I wrote last week in Forbes about the settlement of the OCC/Fed consent orders that mandated foreclosure reviews by “independent” consultants for fourteen mortgage servicers.
Ten mortgage servicers have agreed to pay more than $8.5 billion in cash and other assistance to help borrowers now rather than pay billions later based on the results of the foreclosure review process. The April 2011 OCC/Fed consent orders sanctioned the servicers for foreclosure abuses for the period 2009-2010 and mandated the detailed reviews. Not one check was ever cut for the harmed borrowers, but the banks have reportedly paid out more than $1.5 billion dollars to the “independent” consultants hired and paid by the banks, rather than directly by the regulators, to perform the detailed reviews.
That column was about 1500 words in total, many more than Forbes prefers I use online but many less than needed to tell all I know about this settlement.
No other report looked into how the borrowers who were either in foreclosure or were foreclosed on by these banks in 2009 and 2010 – that was the limited scope of this regulatory action – were going to be paid now.
My sources are close to the “independent” consulting engagements performed by the largest recipients of the foreclosure review largess, PwC and Promontory.
The combined OCC/Fed press release says, “A payment agent will be appointed to administer payments to borrowers on behalf of the servicers.” The settlement announcement cut off the review process before consultants submitted final estimates of how much each bank owed to harmed borrowers. The calculations of harm were never formally submitted to the regulators for approval. So, it’s not obvious how each bank’s payment agents will be able to make accurate and complete payments to borrowers for foreclosure abuses like fee and penalty overcharges…
Sources close to the foreclosure review engagements tell me that the new payment process will be very simple and is being designed by the OCC/Fed with no input from the consultants anymore. (It’s as if the consulting firms couldn’t wash their hand of this mess fast enough, either.) A previously published OCC/Fed harm matrix includes recommended dollar amounts to be paid to all damaged borrowers by harm category and that, you would think, would be a good place for a new process to start. Sources tell me that the matrix, however, is being tweaked as we speak so it will be as easy as possible for each bank to determine how much each borrower will get. The mortgage servicers will decide which of the foreclosure abuse categories each borrower’s case falls into based on these revised guidelines. Some borrowers could potentially deserve compensation for more than one harm category. No questions will be asked, no further analysis will be done, no audits will be performed, and there is no assurance of consistency in payments by the various servicers for the same harm.
Several people affected by this settlement have called and emailed me to ask about this payment process and, in particular, about the non-monetary remediation or fixes that were supposed to be included in this process based on a detailed review of the files. (All the news and emphasis for the settlement seems to be on the monetary compensation part; we’re not calling it fines and penalties. Gretchen Morgensen of the New York Times today explained the tax advantages of structuring the settlement as some kind of altruistic act by the banks rather than civil or criminal penalties for illegal and fraudulent acts.)
For example, many banks under the OCC/Fed consent orders violated the Servicemembers Civil Relief Act, which prohibits foreclosure on a service member’s home while he/she is on active duty. Some of the banks settled those violations separately.
(One foreclosure review consultant at a Big Four audit firm told me the engagement partner on its “independent” review engagement told the team that military service members were the only “deserving” borrowers in this process. The rest of the files represent “losers” and his firm would do everything to help the bank “mitigate the harm to its bottom line”. How’s that for independent?)
The remedies for a service member in the process of foreclosure “at the time of remediation” is non-monetary. The foreclosure will stop. And if the house was already foreclosed on when the “remediation” started, additional non-monetary remedies like correcting the mortgage servicer record for any improper fee and penalty amounts and correcting credit reports are also mandated.
The harm categories on the published OCC/Fed matrix also proscribed non-financial remedies in all cases. Correcting a credit report is one of the mandated remedies banks were supposed to be on the hook for and it’s not clear if anyone will be making sure banks do this at all, let alone well or consistently. Credit report correction, a non-financial remedy, is the remedy everyone is asking me about. Everyone knows that a bad or incorrect credit report can haunt you forever and if fraudulent or illegal actions by the banks caused a bad credit report the bank should be responsible for wiping the slate clean for injured borrowers.
Here are the kinds of things the OCC/Fed said the banks did to borrowers that were supposed to be quantified and fixed by the OCC/Fed reviews:
- Foreclosing on a borrower in error who was not in default
- Servicer foreclosed on borrower prior to expiration of written trial‐period plan while borrower was performing all requirements of the written trial‐period plan
- Failed to convert a borrower to permanent modification after successful completion of written trial‐period plan
- Servicer completed foreclosure on borrower before documented forbearance period expired while borrower was meeting all requirements of documented forbearance
- Servicer denied borrower application for loan modification that should have been approved, or servicer failed to decision complete loan modification application for which borrower would have qualified
- Servicer never followed up to obtain complete loan modification documents as required under HAMP or other program designated by regulator
- Servicer never solicited borrower loan modification option as required under HAMP or other program designated by regulator.
- Failed to approve modification in prescribed timeframe
- Servicer approved borrower for loan modification under HAMP or other program designated by regulator, but did not make decision within required timeframe
- Servicer error resulted in loan modification with higher interest rate than borrower should have been charged under HAMP or other loan modification program designated by regulator
- Servicer initiated foreclosure or foreclosed on borrower who was protected by federal bankruptcy law
- Servicer initiated foreclosure or foreclosed on borrower, but lacked standing to foreclose
- Servicer initiated foreclosure or foreclosed on borrower and either failed to provide any notice or legally sufficient notice as required under state law
- Servicer error occurred that did not directly cause foreclosure, but did directly result in financial injury to borrower
It’s easy to forget, with all the propaganda being published by major media, why these Fed/OCC consent decrees were issued in the first place. Damage control PR on the banks’ behalf is already in full force, especially at the The Wall Street Journal, emphasizing that not much harm was found and that, “those enforcement actions followed the “robo-signing” scandal. This was the episode in which politicians and the press pretended that minor paperwork errors in the process of foreclosing on borrowers who hadn’t paid their bills constituted major crimes.”
