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From Banking and Finance Law Daily, April 25, 2014

Cummings wants answers, says foreclosure review ended too early

By Lisa M. Goolik, J.D.

Representative Elijah E. Cummings (D-Md), Ranking Member of the House Committee on Oversight and Government Reform, sent a letter to Committee Chairman Darrell E. Issa (R-Calif), seeking a hearing to examine why the Federal Reserve Board and Comptroller of the Currency entered into a major settlement agreement with mortgage servicing companies in January 2013 “just as the full extent of harm caused by abusive mortgage servicing practices was beginning to be revealed.” Cummings is questioning why the federal regulators appear to have prematurely ended the Independent Foreclosure Review (IFR) when new documents obtained by the Committee indicate that independent consultants investigating servicer abuses had identified high error rates in some categories directly before the IFR was terminated and the final settlement was announced.

IFR documents. According to the letter, the purpose of the IFR was to determine whether foreclosures were conducted lawfully, including “whether any errors, misrepresentations, or other deficiencies…resulted in financial injury to the borrower or the mortgagee.” Independent consultants were directed to review all files with certain types of potential errors, and they were required to develop sampling methodologies to estimate the extent of errors in other categories. In addition, borrowers could request reviews of their foreclosures under a Request for Review process. As part of their review, independent consultants developed preliminary data on error rates for some categories of violations.

In May 2013, Cummings and Issa sent bipartisan requests seeking documents about the settlement. Their staffs then reviewed these documents, and on March 4, 2014, Cummings and Issa requested copies of a narrow subset of documents relevant to our investigation. Those documents, Cummings writes, demonstrate:

  • some mortgage servicing companies “engaged in widespread and systemic foreclosure abuses, including charging improper and excessive fees, failing to process loan modifications in accordance with federal guidelines, and violating automatic stays after borrowers filed for bankruptcy;”

  • several independent consultants identified very high error rates in several categories of review directly before the settlement that terminated the IFR;

  • when the Federal Reserve and OCC terminated the IFR in January 2013, the independent consultants had just begun to finalize review procedures, assemble complete loan files, and produce detailed data on foreclosures; and

  • the preparatory work for more comprehensive reviews was halted suddenly in January 2013.

High error rates. Cummings notes that Bank of America’s independent consultant, Promontory Financial Group, LLC, found the bank had a 60 percent error rate in loan modification efforts, a 19 percent error rate in charging fees, and a 16 percent error rate in loans involving bankruptcy that were reviewed. In PNC Bank’s foreclosure activities, Promontory found similar trends, including “borrower financial injury” in 21 percent of cases reviewed and “notable exception” errors in 24 percent of cases.

Insufficient data. In addition, Cummings contends that the new documents established that independent consultants had conducted significant preparatory work assembling files and creating systems to conduct more comprehensive reviews, but regulators suddenly halted these efforts in January 2013, despite projections that they would have been completed in months. For example, documents from Promontory’s review of Bank of America indicated that its work was not complete at the time of the settlement, stating, “Because our data were not complete at the time of the closure of the review, however, the ICDR [Independent Consultant Data Report] does not form a sound basis for inference concerning the frequency of errors in the population within the scope of the April 13, 2011, Consent Orders.” Promontory faced similar challenges at PNC Bank and Wells Fargo, and with regard to PNC bank, stated that “only a few additional months would have been necessary to complete the review process,” and it could have completed its review by June 2013.

Similarly, PriceWaterhouseCoopers LLP, the independent consultant for Citibank N.A., GMAC Mortgage, SunTrust Mortgage, and U.S. Bank National Association, noted the challenges of incomplete loan files but anticipated completing the engagements in 2013 or, in the case of GMAC and due to constraints related to its bankruptcy, in early 2014.

Questions for regulators. As a result, Cummings is seeking answers to three fundamental questions about assertions made by the federal regulators in support of ending the IFR and entering into the settlement agreement:

  1. Why did the Fed and the OCC terminate the IFR prematurely before its objective had been achieved? Cummings states that it is unclear why the regulators believed it was in the best interests of borrowers to end the IFR when high error rates were identified during preliminary reviews and more detailed reviews were needed to identify the full extent of harm.
  2. How did the regulators arrive at the compensation amounts in the settlement? The amended consent orders executed on Feb. 28, 2013, required servicers to make cash payments into a Qualified Settlement Fund, from which payments were provided to borrowers. Cummings is seeking clarification as to what criteria were used to determine these settlement amounts and whether settlement amounts were in any way related to the actual or estimated harm suffered by borrowers.
  3. How did the regulators determine that the amounts mortgage servicers would pay—and the amounts borrowers would receive—would be more favorable under the settlement than if the IFR had been completed? Cummings questions why the Fed and the OCC argued that terminating the IFR would provide the “greatest benefit” to borrowers in a more timely manner than if the IFR continued when independent consultants had not reviewed enough loan files to determine reliable error rates.

“Now that we have obtained copies of these documents, they confirm that some mortgage servicing companies engaged in widespread and systemic foreclosure abuses, including charging improper and excessive fees, failing to process loan modifications in accordance with federal guidelines, and violating automatic stays after borrowers filed for bankruptcy,” Cummings states. “It remains unclear why the regulators terminated the IFR prematurely, how regulators determined the compensation amounts servicers were required to pay under the settlement, and how regulators could claim that borrowers who were harmed by these servicers would benefit more from the settlement—including the settlement amounts paid for each error category—than by allowing the IFR to be completed.”

Companies: Bank of America; Citibank N.A.; GMAC Mortgage; PNC Bank; PriceWaterhouseCoopers LLP; Promontory Financial Group, LLC; SunTrust Mortgage; U.S. Bank National Association; Wells Fargo

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