Independent Foreclosure Review
- Executive Summary
- Background on the Independent Foreclosure Review (IFR)
- Transition from the IFR to the Payment Agreement
Between April 2011 and April 2012, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System ("Federal Reserve"), and the Office of Thrift Supervision (OTS) issued formal enforcement actions against 16 mortgage servicing companies to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing identified by examiners during reviews conducted from November 2010 to January 2011. Beginning in January 2013, 15 of the mortgage servicing companies subject to enforcement actions for deficient practices in mortgage loan servicing and foreclosure processing reached agreements with the OCC and the Federal Reserve (collectively, the "regulators") to provide approximately $3.9 billion in direct cash payments to borrowers and approximately $6.1 billion in other foreclosure prevention assistance, such as loan modifications and the forgiveness of deficiency judgments. For participating servicers, fulfillment of these agreements satisfies the foreclosure file review requirements of the enforcement actions issued by the OCC, the Federal Reserve, and the OTS in 2011 and 2012.
This report provides information relating to the conduct of the foreclosure file reviews, including tables with data on the status of findings of the reviews up to the time they were terminated and replaced by the agreements, and tables with data on the status of the payments being made to borrowers and other foreclosure prevention assistance being provided under the agreements. It focuses primarily on servicers regulated by the Federal Reserve. The OCC recently released a public report containing similar data for servicers it regulates (the "OCC Status Report").1
Enforcement Actions against Major Residential Mortgage Servicers
The Federal Reserve, the OCC, and the OTS conducted on-site reviews of foreclosure processing at several large residential mortgage servicers from November 2010 to January 2011. The primary objective of the reviews was to evaluate the adequacy of controls and governance over the servicers' loan servicing and foreclosure processing functions. The reviews found critical weaknesses in servicers' foreclosure governance processes, foreclosure documentation preparation processes, and oversight and monitoring of third-party vendors that resulted in unsafe and unsound processes and practices in residential mortgage loan servicing and foreclosure processing at a number of supervised institutions.2
In response, in 2011 and 2012, the Federal Reserve, the OCC, and the OTS issued formal enforcement actions ("Consent Orders") against 16 major residential loan mortgage servicers (the "servicers") and their parent holding companies ("holding companies") (collectively, "banking organizations"). Each of the Consent Orders contained substantially the same requirements. The banking organizations covered by the Consent Orders and the regulator for each banking organization's servicing operations are displayed in table A.1 in the appendix.3
As of May 2014, the Federal Reserve has announced monetary sanctions totaling $929,700,000 against seven banking organizations for unsafe and unsound processes and practices in residential mortgage loan servicing and foreclosure processing.4 These monetary sanctions, announced beginning in February 2012, were based on the same deficiencies that the servicers were required to correct under the 2011 and 2012 enforcement actions. The amount of sanctions takes into account the maximum amount prescribed for unsafe and unsound practices under applicable statutory limits, the comparative severity of each banking organization's misconduct, and the comparative size of each banking organization's foreclosure activities.
In an effort to facilitate a broad settlement of related state and federal claims, and to obtain an agreement that will maximize the effectiveness of assistance provided through an integrated set of remedial programs, the Federal Reserve decided to act in conjunction with comprehensive settlements between various of these seven banking organizations, the U.S. Department of Justice, and state attorneys general for several states. Under the terms of the Federal Reserve's monetary sanctions against these seven banking organizations, each organization must pay to the Federal Reserve, for remittance to the U.S. Treasury, the amount imposed by the Federal Reserve on the organization that the organization has not expended within the prescribed period in providing borrower assistance or remediation in compliance with the federal-state settlement agreement or on a program acceptable to the Federal Reserve. The Federal Reserve believes that monetary sanctions against the other seven institutions that are also subject to enforcement actions for unsafe and unsound practices in their loan servicing and foreclosure processing are appropriate and plans to announce monetary penalties against them.
The Consent Orders against servicers that were thrifts and against the holding companies of those servicers were issued by the OTS, which at the time regulated thrift institutions and their parent holding companies. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the OTS was abolished and in July 2011, the Federal Reserve assumed the authority to enforce the Consent Orders against the holding companies of the thrifts, and the OCC assumed the authority to enforce the Consent Orders against the four thrift servicing subsidiaries.