The Interagency Review of Foreclosure Policies and Practices published in April of 2011 that backed up the original FED/OCC consent orders documents the pattern of potential illegal and fraudulent behavior that has now been proven in many, many court cases since. The fact that a borrower may be in default does not negate the overwhelming evidence that court cases have provided that banks proceeded fraudulently and illegally in some foreclosures and looted those borrowers and institutional investors in mortgage securities by charging fraudulent and illegal fees in the process.
The interagency reviews identified significant weaknesses in several areas.
Foreclosure process governance.
Foreclosure governance processes of the servicers were under developed and insufficient to manage and control operational, compliance, legal, and reputational risk associated with an increasing volume of fore closures.
- Inadequate policies, procedures, and independent control infrastructure covering all aspects of the foreclosure process;
- Inadequate monitoring and controls to oversee foreclosure activities conducted on behalf of servicers by external law firms or other third- party vendors;
- Lack of sufficient audit trails to show how information set out in the affidavits (amount of indebtedness, fees, penalties, etc.) was linked to the servicers’ internal records at the time the affidavits were executed;
- Inadequate quality control and audit reviews to ensure compliance with legal requirements, policies and procedures, as well as the maintenance of sound operating environments; and
- Inadequate identification of financial, reputational, and legal risks, and absence of internal communication about those risks among boards of directors and senior management.
Organizational structure and availability of staffing.
Examiners found inadequate organization and staffing of foreclosure units to address the increased volumes of foreclosures.
Affidavit and notarization practices.
Individuals who signed foreclosure affidavits often did not personally check the documents for accuracy or pos sess the level of knowledge of the information that they attested to in those affidavits. In addition, some foreclosure documents indicated they were executed under oath, when no oath was administered. Examiners also found that the majority of the servicers had improper notary practices which failed to conform to state legal requirements. These determinations were based primarily on ser vicers’ self-assessments of their foreclosure processes and examiners’ interviews of servicer staff involved in the preparation of foreclosure documents.
Examiners found some— but not widespread—errors between actual fees charged and what the servicers’ internal records indicated, with servicers undercharging fees as frequently as overcharging them. The dollar amount of overcharged fees as compared with the ser vicers’ internal records was generally small.
Third-party vendor management.
Examiners generally found adequate evidence of physical control and possession of original notes and mortgages. Examiners also found, with limited exceptions, that notes appeared to be properly endorsed and mortgages and deeds of trust appeared properly assigned. The review did find that, in some cases, the third-party law firms hired by the servicers were nonetheless filing mortgage foreclosure com plaints or lost-note affidavits even though proper documentation existed.
Quality control (QC) and audit.
Examiners found weaknesses in quality control and internal auditing procedures at all servicers included in the review.
One example of a court case that tells the truth of what’s the banks have been intentionally doing to book profits is the Magner bankruptcy case in Louisiana. The judge found one bank, Wells Fargo, is systemically – meaning they set their systems to do it – overcharging and fraudulently fining borrowers to squeeze the lifeblood out of them before disposing of them in foreclosures. The judge suspects Wells Fargo is still doing it because the bank refuses to correct its systems. The foreclosure reviews will never document this harm in full – Promontory was the “independent” consultant for Wells Fargo – and no one will be checking now up to make sure this behavior has stopped.
Ben Hallman wrote about the Magner case in the Huffington Post in April of last year:
“Wells Fargo has taken advantage of borrowers who rely on it to accurately apply payments and calculate the amounts owed,” Magner writes. “But perhaps more disturbing is Wells Fargo’s refusal to voluntarily correct its errors. It prefers to rely on the ignorance of borrowers or their inability to fund a challenge to its demands, rather than voluntarily relinquish gains obtained through improper accounting methods.”The opinion reflects Magner’s disgust with tactics that Wells Fargo used to fight the case — and perhaps frustration with an appeals court ruling in a separate, but similar case, that overturned her order that would have forced Wells Fargo to audit and provide a full accounting for more than 400 home loans in her jurisdiction…And yet, Magner writes, it is only through litigation that the abuses can be uncovered. Calling Wells Fargo’s conduct “clandestine,” Magner wrote that the bank refused to communicate with Jones even as it was misdirecting payments for improper purposes.“Only through litigation was this practice discovered,” Magner writes. “Wells Fargo admitted to the same practices for all other loans in bankruptcy or default. As a result, it is unlikely that most debtors will be able to discern problems with their accounts without extensive discovery.”Magner wrote that the bank still refuses to come clean with homeowners about mistakes it made in the accounting of home loans. This is particularly troublesome in her district, where more than 80 percent of the borrowers who file for bankruptcy have incomes of less than $40,000, and consequently are often unable to hire the kind of legal firepower necessary to counter Wells Fargo’s army of lawyers.“[W]hen exposed, [Wells Fargo] revealed its true corporate character by denying any obligation to correct its past transgressions and mounting a legal assault ensure it never had to,” Magner wrote.