Mortgage Foreclosures: Regulatory Oversight of Compliance with Servicemembers Civil Relief Act Has Been Limited
GAO-12-700
Published: Jul 17, 2012. Publicly Released: Jul 17, 2012.
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Highlights
What GAO Found
Certain protections under the Servicemembers Civil Relief Act (SCRA) only apply to those servicemembers who obtained mortgages prior to becoming active duty, but at least 15,000 instances of financial institutions failing to properly reduce servicemembers’ mortgage interest rates and over 300 improper foreclosures have been identified by federal investigations and financial institutions in recent years. Additional independent reviews of financial institutions’ compliance are under way, and staff from some of these institutions told GAO that they have implemented improved practices—such as creating single points of contact familiar with military issues for borrowers—to better comply with SCRA.
Federal regulators’ oversight of SCRA compliance has been limited. GAO estimates that from 2007 through 2011 prudential depository institution regulators—the Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Office of the Comptroller of the Currency—reviewed 48 percent of all banks and credit unions for SCRA compliance. Of these institutions that were reviewed for SCRA compliance, only about half received examinations that involved testing of compliance by reviewing loan files. Further, GAO found that examiners had only reviewed loans identified by the institution as involving servicemembers and had not independently selected a statistical sample of loan files, which would have provided greater assurance of SCRA compliance. Without more testing, which examination and auditing guidance suggest provides increased verification, regulators are less likely to detect SCRA violations. Various other federal agencies are involved in SCRA compliance oversight. The Department of Justice has explicit SCRA enforcement authority and since 2007 has brought three cases against mortgage servicers for violations. The Department of Veterans Affairs (VA), Federal Housing Administration, and Federal Housing Finance Agency—which regulates the government-sponsored enterprises—all obtain information about SCRA compliance at the servicers that participate in the mortgage programs they administer or regulate, but the agencies and the prudential regulators do not share such information among themselves. Collaboration among these agencies could lead to more effective supervision and improve their awareness of potential problems with SCRA compliance. Further, VA oversight of mortgage servicers does not specifically review for SCRA compliance. By increasing its SCRA compliance monitoring efforts, VA could better ensure that servicemembers with VA loans are better protected.
SCRA requires that the Department of Defense (DOD) and Department of Homeland Security (DHS)—which oversees the Coast Guard—inform servicemembers of their SCRA rights. The military services provide this information in various forms, such as briefings and websites. However, some military officials said that servicemembers—particularly members of the National Guard and reserve—often receive SCRA information as part of briefings with numerous other topics prior to deployment and do not always retain the necessary awareness when they need it later. DOD and DHS do not assess the effectiveness of their SCRA education methods, such as by using focus groups of servicemembers or testing to reinforce retention of SCRA information. Without such assessment, they may not be able to ensure that they are informing servicemembers of their rights in the most effective manner.
Why GAO Did This Study
SCRA protects servicemembers whose active duty military service prevents them from meeting financial obligations, by allowing interest rates on certain debts to be reduced and requiring a court order before certain foreclosures on their homes can occur. With foreclosures rising, reports surfaced of instances in which financial institutions failed to comply with SCRA. GAO examined the (1) eligibility for SCRA protections and extent of SCRA mortgage-related violations by depository institutions, (2) SCRA compliance oversight by prudential regulators and other federal agencies, and (3) the military services’ efforts to educate servicemembers on SCRA. GAO collected data on populations eligible for SCRA from DOD and SCRA violations from banking and law enforcement agencies and reviewed a stratified random sample of prudential regulators’ examinations of banks and credit unions. GAO also interviewed regulators, law enforcement and military officials, and military service organizations.
Recommendations
Prudential regulators should conduct more extensive loan file testing for SCRA compliance. Regulators and other agencies that oversee mortgage activities should also explore opportunities for information sharing on SCRA compliance oversight, and VA should expand its SCRA compliance monitoring efforts. Finally, DOD and DHS should assess the effectiveness of their efforts to provide SCRA information to servicemembers. The agencies generally agreed and noted actions responsive to GAOs recommendations.
