Independent Foreclosure Review
- Executive Summary
- Background on the Independent Foreclosure Review (IFR)
- Transition from the IFR to the Payment Agreement
Background on the Independent Foreclosure Review (IFR)
Consent Order Requirements
With respect to the conduct of the IFR, the Consent Orders required each servicer to review foreclosures involving in-scope borrowers to determine, at a minimum, whether
- the servicer was a proper party to pursue the foreclosure;
- the foreclosure complied with applicable federal and state laws, including the Servicemembers Civil Relief Act (SCRA) and the Bankruptcy Code;
- the foreclosure followed the applicable procedural requirements;
- a foreclosure sale occurred when the borrower's request for a loan modification or other loss mitigation action was pending;
- the fees or penalties charged were not permissible or otherwise unreasonable;
- any loss mitigation activities related to the foreclosed loans were properly handled; and
- any errors, misrepresentations, or other deficiencies resulted in financial injury.
The Consent Orders required each servicer to submit to the appropriate regulator an acceptable plan to remediate, as appropriate, the errors, misrepresentations, or other deficiencies in any foreclosure proceeding. After the appropriate regulator approved their remediation plan, each servicer was required to provide remediation to injured borrowers and take any other remedial action for each injured borrower as provided for in the approved plan.
Selection of Independent Consultants
The Consent Orders contemplated that the reviews of borrower files would be done by independent consultants paid for by the servicers so that servicers would not be reviewing their own decisions. The regulators required servicers to submit proposals identifying the independent consultant they were most seriously considering for the IFR engagement before making their selection. Those independent consultants were required to submit details on the background and expertise of their management team; availability of resources to staff the engagement; and a list of all previous consulting engagements for the servicer involved, including specific details on any engagements relating to mortgage servicing. For independent consultants proposed by servicers regulated by the Federal Reserve, this information was reviewed by Federal Reserve supervisory teams and staff to ensure the independent consultant would be able to review borrower files without influence by the servicer that retained them, possessed the requisite expertise and staff capacity, and would not be reviewing or assessing their own previous work. For example, an independent consultant would be disqualified from the IFR engagement because of previous engagements designed to develop, enhance, or review mortgage servicing policies, procedures, or processes for that servicer.
The engagement letters for independent consultants were also subject to review by the regulators and were required to set forth, among other things, the methodology for conducting the IFR, including the systems and documents to be reviewed, the criteria for evaluating the reasonableness of fees and penalties, and other procedures necessary to make the required determinations, such as through interviews of employees and third parties, and a process for the receipt and review of borrower claims and complaints. The regulators posted on their public websites the approved engagement letters between the servicers and independent consultants retained to review foreclosures.9
The File Review Process
The Consent Orders required the servicers to conduct a file review to identify borrowers covered by the IFR who could be entitled to financial remediation. Under the basic methodology approved by the regulators, the independent consultants were to select and examine specific types of borrower files maintained by the servicers. The Federal Reserve required the independent consultants to review 100 percent of files with high-risk factors, including military borrowers with foreclosure protections under the SCRA, high-risk bankruptcy-protected borrowers, foreclosure-related complaints filed before the borrower outreach process was launched, foreclosure actions where a complete request for a loan modification was pending at the time of foreclosure, and foreclosure actions that occurred when the borrower was not in default on a trial or permanent modification. These types of files were selected for mandatory review because borrowers in these categories were believed to be more likely to have suffered financial injury because of servicer error. Additional files were identified by the independent consultants through an analysis of the borrower population and were reviewed on a sample basis using accepted sampling techniques. If the sample revealed a high level of errors, the scope of the file review would have been expanded to determine whether other files also contained the same error.
The Request for Review Process and Related Data
The regulators required that each servicer implement a process for the receipt and review of borrower claims and complaints. Borrowers who believed they were financially harmed during the foreclosure process by their servicer's errors were able to request an independent review if a foreclosure action was initiated, pending, or completed during 2009 or 2010 on a mortgage loan on their primary residence.
