Occ Interacency Review-nov 1

8/3/2019 Occ Interacency Review-nov 1

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Interagency Reviewof Foreclosure Policies

and Practices

Federal Reserve SystemOce of the Comptroller of the Currency

Oce of ThriSupervision

W g , D . C . A 2 0 1 1


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Interagency Reviewof Foreclosure Policies

and PracticesFederal Reserve System

Oce of the Comptroller of the CurrencyOce of ThriSupervision

W g , D . C . A 2 0 1 1


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i

Contents

ExecutiveSummary................................................................................................................. 1ReviewScopeandObjectives.............................................................................................1SummaryofReviewFindings ..............................................................................................2SummaryofSupervisoryResponse ...................................................................................4

Part1:BackgroundandRisksAssociatedwithWeakForeclosureProcessandControls.................................................................5

ImpactonBorrowers............................................................................................................. 5ImpactontheIndustryandInvestors.................................................................................6ImpactontheJudicialProcess ...........................................................................................6ImpactontheMortgageMarketandCommunities.........................................................6

Part2:ReviewFindings ......................................................................................................... 7ForeclosureProcessGovernance.......................................................................................7OrganizationalStructureandAvailabilityofStaffing........................................................8AffidavitandNotarizationPractices ...................................................................................8DocumentationPractices ..................................................................................................... 8Third-partyVendorManagement ........................................................................................9ArrangementswithOutsideLawFirms .....................................................................................9ArrangementswithDefaultManagementServiceProviders(DMSPs)........................................10ArrangementswithMortgageElectronicRegistrationSystems,Inc...........................................10

IneffectiveQualityControl(QC)andAudit .......................................................................11Part3:SupervisoryResponse .............................................................................................13Part4:IndustryReforms...................................................................................................... 15

GovernanceandOversight................................................................................................. 15OrganizationalStructure,Staffing,andTechnology .......................................................15AccountabilityandResponsivenessDealingwithConsumers ....................................15


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ExecutiveSummary

TheFederalReserveSystem,theOfficeoftheComp-trolleroftheCurrency(OCC),theFederalDepositInsuranceCorporation(FDIC),andtheOfficeofThriftSupervision(OTS),referredtoastheagencies,conductedon-sitereviewsofforeclosureprocessingat14federallyregulatedmortgageservicersduringthefourthquarterof2010.1Thisreportprovidesasummaryofthereviewfind-ingsandanoverviewofthepotentialimpactsassoci-atedwithinstancesofforeclosure-processingweak-nessesthatoccurredindustrywide.Inaddition,thisreportdiscussesthesupervisoryresponsemadepub-licsimultaneouswiththeissuanceofthisreport,aswellasexpectationsgoingforwardtoaddresstheciteddeficiencies.Thesupervisorymeasuresemployedbytheagenciesareintendedtoensuresafeandsoundmortgage-servicingandforeclosure-processingbusinesspracticesareimplemented.Thereportalsoprovidesanoverviewofhownationalstandards

for

mortgage

servicing

can

help

address

specificindustrywideweaknessesidentifiedduringthesereviews.

ReviewScopeandObjectivesTheprimaryobjectiveofeachreviewwastoevaluatetheadequacyofcontrolsandgovernanceoverser-1 Agenciesconductedforeclosure-processingreviewsatAllyBank/

GMAC,AuroraBank,BankofAmerica,Citibank,EverBank,HSBC,JPMorganChase,MetLife,OneWest,PNC,SovereignBank,SunTrust,U.S.Bank,andWellsFargo.Thereviewsincludedmortgage-servicing activitiesconductedbyinsuredbanksandthrifts,aswellasbyseveralnonbankaffiliatesoftheseorganizations.The14servicerswereselectedbasedontheconcentrationoftheirmortgage-servicing andforeclosure-processingactivities.Theagenciestypicallydonotdiscloseexaminationsorexaminationfindingsregardingparticularinsti-tutions.Inlightoftheformalenforcementactionsenteredintobythese14servicers,whicharebeingmadepublic,theagencieshavedeterminedthatitisappropriatetoidentifytheservicers(whetherabankorabankaffiliate)thatwerereviewed.ThebankandthriftholdingcompanyparentsofAllyBank/GMAC,BankofAmerica,Citibank,Everbank,HSBC,JPMorganChase,MetLife,OneWest,PNC,SunTrust,U.S.Bank,andWellsFargoalsoenteredintoformalenforcementactions.