Recommendations for Executive Action
| Agency Affected | Recommendation | Status |
|---|---|---|
| Office of the Comptroller of the Currency | To better ensure SCRA compliance oversight, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, and Chairman of the National Credit Union Administration should take steps to increase the frequency with which examiners (1) conduct testing of foreclosure files and as applicable, other mortgage loan files; and (2) employ testing methods that provide greater assurance that mortgage servicers are complying with SCRA. |
Closed – Implemented
OCC implemented new Servicemembers Civil Relief Act (SCRA) examination procedures in January 2013. The procedures require that, at a minimum, examiners must review financial institutions' policies, procedures, and processes for servicemember requests for protections under SCRA during each examination. Based on this review, examiners make a determination as to whether or not to conduct transaction testing to test for various aspects of SCRA compliance (e.g., reduction of interest rate, forgiveness of interest, and retroactive interest rate reduction). The procedures also require that for each examination, regardless of the outcome of the examiner's review of the institution's SCRA policies and procedures, that a statistical sample of foreclosure mortgage files be tested to determine how the institution determined if borrower was eligible for SCRA protections and if court orders were obtained before foreclosing.
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| Board of Governors | To better ensure SCRA compliance oversight, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, and Chairman of the National Credit Union Administration should take steps to increase the frequency with which examiners (1) conduct testing of foreclosure files and as applicable, other mortgage loan files; and (2) employ testing methods that provide greater assurance that mortgage servicers are complying with SCRA. |
Closed – Implemented
In June 2013, Federal Reserve officials explained that they look at Servicemembers Civil Relief Act (SCRA) during each exam during the initial risk scoping portion of an examination. Based on this risk assessment, examiners decide to do a further review of SCRA compliance during the examination. Officials also stated that they issued guidance in April 2013 on minimum standards for handling borrower files with imminent scheduled foreclosure sale. These procedures call for each imminent foreclosure file to be reviewed for SCRA eligibility. Guidance on the standards provides specific review and validation standards for regulated institutions to incorporate into their pre-foreclosure reviews. One of the validation standards asks servicers to ensure they have taken all necessary steps to confirm if the borrower or others associated with the mortgage are entitled to SCRA protections, including querying the Department of Defense's database of active duty members. When the servicer determines that a borrower is eligible for SCRA protections, these standards also direct servicers to determine that they have complied with applicable legal requirements before foreclosing.
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| Federal Deposit Insurance Corporation | To better ensure SCRA compliance oversight, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, and Chairman of the National Credit Union Administration should take steps to increase the frequency with which examiners (1) conduct testing of foreclosure files and as applicable, other mortgage loan files; and (2) employ testing methods that provide greater assurance that mortgage servicers are complying with SCRA. |
Closed – Implemented
FDIC officials explained that during each examination of a financial institution, examiners review all of an institution's risk factors for high profile areas, of which Servicemembers Civil Relief Act (SCRA) is one. If the review of high risk areas reveals potential problems with an institution's compliance, examiners will pull a sample of files and review that area further. In addition, they explained that examiners always conduct transaction testing on certain consumer compliance laws (e.g., Truth in Lending, Federal Credit Reform Act, etc). During transaction testing of these laws, examiners look for potential problems with all other consumer laws, including SCRA. If potential SCRA problems were identified during the review of other consumer laws, the examiners would conduct additional transaction testing of files to check for SCRA compliance. In addition, after issuance of our report in July 2012, FDIC held a conference call with all of its examiners reemphasizing the importance of reviewing for SCRA compliance.
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| National Credit Union Administration | To better ensure SCRA compliance oversight, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, and Chairman of the National Credit Union Administration should take steps to increase the frequency with which examiners (1) conduct testing of foreclosure files and as applicable, other mortgage loan files; and (2) employ testing methods that provide greater assurance that mortgage servicers are complying with SCRA. |
Closed – Implemented
NCUA expanded its fair lending pre-examination questionnaire to include questions on SCRA compliance and expanded the scope of fair lending exams to address SCRA compliance. Now examiners may review a sample of loans, loan applications, foreclosures, short sales, and mortgage modifications involving credit union members covered under SCRA. In 2013, NCUA reviewed SCRA compliance in 25 credit unions and identified six SCRA violations. NCUA also incorporated SCRA compliance reviews into the investigation of member complaints by modifying its complaint recordkeeping system to permit members filing complaints against credit unions to identify themselves as servicemembers or servicemember dependents.
