The $25 billion national mortgage settlement essentially allows the five largest servicers to police themselves — which has made many consumer advocates surprisingly happy.
The settlement's final terms,
That hybrid system of internal and external monitoring drew praise this week from consumer advocates, who called Smith and his role crucial to the settlement's success. Paul Leonard, the California director for the Center for Responsible Lending, says Smith will have one of the most aggressive oversight functions he has seen in any agreement stemming from banks' dealings with borrowers.
"The monitor has a fairly broad license to get into the servicers' businesses," says Leonard. "It's pretty clear the state attorneys general learned from previous settlements,
That 2008 settlement between state officials and Bank of America was supposed to provide relief to 400,000 homeowners, who had mortgages from the former Countrywide Financial Corp. But two of the 11 state attorneys general that settled a lawsuit with B of A, which now owns Countrywide, later claimed the bank did not live up to the settlement's terms. Last year Nevada and Arizona sued B of A, claiming the bank modified only 50,000 loans, not 400,000. (B of A denied the allegations.)
Such fallout from previous experiences led officials to hold out for a more rigorous oversight process when negotiating the deal with Bank of America, Citigroup Inc., JPMorgan Chase & Co., Wells Fargo & Co., and Ally Financial Inc.
But state and federal officials also had to take practical considerations into account. Overseeing the five largest servicers would be rather difficult to do without any cooperation from the banks themselves - hence the banks' internal monitoring groups. As Leonard puts it, "How would one even think about collecting this data, apart from through the institutions that are actually administering the programs?"
Representatives from other consumer groups, including the National Consumer Law Center and the National Association of Consumer Advocates, also endorsed the new settlement's requirements for monitoring servicer compliance.
"Clearly each bank has to have an internal process to determine the metrics, and Joe Smith will have access to the information to see if the banks are telling the truth," says Ira Rheingold, the executive director of the National Association of Consumer Advocates.
"This is such a big job, and each bank has to have an internal process to determine the metrics of how they meet the goals and receive credits and how they report it," he adds. Smith "will have the ability to dig deeper into the case files and sample them to ensure they are complying with the servicing guidelines."
One former banking regulator says it would be hard to find a better way to ensure greater compliance.
"What they've put in place here is a pretty rigorous structure, through resources with independence from the business line, for ensuring the terms of the settlement are carried out," says the former regulator, who now works in consulting and would not comment publicly.
"If the self-policing isn't working well, it's going to be a busy monitor," the person adds.
