Independent Foreclosure Review
- Executive Summary
- Background on the Independent Foreclosure Review (IFR)
- Transition from the IFR to the Payment Agreement
Payment Agreement Implementation
As noted above, the Consent Order Amendments implementing the Payment Agreement required the 15 participating servicers to pay a total of approximately $3.9 billion in cash payments to the more than 4.4 million in-scope borrowers and a total of approximately $6.1 billion in foreclosure prevention assistance to borrowers facing foreclosure.
Cash Payments to Borrowers
Beginning in January 2013, immediately after the agreement in principle regarding the Payment Agreement was finalized, the regulators and the participating servicers began implementing the process for making the cash payments. After the Payment Agreement was announced, the regulators conducted outreach sessions targeted to housing counseling agencies to provide additional details on the Payment Agreement, including a webinar on March 13, 2013.23
The cash payments were required to be made to all in-scope borrowers at the participating servicers and did not depend on whether the file review had been completed for the particular borrower. Each servicer's share of the total amount of cash payments was based on that servicer's share of the total number of in-scope borrowers at all of the servicers that were conducting an IFR. The servicers were prohibited from requesting or requiring any borrower to execute a waiver of any claims the borrower may have against the servicer in connection with any cash payment.
Under the Consent Order Amendments, each servicer was required to pay the cash to fund the borrower payments into qualified settlement funds administered by a paying agent, Rust, that issued checks to borrowers. Because of timing differences, three settlement funds were established.24 The primary settlement fund ("Fund 1") contained about $3.6 billion from 11 servicers: 8 regulated by the OCC, 1 regulated by the Federal Reserve, and 2 jointly regulated by the regulators. The second fund ("Fund 2") contained about $250 million from Goldman Sachs and Morgan Stanley, which are regulated solely by the Federal Reserve. As mentioned above, the Consent Orders against Goldman Sachs and Morgan Stanley were issued after the Consent Orders against the other servicers. The third fund ("Fund 3") contained about $230 million paid by GMAC Mortgage, which is also regulated solely by the Federal Reserve. As mentioned above, GMAC Mortgage did not join the Payment Agreement until several months after the other servicers.
Determination of the Cash Payment Amounts
Under the Payment Agreement, the servicers were required to place each in-scope borrower into one of the categories in the payment matrix developed by the regulators, which included 11 categories of potential financial injury to borrowers, based on the categories in the Financial Remediation Framework created for the IFR. Like the Financial Remediation Framework created for the IFR, the payment amounts for each category distinguished among borrowers based on the stage of their foreclosure at the time of remediation: whether the foreclosure was in process, rescinded, or completed. The payment amounts for each category also distinguished between borrowers who had requested a review of their foreclosure under the IFR and those who did not make such a request, as applicable.
In placing an individual borrower into a payment category, each servicer determined if the borrower met the criteria for the first category. If the borrower did not fall into that payment category, the borrower was then tested for inclusion in the next highest payment category. This process continued until the borrower was placed into a final category (i.e., the waterfall approach). The Federal Reserve required the placement of each servicer's in-scope borrowers into payment categories to be validated by an independent audit or compliance function of the servicer or by an independent third party. Federal Reserve supervisory staff then reviewed the validation work.
The payment categories were generally arranged in descending order from largest payment amount to lowest payment amount. A description of the criteria used to place in-scope borrowers into each category (with the approximate percentage of in-scope borrowers in each category) follows.25
- The first category included foreclosed borrowers who were eligible for SCRA protection, which only applied to rescinded and completed foreclosures, but not in-process foreclosures. Under this category, loans must have been originated before the servicermember's military service started and, if applicable, any default judgments must have been filed while the servicemember was on active duty (0.03 percent of borrowers). The first category included a subcategory with a different payout amount for borrowers in foreclosure eligible for SCRA protection whose servicer did not reduce their interest rate as requested in violation of SCRA (0.01 percent of borrowers).