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| Department of Veterans Affairs | To help ensure that VA assists servicemembers with remaining in their homes and avoiding foreclosure, the Secretary of Veterans Affairs should ensure that a review for SCRA compliance is included in the department's new mortgage servicer monitoring program and that additional steps to assess SCRA compliance are taken by VA staff during its Adequacy of Servicing reviews and while conducting supplemental servicing. |
Closed – Implemented
VA officials have developed a checklist that their staff have begun using to conduct servicer monitoring reviews. The checklist includes seven questions related to assessing servicers' Servicemembers Civil Relief Act (SCRA) activities. VA officials stated that one servicer monitoring review was conducted in fiscal year 2012 and that two reviews are planned for fiscal year 2013. To incorporate oversight of SCRA into its Adequacy of Servicing reviews and supplemental servicing activities, VA issued guidance to its loan officers on August 3, 2012 to help them assess if servicers acted to appropriately to provide SCRA mortgage protections to eligible borrowers. The guidance instructs loan officers to include an additional question during Adequacy of Servicing reviews to determine if the reviewed servicer information provides an indication that a servicemember may be eligible for SCRA.
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| Office of the Comptroller of the Currency | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
In May 2015, OCC staff confirmed that OCC staff routinely participate in the Department of Justice's (DOJ) Interagency Bank Fraud Enforcement Working Group, which promotes coordination and communication between the federal law enforcement and regulatory communities. In addition, OCC staff often coordinate directly with DOJ on SCRA issues. OCC staff stated that DOJ recently contacted OCC inquiring about a policy concerning SCRA protections related to reduced interest rates for closed accounts.
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| Board of Governors | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
Federal Reserve staff participate in a subgroup of the Department of Justice's (DOJ) Federal Financial Fraud Enforcement Task Force that is dedicated to consumer protection issues for servicemembers (the Consumer Protection Working Group's (CPWG) Servicemembers Subgroup). The Federal Financial Fraud Enforcement Task Force consists of, among others, more than 20 federal agencies, including the Office of the Comptroller of the Currency (OCC), Department of Housing and Urban Development (HUD), Federal Deposit Insurance Corporation (FDIC), Federal Housing Finance Agency (FHFA), and the National Credit Union Administration. At one of the CPWG Serivcemembers Subgroup's meetings, Federal Reserve staff briefed the group on an interagency webinar that the Federal Reserve hosted in September 2012 entitled "Servicemember Financial Protection." The webinar involved presenters from the Federal Reserve, Consumer Financial Protection Bureau, Department of Justice, Department of Treasury, FHFA, FDIC, NCUA, and OCC and discussed SCRA compliance and recent SCRA enforcement actions.
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| Federal Deposit Insurance Corporation | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
FDIC personnel from the Division of Depositor and Consumer Protection attended the November 2013 meeting of the Joint Federal Housing Agencies Task Force. During the meeting SCRA compliance was discussed, including the exam process and FDIC forwarded its SCRA examination procedures to the agencies that participated in the meeting. FDIC officals stated that the agency plans to continue to participate in future meetings of the Joint Federal Housing Agencies Task Force.
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| National Credit Union Administration | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
NCUA has taken several steps to share inforamtion related to SCRA compliance with other agencies including the following: (1) NCUA participted in the Interagency Consumer Compliance Task Force meeting in August 2012, which included a discussion of our recommendation; (2) NCUA coordinated with the Department of Defense Office of Legal Policy to conduct SCRA training for staff in the Office of Consumer Protection in December 2012; (3) NCUA participated in the Federal Reserve's Servicemember Financial Protection Webinar in October 2012; (4) NCUA consulted with the Consumer Financial Protection Bureau's (CFPB) Office of Servicemember Affairs in August 2012 to discuss effective approaches for indentifying SCRA related issues in member complaints; (5) NCUA invited CFPB to lead a SCRA session at its December 2013 Consumer Compliance Subject Matter Examiner Conference; and (6) NCUA attended the November 2013 meeting of the Joint Federal Housing Agencies task force when SCRA compliance issues were discussed.
