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The foreclosure review process mandated by a federal consent order is turning out to be far more punitive and costly than banks and mortgage servicers initially thought, industry sources say.
November 1 -
OCC head tells American Banker regulatory symposium that banks could face restitution after complaint reviews. Gruenberg, meanwhile, announces FDIC community-bank initiatives.
September 19
WASHINGTON — Regulators have identified how borrowers may have been harmed by a multitude of foreclosure errors, but they are largely leaving it to the servicers and their consultants to figure out how to fix it.
While the regulators will ultimately approve any remediation plan as part of the independent foreclosure review, they have encouraged the independent consultants to work with the 14 servicers to come up with a template for remediation.
The group is meeting in Washington this week to hash out more details, but sources familiar with the process say competing interests from large and small servicers — and strong differences of opinions about how to compensate borrowers — will make it difficult to achieve consensus. Some suggested federal regulators will have to be more explicit about what they will approve.
"This has been the most complex aspect of the overall consent order process to date," said Catherine Brown, a managing director at Treliant Risk Advisors, one of eight independent consultants. "There are some issues that I'm just not sure we can obtain absolute consensus on without more definitive direction by the regulators."
Sources said the Office of the Comptroller of the Currency has not required the group to work together, but has urged them to come up with a framework for remediation that can be applied consistently.
Under the consent orders signed in April by the 14 largest mortgage servicers, the independent consultants will review loan files to determine if errors have occurred, whether those errors resulted in financial injury and how the borrower should be compensated.
The orders technically require the servicers to submit their own remediation plans. But sources said the responsibility for crafting those plans shifted to the independent consultants over the summer when regulators decided they wanted the consultants to report their findings and recommend remediation on a rolling basis.
A steering committee of several consultants has been working for weeks on a draft text that gives more detail about types of financial injury that could result from servicing errors, and offers guidelines for servicers to remedy borrower harm.
But there are concerns among some people involved in the process that the servicers — particularly the larger ones — may be playing too large a role in shaping the remediation guidelines.
"Even though the overall burden has shifted to the independent consultants from a formal perspective, from a practical perspective the servicers have still had a lot of involvement," said an individual working for one of the independent consulting firms. "There is some concern that the regulators will be critical of that, and that ultimately it's the servicers' agendas that are precluding greater consensus, rather than the independent consultant's agendas."
The regulators and servicers insist that the process, including the development of remediation guidelines, is independent.
"The independent reviewer makes the recommendations, which then the servicers have to respond to and all of that will be reviewed by the regulators, so it will be an independent process with oversight from the regulators," said Paul Leonard, the vice president of government affairs for the Financial Services Roundtable's Housing Policy Council, which is coordinating communications for the servicers related to the consent orders.
Bryan Hubbard, a spokesman for the OCC, said the independence of the consultants and their reviews has been a priority from day one.
"The OCC and other federal regulators have been very clear on this issue, and rejected some proposed consultants and law firms to avoid conflicts of interests," Hubbard said. "Regulators required language in the engagement letters to ensure independence. As we progress, we will be monitoring the conduct of the reviews to ensure they are free from undue influence."
The OCC intends to use the proposal from the steering group as a basis for additional guidance on remediation, and will be asking the group to submit final recommendations within the next several weeks.
Although some consensus has been reached, sources said it's doubtful that the group will reach unanimous agreement on a final plan.
"I think we'll get a document that many people are comfortable with, that the OCC and the Fed will probably push us to go further with in many respects, and some people will probably say, 'I don't support this, I think it's wrong for legal reasons or political reasons,'" another person participating in the discussions said this week.
The process has unfolded in three steps.
The regulators issued guidance last summer listing 22 scenarios that could have resulted in borrower harm, including if the mortgage balance at the time of the foreclosure was more than a borrower actually owed; if a borrower was meeting the requirements of a modification agreement, but a foreclosure sale still happened; and if fees or charges were calculated inaccurately.
But the guidance said nothing about what servicers should do next.
"We kind of wanted the regulators to go further than they did, and we've created a process to try and see how far we can go," the person participating in the process said.
Brown said the scenarios help determine which borrowers might deserve remediation, but give no indication how to remediate a borrower injured under scenario one versus scenario seven, for example.
"Having to figure out something that reflects distinctions between different types of injury, and then doing so on a consistent basis not only within the servicers but across the servicers, it's very hard to do," Brown said.
Starting in September, the steering committee asked their fellow independent consultants and the 14 servicers to share any work product that might provide a framework for a collective approach to remediation.
Using several documents from servicers and consultants, the group began to develop a draft text, which they shared on a weekly — and more recently, daily — basis with the rest of the independent consultants and servicers.
So far, the committee has focused on identifying the types of harm that could arise from the scenarios outlined by the OCC. The process looks much like a decision tree, sources said.
For example, if a borrower is assessed improper fees, several injuries could result. They could have paid too much money. Or they could have not paid the fees, resulting in a deficiency judgment against them.
That may have resulted in a negative impact on their credit report, or in an extreme case, could have led to the foreclosure and sale of their home. The remediation for losing their home unfairly would obviously be different than the remediation for paying too much in fees.
The final step, which the group intends to focus on at the meeting, is determining how a borrower should be compensated under any of the various circumstances.
People involved in the process said the servicers and their lawyers, as well as the consultants, each have different philosophical and legal opinions about what harm really consists of and different views on what kind of remediation is fair. In many cases, the law isn't clear and the standards are still evolving.
"Everyone feels like their judgment will be second-guessed, no matter what their decisions are," the person involved in the process said. "The stakes are high."
One consultant said finding a one-size-fits-all approach may not be practical.
The consultant said larger servicers, for example, have been seeking a broader definition of "injury" as they anticipate the requirements of a potential settlement with state attorneys general, the consultant said. With so many files to review, they also favor a more formulaic approach to restitution, the consultants said.
But what if borrowers have been harmed several ways? Or what if the injury doesn't fall under one of the specific scenarios identified by regulators?
Smaller servicers with smaller pockets, however, would like a more flexible approach, taking the time to review loan files on a case-by-case basis and carefully compare them to other borrowers in similar situations.
"Thinking about this from a fairness perspective and doing what's right to really make borrowers whole, it's really challenging," Brown said. "It's part science and part art, and I think the art part is where we will potentially run into some difficulty."
