Foreclosure Review:

Lessons Learned Could Enhance Continuing Reviews and Activities under Amended Consent Orders

GAO-13-277: Published: Mar 26, 2013. Publicly Released: Apr 4, 2013.

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Lawrance L. Evans, Jr
(202) 512-8678
evansl@gao.gov

 

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What GAO Found

Complexity of the reviews, overly broad guidance, and limited monitoring for consistency impeded the ability of the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) to achieve the goals of the foreclosure review--to identify as many harmed borrowers as possible and ensure similar results for similarly situated borrowers. Regulators said that coordinating among foreclosure review participants was challenging, and consultants said that the reviews were complex. In spite of regulators' steps to foster consistency, broad guidance and limited monitoring reduced the potential usefulness of data from consultants and increased risks of inconsistency. For example, GAO found that guidance was revised throughout the process, resulting in delays. Other guidance did not specify key sampling parameters for the file reviews and regulators lacked objective monitoring measures, resulting in difficulty assessing the extent of borrower harm. Good planning and collecting objective data during monitoring provide a basis for making sound conclusions. Without using objective measures to assess sampling or comparing review methods across consultants, regulators' ability to monitor progress toward achievement of foreclosure review goals was hindered.

Although regulators released more information than is typically associated with consent orders, limited communication with borrowers and the public adversely impacted transparency and public confidence. To promote transparency, regulators released redacted engagement letters and guidance on remediation. In addition, OCC released two interim progress reports. However, some stakeholders perceived gaps in key information and wanted more detailed information about how the reviews were carried out. Regulators stated they considered publicly releasing additional information, but expressed concerns that releasing detailed information risked disclosure of confidential or proprietary information. Further, borrowers who requested reviews experienced gaps in communication. For example, borrowers who submitted requests when the submission period opened waited nearly a year before receiving an update.

The foreclosure review activities to date highlight key lessons related to planning, monitoring, and communication. GAO's prior work shows that assessing and using lessons learned from previous experience can benefit the planning of future activities. The foreclosure review produced lessons in advanced planning and establishing mechanisms to monitor progress toward goals. Without assessing and applying relevant lessons learned, regulators might not address challenges in the continuing reviews or similar challenges in activities under the amended consent orders. In particular, regulators announced the agreements that led to the amended consent orders without a clear communication strategy. Although the regulators plan to release reports on the results of the amended consent orders and the continuing foreclosure reviews, neither regulator had made decisions about what information to provide to borrowers. GAO's internal control standards and best practices indicate that an effective communication strategy and timely reporting can enhance transparency and public confidence. Absent a clear strategy to guide regular communications with individual borrowers and the general public, regulators face risks to transparency and public confidence similar to those experienced in the foreclosure review.

Why GAO Did This Study

Since April 2011, OCC and the Federal Reserve had been overseeing the foreclosure review, a requirement of consent orders entered into by 14 mortgage servicers. This undertaking involved a review of loan files by thirdparty consultants to identify errors in servicing and foreclosure practices. More than 4 million borrowers were eligible for reviews. In January 2013, the regulators announced agreements with 11 of the servicers that replaced the reviews with a broad payment process to compensate borrowers in a more timely manner. Reviews continue for three remaining servicers. GAO has been reviewing various aspects of the foreclosure review process. This report addresses: (1) challenges to the achievement of the goals of the foreclosure review, (2) transparency of the process, and (3) lessons that could be useful for carrying out activities under the amended consent orders and continuing reviews. GAO analyzed third-party consultants' sampling plans, reviewed regulatory guidance and other documents, and interviewed representatives of third-party consultants and law firms, consumer groups, and regulators.

What GAO Recommends

OCC and the Federal Reserve should improve oversight of sampling and consistency in the continuing reviews, apply lessons in planning and monitoring from the foreclosure review, as appropriate, to the activities of the continuing reviews and amended consent orders, and implement a communication strategy to keep stakeholders informed. In their comment letters, the regulators agreed to take steps to implement the recommendations.

For more information, contact Lawrance L. Evans, Jr. at (202) 512-8678 or evansl@gao.gov.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Between January and August 2013, OCC continued oversight of the sampling activities of the two servicers that continued file review activities and took steps to monitor consistency of the results. According to OCC, consultants for both servicers used sampling methodologies that were more robust than the one required by regulators and provided sufficient information for consultants to analyze trends and propose additional reviews. To facilitate central monitoring of the consistency of the file review processes and results, the two remaining reviews were partially overseen by the same exam team.

    Recommendation: To better ensure that the goals of the foreclosure review are realized for servicers that are not subject to amended consent orders, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System, as appropriate, should improve oversight of sampling methodologies and mechanisms to centrally monitor consistency, such as assessment of the implications of inconsistencies on remediation results for borrowers in the remaining foreclosure reviews.

