The independent foreclosure review process was disorganized, ineffective and inconsistent, according to a draft report by the Government Accountability Office.
The report, which was obtained by American Banker and other media outlets late Wednesday, provides a damning look at the independent foreclosure reviews that were eventually scrapped by regulators in January in favor of a $9.3 billion settlement with most of the mortgage servicers involved.
The 72-page report provides details about what regulators and consultants were trying to accomplish—and how their efforts fell short. Following are the key lessons:
1. It Was Worse Than We Thought
From the outset, the independent foreclosure reviews appeared doomed to fail. Regulators gave servicers and their small armada of consultants vague guidance about what loans to review and what remediation to seek in case of errors. The result was multiple consultants interpreting the guidance different ways.
For example, consultants had different triggers to determine when to conduct additional analysis of errors found during loan sampling.
"Consultant A would conduct additional analysis of their sampled loan categories if one or more errors were found," the report said. "In contrast, Consultant B would conduct additional analysis only when five or more errors were found in their sampled categories."
Both approaches were technically compliant with the guidance laid out by regulators, but resulted in different outcomes.
"With the same number of errors identified through file reviews, some consultants would conduct additional analysis and some would not," the report said.
These kind of disparities were found throughout the process, the GAO said, with consultants treating similarly-situated borrowers in different ways.
"Broad guidance and limited monitoring reduced the potential usefulness of data from consultants and increased risks of inconsistency," the GAO said.
2. The Process Was Continually Changing
In response to questions from consultants, regulators repeatedly provided new guidance, a process that caused even greater disparities and confusion. For example, the Federal Reserve Board issued three clarifications of loan modification guidance, while the Office of the Comptroller of the Currency provided seven responses to frequent questions on modifications. Regulators insisted to the GAO that the process was "intentionally iterative where they responded to the most immediate need and used their evolving knowledge to help refine the guidance."
But that left consultants constantly developing new test questions on loan files, re-training reviewers and redoing completed file reviews, the GAO said.
The watchdog agency said that although the OCC and Fed made efforts to forge a common approach, they should have done more at the beginning of the process to ensure consultants took a similar tact.
3. Consumers and Others Were Left in the Dark
In some cases, borrowers that applied for remediation waited nearly a year to hear an update about their case. Overall, the GAO said regulators provided "limited communication with borrowers and the public," which "adversely impacted transparency and public confidence."
The OCC released two interim reports, but the GAO said those involved wanted more details about how the reviews were being conducted.
4. Report Suggests Doubt About Current Approach
Ultimately, regulators dropped the independent foreclosure reviews in favor of a broad-based settlement with most of the servicers involved.
While the GAO didn't generally comment on that, it did signal it saw problems there as well, noting that regulators have still not determined the payment amounts for different categories of borrowers because they have to wait to know the number of borrowers in each category. Regulators also have yet to determine what to do with any funds leftover if borrowers refuse them or do not cash their checks.
Rep. Maxine Waters, the lead Democrat on the House Financial Services Committee who called for the GAO examination of the independent foreclosure reviews, said the report shows that the OCC doesn't know the extent of the damage committed by servicers.
"The GAO demonstrates that the projected error rates which were used to negotiate a settlement had little bearing in fact," Waters said in a statement. "The OCC should therefore retract the servicer error rates they previously submitted to Congress and the press."
5. More Scrutiny of Bank Consultants
One of the key narratives of the battle over the foreclosure reviews has been the role of consultants, including Promontory Financial Group, in assessing the damage done to borrowers.
The GAO laid most of the blame for the problems with the review process at the feet of regulators, saying they should have done a better job ensuring accuracy and consistency. Still, the report provided ammunition for critics, including Waters, who announced she would pursue legislation to restrict the role of third parties in enforcement actions.
"Next week, I will introduce legislation to address the problem of relying on outside contractors for enforcement actions," Waters said. "Using outside contractors paid by the servicers themselves did not add to the 'independence' of the Independent Foreclosure Review. My bill will set standards for the use of such consultants so their incentives are clearly aligned with those of the public."