BANKTHINK

Regulators Must Take Responsibility for Failed Foreclosure Review

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Last Friday, the Federal Reserve and the Office of the Comptroller of the Currency finally began sending payments to the 4.2 million borrowers who were wronged in the foreclosure process in 2009 or 2010, under a settlement these agencies reached with several banks in December. The unfortunate news is that this relief is likely too little, too late.

Two years have gone by since the original consent order was signed in 2011. During that time, independent consultants, hired by the banks and poorly supervised by the regulators, were paid over $2 billion to review borrower records while affected borrowers received nothing. What precisely happened over the last two years and why it took so long for the regulators to realize the process wasn't working is what some of us in Congress are trying to get to the bottom of so that this kind of thing doesn't happen again. 

When the final settlement was signed in late 2012, I wrote Thomas Curry, the Comptroller of the Currency, and Ben Bernanke, Chairman of the Federal Reserve, on three occasions with specific questions about what went wrong and how they were going to reach and compensate the borrowers. I finally received an anemic reply in late March, without specific answers to my questions.

When Chairman Bernanke gave his semi-annual report on the economy and the Fed before the House Financial Services Committee in late February, I raised my concerns about the delays and confusion in implementing the original consent order program. To the chairman's credit, he did not dodge, weave or equivocate. He took responsibility, said they messed-up the program, and that they were moving ahead quickly to get compensation to borrowers.

There is plenty of blame to go around here. Through the course of my own examination of this process, I heard accounts of constantly shifting scope guidance from the regulators, a lack of a clear system to measure progress, concerns over conflicts of interest and a failure to effectively communicate with wronged borrowers.

Last month, a Government Accountability Office report found that, "The complexity of the foreclosure reviews and limitations in the regulators' guidance challenged their ability to achieve their stated goals of the process." I have no doubt that this was a very complex process. However, our country has overcome complexity before and this time it should have been no different.

So, what are the real lessons learned from this experience? The GAO report makes some general recommendations in the areas of sampling methodologies, getting direct payments to borrowers and improving transparency, but more specifics are needed. From the initial Senate Banking hearing in September 2011, it was clear that the prospects for the program did not look good. The outreach program was deficient. The letters to borrowers had too much "governmentese" language. The website was too difficult to navigate. Specifics about which wrongs would be compensated were absent. The list of concerns went on and on.

If we are to learn anything from the financial crisis of 2008, an essential component is to have federal regulators who are trained to develop and implement corrective programs, set measurable goals, report regularly to the oversight entities and take responsibility for their work. Without these guidelines, the public will quickly recognize that no lessons were learned from the OCC-Fed debacle.

Congress can certainly help address these issues, but the regulators must also recognize that they have a structural oversight problem, and they need to develop many of the remedies on their own.

Carolyn B. Maloney represents New York's 12th Congressional District. She is a senior member of the House Financial Services Committee and Ranking Member of its Subcommittee on Capital Markets and Government-Sponsored Enterprises.

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Comments (3)
The failure of Federal Financial Regulators in the foreclosure review is just the latest in a series of failures that began with their willful blindness to the imprudent sub-prime mortgage lending activities of the Too Big To Behave Banks that led to the 2d worst economic disaster in US history. Their failure to hold anyone or any institution responsible for this disaster allowed the US financial crisis to grow into a global financial crisis and to produce and prolong the Great Recession. Even if federal regulators are forced to accept responsibility for their serial failures, without adequate consequences (personally and corporately) there's little reason to expect these agencies to stop coddling the mega-banks that continue to victimize consumers whilst announcing record earnings.
Posted by jim_wells | Wednesday, April 17 2013 at 11:22AM ET
If we want badly needed financial reform, then regulators have to make some very tough decisions. We know that regulations have grown too much and many are ineffective. Most banks will become even less able to deal with the complexity now that most provisions of Dodd-Frank have been implemented. The cost and time burden has grown astronomically and result in a ratio of costs to equity a much higher burden for community banks. It does not appear to be enough emphasis placed on this fact by regulators.

Regulators are hanging their hat on risk models and stress-testing by the banks to ensure banks are not headed for trouble. Unfortunately stress-testing and models being used have never been back-tested and provide a false sense of security. One example to highlight the point is shown by Basel II capital standard being entirely ineffective in protecting banks from serious hardship during the most recent financial crisis.