The servicers contracted with Rust to serve as the IFR administrator. This contract required Rust to, among other things: (1) conduct mailings to all in-scope borrowers inviting the borrowers to submit a form, referred to as a "Request for Review," or RFR, which borrowers could return to request that their foreclosure file be reviewed by the independent consultants; (2) operate the www.independentforeclosurereview.com website, through which borrowers could confirm whether they were part of the in-scope population, submit RFR forms online, and find answers to frequently asked questions about the IFR; (3) manage the IFR call center to answer borrower inquiries related to the IFR; (4) serve as the intake administrator for submitted RFRs; and (5) manage borrower data transmissions to the servicers and independent consultants.
To carry out its role as the IFR administrator, Rust worked with the servicers to obtain key borrower data and information for in-scope borrowers, including borrowers' names, loan numbers, property addresses, and current mailing addresses. Broad outreach by mail and mass media was used to raise awareness of the IFR. Outreach efforts to borrowers of 14 of the 16 servicers under Consent Orders were launched on November 1, 2011, when Rust mailed letters about the IFR, including an RFR form, to more than 4.4 million borrowers who were identified as potentially eligible for an independent review. Because Goldman Sachs and Morgan Stanley entered into Consent Orders after the other servicers, these two servicers were still in the process of implementing outreach procedures when they entered into the Payment Agreement.10
Additionally, the regulators conducted outreach sessions targeted to housing counseling agencies to increase program awareness and promote borrower participation. These sessions included two webinars (on February 29, 2012, and March 6, 2012) moderated by the independent consultants, with participation from the regulators, to provide information on the process for requesting a review and to train counselors on how to help borrowers complete the RFR form. The webinars attracted over 1,100 housing counselors and legal professionals via online streaming and phone conference bridges. Over 80 percent of the webinar survey respondents found that the webinar training presentations were well organized, met their information needs, and improved their understanding of the RFR form. The Federal Reserve posted the webinar video on its public website, and from March 6 through December 31, 2012, the page where the webinar was posted had been visited over 2,200 times. In addition to the webinars, the Federal Reserve produced videos in English and Spanish explaining the IFR and posted them on its public website and on YouTube. A link to these videos was also published on the Federal Reserve's Twitter feed to expand outreach efforts through social media channels. In the first week of the release, there were 4,300 views of the YouTube video. In total, through December 31, 2012, the Federal Reserve video was viewed over 51,000 times in English and over 9,500 times in Spanish, and the same video on YouTube received over 8,600 views in English and over 2,300 views in Spanish. Federal Reserve staff also participated in outreach events held in local Federal Reserve Bank Districts to discuss the IFR process with local housing counseling groups.
The borrower outreach was expanded in 2012 to include more targeted approaches to reaching borrowers during which the regulators made substantial efforts to maximize the likelihood that all affected borrowers would receive an RFR form and understand IFR communications. For example, the regulators initially consulted with the U.S. Department of Justice, which has conducted litigation settlement outreach to large numbers of affected persons, for guidance on enhancing the borrower outreach process and covering a broader spectrum of non-English speakers. In connection with these consultations, the regulators took several significant steps to expand borrowers' understanding of the mailings, such as translating information about the IFR call center into seven non-English languages that the regulators were advised were likely to be spoken by borrowers, including Spanish, Chinese, Korean, Hmong, Tagalog, Vietnamese, and Russian. In addition, the IFR call center, managed by Rust, was capable of providing interpretation services and assistance in over 200 languages.
To facilitate reaching as many borrowers as possible, on August 15, 2012, the regulators convened a meeting of servicers, independent consultants, media firms, and community-based organizations with experience in outreach to diverse borrower populations. With the benefit of the ideas shared during the meeting, the regulators instructed servicers to develop new outreach strategies that included additional borrower mailings, television and radio campaigns, and an expanded print media campaign. At this juncture, as with other developments throughout the IFR process, and when requested, briefings were held with members of Congress and congressional staff.
A third webinar was held on October 16, 2012, to provide more information about the foreclosure file review process. It was mainly attended by local housing nonprofit organizations. In total, over 900 people registered and over 550 phone lines were used. The survey response results revealed that 89 percent of survey respondents thought that the webinar was a good investment of their time.