- The second category included foreclosed borrowers who were current on all required payments at the time of referral to foreclosure or at the time of foreclosure sale. Under this category, the definition of "current" followed the Mortgage Bankers Association method of identifying mortgages that were less than 60 days past due (0.03 percent of borrowers).
- The third category included borrowers in foreclosure who were subject to federal bankruptcy protection when their servicer initiated or completed a foreclosure. Under this category, there were exclusions for: (1) judicial foreclosures where the referral or sale occurred within less than 10 days of the bankruptcy filing; (2) nonjudicial foreclosures where the referral or sale occurred within less than 30 days of the bankruptcy filing; (3) foreclosure sales that occurred after a borrower filed their third bankruptcy filing in a period of three months; and (4) foreclosure referrals or sales that occurred after dismissal, discharge, or relief of the automatic bankruptcy stay (0.68 percent of borrowers).
- The fourth category included borrowers in foreclosure who were meeting all requirements of a documented forbearance or repayment plan when their foreclosure was completed (0.03 percent of borrowers).
- The fifth category included borrowers in foreclosure who made three successful payments under a written trial-period plan and whose servicer failed to convert them to a permanent loan modification. This category contemplated that the borrower was underwritten and approved for a permanent loan modification, made all required trial payments and provided signed final modification documents, but was not converted to a loan modification in the servicer's systems prior to a foreclosure sale (0.11 percent of borrowers).
- The sixth category included borrowers in foreclosure who were performing on all requirements of a written trial-period plan when their foreclosure was completed. This category contemplated that the borrower was approved for a loan modification in a written agreement that required trial payments before conversion to a permanent loan modification and that the servicer completed the foreclosure during the trial period (0.03 percent of borrowers).
- The seventh category included borrowers who were in foreclosure and had a loan modification request approved by their servicer prior to or at the time of foreclosure (29.14 percent of borrowers).
- The eighth category included borrowers in foreclosure who had one or more requests for a loan modification denied by the servicer, for any reason (22.26 percent of borrowers).
- The ninth category included borrowers in foreclosure who had submitted a request for a loan modification to their servicer, but the servicer did not make a decision on the request (10.29 percent of borrowers).
- The 10th category included borrowers in foreclosure whose servicer had never worked with them on any type of loan modification or other loss mitigation activity, such as a short-sale, deed-in-lieu of foreclosure, a forbearance plan, or a repayment plan (22.06 percent of borrowers).
- The last category included borrowers in foreclosure who did not meet the criteria for any of the preceding categories. For example, this category may have included borrowers facing foreclosure who had a request for loss mitigation assistance still pending when the categorization process occurred (15.33 percent of borrowers).
The criteria for determining whether individual borrowers fell within specific payment categories incorporated objective characteristics that were readily identifiable in the servicers' records systems, such as whether a request for a loan modification had been approved. Servicers were required to address any known weaknesses in their records systems to avoid placement of in-scope borrowers into lower paying categories than the objective characteristics of their loan files merited.
The regulators determined the amount of the payment to be made to borrowers in each of the payment categories. The regulators worked together closely to optimize the distribution of payments to borrowers and consulted various interested stakeholders. Each borrower's payment was based upon the dollar amount assigned by the regulators to the payment category into which the borrower was placed. The payment amounts for each category were determined by using the compensation amounts in the Financial Remediation Framework published in June 2012 as a guide and taking into account the total amount of funds available for payments under the payment agreement. The payment amounts ranged from $300 to $125,000.26
The Federal Reserve created a separate set of payment amounts for borrowers whose mortgages were serviced by Goldman Sachs and Morgan Stanley because, as noted above, both servicers were still working toward implementing RFR processes under the IFR when these servicers agreed to participate in the Payment Agreement.27 Payment amounts for these borrowers thus could not distinguish between borrowers who submitted RFRs and those who did not.
