Independent Foreclosure Review
- Executive Summary
- Background on the Independent Foreclosure Review (IFR)
- Transition from the IFR to the Payment Agreement
Supervisory Response to Issues Identified in the IFR
In February 2012, the regulators issued regulatory guidance to banking organizations subject to Consent Orders for deficient practices in mortgage loan servicing and foreclosure processing, establishing minimum standards for the handling and prioritization of files with an imminent foreclosure sale. In March 2013, the regulators expanded the applicability of this guidance to all institutions under their respective jurisdiction that service residential mortgages.31 The minimum standards set forth in the guidance include detailed pre-foreclosure sale review standards and reflect sound business practices that should be part of a mortgage servicer's ongoing collections, loss mitigation, and foreclosure processing functions. The regulators expected the standards set forth in the guidance to be part of a mortgage servicer's ongoing collections, loss mitigation, and foreclosure processing functions. A servicer's failure to comply with the guidance may result in additional agency enforcement actions for noncompliance with foreclosure-related Consent Orders, new actions for unsafe and unsound banking practices, and/or other remedial actions, including rescission of completed foreclosures.
The regulators have been conducting targeted reviews to monitor adherence to these standards for those banking organizations subject to enforcement actions. The reviews conducted to date for banking organizations subject to enforcement actions have revealed that additional, minor enhancements to the servicers' processes remain necessary; however, no evidence of improper foreclosures has been uncovered.
Ongoing Supervision of Corrective Actions Required by Consent Orders
Compensating borrowers for deficient foreclosure processes was just one goal of the Consent Orders. The Payment Agreement with the participating servicers does not eliminate the other existing provisions of the Consent Orders, which remain in full force and effect. Those provisions required servicers to correct the unsafe and unsound practices to ensure a fair and orderly mortgage servicing process going forward.
Federal Reserve supervisory teams and staff have been monitoring, and continue to closely monitor, the mortgage servicers' compliance with the action plan provisions of the Consent Orders. As mentioned above, the Consent Orders required servicers and their parent holding companies to submit acceptable written plans to address various mortgage loan servicing and foreclosure processing deficiencies, and deficiencies in the oversight of servicing operations, as applicable.
In the time since the Consent Orders were issued, the servicers and their parent holding companies have been implementing the plans required by the enforcement actions, including enhanced controls, and improving systems and processes. Federal Reserve supervisory teams performed off-site monitoring and on-site reviews to evaluate the servicers' implementation progress. The off-site monitoring activities generally included a review of management reporting and routine meetings by phone with the banking organizations' management teams. The on-site reviews generally included process walkthroughs and transaction testing of the enhancements to assess adherence to the action plans.
Federal Reserve-regulated servicers were required to engage a third-party consultant to perform an independent validation to evaluate the design and effectiveness of the programs, policies, and procedures described in the action plans developed in response to the Consent Orders.32 The testing methodology included interviews and process walkthroughs with staff and management, review of documentation and reporting, and transactional testing of the mortgage servicing risk management and governance processes and practices. These reviews were completed at two of the Federal Reserve-regulated servicers and are under way at the remaining two servicers. Each completed independent validation review identified items for the banking organizations to correct or enhance. Federal Reserve supervisory teams continue to monitor the implementation of these enhancements and perform testing to confirm completion, as applicable.
The regulators have developed a supervisory work program that outlines minimum standards and test steps to assess compliance with each provision of the Consent Orders and ensures that the banking organizations have taken all necessary actions to address the deficiencies found in servicing and foreclosure processes. The supervisory teams are 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 Federal Reserve supervisory teams are leveraging the work performed during the independent validation and during previous supervisory reviews, where relevant, to expand upon the minimum standards contained in the work program. To date, the initial supervisory review of the servicer and holding company action plans has shown that the banking organizations under Consent Orders have implemented significant corrective actions with regard to their mortgage servicing and foreclosure processes, but that some additional actions need to be taken.
While the Consent Orders issued against the servicers do not forestall or prevent foreclosure actions from continuing, efforts to prevent dual tracking of borrowers who are being foreclosed on at the same time that they are seeking assistance aimed at preventing foreclosure, which has been a central concern of the regulators, are addressed in the Consent Orders. In addition, various federal banking regulators coordinated very closely with the Consumer Financial Protection Bureau on the development of national standards that are designed to improve mortgage servicing across the industry, including those that limit a servicer's ability to dual track borrowers. The standards were issued in February 2013 and became effective in January 2014. The regulators are committed to the enforcement of our Consent Orders and of these standards.
31. See Board of Governors of the Federal Reserve System, Division of Banking Supervision and Regulation (2013), "Minimum Standards for Prioritization and Handling Borrower Files with Imminent Scheduled Foreclosure Sale," Supervision and Regulation Letter/Consumer Affairs Letter, SR 13-9/CA 13-6, April 23, available at www.federalreserve.gov/bankinforeg/srletters/sr1309.htm. Return to text
32. The independent validation of the action plans of one Federal Reserve-supervised servicer, GMAC Mortgage, became unnecessary when GMAC Mortgage's servicing operations were sold to institutions that were not supervised by the Federal Reserve. Return to text