Doing something — anything — quickly but poorly is no substitute for taking the time to do what needs to be done well.
Congresswoman Maxine Waters (D-CA) is fearful that the quick-and-poor may prevail with mortgage servicer reviews, based on what she sees planned in response to last April’s consent orders from federal regulators.
"The only thing worse than no accountability for the banks," according to Waters, "is for regulators to create the illusion of accountability, while putting no enforcement power behind their efforts."
The accountability Waters is seeking relates to an announcement by the Office of the Comptroller of the Currency and the Federal Reserve Bank last April of formal enforcement actions against 14 national bank mortgage servicers and third-party servicer providers. The regulatory actions relate to findings of for unsafe and unsound practices involving residential mortgage loan servicing and foreclosure processing.
The enforcement actions require the servicers to: promptly correct deficiencies; significantly improve practices, including communications with borrowers and dual-tracking; and to establish robust oversight and controls pertaining to third-party vendors, including outside legal counsel that provides default management or foreclosure services. To meet the requirements, the servicers were required to hire independent outside consultants and legal counsel directly.
Waters' displeasure is particularly notable these days, given her sudden position as next-in-line to take over as ranking Democrat on the House Financial Services Committee in the wake of Rep. Barney Frank's announcement last week that he will not run for reelection. She has been speaking out strongly about lack of transparency and potential conflicts of interest built into the regulators' plans to make mortgage servicers step up and right foreclosure wrongs.
Waters sent a letter On October 28 to the Office of the Comptroller of the Currency and the Federal Reserve, signed by 15 of her House colleagues, calling on regulators to publicly release information regarding the steps that mortgage servicers are taking to investigate potential illegal foreclosure practices and prevent such acts in the future. (My October 6 American Banker column on potential conflicts of interest between servicers and consultants was cited in the letter.)
This was the second letter Waters sent on the matter. The first, delivered in July, was ignored. The Congresswoman's concerns center on three issues:
- How servicers and their consultants identify households with eligible claims and the methods used to reach households harmed by foreclosure-processing problems.
- Concerns that review results will be tainted in favor of servicers due to ties between them and the firms they're hiring to review them.
- Concerns about a lack of expertise about implementing the terms of the 14 consent orders among the staff hired by servicers and/or their foreclosure review consultants.
This time, the OCC responded quickly about the miscreant servicers they regulate. On November 22, 2011, it issued a report on the actions of a dozen national bank and federal savings association mortgage servicers aimed at complying with the consent orders issued in April 2011 to correct deficient and unsafe or unsound foreclosure practices. (The two remaining consent order recipients — GMAC/Ally and SunTrust — have not yet finalized their terms with vendors and as a result their overseers, Fed Chairman Bernanke and the Federal Reserve Bank, have not yet responded to the request for full disclosure, according to the Water’s office.)
"The OCC also released engagement letters that describe how the independent consultants, retained by the servicers, will conduct their file reviews and claims processes to identify borrowers who suffered financial injury as a result of deficiencies identified in the OCC's consent orders. The letters identify the names of the independent consultants conducting the reviews and include language stipulating that consultants would take direction from the OCC throughout the reviews," the OCC report said.
The disclosure of the consultant engagement letters for each servicer has already had a huge impact. The Financial Times reports that the New York Attorney General "launched an investigation into possibly unlawful foreclosures on the mortgages of active-duty members of the US military." The foreclosure review engagement letters posted by the OCC included estimates prepared by the banks and their consultants suggesting, according to the Financial Times, that 10 leading lenders may have seized the homes of about 5,000 service members in violation of the Servicemembers Civil Relief Act, which restricts foreclosures on the homes of active duty members of the U.S. armed forces.
Paul Leonard is vice president of government affairs for the Housing Policy Council, a group backed by the Financial Services Roundtable, an industry trade organization. Leonard is assisting with communications regarding foreclosure reviews on behalf of mortgage servicers. He told me they've held two conference calls already in November to brief hundreds of non-profits on borrower outreach programs. A nationwide advertising campaign is scheduled for the first two weeks of January. Borrowers have until April 30, 2012 to request a reviews of their cases.
Waters is less than impressed. "The OCC allowed the servicers to design an outreach questionnaire that will be sent out to 4 million impacted households which is confusing, full of legal jargon and will be difficult for the typical household to complete. Moreover, the OCC-approved servicer media outreach plan to eligible borrowers is weak at best, with a dozen mortgage servicers spending just $12 million on a media campaign to reach the 4 million affected households."
Waters is also still concerned about potential conflicts of interest between the servicers and the firms hired to do the foreclosure reviews. "My letters specifically asked for information on conflicts of interest between the banks and the consultants — which is precisely what the OCC redacted in the information they released last week. A cursory look into the banks and their consultants indicates that in some cases, there are substantial pre-existing relationships between the firms."
I'm still concerned, too.
The OCC took a big step towards transparency when it disclosed the consultants and law firms involved in the review process and posted 12 engagement letters between servicers and consultants. (The Fed has not officially decided whether they will disclose similar information for the servicers they oversee, but in response to follow-up from the Congresswoman's staff said they have not yet finalized their two engagement letters. We'll see...)
The extensive redactions make me more, not less, worried about potential conflicts. Some of the engagement letters are just blob after blob of blackout.
According to OCC spokesman Bryan Hubbard, "Limited proprietary and personal information has been redacted from the engagement letters including, but not limited to: names, titles and biographies of individuals; proprietary systems information; references to specific bank policy; fees and costs associated with the engagement; and specific descriptions of past work performed by the independent consultants."
Members of the committee, with the permission of committee Chairman Spencer Bachus (R-AL), will be allowed to view the engagement letters without redactions, the OCC's Hubbard says. Congresswoman Water’s staff plans to seek a full view, but the redacted information will not be made public.
If I could take a look, here’s a couple of things I would check:
- Names of key engagement leaders, especially from the Big Four audit firms. It would be enlightening, for example, to see whether any of the Deloitte partners proposed as consultants that is part of the foreclosure solution at JP Morgan/EMC, were previously part of the mortgage origination/securitization problems as auditors at Bear Stearns or Washington Mutual. Bear and Washington Mutual, both former Deloitte audit clients, are now part of JP Morgan Chase, and Deloitte is defending lawsuits over alleged audit failures at those firms.
- Consistency of hourly rates proposed across contracts for vendors involved in multiple reviews. Examples of firms involved in multiple reviews include Ernst & Young (involved in three reviews as both a primary consultant and subcontractor), PriceWaterhouseCoopers (involved in two reviews as a primary consultant), and Promontory Financial Group (involved in three reviews as primary consultant). Law firm Gibson Dunn is legal counsel for three reviews (retained by the consultant in two cases and by the bank directly in one). For example, one firm could be charging different rates to different banks for what is supposed to be a consistent review across servicers. That not only indicates banks can leverage their influence with vendors to get the review they want (and the monetary exposure estimate) at the price they want to pay, but that we may not get consistent results for borrowers that were harmed by multiple servicers.
One tricky area for the consultants and legal counsel is attorney-client privilege. The engagement letters include boilerplate language that emphasizes the OCC is the primary director of the engagement at each servicer. However, the level of emphasis of this fine point in the final versions varies.