Models are not shared with the industry, nor are they shared with other bank regulatory agencies. They remain a secret black box. Examination ratings remain a secret as well to all but the subject bank.

A number of empirical studies show that leverage capital to assets is the best predictor to determine whether bank will hold up during a major crisis. Also, the larger the leverage capital, the better secured is the bank which should translate to better examination ratings, and lower FDIC deposit insurance assessments.

While regulations are growing in leaps and bounds, the financial industry, which includes banks and shadow banks is outpacing regulations quite handily. Regulators, as a result, become less effective over time because they cannot keep pace with a more rapidly changing industry.

Since regulations and regulators become less effective, the only way to prevent TBTF and bank failures is to increase the capital of all banks. Due to the heightened complexity of the large banks and the additional resources (regulatory examinations, monitoring and FDIC insurance protection) large banks should be required to have higher leverage capital ratios on a graduated scale based on asset size. The higher capital, if appropriately high enough, should exert pressure for the large banks to shrink to a more reasonable size.
Posted by Dwihas3 | Wednesday, April 17 2013 at 10:10PM ET
To Honorable Carolyn B. Maloney, thank you for taking the proper stance. I have attempted to blow the whistle since 2006 about the lack of proper oversight at the FDIC. My supervisors thumbed their nose at me when I questioned their professionalism, gross negligence, conflicts of interest, and cronyism. I took my concerns first to the National Employee Treasury Union (NTEU) and experienced more incompetence and cronyism. The union president, a lawyer for the FDIC wouldn't meet with me or return a number of emails and phone messages. Never attended any meetings held on my behalf, including an arbitration hearing. I later found out he was best friends and a "car pool" buddy with the FDIC in-house lawyer assigned to defend the FDIC.
I took my complaints to two consecutive Ombudsmen who began investigations of my complaints. Both took early and unexpected retirement before they could complete their respective investigations. I never was allowed to meet with Chairman Bair to go over my concerns, although I kept her fully informed by email. I took my complaints to the FDIC Office of Inspector General and they refused to act on my whistleblower disclosures regarding abuse of power, gross negligence, gross waste of funds, and conflicts of interest. Even took my concerns to the Financial Crisis Inquiry Commission and never heard back.
Adding the most insult to injury is that had my warnings been acknowledged by top officials at the agency, I believe the financial crisis may have been stopped altogether. This not conjecture but supported by a litany of documents providing hard evidence. I realize most will be shocked to know that nearly everyone looking at the cause s for the bank crisis have missed the big picture. This was not by accident, but by design. Those in power, protected by political professionals, have been able to hide the truth from the public.
I have evidence showing how regulators knew that banks were securitizing toxic loans and not providing any "reps or warranties" to the purchaser. This was done to protect any legal exposure once downstream third party investors realized their securities were not performing. In 2007, I was already reporting to supervisors how the top 5 banks had deficient loan loss reserves of $25 billion. I reported on non-permissible accounting and on golden parachutes being paid by one of the largest banks after it received TARP funds. While my list of misdeeds goes on and on, my senior officials hid all that reported to them "under the rug." While I then made complaints to whomever I could get to listen, I was denied whistleblower protections as the Merit System Protection Board created their own alternative reason to deny me a hearing and protection. In a total misapplication of law, the MSPB ruled that I only took my concerns to my immediate supervisor because I did not want to be second guessed by the chairman. Of course this was just the opposite of what I provided to the MSPB as evidence.
If one believes in conspiracy theories, there is no better one than my account. The top four senior officials over me at the FDIC have now left the agency, including me. Fortunately, I know where all the skeletons are buried since I headed up the Large Insured Depository Institutions program until right up to the crisis in 2008. Fortunately, I can put all the pieces back together again so that Congress and the public finally can see how regulators were incompetent, misguided and as sleazy as some of the bankers who caused the nation such immeasurable harm. Yes, it is true; all the devils are here because there was a lack of oversight.

Dwight Haskins
djhask@gmail.com
http://govwhistleblower.wordpress.com/
Posted by Dwihas3 | Friday, April 19 2013 at 4:15PM ET
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