In the wake of the financial crisis, banks mishandled foreclosures on such a scale that regulators stepped in. Led by the Office of the Comptroller of the Currency, they ordered banks to hire independent outsiders to identify homeowners who were wrongly foreclosed on and to provide compensation.
Instead of righting a large-scale wrong, however, the "lookback" reviews have become nearly as controversial as the original servicing blunders. Consumer advocates have blasted the reviews as lacking in independence. They allege that regulators have allowed banks to subvert the program by choosing their reviewers, weighing in on whether borrowers were harmed and even appealing consultants' decisions.
Obscured in the feuding is an issue potentially even more troubling than the questions about the consultants' independence: the cost of running the reviews has spiraled out of all proportion to their potential benefits.
Designed to compensate wronged homeowners, the review programs are almost certain to deliver several times more cash to the consultants overseeing them. Bankruptcy filings by ResCap, the former GMAC mortgage servicer slated to be acquired by Ocwen, state that the company will pay consultant PricewaterhouseCoopers $12,500 to review each of 20,000 loans for a total cost of a quarter-billion dollars. Yet ResCap expects to pay only $35 million to $60 million to harmed homeowners.
PwC employees working on the review are billing between $235 and $630 an hour, depending on seniority. The auditing firm declined to respond to emailed questions on the cost and its procedures.
Other servicers appear to be paying foreclosure reviewers similar fees per file, and the OCC has offered no reason not to use ResCap's filings as a proxy for the costs of its peers. The massive bills being incurred indicate that the banks aren't calling the shots, industry sources argue — the institutions are simply following orders and footing the tab for a program that has gone off the rails
"This is Kafkaesque," says an industry source who requested anonymity to avoid angering the OCC and independent reviewers. "The reviews don't provide any closure [to borrowers], and their cost is going to be orders of magnitude beyond what banks pay out."
Many of the independent foreclosure reviews' alleged flaws can be seen in the Bank of America loan lookback, run by consultant Promontory Financial Group. A spokesman for the bank offered a general description of its review operation for this story, but directed questions about the costs and design of the program to the OCC and Promontory.
The OCC and Promontory concede that performing the reviews has required more work than anticipated, but say that the disarray in banks’ records is at least partly to blame. The reviews are essential to compensate borrowers and restore confidence in the mortgage market, they say. The cost of the review for banks is not among the OCC’s concerns,Deputy Comptroller for Large Banks Morris Morgan wrote in response to emailed questions.
"The OCC has two primary objectives," he wrote. "One is to determine what was broke and to fix it. The second one is to ensure eligible borrowers receive a fair and impartial review ... Servicers will need to bear the necessary costs."
The Federal Reserve, which is overseeing the ResCap engagement and three smaller servicer reviews, declined comment.
Consumer advocates are not buying that the process is functioning as it should. Instead, they argue that regulators have bungled the job of creating an effective foreclosures revpiew and compensation process.
"A system to compensate the maximum number of homeowners as efficiently as possible would not look at all like the system that's in place," says Diane Thompson, of Counsel for the National Consumer Law Center.
Independence has been a sticking point in the foreclosure reviews since their start. The OCC and Fed gave banks the responsibility of selecting, and paying, independent consultants to design and implement foreclosure reviews.
The list of entities that won the work included mortgage due diligence specialists, like Clayton Services, auditors such as Deloitte and PricewaterhouseCoopers, and banking industry consultants Promontory and Treliant Risk Advisors.The hires reflected the scarcity of independent entities that both understood mortgage servicing and could be expected to handle the scale of the review projects, industry sources argue.
"They're all big companies doing financial services consulting," says one such person. "Are they really independent? No. Of course not."
Most of the consultants declined to address concerns about their relationships with banks. Promontory, which has done consulting work for Bank of America in the past, was the only one contacted by American Banker that was willing to discuss its process. It has no other current engagements and says it's now in everyone's interest to clean up past mistakes.
"Bank of America has been entirely open with us," says Elizabeth McCaul, the head of Promontory's New York office and an architect of its foreclosure review program. "They [bank executives] have not made it difficult for us to do the review despite the intrusiveness of it."
The sizable role that some banks have been permitted to play in the reviews became clear last November, when Congressional pressure forced the OCC to release engagement letters detailing the work consultants had been hired to do. Some outlined review methodologies that relied on the banks themselves to do much of the job.
Bank of America's agreement with Promontory, for example, put the bank in charge of compiling loan files that it would pass on and making initial recommendations about which individual borrowers had been harmed, ProPublica reported last month. Promontory retained the right to make the final call on borrower harm and compensation. Before that, however, Bank of America was given the opportunity to propose "revisions" to the reviewer's judgment before each review was settled.
The OCC, Promontory and Bank of America have argued that the engagement letter is outdated. All insisted first to ProPublica, and then to American Banker, that the bank's role was merely to gather and stage files in order to speed up the process.
"We are the only ones doing the review. That's a fact," says McCaul. "I've never seen a recommendation [from B of A] as to whether harm occurred."
In contrast, three B of A employees who did OCC foreclosure reviews tell American Banker that their duties involved both gathering files and offering recommendations about whether borrowers had legitimate claims. All three have since left the bank.
The facilities where the employees worked were overseen by bank executives and visited only every few weeks by a Promontory official, they say. One such facility was located inside a shuttered cafeteria on the largely empty Agoura Hills, Calif., corporate campus formerly owned by Countrywide Financial.
"If [Promontory and the OCC] wanted a truly independent foreclosure review, they should have had it offsite with no bank employees in the building," says one of the former B of A employees.
Postings for jobs inside Bank of America that involved foreclosure reviews appear to back up the view that that bank was effectively reviewing itself. A description of the duties of a B of A File Reviewer III, for example, includes collaborating with Promontory and providing "a recommendation whether or not any errors … resulted in financial injury to the borrower or the mortgagee," according to a B of A job posting announcement found by American Banker and confirmed by Promontory.
"I think what I should do is do some research," McCaul said when asked about the job description.
Promontory later said that the job descriptions it had previously described as current were also outdated, and had been changed. The company did not offer the new language, however, and the version described above continues to be used in job postings for foreclosure reviewers.