The Federal Reserve also created a separate set of payment amounts for borrowers whose mortgages were serviced by GMAC Mortgage.28 GMAC Mortgage, which joined the Payment Agreement after the creation of the first two settlement funds, elected, as permitted by the Consent Order Amendment, to meet its foreclosure prevention assistance requirement by making an additional cash payment to in-scope borrowers to supplement the payments GMAC Mortgage was required to make under the cash payments portion of the Payment Agreement. As a result, many GMAC Mortgage borrowers were able to receive somewhat larger payment amounts than those provided for borrowers of other servicers who were placed into the same payment categories.
Current Status of the Cash Payments
On April 12, 2013, Rust, in its role as the paying agent for the cash payments, began mailing checks totaling about $3.6 billion to the nearly 4.2 million borrowers whose mortgages were serviced by one of the 13 servicers that entered into the Payment Agreement at the beginning of 2013. These borrowers were customers of Aurora, Bank of America, Citibank, Goldman Sachs, HSBC, JPMC, MetLife, Morgan Stanley, PNC, Sovereign, SunTrust, U.S. Bank, or Wells Fargo.29
As of April 25, 2014, more than 3.4 million checks, totaling over $3.1 billion had been cashed or deposited by in-scope borrowers of these servicers. Thus, as of that date, approximately 83 percent of these borrowers who were mailed cash payments had received financial remediation under the Payment Agreement. This represents over 85 percent of the total amount of funds these servicers where required to pay to the in-scope borrowers.
On January 27, 2014, Rust began mailing checks totaling approximately $230 million in cash payments to approximately 232,000 in-scope borrowers whose mortgages were serviced by GMAC Mortgage. As of April 25, 2014, more than 164,000 of these checks have been cashed or deposited by borrowers, totaling over $161 million. Thus, as of that date, approximately 72 percent of the total value of cash payments distributed to GMAC Mortgage borrowers have been cashed or deposited.
Every several weeks, the Federal Reserve publishes on its public website interim data on the current status of the cash payments.30 At the end of the Payment Agreement, the Federal Reserve expects to publish data on the final status of the cash payments.
Interim data on the status of the cash payments as of April 25, 2014, are included in the appendix. Data on the number and value of checks required to be distributed and the number and value that have been cashed or deposited for each state are included in table A.7 for Fund 2 and in table A.8 for Fund 3. Data on the number of in-scope borrowers in each payment category and the number and value of checks that have been cashed or deposited are included in table A.9 for Fund 2 and in table A.10 for Fund 3. For payments made from Fund 1, similar data on the status of the cash payments as of January 24, 2014, were included in tables 8 and 10 of the OCC Status Report.
Under the oversight of the regulators, Rust is continuing to undertake significant efforts to ensure that as many in-scope borrowers as possible actually receive their checks and are able to deposit or cash them. For example, there are a number of checks that have been returned as undeliverable with no forwarding address and a number of checks where there has been no response at all. For these checks, Rust has conducted multiple searches, including commercial database searches and a Social Security Administration deceased search, in an attempt to find a better address for a borrower or a representative of a deceased borrower. When a better address is located, a check is reissued, with all uncashed checks expected to be reissued at least once.
Payment Agreement checks continue to be cashed and deposited. Information about the period to cash or deposit checks and the process to request a reissued check is available online at www.independentforeclosurereview.com or by contacting Rust at 1-888-952-9105. Borrowers whose payment amounts were based on their SCRA status, as indicated in the letter enclosed with their payments, have two years from the date of their initial check to have their check reissued. The regulators anticipate that, despite the outreach efforts to increase the number of in-scope borrowers who have received their cash payments, not all borrowers will cash or deposit their checks within the time allowed for that purpose. Under the Consent Order Amendments, the Federal Reserve and the OCC, not the servicers, are responsible for the disposition of any residual funds not distributed in cash payments to borrowers. The regulators have not at this time made any final decision with respect to the distribution of the residual funds.
