Foreclosure Review: Lessons Learned Could Enhance Continuing Reviews and Activities under Amended Consent Orders

What GAO Found

GAO found the following:

• Regulators' ability to achieve the goals of the foreclosure review was affected by the complexity of the reviews, as well as by overly broad regulator-issued guidance and limited monitoring for the consistency and sufficiency of consultants' review activities. For example, regulators' statistical sampling approach did not include mechanisms to allow the regulators to monitor consultants' progress toward finding as many harmed borrowers as possible. Our prior work has identified practices, such as assessing progress toward goals and designing monitoring during the planning stage of a project, as effective management practices. In addition, the Office of Management and Budget (OMB) has found that in planning data analysis activities, such as sampling, agencies should take necessary steps to ensure that they have collected the appropriate data from which to draw conclusions. Without using objective measures to compare review methods or assess sampling among consultants, regulators' ability to monitor progress toward achievement of foreclosure review goals was hindered.

• Although regulators publicly released more information on the foreclosure review process than is typically disclosed in connection with a consent order, the absence of timely and useful communication to the general public and individual borrowers at certain stages of the process impacted transparency and public confidence. To promote transparency, OCC and the Federal Reserve released redacted engagement letters between servicers and consultants, among other documents. However, some stakeholders felt there were gaps in the publicly released information, including the lack of detailed information on how the reviews were to be carried out. In addition, although borrowers who requested reviews under the foreclosure review process received an acknowledgement letter, some borrowers did not receive updates on their request for almost a year after the program was launched.

• The foreclosure review experience revealed lessons related to planning, monitoring, and communication that could help inform regulators' implementation of the amended consent orders and the remaining foreclosure reviews. In our prior work, we found that assessing lessons learned from previous experiences, such as through discussions with key participants and stakeholders, and applying these lessons can help strengthen future activities. Without assessing and applying relevant lessons learned, regulators might not address similar challenges in activities under the amended consent orders or in the continuing reviews. In particular, regulators announced the agreements that led to the amended consent orders without a clear communication strategy, including determining what information to provide to borrowers. GAO's internal control standards and our work related to best practices indicate that an effective communication strategy and timely reporting can enhance transparency and public confidence. Absent a clear strategy to guide regular communications with individual borrowers and the general public, regulators face risks to transparency and public confidence similar to those experienced in the foreclosure review.

Based on our findings, we recommended that OCC and the Federal Reserve improve oversight of sampling and consistency in the continuing reviews; apply lessons in planning and monitoring, as appropriate, to the activities of the amended consent orders and continuing reviews; and implement a communication strategy to keep stakeholders informed. The regulators agreed to take steps to implement these recommendations.

Why GAO Did This Study

This testimony discusses the Independent Foreclosure Review process. In April 2011, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Federal Reserve), and the Office of Thrift Supervision (OTS) issued consent orders against 14 mortgage servicers. These orders required the servicers to engage third-party consultants to review servicers' loan files to identify borrowers who had suffered financial harm due to errors, misrepresentations, or other deficiencies in foreclosure processing and recommend remediation for the harms these borrowers suffered. Roughly 4.3 million borrowers who were in some stage of foreclosure in 2009 and 2010 were eligible for the foreclosure review. As of December 2012, consultants had more than 800,000 loans slated for review. In January 2013, the regulators announced agreements that led to amended consent orders with 11 of the 14 servicers to discontinue foreclosure reviews and replace the reviews with a compensation framework that does not rely on determinations of whether borrowers suffered financial harm. The remaining 3 servicers, covering 450,000 borrowers (10 percent), are continuing with the foreclosure review work.

The remarks are based on our March 2013 report on the implementation of the foreclosure review and lessons learned that can be applied to the activities required by the amended consent orders and ongoing foreclosure reviews. The statement addresses (1) challenges to the achievement of the goals of the foreclosure review, (2) the extent of transparency in the foreclosure review process, and (3) lessons that could be useful for the activities under the amended consent orders and continuing reviews. As noted in our report, we were in the process of reviewing other aspects of the foreclosure review when OCC and the Federal Reserve announced the agreements. Neither our report nor this statement assesses the regulators' rationale for accepting the agreements nor any trade-offs involved in the regulators' choice to amend the consent orders with the servicers.

For more information, contact Lawrance L. Evans, Jr. at (202) 512-8678 or evansl@gao.gov.