Report Finds Fault with Freddie Mac, FHFA Handling of Servicer Complaint Process

Freddie Mac owned or guaranteed 10.6 million mortgages that were being serviced by third parties at the end of 2012.  Servicer responsibilities include handing of consumer complaints but if these complaints become serious enough to fall into the category of "escalated cases" there are special procedures to handle them.  According to the Federal Housing Finance Agency's (FHFA) Servicing Alignment Initiative (SAI) servicers are required to report on the escalated cases they receive and resolve those cases within 30 days. Additionally, Freddie Mac's Servicing Guide specifically requires servicers to report monthly on the escalated cases they receive.

During the 14 month period ended November 30, 2012 Freddie Mac received 34,000 and FHFA received 565 consumer complaints about the servicers that fell into the category of "escalated cases" involving:

• Foreclosure actions initiated or continued in violation of Fannie Mae or Freddie guidelines;
• Allegations of fraudulent servicing practices;
• Complaints that the borrower was not appropriately evaluated for or inappropriately denied a foreclosure alternative;
• Threats of litigation; or
• Violations of Fannie Mae or Freddie Mac policy timeframes for borrower outreach, evaluation, or response.

In addition to the requirement that servicers must handle escalated cases within 30 days, servicers must also satisfy the following requirements when handing escalated cases:

• Ensure that staff resolving an escalated case are independent from the personnel that initially handled the borrower's request for assistance;
• Have written procedures and sufficient, adequately trained staff to track and respond to escalated cases;
• Regularly review and assess the adequacy of internal controls and procedures in connection with servicing activities; and
• Take remedial steps if any deficiencies are identified as a result of their review of internal controls, and formally document the results and make them available to the enterprise upon request.

According to the SAI, an escalated case is considered resolved when the complaint has been resolved in accordance with the guidelines, has been evaluated to require no change to the original determination or a proposed solution has been identified and the proposed solution appropriately documented and the first action taken to implement the resolution.

FHFA's Office of Inspector General (OIG) recently undertook a performance audit to assess Freddie Mac's controls over servicer handing of escalated cases.  OIG found that most of Freddie Mac's servicers have not complied with escalated case reporting requirements. 

Among Freddie Mac's eight largest servicers-which serviced nearly 70% of Freddie Mac's 10.6 million mortgages-four (Bank of America, CitiMortgage, Provident, and Wells Fargo Bank) did not report any escalated cases to Freddie Mac despite handling more than 20,000 such cases during the 14-month period between October 2011 and November 2012.

Further, Freddie Mac data on all of its servicers reveals that about 98% (1,179 of 1,207) including four of the largest did not report any escalated cases as of December 2012. Although Freddie Mac officials told us that reports are only required of servicers with escalated cases-and, thus, the lack of reporting may indicate that there were no escalated cases to report-it is highly unlikely that 98% of its servicers had no escalated cases to report given the 6.6 million loans that they manage.

Reasons for not reporting given by the four large non-reporting servicers included being unaware of the requirement or that the information had not been requested.  One servicer stated it had informed Freddie Mac of internal issues that were delaying the servicer's implementation of the SAI.

Freddie Mac's eight largest servicers handled 26,196 escalated cases during the 14 month period and resolved 25,528 of them during this period but 21% of the resolved cases exceeded the 30-day time limit.  In addition, of the 668 unresolved cases as of November 30, 2012, 398 (or 60%) had not been resolved within the required 30 days.

Among the eight largest servicers, only Branch Banking & Trust Corporation (BB&T) resolved all of its escalated cases within 30 days, but that bank had significantly fewer cases to process. The worst performing servicer, Bank of America, handled 4,404 escalated cases and resolved 3,950 of them. Bank of America took an average of 52 days to resolve its cases, and the longest case required 392 days to resolve.

Servicers are required to report the resolution of escalated cases, using 13 resolution categories that include bankruptcy, initiation of some type of modification, or a final resolution such as a short sale, completed foreclosure, or loan payoff.  

OIG found notable instances of inconsistencies and inaccuracies among the categories used by the largest eight servicers to track the proposed resolutions in the servicing system. For example, instead of 13, one servicer used 61 different categories to identify the types of resolutions of its escalated cases. In addition, about 2,000 (or 8%) of the 25,528 cases resolved by Freddie Mac's eight largest servicers between October 1, 2011, and November 30, 2012, lacked a resolution category, as required.

OIG also found that Freddie Mac's oversight did not adequately address escalated cases.  Out of 38 onsite operational reviews of the largest servicers Freddie Mac made only one finding regarding handling of escalated cases.   

Whereas Fannie Mae has implemented testing procedures with respect to its servicers, Freddie Mac has not. Lack of testing procedures reduces the likelihood of finding servicer noncompliance with escalated case requirements.

OIG also found that Freddie Mac's Servicing Guide lack performance-based incentives such as penalties related to escalated cases and that Freddie Mac did not use the escalated case information it did receive to identify areas of elevated risk.  

The report also finds that FHFA oversight had failed to identify noncompliance with consumer complaint requirements.

In August 2012, FHFA initiated its first examination of Freddie Mac's implementation of the SAI which included, among other things, Freddie Mac's monitoring of the servicers' compliance with the SAI.  OIG found in interviews with FHFA officials that their examination team was unaware that almost all of Freddie Mac's servicers failed to report escalated cases to Freddie Mac. The examination team did not perform independent testing of servicer compliance, but instead relied on internal reports produced by Freddie Mac related to testing servicers' compliance with implementation of the SAI. The examination team noted that the enterprise's reports did not identify any problems with servicers failing to report. As OIG had found, Freddie Mac was not testing servicers' compliance with requirements for handling escalated cases, which explains why Freddie Mac's reports- with one exception-did not contain instances of reporting violations. FHFA's failure to conduct independent testing of servicer compliance resulted in its reliance on incomplete data supplied by Freddie Mac and faulty conclusions about Freddie Mac's implementation and oversight of the SAI.

Finally, FHFA did not publish guidance for examining Freddie Mac's implementation of FHFA directives, including the SAI. Specifically, FHFA's Supervisory Guide, related advisory bulletins, and the Supervision Handbook do not contain guidance as to how to test enterprise compliance with FHFA directives.

OIG concluded that FHFA developed the SAI as part of an effort to keep homeowners in their homes; help servicers interact with delinquent borrowers in a timely, efficient, and fair way; and make enterprise loss mitigation programs more effective.  These goals are at risk of not being achieved because none of the parties have adequately fulfilled their respective roles relative to addressing and resolving escalated consumer complaints in a timely and consistent manner.

FHFA must take immediate action to improve servicer reporting which will in turn help the agency to ensure that escalated cases are resolved before homeowners and the enterprises unnecessarily suffer adverse consequences such as foreclosure.

OIG recommends that servicers be required to report consumer complaint information, to include that no escalated complaints have been received, on a monthly basis and that escalated complains are resolved within 30 days.  Servicers should also be required to categorize information in accordance with the resolution categories in the Servicing Guide.

To enhance Freddie Mac's oversight of its servicers, FHFA should perform supervisory review and follow-up to ensure that Freddie Mac included testing of servicers' performance for handling and reporting escalated cases, identifies and addresses servicer operational challenges with implementing the escalated case requirements, and establishes penalties for servicers' lack of reporting escalated cases.  FHFA should also expand the servicer scorecard and servicer performance evaluations to include reporting of escalated cases and communicate information on escalated cases to its internal staff.