Foreclosure Prevention Assistance
In this Section:
Apart from the cash payments to borrowers discussed above, servicers were required to satisfy their foreclosure prevention assistance obligations under the Consent Order Amendments within two years from the date they agreed in principle to enter into the Payment Agreement. As stated in the Amendments, the regulators expected servicers to undertake well-structured loss mitigation efforts focused on foreclosure prevention, with preference given to activities designed to keep borrowers in their homes through affordable, sustainable, and meaningful home preservation actions. Foreclosure prevention actions should otherwise provide significant and meaningful relief or assistance to qualified borrowers and should not disfavor a specific geography within or among states, nor disfavor low- and/or moderate-income borrowers, and not discriminate against any protected class.
Overview of Foreclosure Prevention Assistance Requirements
Under the Payment Agreement, servicers may fulfill their obligations by taking a variety of actions designed to assist borrowers in danger of foreclosure. Servicers may receive credit toward their obligations by providing three specific types of consumer relief activities that would be eligible for credit under the similar foreclosure assistance requirements in the National Mortgage Settlement (NMS) entered into in early 2012 by certain large residential mortgage servicers, on one hand, and the United States, acting through the U.S. Department of Justice, with the state attorneys general for several states, on the other hand: first-lien loan modifications, second-lien loan modifications, and short sales, or deeds-in-lieu of foreclosure.
In order to obtain credit for short sales and deeds-in-lieu of foreclosure, servicers are expected to have extinguished all remaining unpaid principal balance, interest, fees, deficiencies, and any other claims the servicer owns associated with the property. For example, if the servicer submitting a short-sale transaction for credit owns both the first and second liens, all deficiencies against the borrower must be waived in connection with the short sale for the servicer to receive credit under the Payment Agreement.
Servicers will receive credit for purposes of their foreclosure prevention assistance requirements for NMS-eligible first- and second-lien modifications, short sales, and deeds-in-lieu of foreclosure based on the unpaid principal balance of the loans involved with no maximum or minimum restrictions on the amount of any particular activity that is creditable. Loan modification actions, short sales, and deeds-in-lieu of foreclosure that do not meet NMS eligibility standards or other types of programs require preapproval from the regulators in order to be considered as satisfying the servicers' foreclosure prevention assistance requirements. Subject to the non-objection of the appropriate regulator, the servicers may also fulfill their requirements by providing other types of foreclosure prevention assistance, including interest rate modifications and deficiency waivers. However, servicers that are part of the NMS and the Payment Agreement must separately meet the obligations of the NMS and the Payment Agreement. Servicers cannot count actions taken to fulfill their NMS obligations toward their foreclosure prevention assistance obligations under the Consent Order Amendments.
As noted above, servicers were not permitted to request or require waivers or releases of claims against the servicers from borrowers who receive foreclosure prevention assistance. In the event that a release was required from a borrower, the activity would be ineligible for credit under the Consent Order Amendments.
Cash Payments in Lieu of Foreclosure Prevention Assistance
Subject to non-objection from their regulator, servicers also were given the option to meet their foreclosure prevention assistance requirements by paying additional cash to be used to fund the cash payments for the servicer's in-scope borrowers or by providing cash or other resource commitments to borrower counseling or education. Based on the decision of the regulators, the servicer would receive $7 to $10 of credit toward their foreclosure prevention assistance commitment for each $1 of cash contribution made to the cash payment funds or paid for borrower counseling or education. To date, three Federal Reserve-regulated servicers have met their foreclosure prevention assistance requirements in this manner. Morgan Stanley contributed over $16.5 million for supplemental cash payments and provided an additional $2 million for borrower counseling or education. GMAC Mortgage made approximately $31.7 million in supplemental cash payments. Finally, SunTrust made $14.3 million in payments to nonprofit organizations to support housing counseling, borrower education, and neighborhood stabilization efforts.
Current Status of Foreclosure Prevention Assistance
As required by the Consent Order Amendments, the servicers that have not already satisfied their foreclosure prevention assistance requirements by making supplemental cash payments have submitted periodic reports detailing their actions taken during that period aimed at borrowers facing foreclosure in order to satisfy these requirements. The foreclosure prevention assistance actions reported include loan modifications, short sales, and deeds-in-lieu of foreclosure.
