Watchdog Addresses Problems With Foreclosure Review Payments

The Office of Inspector General (OIG) of the Federal Reserve System released a report on Thursday critical of the way in which the Board (and by extension the Office of Comptroller of the Currency (OCC)), managed amendments to the controversial Independent Foreclosure Review (IFR).   IFR was established by a series of consent orders issued by the two regulators and the now defunct Office of Thrift Supervision in 2010 and 2011.  The consent orders were issued to 13 mortgage servicers to address deficient mortgage loan servicing and foreclosure processing practices.

The IFR, which was ultimately expanded to 16 servicers, required that the servicers retain independent consultants to review foreclosure activities of the servicers in 2009 and 2010 to determine if borrowers suffered financial injury due to servicer errors or deficiencies.  The Board and the OCC attempted to implement this through a borrower level file review for more than 4.4 million borrowers across multiple financial institutions.  The review ultimately proved to be a cumbersome, slow, and costly process and by November 2012, 18 months into the review, no money had been given to any of the borrowers but the independent consultants had billed servicers $1.8 billion and there were estimates that another two years and $2 billion would be needed to complete the reviews which had also attracted a good deal of Congressional attention. 

In January the Board and the OCC agreed to replace the consent orders and the IFR with payments to borrowers of approximately $367 billon and additional foreclosure prevention services.  Borrowers were "slotted" in payment categories according to waterfall definitions established by regulators according to extent of the harm they suffered. .

The OIG conducted their assessment of the amendments to the consent orders to (1) evaluate the Board's overall approach to oversight of the amended orders, (2) determine the effectiveness of the Board's oversight of the slotting process, and (3) determine the effectiveness of the Board's oversight of the servicers' paying agent, Rust Consulting, Inc.

Five of the services affected by the payment agreement were supervised by the Federal Reserve and these servicers began slotting borrowers into the waterfall categories and were supervised by the responsible reserve bank.  In April 2013 after servicers finalized their waterfalls the Board and OCC published payment plans for most of the servicers; payment amounts ranged from $300 to $125,000 with a few borrowers eligible for addition payments. 

All servicers selected Rust Consulting to function as their paying agent and beginning in March 2013 the company mailed postcards to borrowers alerting them that checks would be mailed and commenced those mailings in April.

OIG found that the Federal Reserve staff's advance preparation and planning efforts for the payment agreement were not commensurate with the agreement's complexity.  The project entailed oversight of corrective action at the borrower level for 4 million loans involving several agencies, multiple mortgage servicers, and three regional Reserve Banks.  Yet the Board engaged in only limited planning activities which did not include submission of a detailed implementation plan such as it typically requires of the financial institutions it supervises.

The report also criticizes the lack of project management resources made available to support the initiative saying that support from senior Board officials may have limited the need for daily oversight during plan implementation.

While the audit did not seek to validate the results of slotting at an individual borrower level OIG found some data integrity issues that impacted the reliability and consistency of the results for at least two servicers and may have resulted in inconsistencies in payments. 

OIG also found that the Board has not selected an approach with which to end the payment agreement and to distribute any remaining funds.  The lack of an approved plan creates uncertainty about the disposition of these monies and may subject the Board to further stakeholder criticism.

OIG said it attributes the limited planning to the compressed time frame involved in transitioning to the payment agreement and the aggressive deadlines imposed in order to get payments to borrowers without further delays. 

The OIG report concludes that the limited planning activities were a missed opportunity to assess the feasibility of implementing the agreement, to define the success measures such as the percentage of borrowers cashing or depositing a check, to assess whether the Board had the requisite skills and capabilities to oversee the exercise; to consider the possible risks associated with its course of action including possible risk mitigation measures, and to vet fully any alternative courses of action. 

"Despite these challenges and limitations," OIG says, "as of August 15, 2014, borrowers of the 13 servicers that joined the payment agreement in January 2013 had cashed or deposited checks representing about $3.15 billion, or approximately 86 percent, of the total $3.67 billion.

OIG made five recommendations to the Board:

• Develop a framework for planning, vetting, and approving activities for large, complex enforcement actions that may involve multiple participants on several levels.
• Identify the circumstances in which project management resources should be used and a staffing plan to include such resources with appropriate specific expertise for the situation.
• Assess the potential impact of data reliability issues
• Finalize an approach to ending the payment agreement and to allocate any remaining funds.
• Identify potential options for distributing residual amounts as part of the planning process for any future payment agreements.