The deadline for submitting RFRs was extended multiple times from the original deadline of April 30, 2012, to December 31, 2012, the last and final deadline. The deadline extensions provided more time to increase awareness about the IFR, share information about how eligible borrowers could request a review, and encourage the broadest participation possible.
The Federal Reserve released data on the IFR mailings and responses received as of December 31, 2012, by geographic location, on its public website.11 The data reflect the number of borrowers meeting the initial eligibility criteria who were mailed RFRs ("mailings") and those who returned completed RFRs ("responses") by geographic location. The figures for mailings and responses do not represent the total number of financially injured or remediated borrowers; rather, they offer a snapshot of borrower outreach mailings and responses using property addresses. The data were collected by Rust and reflect all RFRs received as of the December 31, 2012, deadline, at which time nearly 500,000 borrowers out of the total eligible population of more than 4.4 million had submitted RFRs.
Further analysis of the RFR forms mailed and received revealed that a majority were concentrated in areas that were hardest hit by the housing crisis. These areas were identified by the U.S. Department of the Treasury as areas that, beginning in February 2010, had unemployment rates at or above the national average or house prices that had fallen more than 20 percent since the housing market downturn. For example, counties in California, Arizona, Nevada, and Florida received and returned a sizable share of the mailings.
Borrowers were not required to provide personal data on race, ethnicity, or income in the RFR form, so that type of data is not available. However, borrower address data were geocoded using 2010 U.S. Census Bureau data, which were used as a proxy for the probable income level and minority representation of borrowers who submitted RFRs compared with those who did not. Response rates within low- or moderate-income census tracts and high minority census tracts revealed that borrowers residing in these census tracts are comparably represented in the population of borrowers that submitted RFR forms.
Financial Injury Guidance
The primary objective of the IFR, as set forth in the Consent Orders, was to identify financial injury or harm to borrowers caused by servicer errors, misrepresentations, or other deficiencies, and to provide a general level of remediation for different classes of deficiencies, as appropriate. In June 2012, the regulators developed and released a financial remediation framework that provided nonexclusive examples of situations where specific compensation amounts or other remedial action were required for direct financial injury due to 13 different categories of servicer errors (the "Financial Remediation Framework"). The nature of the required remediation varied depending on whether the borrower's foreclosure was in process, completed, or rescinded when the remediation occurred. The regulators also issued extensive guidance in the form of frequently asked questions relating to application of the Financial Remediation Framework, which was periodically updated as additional issues arose.12 Remediation under this framework was not intended to fully redress all harm suffered by a borrower and did not take into account factors such as emotional distress or other indirect injury that borrowers may have experienced during the foreclosure process, as such factors can be very difficult to quantify.
Under the Consent Orders, the independent consultants were directed to use the Financial Remediation Framework to recommend remediation for servicer errors identified during the IFR, including those errors identified in files of borrowers who submitted RFR forms. The servicers were required to prepare remediation plans based on the independent consultants' recommendations. The remediation plans would have been submitted to the regulators for approval prior to implementation.
Regulatory Oversight of Independent Consultants' Reviews
Federal Reserve supervisory teams developed a supervisory approach to provide consistency in oversight of the independent consultants among the Federal Reserve-regulated servicers. The approach included expectations for both off-site monitoring and on-site reviews performed alongside the independent consultants to evaluate the progress on the independent file reviews.
The supervisory teams' off-site monitoring was primarily comprised of regular meetings by phone with the independent consultants, which included a review of data reports. The on-site reviews consisted of two main components--process reviews and transaction testing of work performed by the independent consultants. The process reviews included an assessment of the independent consultant's training materials, written procedures, determination of the in-scope population, completed file review checklists, and quality assurance and quality control processes. The transaction testing included following a file review sampling methodology, which outlined minimum standards that were employed by each supervisory team for the duration of the file reviews. The sampling methodology included a supervisory review of completed files for which both harm and no harm determinations had been made. In those instances where the independent consultant had identified harm, the supervisory teams assessed whether the proposed remediation was consistent with the Financial Remediation Framework.