vicersforeclosureprocessesandassessservicersauthoritytoforeclose.Thereviewsfocusedonissuesrelatedtoforeclosure-processingfunctions.Whilethereviewsuncoveredsignificantproblemsinforeclosureprocessingattheservicersincludedinthereport,examinersreviewedarelativelysmallnumberoffilesfromamongthevolumesofforeclosuresprocessedbytheservicers.Therefore,thereviewscouldnotpro-videareliableestimateofthenumberofforeclosuresthatshouldnothaveproceeded.Theagencies,there-fore,arerequiringeachservicertoretainanindepen-dentfirmtoconductathoroughreviewofforeclo-sureactionsthatwerependingatanytimefromJanu-ary1,2009,throughDecember31,2010,to,amongotherthings,1)identifyborrowersthathavebeenfinanciallyharmedbydeficienciesidentifiedintheindependentreviewand2)provideremediationtothoseborrowerswhereappropriate.Theseindepen-dentreviewswillbesubjecttosupervisoryoversighttoensurethatthereviewsarecomprehensiveandtheresults

are

reliable.

Forthereviewsdiscussedinthisreport,examinersevaluatedeachservicersself-assessmentsoftheirforeclosurepoliciesandprocesses;assessedeachser-vicersforeclosureoperatingproceduresandcontrols;interviewedservicerstaff involvedinthepreparationofforeclosuredocuments;andreviewed,collectivelyforallservicers,approximately2,800borrowerfore-closurefilesthatwereinvariousstagesoftheforeclo-sureprocessbetweenJanuary1,2009,andDecem-ber31,2010.2

Examinersfocusedonforeclosurepoliciesandproce-dures;qualitycontrolandaudits;organizationalstructureandstaffing;andvendormanagement,2 Foreclosurefilesateachservicerwereselectedfromthepopula-

tionof in-processandcompletedforeclosuresduring2010.Theforeclosurefilesampleateachservicerincludedforeclosuresfrombothjudicialstatesandnonjudicialstates.Reviewteamsindependentlyselectedforeclosurefilesamplesbasedonpre-establishedcriteria(suchasfilesforwhichconsumercomplaintshadbeenraised,orthoseingeographicareaswithhighvolumesofforeclosures)withthebalanceofthefilesselectedbasedonexaminerjudgment.


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includinguseofthird-partyvendorssuchasforeclo-sureattorneys,LenderProcessingServices(LPS)andotherdefault-serviceproviders,andMERSCORPanditswhollyownedsubsidiary,MortgageElec-tronicRegistrationSystems,Inc.(MERS).Basedontheirreviewsofthelimitednumberofforeclosure-filesamples,examinersalsoassessedtheaccuracyofforeclosure-relateddocumentation,includingnoteendorsementsandtheassignmentsofmortgagesanddeedsoftrust,andloandocumentcontrol.3Withrespecttothosefiles,examinersalsoassessedwhetherfeeschargedinconnectionwiththeforeclosuresexceededtheamountsreflectedintheservicersinter-nalrecords.Inaddition,theFederalReserveandtheOCCsolicitedviewsfromconsumergroupstohelpdetectproblemsatspecificservicers,andtheFederalReserveexpandedthefilesampletoincludeborrow-erswhoweredelinquent,butnotyetinforeclosure.Thefilereviewsdidnotincludeacompleteanalysisofthepaymenthistoryofeachloanpriortoforeclo-sureorpotentialmortgage-servicingissuesoutsideoftheforeclosureprocess.Accordingly,examinersmaynothaveuncoveredcasesofmisappliedpaymentsorunreasonablefees,particularlywhentheseactionsoccurredpriortothedefaultthatledtotheforeclo-sureaction.Theforeclosure-filereviewsalsomaynothaveuncoveredcertainfactsrelatedtotheprocessingofaforeclosurethatwouldleadanexaminertocon-cludethataforeclosureotherwiseshouldnothaveproceeded,

