Independent consultants, the Government Accountability Office, and lawmakers have warned banking regulators over the past month that their foreclosure reviews were unfocused, behind schedule and headed for disaster.
Even as the Office of the Comptroller of the Currency and Federal Reserve Board publicly defended the process, they appear to have concluded the same thing.
The country's largest banks are likely to reach a settlement soon that would effectively put a stop to the reviews, which involved verifying borrower claims and performing "look backs" on their files for systematic errors, in return for as much as $10 billion, according to a story published Monday by The New York Times.
Independent consultants and outside attorneys confirmed the pending deal to American Banker, though it caught many of them off guard and they were still trying to learn details.
Promontory Financial — which heads the largest of the reviews for Bank of America and employs thousands of contractors — said it had not received any instructions to stop work or change its practices.
"Until we hear otherwise, we'll keep doing what we're doing," Promontory Financial spokeswoman Debra Cope wrote in an email.
A settlement will likely provide a faster resolution to allegations of foreclosure mistakes and misconduct during the current review process, which one foreclosure consultant previously told American Banker was going to drag at least into 2014.Such a deal would also provide tremendous political relief for the OCC, Fed, and the 14 banks involved, which faced a harsh review by the Government Accountability Office within the next month, according to multiple sources in Washington.
But thorny questions remain about how regulators will dole out the $3.75 billion in direct homeowner remediation payments that the Times reported is part of the settlement.
For now, the banks and their consultants are not saying much publicly.
A spokesman for the OCC stated only that the regulator is "committed to ensuring the Independent Foreclosure Review proceeds efficiently and to ensuring harmed borrowers are compensated as quickly as possible."
An irony of the foreclosure reviews is that both bankers and consumer advocates consistently criticized them as unlikely to turn up evidence of borrower harm, though the sides differed as to whether that was because the reviews were rigged or because little harm had occurred.
According to the foreclosure consultants and other sources, however, both sides were wrong. At a meeting earlier this year with Rep. Brad Miller and other members of Congress, Comptroller Thomas Curry said that a random sampling of foreclosures revealed that 11% of all foreclosures were flawed in ways that would require remediation payments or other compensation.
"I'm sure they're not going to ring a bell and say, we've got money, who wants some," says Rep. Brad Miller, an outgoing North Carolina Democrat on the House Financial Services Committee who in an interview earlier this month raised foreclosure review oversight concerns and suggested temporarily halting the program to sort out the problems. But "the idea of compensating [borrowers] without making some determination of who's been harmed and how is a little confusing to me."
The OCC's foreclosure review process has been controversial from its inception, though in recent months its troubles have come into sharp focus. The reviews relied on industry consultants and law firms that had long histories with the banks, relying in some cases on the banks to identify their own failings.
The process also became hugely expensive, with the average loan review costing $10,000 or more — multiples of what both banks and consumer advocates expected the average borrower will ever receive.
But the management of the program by the OCC and the Fed ultimately became a greater concern than questions of independence and cost.
The OCC left banks and the consultants they hired to design their own foreclosure reviews, and the process was launched well before essential details were hammered out, consultants told American Banker. Consultants were not informed of what harms their armies of temporary contractors were looking for. OCC and Fed guidelines on how to handle files were initially vague and then repeatedly changed. Perhaps worst of all, the OCC ran much of the process through its field examiners.
During a large meeting last month between the consultants and the regulators, the consultants asked for a much greater degree of oversight from regulators, according to contemporary accounts by people working for the consultants. Without it, the consultants warned, borrower outcomes would vary widely, leading to possible legal trouble and a backlash against both the consultants and the banks, they said.
"The agencies are pretty overwhelmed," an official at one independent foreclosure review told American Banker early this month. "It's got an unprecedented level of operational complexity and political scrutiny."
The OCC maintained that the process was on track, however, even providing updates in early December on the spike of borrower review applications filed in the wake of a $30 million media outreach blitz paid for by banks. Dec. 31 was supposed to be the deadline for the filing of consumer claims.
Consultants weren't the only ones to be concerned about the program's management, however. The GAO has been working on an analysis of the foreclosure review for several months. Follow up questions distributed to the consultants suggested that it was focused on the issue of regulatory coordination and standardization among the consultants' methods.
The GAO's general conclusions broadly matched those of his office, says Miller, whose office was in touch with the watchdog's staff.
"[Regulators] were almost certainly about to get a very critical review from the GAO," he said. "The reviews seems to have been somewhat haphazard, and they never quite got them organized."
The foreclosure review settlement will likely obviate some intractable problems in coordinating the widely unpopular, multi-year, multi-regulator, multi-bank process. It will also unchain Curry, who took office in April, from a mess inherited from his predecessors.
"This was not his idea or his design," Miller said. "And obviously, there were some real problems with it."
Ending, or at least curtailing, the reviews would raise a different, if more manageable, set of problems.
"Anything that they could have done to fix [the existing foreclosure review process] would have required replowing a lot of the same ground," Miller says. "Fixing it would be expensive and time consuming, but I don't know what they plan to do now."
Others raised similar concerns. Informed of the reported settlement during a lunchbreak, a foreclosure review contractor at JPMorgan Chase noted that the OCC-mandated outreach by the bank had brought in many thousands of borrower review requests. Rust Consulting, which handles borrower contact for all of the foreclosure consultants, is expected to continue funneling in relief applications for weeks or months.
Some of the requests already processed were clearly meritorious, the person says. But the borrowers weren't uniformly deserving.
"There were a lot of claims that come in that were bogus," the reviewer says. "It just calls into question how individual cases will be resolved."
For the consultants, ending the reviews would mean calling off whale-sized business engagements, though high-level employees at the firms that have spoken with American Banker have long maintained that a speedier end to the process would be a significant relief. Over the last year and a half, they have also drawn significant heat over allegations of profiteering and conflicts of interest.
"Most of the consultants hands are not clean," says Miller. "They were involved in the foreclosures in the first place, as were the law firms [working on the reviews]."
Given the confluence of consumer advocate skepticism about the foreclosure reviews, their cost to banks, and the hassle they caused for those administering them, few are likely to miss them if they're called off.
But perhaps more than any other response to the crisis, an abrupt conclusion of the reviews would illustrate the difficulty regulators and banks have had in identifying, much less fixing, operational failures.
"One of the things that I'm very worried about is what lesson will the agencies take away from this," said one of the foreclosure consultants in an interview earlier this month. "Doing a transactional review of borrowers who may have been harmed is a good impulse. I worry they'll decide that they're never going to do that again."