Interim data on the status of the foreclosure prevention assistance are included in the appendix for Goldman Sachs, which is the only servicer regulated solely by the Federal Reserve that has not elected to meet its foreclosure prevention assistance requirement by paying additional cash to fund the cash payments for their in-scope borrowers or by providing cash or other resource commitments to borrower counseling or education. Under its Consent Order Amendment, Goldman Sachs must provide a total of $195,000,000 in foreclosure prevention assistance by January 2015. As of April 30, 2014, Goldman Sachs reported providing first-lien modifications or debt cancellation and the extinguishment of first or second liens in connection with 1,977 loans representing approximately $118,475,000 toward satisfaction of its foreclosure prevention assistance obligation. These reports have not yet been validated.
Aggregate data on the value of consumer relief activities that Goldman Sachs reported taking as of April 30, 2014, are displayed in table 11. State-level data on the type and value of consumer relief activities that Goldman Sachs reported taking as of April 30, 2014, are displayed in table 12. For servicers regulated by the OCC or jointly regulated by the regulators, similar data on the status of the foreclosure prevention assistance as of January 24, 2014, were included in table 2 and appendix 5 of the OCC Status Report.
In order to receive credit toward the servicer's total foreclosure prevention assistance obligation, the foreclosure prevention assistance actions submitted by servicers must be validated by the regulators. A process is being established for a third party to conduct this validation and ensure that the foreclosure prevention assistance amounts meet the requirements of the Amendments. At the conclusion of the implementation of the Payment Agreement, the Federal Reserve expects to publish data on the final status of the foreclosure prevention assistance. The regulators will continue to monitor each servicer's foreclosure prevention assistance, as well as compliance with the original Consent Orders, which require effective loss mitigation and foreclosure prevention activities beyond those required by the Amendments, including a review of how the servicers' foreclosure prevention activities generally meet the regulators' expectations for well-structured programs.
23. See Federal Reserve Bank of St. Louis (2013), "Independent Foreclosure Review: Important Changes," March 13, available at www.stlouisfed.org/bsr/connectingcommunities/index.cfm?proc=call&act=view&sid=16 . Return to text
24. In addition, cash payments made in connection with the Payment Agreement for EverBank, an OCC-regulated servicer, are being administered by a separate paying agent. For more information, refer to the OCC Status Report. Return to text
25. For borrowers who were potentially entitled to protection under the SCRA (the first category) or borrowers who were potentially not in default at the time of the foreclosure (the second category), a servicer could automatically make the payment prescribed by that category, whether or not those borrowers actually suffered any financial injury from their servicer's practices, or the servicer could elect to have their independent consultant complete the file reviews to identify borrowers for inclusion in those categories if it was determined that an error, misrepresentation, or other deficiency by the servicer had caused financial injury to the borrower. If the file review determined that the servicer had not caused financial injury to the borrower, then the borrower was placed into the next highest payment category for which they were eligible. Thus, payments to borrowers in the first and second categories were generally based on findings of the independent consultants. If the file review identified an SCRA interest rate violation (the sub-category of the first category), the payment amount was no less than the amount of actual financial injury identified by the finding of the independent consultant. The approximate percentages of in-scope borrowers in each category exclude EverBank and OneWest. Return to text
26. See Independent Foreclosure Review Payment Agreement Details, available at www.federalreserve.gov/newsevents/press/bcreg/bcreg20130409a1.pdf. Return to text
27. See Independent Foreclosure Review Payment Agreement Details--Goldman Sachs and Morgan Stanley, available at www.federalreserve.gov/consumerinfo/files/bcreg20130429a1.pdf. Return to text
28. See Independent Foreclosure Review Payment Agreement Details--GMAC Mortgage, available at www.federalreserve.gov/consumerinfo/gmac-mortgage-borrowers-payment-agreement-20140127.pdf. Return to text
29. For more information about the timing of each of the Consent Orders and the Amendments, see table A.1 in the appendix. Return to text