Banking regulators this week launched the government’s latest attempt to help troubled homeowners—the Independent Foreclosure Review—heralding it as a thorough and fair way to compensate homeowners victimized by big banks. But early indications are that this program, like earlier efforts, has fundamental flaws.
The most central question, how compensation will be calculated, has not been determined, regulators said, and it’s even unclear what type of compensation borrowers would get: cash or a nonmonetary remedy. Many key elements of the program have been kept secret, including the specific bank errors or abuses that would merit compensation. Democratic lawmakers have questioned whether the personnel deciding who deserves compensation are qualified to do so. And the process, which allows no appeals, can require homeowners to put forth their cases in writing, a formidable task that consumer advocates say many borrowers lack the expertise to do.
The government's previous main effort to aid troubled homeowners, the Obama administration’s widely criticized Home Affordable Modification Program, attempts to keep troubled borrowers in their homes by facilitating loan modifications. The new review has a different goal, and it was developed by federal bank regulators, who are independent from the administration.
The review is one response by regulators to the widespread revelations last fall that mortgage servicers—companies that collect home-loan payments—were regularly filing false affidavits signed by so-called robo-signers. The new program will evaluate up to 4.5 million home loans to determine whether those borrowers were victimized by bank errors or abuses and, if so, what compensation the banks must pay.
The task of evaluating so many loans—those in foreclosure at any point during 2009 or 2010—is beyond regulators’ capacity. So the two agencies heading the effort, the Office of the Comptroller of the Currency and the Federal Reserve, have overseen the selection of eight “independent consultants” that will do the work. The government has refused to identify these consulting firms, though it now says it will.
Regulators said Tuesday they have not yet determined how the consultants and regulators will calculate the financial harm a homeowner suffered, and therefore what compensation the banks would have to pay. Even the form of compensation—cash or something else—remains unclear. An example of noncash compensation, said OCC spokesman Bryan Hubbard, could be repairing a borrower’s credit report.
Regulators have declined to provide a comprehensive list of the problems the consultants will be looking for—in essence, what constitutes an abuse or error by a mortgage servicer. Regulators have issued guidance on this topic to the independent consultants, but during a conference call Tuesday with reporters, they declined to make those documents available.
Regulators have given some public indications of what they’ll be looking for, which we note on our FAQ about the foreclosure reviews. In April, regulators issued "consent orders" that laid out some of the faults committed by the biggest servicers, which collectively handle almost 70 percent of the country's mortgages. The orders also mandated this new foreclosure review to address past problems and general standards that servicers should follow going forward.
So far, regulators have withheld the identity of the eight consulting firms that will conduct the reviews — a stance that angered some members of Congress. In July, a group of about two dozen senators and representatives—all Democrats except for Sen. Bernie Sanders, the Vermont independent—objected to the lack of transparency and questioned whether the consultants had conflicts of interest such as ongoing business relationships with the banks.
The consultants will be paid by the banks, but regulators must approve each consulting firm and its scope of work. Last week, some House Democrats pushed to subpoena the documents, called engagement letters, that identify the consulting firms and spell out what they would do. On Tuesday, the OCC said it will release those documents later this month.
OCC officials say they’ve worked diligently to ensure that the consultants are truly independent of the banks. The banks sought to hire some consulting firms and law firms that had “inappropriate conflicts,” said Joe Evers, the OCC’s deputy comptroller for large banks, so regulators disqualified those companies. Evers declined to identify the firms or how many had been disqualified.
Lawmakers have also expressed concern about the experience of the personnel who will conduct the reviews. At least three temporary staffing agencies have posted positions for a “Foreclosure File Reviewer.” (One agency said it doesn’t discuss its clients, and the other two didn’t return phone calls requesting comment.)
The ads reviewed by ProPublica typically call for some foreclosure or mortgage-servicing experience but little else. Critics have questioned whether the people filling these positions will be qualified to determine whether servicers followed the law.
“Distressingly, the job solicitations for these positions seem to suggest that servicers intend to hire individuals with no more expertise than the so-called ‘robo-signers’ that created many of these problems in the first place,” wrote Rep. Maxine Waters, D-Calif., in a letter to regulators last week.