The regulators also held weekly calls and periodic in-person meetings with the independent consultants to provide and discuss guidance, as well as to address challenges the independent consultants were encountering during the execution of the IFR. The regulators directed the independent consultants to work closely with one another to achieve consistency, to the extent possible.
After the IFR ended, the Federal Reserve instructed Federal Reserve-regulated servicers, the independent consultants that conducted the IFR on their behalf, and Rust, their administrative agent, that the Federal Reserve has no objection to the release of information in their possession that relates solely to a borrower who requests information about the IFR review of that borrower's foreclosure file.
Independent Consultants' Processes for Reviewing Foreclosure Files
The basic methodology for conducting the IFR was generally the same for all servicers subject to the Consent Orders. Although the details of the processes for implementing the methodology were left to the specific independent consultants, all of the independent consultants' processes included a review for the relevant state and federal legal and regulatory requirements. The independent consultants, in conjunction with individual law firms that each independent consultant retained ("independent legal counsel"), developed detailed methodologies and testing programs with thousands of questions that were utilized to complete the file reviews.
The independent consultants separated the file review process into segments commonly referred to as workstreams that focused on a specific subject matter. While the workstreams were unique to each independent consultant, they generally can be grouped into categories that corresponded to the various determinations that the independent consultants were required to make under the Consent Orders. Under this approach, the completion of a single file review involved processing it through various workstreams, as applicable, but a file could be simultaneously processed through multiple workstreams. Separating the file review process into workstreams allowed the independent consultants' file reviewers to develop subject matter expertise in a discrete area. For each independent consultant, there were multiple levels of review that generally included a primary review, a secondary manager review, and a quality control review to ensure accuracy and consistency across file reviews.
The servicers were permitted to review the errors identified by the independent consultants, but only in order to determine if the facts and documents upon which the decisions were made were comprehensive. If the servicer could not present any additional documents or records to identify a factual inaccuracy in the independent consultant's conclusion, the file was classified as complete and mapped to the categories of injuries in the Financial Remediation Framework.
During the IFR, the independent consultants provided data estimating the average time required to complete a full file review, which included the performance of quality assurance and quality control reviews but did not include the time required to assemble each file. Estimates provided by independent consultants conducting the IFR for Federal Reserve-regulated servicers varied from approximately 30 hours per file to approximately 67 hours per file. For the four Federal Reserve-supervised servicers that entered into Consent Orders in April 2011, the independent consultants required an average of 44 hours per file to complete a full file review.13
Preliminary Findings of the IFR
Beginning in January 2012, the regulators received weekly reports from the independent consultants about their progress on the file reviews. These reports showed that the IFR was progressing much slower than anticipated, and that the reviews of very few files were complete at the time of the Payment Agreement. As of December 31, 2012, based on data for the 13 servicers that ended the IFR in January 2013, the number of file reviews completed was 103,820 out of an initial group of 738,231 files identified through the file review process or by the submission of an RFR form. This represented a completion rate of about 14 percent. Of the 103,820 completed file reviews, 88,330 were selected for review through the file review process initiated by the independent consultants ("sampled file reviews complete") and 15,490 were selected for review because a borrower submitted an RFR form ("requested file reviews complete").14
The independent consultants for the three servicers that continued the IFR beyond January 2013--GMAC Mortgage, EverBank, and OneWest--subsequently submitted reports on the progress of the IFR as of year-end 2012. According to these reports, the three independent consultants together, as of December 31, 2012, had selected a total of 72,764 files to review. Of these files, the reviews of 9,955 files were reported as having been completed, representing a completion rate of about 14 percent.15
The 103,820 file reviews that were completed by independent consultants as of December 31, 2012, identified some files where errors causing financial injury to borrowers occurred. In particular, 4,670 (or about 4.5 percent of the total number of file reviews completed by the independent consultants) identified servicer errors that caused financial injury. Of the 4,670 complete file reviews that identified financial injury errors, 3,865 were selected for review through the file review process initiated by the independent consultants (or about 4.4 percent of the sampled file reviews complete), and 805 were selected for review because a borrower submitted an RFR form (or about 5.2 percent of the requested file reviews complete). The highest numbers of errors found in file reviews completed when the IFR ended were in three categories of servicer errors: assessment of prohibited or unreasonable fees, violation of SCRA protections, and instances where the servicer made an error when denying a request for a loan modification. Aggregate data on the most common errors with financial injury found by independent consultants for all servicers that entered into a Payment Agreement are displayed in table A.3 in the appendix.
