation and foreclosure processes and establish policies, procedures, and requirements 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 them to compile it into a servicing file within five days. These rules take the place of previous interagency discussions to create national servicing standards.

    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

  8. Status: Closed - Implemented

    Comments: In January 2014, a final Bureau of Consumer Financial Protection rule on national mortgage servicing standards went into effect. The rule 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. 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. These actions take the place of previous interagency discussions to create national servicing standards.

    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

  9. Status: Open

    Comments: The Office of the Comptroller of the Currency (OCC) recently issued a revised examination handbook for Mortgage Banking. The handbook includes a "Core Examination Procedure" on determining whether a bank has sufficient policies, procedures, and staff to comply with all servicing standards prescribed by federal, state, and investor requirements. According to the handbook, a bank should pay particular attention to practices surrounding disclosures, servicing transfers, escrow management, error resolution procedures, borrower information requests, force-placed insurance, default management, and continuity of contact practices. Consistent with guidance included in the Mortgage Banking Handbook, OCC reports that examiners are reviewing the loan transfer process, including documentation standards, and its potential impacts on the bank's legal and reputation risks. We continue to follow up with OCC about how examiners have implemented this guidance in examinations.

    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

  10. Status: Open

    Comments: We continue to follow up with the Federal Reserve on the status of any actions that respond to this recommendation.

    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

  11. Status: Open

    Comments: As of July 2011, regulatory responsibility for federal savings associations was transferred to the Office of the Comptroller of the Currency (OCC). The status of this recommendation as it pertains to institutions formerly under jurisdiction of OTS is pending OCC action.

    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

  12. Status: Closed - Implemented

    Comments: In January 2014, final rules from the Bureau of Consumer Financial Protection on national mortgage servicing standards became effective. These rules, 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.

    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

  13. Status: Open

    Comments: FDIC officials stated that the risk of litigation from mortgage documentation was minimal for most of the institutions under their jurisdiction because servicing mortgages is not a primary activity for these instituions. In addition, they noted that institutions that do service mortgages do not have high rates of delinquencies or foreclosures. However, FDIC took steps to assess and raise awareness among examiners of institutions' foreclosure documentation practices. For example, the officials said that examiners inorporated elements related to foreclosure documentation in the scope of their exams and looked at the risk of repurchases at institutions with larger concentrations of mortgage activity. In addition, in May 2011, FDIC issued a supervisory journal describing lessons learned from the interagency review of foreclosure practicess and implications of the findings for community banks. We continue to follow up with FDIC for documentation of these actions.

    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

 

Explore the full database of GAO's Open Recommendations »

Sep 22, 2014

Sep 16, 2014

Jul 28, 2014

Jul 23, 2014

Jul 22, 2014

Jul 21, 2014

Jun 26, 2014

Jun 20, 2014

Jun 6, 2014

Looking for more? Browse all our products here