Corrective Actions to Address Deficiencies
The Consent Orders were issued to ensure the banking organizations promptly initiated steps to establish mortgage loan servicing and foreclosure processes that treated customers fairly, were fully compliant with all applicable law, and were safe and sound. The Consent Orders required the banking organizations to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing. These deficiencies represented significant and pervasive compliance failures and unsafe and unsound practices.
The servicers were required to submit acceptable action plans that described, among other things, how they would: strengthen compliance programs; strengthen communications with borrowers by providing each borrower the name of a primary point of contact at the servicer; establish limits on foreclosures where loan modifications have been approved; establish robust, third-party vendor controls; ensure adequate staffing; and improve training of staff. The holding companies were required to submit action plans acceptable to the regulators that described, among other things, how the companies would improve oversight of servicing and foreclosure processing conducted by their bank and nonbank subsidiaries.
The regulators reviewed the action plans and requested various revisions before deeming them acceptable, and the Federal Reserve published each action plan for its banking organizations on its public website.5 The OCC issued reports summarizing its servicers' action plans. The Federal Reserve's supervisory teams have closely followed the implementation of the action plans throughout 2012, 2013, and into 2014. The supervisory teams are now in the process of assessing the adequacy of policies, procedures, and practices; conducting process reviews; and performing loan-level transaction testing to confirm whether the deficiencies have been corrected. The regulators remain committed to ensuring that the banking organizations have taken all necessary actions to address the deficiencies in servicing and foreclosure processes.
Actions to Identify and Remediate Potentially Harmed Borrowers
Independent Foreclosure Review
In addition to correcting servicing practices going forward, the Consent Orders required the banking organizations to determine if any borrowers were harmed by the deficient servicing and foreclosure processes and practices. To accomplish this, the banking organizations were required to retain independent consultants to conduct comprehensive reviews of foreclosure activity to identify whether borrowers whose mortgages were serviced by the organizations and whose homes were in the foreclosure process during 2009 or 2010 ("in-scope borrowers") suffered financial injury because of servicer errors, misrepresentations, or other deficiencies. This review encompassed more than 4.4 million borrower loan files. The number of in-scope borrowers whose mortgages were serviced by each servicer subject to a Consent Order is listed in table A.2 in the appendix. Less than 20 percent of in-scope borrowers had mortgages that were serviced by Federal Reserve-regulated servicers.
The file review initiated by the independent consultants, combined with a significant borrower outreach process, was referred to as the Independent Foreclosure Review (IFR). Before proceeding with the file reviews, the banking organizations submitted proposals outlining the independent consultants they wished to engage, which were subject to the approval of the regulators. The independent consultants' engagement letters were subject to extensive review and revision prior to acceptance by the regulators.
The servicers also were required to contact all in-scope borrowers and provide them with the opportunity to request a review of their foreclosure action by an independent consultant to determine whether the borrower suffered financial injury because of errors by their servicer and potentially receive compensation (the "borrower outreach process"). Rust Consulting, Inc. ("Rust") was selected by the servicers to serve as the "IFR administrator," which required Rust, among other things, to establish a toll-free number that borrowers could call for more information about the review and a website that borrowers could access for information and to submit a request for review of their foreclosure.6 In addition, Rust managed all borrower communications related to the IFR.
The independent consultants were required to evaluate an individual's foreclosure action to determine if the borrower had experienced financial injury, and, if so, the category of injury identified. Once the reviews of individual borrowers' foreclosure actions had been completed, the independent consultants were expected to determine the number of injured borrowers who were eligible for compensation. The appropriate amount of compensation to be provided to borrowers was based on financial remediation guidance issued by the regulators for general categories of harm and was not intended to replace the type of specific finding of actual harm or losses that might be determined by a court.7 Indeed, the regulators specifically provided that borrowers receiving payments under the IFR would not waive the right to pursue damages in other venues.