such

as

undocumented

communications

betweenaserviceremployeeandtheborrowerinwhichtheemployeetoldtheborrowerheorshehadtobedelinquentontheloantoqualifyforamodifi-cation.Inaddition,thereviewsdidnotfocusonloan-modification processes,butwhenreviewingindividualforeclosurefiles,examinerscheckedforevidencethatservicerswereincontactwithborrow-ersandhadconsideredalternativeloss-mitigationefforts,includingloanmodifications.Toensureconsistencyinthereviews,theagenciesusedstandardizedworkprogramstoguidetheassessmentandtodocumentfindingspertainingtoeachservicerscorporategovernanceprocessandtheindividualforeclosure-filereviews.Theworkpro-gramswereorganizedintothefollowingcategories: Policiesandprocedures.Examinersreviewedthe

servicerspoliciesandprocedurestoseeiftheyForpurposesofthisreport,defaultmanagementservicesgener-allyincludeadministrativesupportandservicesprovidedtotheservicersbythird-partyvendorstomanageandperformthetasksassociatedwithforeclosures.

providedadequatecontrolsovertheforeclosureprocessandwhetherthosepoliciesandproceduresweresufficientforcompliancewithapplicablelawsandregulations.

Organizational

structure

and

staffing.

Examiners

reviewedthefunctionalunit(s)responsibleforfore-closureprocesses,includingtheirstaffinglevels,theirstaffsqualifications,andtheirtrainingprograms.

Managementofthird-partyserviceproviders.Examinersreviewedtheservicersoversightofkeythirdpartiesusedthroughouttheforeclosurepro-cess,withafocusonforeclosureattorneys,MERS,anddefault-serviceproviderssuchasLPS.

Qualitycontrolandinternalaudits.Examinersassessedquality-controlprocessesinforeclosures.Examinersalsoreviewedinternalandexternalauditreports,includinggovernment-sponsoredenterprise(GSE)andinvestorauditsandreviewsofforeclosureactivitiesaswellasservicersself-assessments.

Compliancewithapplicablelaws.Examinerscheckedtheadequacyofthegovernance,audits,andcontrolsthatservicershadinplacetoensurecompliancewithapplicablelaws.

Lossmitigation.Examinersdeterminedifservicerswereindirectcommunicationwithborrowersandwhetherloss-mitigationactions,includingloanmodifications,wereconsideredasalternativestoforeclosure.

Criticaldocuments.Examinersevaluatedservicerscontrolovercriticaldocumentsintheforeclosureprocess,includingthesafeguardingoforiginalloandocumentation.Examinersalsodeterminedwhethercriticalforeclosuredocumentswereintheforeclosurefilesthattheyreviewed,andwhethernoteswereendorsedandmortgagesassigned.

Riskmanagement.Examinersassessedwhetherservicersappropriatelyidentifiedfinancial,reputa-tional,andlegalrisksandwhethertheseriskswerecommunicatedtotheboardofdirectorsandseniormanagementoftheservicer.

