Independent Foreclosure Review
- Executive Summary
- Background on the Independent Foreclosure Review (IFR)
- Transition from the IFR to the Payment Agreement
Transition from the IFR to the Payment Agreement
In late-2012, 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. The regulators recognized that the IFR was proceeding much too slowly and was delaying remediation to borrowers affected by foreclosures. The process of carefully reconstructing and reviewing the hundreds of thousands of files for every potential financial injury caused by servicer errors, misrepresentations, or other deficiencies took the servicers and independent consultants substantial time and required significant resources. Based on the best information available to the regulators regarding the time necessary to complete the IFR, which ranged from projection completion dates of year-end 2013 to late-2016, coupled with the estimated amount of potential borrower payments, the regulators determined that this process resulted in unacceptable delays. With the OCC, which regulated most of the largest servicers, taking the lead, the regulators decided to accept the Payment Agreement as a replacement for the IFR. The total amount of remediation to be provided by the participating servicers under the Payment Agreement is approximately $10 billion.
The Consent Order Amendments that implemented the Payment Agreement were entered into by the regulators in February, July, and October 2013, with each of the 15 participating servicers.20 The specific terms of these Amendments, which were essentially the same for all participating servicers, required direct cash payments totaling approximately $3.9 billion to all in-scope borrowers whose foreclosure actions were covered by the IFR. As noted above, these are borrowers whose homes were in any stage of the foreclosure process in 2009 or 2010 and whose mortgages were serviced by one of the participating servicers. This amount of cash payments is the largest total cash payment of any federal bank regulatory foreclosure-related enforcement action. Servicers were not permitted to require borrowers to execute a waiver of any legal claims they may have against their servicer as a condition for receiving payment, thereby preserving the rights of borrowers to obtain full compensation for any actual injury.
The Consent Order Amendments also required the 15 servicers to provide a total of approximately $6.1 billion in other foreclosure prevention assistance, such as loan modifications and the forgiveness of deficiency judgments, to borrowers facing foreclosure, within two years from the date of the Payment Agreement. The Amendments stated that well-structured loss mitigation efforts should focus on foreclosure prevention and should reflect the following guiding principles: (1) preference to activities designed to keep borrowers in their homes; (2) emphasis on affordable, sustainable, and meaningful home preservation actions for qualified borrowers; (3) otherwise providing significant and meaningful relief or assistance to qualified borrowers; and (4) not disfavoring a specific geography within or among states or low- and/or moderate-income borrowers, and not discriminating against any protected class.
The Federal Reserve consulted internally and externally regarding an alternate approach to the IFR, and ultimately decided to accept the change in course and transition to the Payment Agreement as the best of the available options. The regulators accepted this approach because it provided for payments to borrowers faster than if the IFR had continued and resulted in the servicers paying to borrowers more than the IFR was expected to have cost. Maximizing the benefit to borrowers has been a primary focus of the regulators and was one of the driving reasons behind the decision to pursue these agreements. The final amount of cash payments and other assistance provided by the agreement was reached through negotiation between the regulators and the servicers. The Federal Reserve believes the total cash payment obligation alone is more than both the total amount borrowers would likely have received through the IFR process based on data available at the time and the estimated cost the servicers would have incurred if the IFR had continued, measured by fees paid to independent consultants and independent legal counsel to support the consultants as well as the cost of Rust's services. In addition, the total amount of the cash payment obligation of the servicers permitted payments to borrowers of amounts ranging from several hundred dollars up to $125,000 to each of the more than 4.4 million in-scope borrowers. In their April 2014 report, the GAO stated that, "To evaluate the final cash payment amount, GAO tested regulators' major assumptions and found that the final negotiated amount generally fell within a reasonable range. Regulators generally met their goals for timeliness and amount of the cash payments."21
Independent Consultant Feedback
While the IFR was in progress, the independent consultants were focused on conducting file reviews rather than reviewing policies and procedures related to foreclosures. However, some independent consultants also reported observing weaknesses in the servicers' processes. For example, a number of independent consultants noted that certain critical documents were not consistently retained by servicers or their third-party foreclosure attorneys.
After the IFR concluded as a result of the Payment Agreement, the regulators sent a questionnaire to the independent consultants engaged to conduct the IFR at servicers participating in the Payment Agreement seeking written responses specific to each engagement. The purpose of the questionnaire was to learn the independent consultants' perspectives on aspects of the reviews that could have been improved or done differently. The information was collected for the regulators' use in analyzing the conduct of the IFR prior to its termination and in public reporting on IFR activities.
The questionnaire covered topics including, but not limited to, file testing, the consultants' findings, conclusions and recommendations related to the file reviews, error rates, and overall observations about how the IFR process could have been improved. The regulators convened in-person interviews with the independent consultants, separately for each engagement, to discuss the responses to the questionnaire. The interviews focused on the conduct of the file reviews, including any gaps in the consultants' written responses to the questionnaire, observations made about the servicers' systems when determining the file review universe or the conduct of the reviews, and lessons that could be learned from the IFR generally.
A summary of key discussion items follows.22
- File testing procedures--The independent consultants conducted simultaneous testing among a number of workstreams. While the independent consultants agreed that this approach had advantages, there were challenges encountered in developing the test plans for each workstream for a number of reasons, including the complexity and volume of legal requirements, both federal and state, and guidelines governing the many different loan modification programs, which differed for federal programs as compared with each servicer's proprietary programs. Several independent consultants suggested that it would have been helpful to have a standard test program that each independent consultant could have customized based on the particular servicers' programs and processes.
- Error rates--All of the independent consultants raised concerns about drawing conclusions about the IFR process solely from the preliminary error rates that were reported. The independent consultants observed that the methodology used to calculate the reported rates may differ among the independent consultants. For example, some independent consultants reported the number of files with apparent errors, even though those files were awaiting further review. The consultants believed that further review would likely have reduced the number of overall errors, as some of those errors were reported solely as a result of missing documentation, which the servicer may have been able to subsequently provide. Finally, the number of completed files was very small relative to the total number of files to be reviewed, so the independent consultants cautioned against extrapolating the data to the entire population.
- Suggestions for improving the IFR process--The primary suggestions from the independent consultants included: (1) hiring one independent legal counsel to advise all of the independent consultants, instead of having each independent consultant hire its own legal counsel; (2) having one project manager to oversee and ensure consistency among the independent consultants; (3) conducting a pilot to review files at each servicer in order to develop a consistent file review approach prior to launching the IFR; and (4) developing consistent guidance at the beginning of the IFR (informed by the pilot review process).
The review process by the consultants proved to be more time consuming and labor intensive than anticipated, which resulted in significant delays in providing remediation to borrowers. In light of these delays and the public criticisms of the IFR process, the independent consultants generally acknowledged that replacing the IFR was the most effective way to provide payments to borrowers.
20. 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
21. See the unnumbered introductory page labeled "GAO Highlights" in the report U.S. Government Accountability Office (2014), "Foreclosure Review: Regulators Could Strengthen Oversight and Improve Transparency of the Process," GAO-14-376, available at www.gao.gov/assets/670/662791.pdf. Return to text
22. This section reflects input the Federal Reserve received when it interviewed the independent consultants that were hired by servicers it regulates (GMAC Mortgage, Goldman Sachs, HSBC, JPMC, Morgan Stanley, and SunTrust). Return to text