By Daniel Edstrom
DTC Systems, Inc.
Here is the analysis, which comes word for word from the Interagency review of Foreclosure Policies and Practices in 2010 (available here: http://dtc-systems.net/wp-content/uploads/2011/04/InterAgency_Review_4900701.pdf).
The Federal Reserve System, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS), referred to as the agencies, conducted on-site reviews of foreclosure processing at 14 federally regulated mortgage servicers during the fourth quarter of 2010.
This report provides a summary of the review findings and an overview of the potential impacts associated with instances of foreclosure-processing weaknesses that occurred industrywide. In addition, this report discusses the supervisory response made public simultaneous with the issuance of this report, as well as expectations going forward to address the cited deficiencies. The supervisory measures employed by the agencies are intended to ensure safe and sound mortgage-servicing and foreclosure processing business practices are implemented. The report also provides an overview of how national standards for mortgage servicing can help address specific industrywide weaknesses identified during these reviews.
For the reviews discussed in this report, examiners evaluated each servicer’s self-assessments of their foreclosure policies and processes; assessed each servicer’s foreclosure operating procedures and controls; interviewed servicer staff involved in the preparation of foreclosure documents; and reviewed, collectively for all servicers, approximately 2,800 borrower foreclosure files that were in various stages of the foreclosure process between January 1, 2009, and December 31, 2010.
Examiners focused on foreclosure policies and procedures; quality control and audits; organizational structure and staffing; and vendor management, including use of third-party vendors such as foreclosure attorneys, Lender Processing Services (LPS) and other default-service providers, and MERSCORP and its wholly owned subsidiary, Mortgage Electronic Registration Systems, Inc. (MERS). Based on their reviews of the limited number of foreclosure-file samples, examiners also assessed the accuracy of foreclosure-related documentation, including note endorsements and the assignments of mortgages and deeds of trust, and loan document control. With respect to those files, examiners also assessed whether fees charged in connection with the foreclosures exceeded the amounts reflected in the servicers’ internal records. In addition, the Federal Reserve and the OCC solicited views from consumer groups to help detect problems at specific servicers, and the Federal Reserve expanded the file sample to include borrowers who were delinquent, but not yet in foreclosure.
- Policies and procedures. Examiners reviewed the servicers’ policies and procedures to see if they provided adequate controls over the foreclosure process and whether those policies and procedures were sufficient for compliance with applicable laws and regulations.
- Organizational structure and staffing. Examiners reviewed the functional unit(s) responsible for foreclosure processes, including their staffing levels, their staff ’s qualifications, and their training programs.
- Management of third-party service providers. Examiners reviewed the servicers’ oversight of key third parties used throughout the foreclosure process, with a focus on foreclosure attorneys, MERS, and default-service providers such as LPS.
- Quality control and internal audits. Examiners assessed quality-control processes in foreclosures. Examiners also reviewed internal and external audit reports, including government-sponsored enterprise (GSE) and investor audits and reviews of foreclosure activities as well as servicers’ self-assessments.
- Compliance with applicable laws. Examiners checked the adequacy of the governance, audits, and controls that servicers had in place to ensure compliance with applicable laws.
- Loss mitigation. Examiners determined if servicers were in direct communication with borrowers and whether loss-mitigation actions, including loan modifications, were considered as alternatives to foreclosure.
- Critical documents. Examiners evaluated servicers’ control over critical documents in the foreclosure process, including the safeguarding of original loan documentation. Examiners also determined whether critical foreclosure documents were in the foreclosure files that they reviewed, and whether notes were endorsed and mortgages assigned.
- Risk management. Examiners assessed whether servicers appropriately identified financial, reputational, and legal risks and whether these risks were communicated to the board of directors and senior management of the servicer.
Summary of Review Findings
The reviews found critical weaknesses in servicers’ foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys.While it is important to note that findings varied across institutions, the weaknesses at each servicer, individually or collectively, resulted in unsafe and unsound practices and violations of applicable federal and state law and requirements. The results elevated the agencies’ concern that widespread risks may be presented—to consumers, communities, various market participants, and the overall mortgage market. The servicers included in this review represent more than two-thirds of the servicing market. Thus, the agencies consider problems cited within this report to have widespread consequences for the national housing market and borrowers.
Based on the deficiencies identified in these reviews and the risks of additional issues as a result of weak controls and processes, the agencies at this time are taking formal enforcement actions against each of the 14 servicers subject to this review to address those weaknesses and risks. The enforcement actions require each servicer, among other things, to conduct a more complete review of certain aspects of foreclosure actions that occurred between January 1, 2009, and December 31, 2010. The specific supervisory responses are summarized in Part 3 of this report.
The interagency reviews identified significant weaknesses in several areas.
- Foreclosure process governance. Foreclosure governance processes of the servicers were underdeveloped and insufficient to manage and control operational, compliance, legal, and reputational risk associated with an increasing volume of foreclosures.
- 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 thirdparty 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 possess 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 servicers’ self-assessments of their foreclosure processes and examiners’ interviews of servicer staff involved in the preparation of foreclosure documents.
- Documentation practices. 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 servicers’ 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 complaints 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.
The results of the Interagency Review are summed up by the Acting Comptroller John Walsh’s Congressional testimony (excerpt):
The mortgage servicing business is also under severe stress, its business model already challenged by the mortgage crisis, and that challenge now compounded by the foreclosure mess. The drumbeat of criticism against the industry has now gone on for years, from criticism of its slow reaction to the housing downturn in general, to its handling of mortgage modifications, and now to the complete mishandling of the foreclosure process. That routine processing of bank files and legal documents could deteriorate into safety and soundness failures requiring formal enforcement orders is simply astounding. The federal banking agencies have imposed orders on 14 large servicers, including eight national bank servicers, with the goal of fixing the very serious problems we found in foreclosure processing; ensuring that any borrowers harmed by shoddy practices receive appropriate remedies; and getting mortgage markets operating again.
Not a partial or controlled mishandling, but the COMPLETE mishandling of the foreclosure process.
Not exceptional processing of bank files and legal documents, but routine processing of bank files and legal documents.