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From Banking and Finance Law Daily, October 7, 2014

GAO reports Treasury could do more to assess servicer compliance

By Lisa M. Goolik, J.D.

According to a report released by the Government Accountability Office, the Treasury Department could be doing a better job of analyzing data from servicers that participate in the Home Affordable Modification Program. The GAO concluded that, without more fully evaluating servicer data, “Treasury may miss opportunities to identify and address servicer weaknesses and assist and retain as many borrowers as possible.”

Background. Treasury introduced the Making Home Affordable program in early 2009 and has allocated $38.5 billion in Troubled Asset Relief Program (TARP) funds to help struggling homeowners avoid potential foreclosure. Through June 2014, Treasury had disbursed about one-third of the $38.5 billion in TARP funds allocated to housing programs, including the Home Affordable Modification Program (HAMP).

The Emergency Economic Stabilization Act of 2008 requires the GAO to report every 60 days on TARP activities. The GAO’s report, “Troubled Asset Relief Program: Treasury Could Better Analyze Data to Improve Oversight of Servicers' Practices,” examined: (1) the status of TARP-funded housing programs; (2) Treasury’s efforts to monitor and evaluate HAMP denial and redefault rates among servicers; and (3) the status of the implementation of GAO’s prior recommendations related to TARP-funded housing programs.

Status report. The GAO reported that, through June 2014, Treasury had disbursed almost one-third of the $38.5 billion TARP funds allocated to housing programs. However, the number of new borrowers added to the HAMP began to decline in late 2013. The GAO noted that Treasury has taken steps to assist more homeowners and to address upcoming interest rate increases for borrowers already in the program—after 5 years, interest rates on modified loans may gradually increase to the market rate at the time of the modification.

Monitoring denial rates. According to the GAO, analyzing relationships among data helps inform control and performance monitoring activities. Although Treasury monitors HAMP denial and redefault rates, the GAO determined that its evaluation of data to help explain the reasons for differences among servicers is limited. The GAO found “wide variation” among servicers in reasons for denials of trial modifications, which, in part, may be due to differences in servicer practices that would not necessarily be identified by Treasury’s compliance review process or analysis for reporting errors. In addition, even after controlling for differences in servicers’ loan, borrower, and property characteristics, the GAO discovered similar variations in the probability of redefault, ranging from 8 percent to 17 percent among servicers.

As a result, the GAO recommended that Treasury conduct periodic evaluations to help explain differences among servicers: (1) in the reasons they gave for denying applications for HAMP trial modifications; and (2) in HAMP loan modification redefault rates. The data from the evaluations would aid Treasury in compliance reviews of individual servicers and help identify any needed program policy changes.

Prior recommendations. Lastly, although Treasury has implemented most of GAO’s prior recommendations, the GAO identified several that were intended to improve its oversight of the TARP-funded housing programs but which have not been fully implemented. As an example, Treasury requires servicers to have controls in place for monitoring compliance with fair lending laws. However, Treasury informed the GAO that it does not intend to monitor servicers to ensure compliance because other federal agencies assess compliance with fair lending laws. The GAO responded that without these assessments, Treasury cannot determine whether servicers implement the required controls.

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