A $2 billion effort by regulators to have banks and hired consultants review botched U.S. foreclosures was poorly executed with limited monitoring, ending without compensation for victims despite more than a year of tedious searches through thousands of files.
“Regulators may have been able to better define the scope of activities and issue more complete guidance…” said the report Thursday by the Government Accountability Office.
The report also cited limited communication with borrowers and the public that “adversely impacted transparency and public confidence.”
The GAO also found that regulators did not consult with community groups, “such as national organizations representing housing counselors that have worked with individual borrowers on their loan modification and loss mitigation applications.”
The so-called Independent Foreclosure Review launched in 2011 lacked strong, focused and consistent guidance by banking regulators as they tried to uncover the depth of errors or wrongdoing in foreclosure actions against 4.2 million borrowers in 2009 and 2010 — many of whom lost their homes.
No one, the GAO indicates, including the overseeing regulators at the Office of the Comptroller of the Currency and the Federal Reserve, seemed to grasp the enormity of the task and the number of players involved in the process that would ultimately doom the vast majority of the reviews.
By January of this year, regulators opted to enter into consent orders with 13 mortgage servicers, many of them represented by the largest U.S. banks, including JPMorgan Chase, Bank of America, Wells Fargo and Citibank.
Payouts of up to $125,000 for the most serious cases of wrongful evictions are now expected to begin this month, according to postcards that were sent out by the paying agent for the regulators, Rust Consulting.
Third-party consultsants told the GAO that the initial Independent Foreclosure Review last year became too complicated and time-consuming.
“Consultants told us that some files may contain as many as 50 documents, potentially comprising more than 2,000 pages,” the GAO said. “Consultants also stated that the reviews were challenging because they covered such a wide variety of complex issues, including different state foreclosure laws, federal laws and regulations, and guidelines for federal and servicers’ proprietary loan modification programs.”
The process became bogged down through test questions for determining foreclosure documentation errors.
Consultants developed a series of test questions — generally yes or no questions — to identify potential errors. The number of test questions consultants used to conduct the file reviews varied. For example, one consultant said that their group had about 2,600 test questions, “with more than 4,000 discrete steps, while another consultant told us they had 16,000 test questions.”
The GAO report did say that regulators had “a robust system of regular meetings” involving third-party consultants, servicers, and regulators’ staff to discuss challenges with the files and help promote consistency among the reviews.
However, the GAO’s analysis found that the regulators’ “sampling approach” used as a guide for consultants did not include mechanisms to facilitate the regulators’ oversight.
For example, there was no objective method for regulators to use in determining “if consultants had conducted sufficient reviews and could stop their review activities, except in those cases where there were few or no errors.”
According to third-party consultants, regulators missed key opportunities by not requiring development of “common criteria or reference materials” that would serve as the basis for the foreclosure review process.
“Third-party consultants and their respective law firms we interviewed told us that they each developed their own test questions used by their file reviewers to determine whether any errors or financial harm occurred,” the GAO said.
Both Federal Reserve Chairman Ben Bernanke and Thomas Curry, U.S. Comptroller of the Currency, have testified before congress about the failure of the foreclosure reviews:
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