Mortgage-Deal Overlap with OCC Orders Complicates Oversight

The terms of the national mortgage settlement overlap to some extent with existing federal consent orders against the largest servicers, which could complicate banks' compliance efforts with both — and the role of the external settlement monitor.

The 14 largest servicers are already attempting to comply with the terms of consent orders from the Office of the Comptroller of the Currency. Now independent monitor Joseph A. Smith, Jr., will be overseeing the five largest servicers' new efforts to comply with the terms of the $25 billion settlement with state and federal officials.

Consumer groups have praised the settlement's aggressive oversight functions, which includes a mix of internal and external oversight. But some industry members question whether the existence of the consent orders will help or hinder that oversight. For example, it is unclear if Smith will be able to use the information gleaned from the consent orders, which has been confidential.

"If Joe Smith started with the OCC information, he would be a significant way down the track. It's a valuable asset that I hope they're going to use," says former Arizona attorney general Terry Goddard, now a senior advisor at Treliant Risk Advisors and a senior counsel at the law firm SNR Denton.

But "I'm a little skeptical, because I haven't seen a lot of discussion between the regulatory effort and the AG effort," Goddard adds. "I don't know that many of the AGs are aware of the depth of the work on the OCC consent orders … and how comprehensive and complicated it is. As long as we have these agreements operating in isolation, the opportunity for the market to stabilize will be elusive."

There are clear distinctions between the consent orders and the national settlement, whose final terms were released last week. The settlement is prospective in nature, meaning it was designed to help borrowers currently in the foreclosure process stay in their homes, in part by requiring principal reductions, refinancing and loss mitigation.

The consent orders issued last year by the Office of the Comptroller of the Currency are retrospective, focused primarily on assessing the harm done to borrowers who were in the process of foreclosure in 2009 and 2010. Regulators mandated that servicers hire third party consultants to conduct "look-back" reviews and to identify how many borrowers may have been harmed by a variety of foreclosure errors. But the OCC has largely allowed the servicers and consultants to determine how borrowers will be repaid for the banks' errors.

One bank lawyer described the two agreements as similar to a Venn diagram, with plenty of overlap.

"They may not fit together like hands in a glove, but they are trying to synchronize that," says the lawyer, who works for a mortgage servicer and did not want to speak publicly. "Everything in the [settlement] servicing standards is consistent with what the OCC wants, so there may not be tension between them. They share a common goal."

OCC spokesman Bryan Hubbard says the agency's consent orders and the national settlement "were independent but complementary."

"If there is one [agreement] where the standard is higher, that's the one you get held to," Hubbard says.

But there are big differences as well. The state attorneys general created specific metrics with clearly-defined error-rate thresholds in the settlement.

That differs dramatically from the OCC's consent orders. With so many third-party consultants in the mix, consensus on issues including a remediation plan has been hard to achieve, stalling the process. The consultants working for servicers have spent months trying to craft a remediation plan that would determine the amounts borrowers who file claims through the OCC would be paid, based on various types of harm caused by improper foreclosures. The plan is expected in the next few weeks.

"One of the questions about the OCC process is why they didn't just have one independent consultant instead of allowing each servicer to hire their own, which raises questions about how they would ensure a consistent review or process," says Paul Leonard, the California director for the Center for Responsible Lending.

"The structure they created is pretty unwieldy," he adds.