The OCC’s Hubbard responded that the consultants “have spent significant time training staff, who will be supported by subject matter experts and whose work will be governed by a rigorous quality assurance process.”
It’s not known how long the reviews will take: On Tuesday, the OCC’s Evers said only that he didn’t think it would last “years.” He said he couldn’t guarantee, however, that the process wouldn’t stretch into 2013. Even before Tuesday’s launch, many consumer advocates and homeowners had viewed the process skeptically because regulators had overlooked servicing abuses for years and because regulators developed much of the new review process behind closed doors. Housing counseling and consumer groups could have given valuable input on the types of problems homeowners have faced in the past few years, said Alys Cohen of the National Consumer Law Center, but they were shut out of the process.
The OCC’s Hubbard said regulators did meet last week with consumer groups to discuss the process, and that Hope Now, a servicer-dominated alliance with counseling organizations and community groups, had been involved earlier. Cohen said consumer groups hadn’t received any “meaningful information” during last week’s meeting.
Not all eligible loans are guaranteed a review. First, the consultants will screen each servicer’s portfolio using a statistical sampling method to select loans with “the highest potential for financial injury,” as OCC head John Walsh put it in a speech in September. Regulators have not released details on that sampling method. The loans flagged by this statistical method will be automatically reviewed.
But if homeowners want to ensure that their loan is reviewed, they must submit a “Request for Review Form.”
The OCC and the Financial Services Roundtable, a trade group representing the biggest banks, refused to provide ProPublica with a sample of this form, even though a version of it will likely be mailed to millions of people. They cited concerns about “copycats, fraud and the negative effects on truly eligible borrowers who would suffer if the system becomes unnecessarily burdened with requests which are out of scope,” as the FSR’s Paul Leonard put it. Nevertheless, we did obtain a sample of the five-page form.
The form includes a list of yes-or-no questions such as “Do you believe that you were denied a modification when you qualified under the applicable program rules?” and an open-ended request to “Describe any other way in which you believe you may have been financially injured as a result of the mortgage foreclosure process.”
But homeowners often lack the legal or technical expertise to know why their foreclosure was wrong or abusive, Cohen said. “They just know how they were treated.” She drew an analogy to going to court without a lawyer: “This essentially looks like a class-action case where the homeowners have no representation,” she said.
After a borrower mails the Request for Review Form, the consultant will obtain the borrower’s file from the servicer. The consultants will not interview borrowers but may ask them for additional documentation.
After the consultants have reviewed the loan files, they will write up their findings in a report, which will be turned over to regulators and the servicer of the loan but not to the borrower. Based on that report, the servicer will put together a report of his own on how he will compensate the borrower. Once regulators approve that plan, the servicer will send the borrower the findings of the review, including details on what compensation, if any, the borrower will receive.
OCC officials would not say whether homeowners will be asked to waive their right to sue their servicer in exchange for accepting the compensation. Borrowers will not have an opportunity to appeal the findings or the offer. But, Hubbard said, if homeowners decline their compensation, they retain “the right to pursue satisfaction through the courts or other means that may exist.”
The consultants will attempt to mail every eligible borrower a copy of the Request for Review Form—no small task given that, by definition, many foreclosed homeowners no longer live at the addresses the loan servicers have on file. For such people, the consultants will attempt to find new addresses. Regulators will also oversee an advertising campaign in newspapers, magazines and online, but the campaign may change depending on the response rate, Hubbard said.
The process has already proved confusing for at least one homeowner. Dan Sanders of Marysville, Calif., contacted ProPublica in early October after receiving a letter from the OCC’s Customer Assistance Group that said his case would not be covered by the foreclosure review. The reason, the letter said, was that Sanders had not actually lost his home to foreclosure, and the review was limited to completed foreclosures. That’s not true.
Hubbard said the error was unfortunate but said a review by the OCC’s ombudsman concluded that Sanders was the only homeowner who’d received this misinformation, which was the result of one OCC employee’s error. Sanders can submit a request for review, which would ensure his case gets evaluated.
ProPublica will continue to monitor the foreclosure review process as it progresses. Homeowners going through the process should read this FAQ, fill out this questionnaire if they haven’t already, and let me know what’s happening.