Critique Of Foreclosure Review Process Increasingly Cited By Consumer Groups

By: Jann Swanson •

In June the Government Accountability Office (GAO) issued a report critical of outreach undertaken by mortgage servicers to inform and enroll borrowers in the Independent Foreclosure Review (IFR) process.  The report also faulted the role of regulators in monitoring that outreach.

At the time the report was released it received very little attention, in fact we could find no mention of it at all in the mainstream press.  Now, however, eleven advocacy groups led by the Center for Responsible Lending (CRL) have asked federal regulators to take steps to correct the problems found by GAO.

IFR originated in April 2011 when the Office of Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Reserve (Fed) directed 14 major servicers to hire third party consultants to review 2009 and 2010 foreclosure action to determine if financial injury had occurred and to determine appropriate remediation.  Appropriate outreach to borrowers was part of the requirements for the IFR.

According to the review undertaken by GAO, servicers sent out 4.3 million outreach letters, 95 percent of which were delivered to borrowers.  The response rate as of June 2012 was 5.2 percent.  However, GAO found that servicers had done an insufficient job of outreach to borrowers, faulting them for the quality of their outreach materials when measured against best practices and federal guidelines.  Specifically, GAO posted the following criticisms of the materials.  Some regulator responses were also noted.    

  • Regulators and servicers failed to conduct readability tests or use focus groups in developing communication materials. The Fed said this was a trade off to expedite the remediation process.
  • Regulators did not solicit input from consumer groups in reviewing the initial materials.
  • Readability tests found the initial outreach letter, request-for-review form, and program website to be written above the average reading level of the U.S. population. Regulators said they had discussed using plain language but use of complex mortgage and legal terms was necessary for accuracy and precision.
  • Clear language on the program website was particularly important as borrowers were encouraged to submit requests for review on line.
  • Communication materials included information about the purpose, scope and process for review and noted that borrowers might be eligible for compensation, but did not provide specific information about remediation. Best practices suggest that this is important to encourage responses.

GAO found that outreach planning and evaluation did take into account the extent to which the plan promoted national awareness and was appropriate to reach the demographics of the target audience.  It was largely uniform with some efforts targeted to Spanish-speaking and African-American borrowers.  Regulators did not call for servicers to analyze eligible borrowers by characteristics such as limited English proficiency. 

Community groups are effective messengers, GAO said, but servicers utilized them to varying degrees.  Community groups told GAO that borrowers may have ignored communications because they did not understand who was providing the information and believed the communications were fraudulent. 

Regulators did not analyze characteristics of respondents and nonrespondents in preparing a second wave of outreach and thus may not know if certain groups of borrowers were underrepresented in the review.  GAO said it is unclear if additional outreach to target these groups or changes to the file review process itself are needed to help ensure that all borrowers have a fair opportunity for review.

 In its press release CRL said the GAO report reveals serious flaws "that threaten to undermine the program's success."  It calls IFR the most significant effort the federal government has undertaken to help people "who should never have faced foreclosure at all, or who were harmed by errors their servicers made in the process." 

Debby Goldberg, Special Project Director, National Fair Housing Alliance (NFHA), one of the consumer groups signing the press release said that regulators did not tell the servicers to gather the information needed to see what type of borrowers were requesting help. "Without this basic information," Goldberg said, "we'll never know whether borrowers in communities hardest hit by the foreclosure crisis are being helped by this program."

That the program materials were found by GAO to be hard to understand and failed to enumerate the compensation available may account for the program's very low response rate, the release said, which may account for the program's very low response rate. Very limited outreach has been done in languages other than English, which may prevent borrowers with limited English proficiency from getting a fair shot at help through the program.

 "Communities of color have suffered higher rates of foreclosure and disproportionate loss of wealth because they were targeted for risky, unsustainable loans," Goldberg said. "It is critically important that these borrowers have fair access to the IFR program."

CRL said that, in addition to the problems documented by GAO, the IFR program has a number of other serious flaws. To correct these, the regulators must do the following:

  • Eliminate unfair distinctions among groups of borrowers who all faced foreclosure because of mistakes made by their mortgage servicers including borrowers wrongfully denied loan modifications or those who were foreclosed while paying under a forbearance plan;
  • Increase compensation provided for other types of servicer errors;
  • Provide an appeals process for borrowers;
  • Make information available to borrowers, their advocates, and the public about the method used to determine whether borrowers suffered harm;
  • Report regularly to the public on the progress of the file reviews and the errors that have been found;
  • Extend the application deadline through the end of the year.

In addition to NFHA and CRL the press release was signed by California Reinvestment Coalition, Consumer Action, Empowering and Strengthening Ohio's People, National Association of Consumer Advocates, National Consumer Law Center, National Council of La Raza, National People's Action, Neighborhood Assistance Corporation of America, Neighborhood Economic Development Advocacy Project.