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| Federal Housing Finance Agency | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
FHFA's Division of Enterprise Regulation conducted an assessment of existing mechanisms for information sharing including MOUs in FY13 and determined they were sufficient to share supervisory information with other Federal agencies. This analysis stated that FHFA staff meet with representatives of other U.S. government departments and regulatory agencies involved in housing finance. For instance, interagency coordination occurs through the Financial Stability Oversight Council's Systemic Risk Committee. The committee meets monthly and provides opportunities for coordination with staff from the U.S. Treasury, the Federal Reserve Board and other FSOC agencies. In addition, FHFA personnel attended the November 2013 meeting of the Joint Federal Housing Agencies Task Force, during which SCRA compliance was discussed. Finally, in September 2012, FHFA staff participated in an interagency discussion hosted by the Federal Reserve on servicemember protections and SCRA compliance. In this discussion, FHFA outlined proposed changes to Fannie Mae and Freddie Mac short sale guidelines affecting military homeowners receiving permanent change of station orders.
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| Department of Housing and Urban Development | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
Federal Housing Administration staff attended the November 2013 meeting of the Joint Federal Housing Agencies Task Force. During the meeting, SCRA compliance was discussed and officials also stated that the agency plans to continue to participate in future meetings of the Joint Federal Housing Agencies Task Force when SCRA issues will be discussed.
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| Department of Veterans Affairs | To increase agencies' awareness of potential problems with SCRA compliance, the Comptroller of the Currency, the Chairman of the Board of Governors of the Federal Reserve System, the Chairman of the Federal Deposit Insurance Corporation, the Chairman of the National Credit Union Administration, the Acting Director of the Federal Housing Finance Agency, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs should explore options to use existing mechanisms or develop new ones to share information related to SCRA compliance oversight. |
Closed – Implemented
VA officials led the effort to create the Joint Federal Housing Agencies (JFHA) task force, which consists of the Department of Agriculture (USDA), Department of Housing and Urban Development (HUD), Consumer Financial Protection Bureau (CFPB) and VA. The task force coordinates to improve housing programs and met at least 12 times between May 2012 and November 2013. On November 13, 2013 the JFHA task force met to discuss Servicemembers Civil Relief Act (SCRA) compliance. Those in attendance included HUD, Federal Housing Administration (FHA), USDA, Government National Mortgage Association, Federal Housing Finance Agency, and the Federal Deposit Insurance Corporation. CFPB, Office of the Comptroller of the Currency, Federal Reserve, and National Credit Union Administration were invited but did not attend the meeting. The discussions included the role that the Department of Justice has regarding SCRA compliance oversight and the Department of Defense's recent input regarding DOJ's responsibility. FDIC confirmed that federal banking regulators create individualized SCRA compliance testing prior to conducting their periodic assessments and that SCRA compliance testing is a part of the individualized assessments. All attendees noted that FHA, USDA, and VA rely on the federal banking regulators to conduct their periodic assessments.
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| Department of Defense | The Secretary of Defense through the Secretaries of the Army, Air Force, and Navy and the Secretary of Homeland Security should assess the effectiveness of their efforts to educate servicemembers on SCRA to determine better ways for making servicemembers aware of their SCRA rights and benefits, including improving the ways in which members of the reserve components obtain such information. |
Closed – Implemented
As of September 2013, DOD was in the process of undertaking surveys on the overall financial well-being of military families. The surveys are being administered to three groups: 1) servicemembers, 2) military financial counselors, and 3) military legal assistance attorneys. While the surveys are not focused solely on Servicemembers Civil Relief Act (SCRA), they do take into account all financial products, including mortgages and student loans, which are covered by SCRA. DOD officials explained that the purpose of the surveys is to use the results, including suggestions from legal assistance attorneys to adjust training and education for SCRA, should such issues be identified.
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| Department of Homeland Security | The Secretary of Defense through the Secretaries of the Army, Air Force, and Navy and the Secretary of Homeland Security should assess the effectiveness of their efforts to educate servicemembers on SCRA to determine better ways for making servicemembers aware of their SCRA rights and benefits, including improving the ways in which members of the reserve components obtain such information. |
Closed – Not Implemented
In August 2013, Coast Guard officials reiterated the steps the agency takes to ensure that its members are aware of their Servicemembers Civil Relief Act (SCRA) benefits and rights. Coast Guard's response stated that Coast Guard officials feel that to effectively measure the effectiveness of their SCRA efforts, the Coast Guard would need to charter/conduct a study or survey servicewide to tally responses, analyze the findings, and disseminate the results and that the Coast Guard does not possess the resources and/or manpower to dedicate to such an initiative.
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