Error rates identified by independent consultants for the six Federal Reserve-regulated servicers--GMAC Mortgage, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, and SunTrust--varied. Goldman Sachs and Morgan Stanley entered into Consent Orders later than the other servicers, as noted above, and their independent consultants completed very few file reviews without identifying any errors resulting in financial injury. More detail on files completed at Goldman Sachs and Morgan Stanley as of December 31, 2012, can be found in table A.4 in the appendix. For SunTrust, the rate of financial injury errors found by the independent consultant was 3.3 percent. More detail on files completed and financial injury errors found in the file reviews at SunTrust as of December 31, 2012, can also be found in table A.4 in the appendix. For GMAC Mortgage, which ended the IFR in mid-2013, the rate of financial injury errors found in the file reviews by the independent consultant was 11.4 percent. More detail on files completed and financial injury errors found in the file reviews at GMAC Mortgage as of June 30, 2013, can be found in table A.5 of the appendix. The rates of financial injury errors found by the independent consultant for HSBC and JPMC at the Federal Reserve-regulated servicing subsidiaries were amalgamated with the financial injury error rates found at their affiliated OCC-regulated national bank servicers. The file reviews by the independent consultants for HSBC overall had not found any confirmed errors causing financial injury and, for JPMorgan Chase overall, the rate of financial injury errors found in the file reviews by the independent consultants was 0.6 percent. More detail on files completed and financial injury errors found in the files reviews at HSBC and JPMorgan Chase as of December 31, 2012, can be found in table 4 of the OCC Status Report.16 Aggregate data on the findings of independent consultants for all 15 servicers that entered into a Payment Agreement are displayed in table A.6 in the appendix of this report.
In interviews of independent consultants conducted by the regulators after the implementation of the Payment Agreement, independent consultants emphasized that the overall error rates based on year-end 2012 data were preliminary and reflected both differences in methodologies for reporting errors and differences in review procedures among the independent consultants that were necessary to address each of the servicers' specific processes and servicing platforms.17 They emphasized that the differences in reporting and review procedures among the independent consultants could cause the preliminary error rates reported by different independent consultants to be based on different methodologies for classifying errors or different segments of borrower file reviews that might not be representative of the entire population of in-scope borrowers or comparable across servicers.
However, to the extent that the preliminary error rate data can be relied upon, the data suggest that the independent consultants were not finding errors by servicers resulting in financial injury that were pervasive among in-scope borrowers. In an April 2014 report, the U.S. Government Accountability Office (GAO) noted of the Payment Agreement that, "the negotiated cash payment amount of $3.9 billion was higher than the payment of $3.7 billion that we calculated at the highest reported servicer error rate."18
The cost of the IFR was measured by the amounts paid to independent consultants and independent legal counsel to support the consultants, as well as the cost of Rust's services. These amounts do not include other internal servicer-related costs, such as servicer costs for temporary or permanent staff to support the IFR, office space that was leased for the independent consultants as necessary, or amounts paid by servicers to remediate borrower injury.