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

  2. Status: Closed - Not Implemented

    Comments: The circumstances of this recommendation have changed and the recommendation is no longer valid. The Federal Reserve signed amended consent orders ending the file review process for all the servicers it oversees that were subject to the consent orders and instituted a process to provide cash payments to all borrowers based on data in servicers' systems.

    Recommendation: To better ensure that the goals of the foreclosure review are realized for servicers that are not subject to amended consent orders, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System, as appropriate, should improve oversight of sampling methodologies and mechanisms to centrally monitor consistency, such as assessment of the implications of inconsistencies on remediation results for borrowers in the remaining foreclosure reviews.

    Agency Affected: Federal Reserve System: Board of Governors

  3. Status: Closed - Implemented

    Comments: According to OCC staff, they considered lessons learned from the file review process in both their planning and oversight of the amended consent order activities. For example, for the cash payment categorization process they issued up-front guidance to servicers and examination teams to facilitate consistent categorization and oversight of the process. In addition, they took steps to prepare for the distribution of checks to borrowers, including establishing a terms of work with the third-party administrator responsible for check mailing and performance measures to facilitate monitoring. With regards to the foreclosure prevention component, they consulted with consumer groups to help identify the types of information to collect on servicers' activities, issued a reporting template for servicers to record information on the loans they were submitting for crediting, and are hiring a third-party to review the crediting process.

    Recommendation: To better ensure that the goals of the amended consent orders related to the distribution of direct payments and other assistance are realized, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should identify and apply lessons from the foreclosure review process, such as enhancing planning and monitoring activities to achieve goals, as they develop and implement the activities under the amended consent orders.

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

  4. Status: Closed - Implemented

    Comments: According to Federal Reserve staff, they considered lessons learned from the file review process in both their planning and oversight of the amended consent order activities. For example, for the cash payment categorization process they issued up-front guidance to servicers and examination teams to facilitate consistent categorization and oversight of the process. In addition, they took steps to prepare for the distribution of checks to borrowers, including establishing a terms of work with the third-party administrator responsible for check mailing and performance measures to facilitate monitoring. With regards to the foreclosure prevention component, they consulted with consumer groups to help identify the types of information to collect on servicers' activities, issued a reporting template for servicers to record information on the loans they were submitting for crediting, and are hiring a third-party to review the crediting process.

    Recommendation: To better ensure that the goals of the amended consent orders related to the distribution of direct payments and other assistance are realized, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should identify and apply lessons from the foreclosure review process, such as enhancing planning and monitoring activities to achieve goals, as they develop and implement the activities under the amended consent orders.

    Agency Affected: Federal Reserve System: Board of Governors

  5. Status: Open

    Comments: Since the announcement of the amended consent orders and our March 2013 report, OCC has taken steps to keep borrowers and the general public informed about the status of activities under the amended consent orders and continuing foreclosure reviews. For example, OCC directed servicers participating in the amended consent orders to send postcards to borrowers informing them that they would receive a cash payment from their servicer and regularly updated its website with information on the number and amount of cash payment checks cashed under the amended consent orders. OCC also directed servicers to send communications to borrowers subject to the continuing review to inform them that their reviews were ongoing. However, OCC has not yet determined the content and timing of planned public reports on the direct payment process and foreclosure prevention actions as well as the preliminary results of the reviews that were terminated and the results of the review that continued. In addition, OCC's actions to date have included limited information on processes, such as the overall approach used to determine cash payment amounts or information on the criteria for borrower placement in each category, such as the specific loan and borrower characteristics associated with each category.

    Recommendation: To better ensure transparency and public confidence in the activities under the amended consent orders and results of the continuing foreclosure reviews, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should develop and implement a communication strategy to regularly inform borrowers and the public about the processes, status, and results of the activities under the amended consent orders and continuing foreclosure reviews.

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

  6. Status: Open

    Comments: Since the announcement of the amended consent orders and our March 2013 report, the Federal Reserve has taken steps to keep borrowers and the general public informed about the status of activities under the amended consent orders. For example, the Federal Reserve directed servicers participating in the amended consent orders to send postcards to borrowers informing them that they would receive a cash payment from their servicer and made information on the number and amount of cash payment checks cashed under the amended consent orders available on the internet. However, the Federal Reserve has not yet determined the content and timing of a public report on the direct payment process and foreclosure prevention actions as well as the preliminary results of the reviews that were terminated. In addition, the actions to date have included limited information on processes, such as the overall approach used to determine cash payment amounts or information on the criteria for borrower placement in each category, such as the specific loan and borrower characteristics associated with each category.

    Recommendation: To better ensure transparency and public confidence in the activities under the amended consent orders and results of the continuing foreclosure reviews, the Comptroller of the Currency and the Chairman of the Board of Governors of the Federal Reserve System should develop and implement a communication strategy to regularly inform borrowers and the public about the processes, status, and results of the activities under the amended consent orders and continuing foreclosure reviews.

    Agency Affected: Federal Reserve System: Board of Governors

 

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