After nearly two years of reviews, the independent consultants indicated that the file-by-file review of in-scope borrowers would require substantially more time to complete. To speed remediation to borrowers--all of whom were in the foreclosure process more than two years earlier--and considering that the independent consultants' reports did not reveal the existence of widespread financial injury among borrowers whose files had been reviewed, the regulators determined to stop the IFR. The regulators entered into agreements with the servicers that chose to replace the IFR with direct cash payments to all in-scope borrowers and other assistance (the "Payment Agreement") in order to provide the greatest benefit to borrowers in a timelier manner than would have occurred under the IFR process.
The Payment Agreement imposed two principal requirements on participating servicers. First, the servicers were required to promptly make cash payments to all in-scope borrowers under the IFR, regardless of whether or not the independent consultants found that the borrower had suffered financial injury caused by servicer error or requested an independent review (the "cash payments"). Second, the servicers were required to provide, during the next two years, loss mitigation or other foreclosure prevention assistance, such as loan modifications or forgiveness of deficiency judgments, to borrowers facing foreclosure (the "foreclosure prevention assistance"). Borrowers could not be required to waive or release any rights or claims they might have against their servicer in order to receive a cash payment or foreclosure prevention assistance. The servicers' fulfillment of the cash payment and foreclosure prevention assistance requirements replaced their obligation to complete the IFR under the Consent Orders. The Payment Agreement did not affect the servicers' continuing obligations under the Consent Orders to take corrective actions to address deficiencies in their mortgage servicing and foreclosure policies and procedures. Nor did the Payment Agreement affect the rights of borrowers to pursue claims for actual damages against the servicers.
Ultimately, 15 of the 16 banking organizations required to conduct an IFR agreed to participate in Payment Agreements, which were implemented by amendments to the Consent Orders (the "Consent Order Amendments" or "Amendments") entered into by the regulators with each of the participating servicers.8 OneWest, an OCC-regulated servicer, did not enter into a Payment Agreement. The IFR that remains under way at OneWest is addressed in the OCC Status Report, but not in this report. The timing of the servicers' entry into the Consent Orders and the related Amendments is displayed in table A.1 in the appendix.
Under the Payment Agreement, participating servicers are required to provide a total of approximately $10 billion in cash payments and foreclosure prevention assistance to help borrowers: approximately $3.9 billion in cash payments to more than 4.4 million borrowers and approximately $6.1 billion in foreclosure prevention assistance. The amount of cash payments to in-scope borrowers and foreclosure prevention assistance required by the Consent Order Amendments is displayed in table A.2 in the appendix. The Payment Agreement resulted in the largest total cash payout of any federal banking regulatory foreclosure-related action to date.
1. U.S. Department of the Treasury, Office of the Comptroller of the Currency (2014), "Foreclosure-Related Consent Orders Status Report: Observations, Payments, and Foreclosure Prevention Assistance," April, available at www.occ.treas.gov/news-issuances/news-releases/2014/nr-occ-2014-65a.pdf. Return to text
2. See Board of Governors of the Federal Reserve System (2011), "Interagency Review of Foreclosure Policies and Practices," press release, April 13, available at www.federalreserve.gov/newsevents/press/enforcement/20110413a.htm. Return to text
3. The OCC regulates a majority of the servicers. Of the 16 servicers subject to Consent Orders, 8 are regulated solely by the OCC, 4 are regulated solely by the Federal Reserve, and 2 are jointly regulated by the regulators, resulting in a total of 6 Federal Reserve-regulated servicers. Return to text
4. These seven banking organizations are Ally Financial, Bank of America, Citigroup, JPMorgan Chase, MetLife, SunTrust, and Wells Fargo. Return to text
5. The action plans for Federal Reserve-supervised institutions are available at www.federalreserve.gov/consumerinfo/independent-foreclosure-review-payment-agreement.htm. Return to text
7. See Board of Governors of the Federal Reserve System (2012), "Agencies Release Financial Remediation Guidance, Extend Deadline for Requesting a Free Independent Foreclosure Review to September 30, 2012," press release, June 21, available at www.federalreserve.gov/newsevents/press/bcreg/20120621a.htm. Return to text
8. The Consent Order Amendments that implement the Payment Agreement, issued by the Federal Reserve in February and July of 2013, can be found at www.federalreserve.gov/consumerinfo/independent-foreclosure-review.htm. Return to text