The servicers reported the total amounts of fees paid to independent consultants and independent legal counsel and Rust reported the total amounts billed for its role as the IFR administrator. Fees ranged quite significantly and were primarily driven by the number of files projected to be included in the IFR. The fees billed by the independent consultants to the six servicers conducting the IFR that are regulated by the Federal Reserve only or jointly regulated by both regulators--JPMC, GMAC Mortgage, HSBC, SunTrust, Goldman Sachs, and Morgan Stanley--ranged from approximately $11 million to $176 million, as of December 31, 2012. Their independent legal counsel, different law firms that supported each of the independent consultants for these six servicers, billed fees ranging between approximately $2 million to $11 million, also as of December 31, 2012. In total, through December 31, 2012, these six Federal Reserve-regulated servicers were billed a combined total of nearly $424 million by independent consultants and $40 million by independent legal counsel. Rust's IFR administrator costs for these six servicers as of December 31, 2012, ranged from nearly $1.3 million for a smaller servicer to over $10.2 million for a larger servicer, totaling approximately $16.7 million for all Federal Reserve-regulated servicers as of December 31, 2012.19 Because Goldman Sachs and Morgan Stanley entered into Consent Orders later than the other servicers, as noted above, the total fees billed by their independent consultants was lower than the other independent consultants and they had not yet initiated a Request for Review process, so they had only paid initial planning and setup costs to Rust related to its role as IFR administrator.
If the IFR had continued, the Federal Reserve-regulated servicers estimated they would pay a combined total of between $760 million and $822 million to independent consultants through year-end 2013. Not all of the independent consultants expected their file reviews to be completed by year-end 2013. Consequently, final costs for the completion of the IFR were projected to increase beyond these amounts.
10. Other than Goldman Sachs and Morgan Stanley, all of the other 14 servicers listed in table A.1 in the appendix participated in the initiation of borrower outreach efforts on November 1, 2011. Return to text
11. See "Independent Foreclosure Review: Borrower Outreach Mailing and Response Data," available at www.federalreserve.gov/consumerinfo/borrower-outreach-mailings-and-response.htm. Return to text
12. The Financial Remediation Framework and the Financial Remediation Framework Frequently Asked Questions, both posted on the Federal Reserve's public website, are available at www.federalreserve.gov/newsevents/press/bcreg/20120621a.htm. Return to text
13. As noted above, the reviews of foreclosure files at Goldman Sachs and Morgan Stanley were at the early stages when the IFR ended because they entered into Consent Orders after the other servicers, and they are not included in these averages. Return to text
14. Under the approved IFR methodology, the regulators expected the independent consultants to conduct reviews of additional files if error rates in various types of sampled files were indicative of systemic errors. The total number of files for review, referenced above, did not include these additional files. Return to text
15. Of the three servicers that were continuing with the IFR at year-end 2012, two have since entered into agreements that ended the IFR at those servicers. GMAC Mortgage, a Federal Reserve-regulated servicer, joined the Payment Agreement in July 2013. EverBank, an OCC-regulated servicer, joined the Payment Agreement in August 2013. OneWest, also regulated by the OCC, has not entered into a payment agreement. It is finishing the IFR required by the original Consent Order against it. The status of the file reviews at these two OCC-regulated servicers and remediation for their borrowers is not discussed in this report. Return to text
16. Two OCC-regulated servicers, EverBank and OneWest, continued the IFR beyond January 2013. Data on file reviews completed and errors found in the file reviews for EverBank, which entered into a Payment Agreement in late-2013, and for OneWest, the only servicer continuing the IFR, can be found in the OCC Status Report in tables 5 and 6. Return to text
17. For additional discussion of the concerns that the independent consultants raised about drawing conclusions about the IFR process solely from the preliminary error rates that were reported, see the Independent Consultant Feedback section of this report, which follows below. Return to text
18. U.S. Government Accountability Office (2014), "Foreclosure Review: Regulators Could Strengthen Oversight and Improve Transparency of the Process," GAO-14-376, p. 27, available at www.gao.gov/assets/670/662791.pdf. Return to text
19. Reported fees paid to independent consultants for two Federal Reserve-regulated servicers, EMC Mortgage, a subsidiary of JPMorgan Chase & Co., and HSBC Finance Corp., a subsidiary of HSBC North America Holdings, Inc., were separate from and in addition to fees reported by their affiliated national bank servicers, which are regulated by the OCC. However, reported costs paid to Rust as IFR administrator for these two Federal Reserve-regulated servicers were combined with costs paid for their affiliated OCC-regulated national bank servicers. Return to text