SummaryofReviewFindingsThereviewsfoundcriticalweaknessesinservicersforeclosuregovernanceprocesses,foreclosuredocu-mentpreparationprocesses,andoversightandmoni-toringofthird-partyvendors,includingforeclosureattorneys.Whileitisimportanttonotethatfindings

3


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variedacrossinstitutions,theweaknessesateachser-vicer,individuallyorcollectively,resultedinunsafeandunsoundpracticesandviolationsofapplicablefederalandstatelawandrequirements.4Theresultselevatedtheagenciesconcernthatwidespreadrisksmaybepresentedtoconsumers,communities,vari-ousmarketparticipants,andtheoverallmortgagemarket.Theservicersincludedinthisreviewrepre-sentmorethantwo-thirdsoftheservicingmarket.Thus,theagenciesconsiderproblemscitedwithinthisreporttohavewidespreadconsequencesforthenationalhousingmarketandborrowers.Basedonthedeficienciesidentifiedinthesereviewsandtherisksofadditionalissuesasaresultofweakcontrolsandprocesses,theagenciesatthistimearetakingformalenforcementactionsagainsteachofthe14servicerssubjecttothisreviewtoaddressthoseweaknessesandrisks.Theenforcementactionsrequireeachservicer,amongotherthings,toconductamorecompletereviewofcertainaspectsofforeclo-sureactionsthatoccurredbetweenJanuary1,2009,andDecember31,2010.ThespecificsupervisoryresponsesaresummarizedinPart3ofthisreport.Theloan-filereviewsshowedthatborrowerssubjecttoforeclosureinthereviewedfileswereseriouslydelinquentontheirloans.Aspreviouslystated,thereviewsconductedbytheagenciesshouldnotbeviewedasananalysisoftheentirelifecycleoftheborrowersloansorpotentialmortgage-servicingissuesoutsideoftheforeclosureprocess.Thereviewsalsoshowedthatservicerspossessedoriginalnotesandmortgagesand,therefore,hadsufficientdocu-mentationavailabletodemonstrateauthoritytofore-close.Further,examinersfoundevidencethatser-vicersgenerallyattemptedtocontactdistressedbor-rowerspriortoinitiatingtheforeclosureprocesstopursueloss-mitigationalternatives,includingloanmodifications.However,examinersdidnotecasesinwhichforeclosuresshouldnothaveproceededduetoaninterveningeventorcondition,suchasthebor-rower(a)wascoveredbytheServicemembersCivilReliefAct,(b)filedforbankruptcyshortlybeforetheforeclosureaction,or(c)qualifiedfororwaspayinginaccordancewithatrialmodification.5Theinteragencyreviewsidentifiedsignificantweak-nessesinseveralareas.4 Thisreportcapturesonlythesignificantissuesfoundacrossthe

servicersreviewed,notnecessarilyfindingsateachservicer.5 Servicemembers CivilReliefAct,50USCApp.sections.501

596,PublicLaw108-189.

ExecutiveSummary

Foreclosureprocessgovernance.Foreclosuregover-nanceprocessesoftheservicerswereunder-developedandinsufficienttomanageandcontroloperational,compliance,legal,andreputationalriskassociatedwithanincreasingvolumeoffore-closures.Weaknessesincluded: inadequatepolicies,procedures,andindepen-

dentcontrolinfrastructurecoveringallaspectsoftheforeclosureprocess;

inadequatemonitoringandcontrolstooverseeforeclosureactivitiesconductedonbehalfofservicersbyexternallawfirmsorotherthird-partyvendors;

lackofsufficientaudittrailstoshowhowinfor-mationsetoutintheaffidavits(amountofindebtedness,fees,penalties,etc.)waslinkedtotheservicersinternalrecordsatthetimetheaffidavitswereexecuted;

inadequatequalitycontrolandauditreviewstoensurecompliancewithlegalrequirements,poli-ciesandprocedures,aswellasthemaintenanceofsoundoperatingenvironments;and

inadequateidentificationoffinancial,reputa-tional,andlegalrisks,andabsenceof internalcommunicationaboutthoserisksamongboardsofdirectorsandseniormanagement.

Organizational structureandavailabilityofstaff-ing.

Examiners

found

inadequate

organization

and

staffingofforeclosureunitstoaddresstheincreasedvolumesofforeclosures.

Affidavitandnotarizationpractices.Individualswhosignedforeclosureaffidavitsoftendidnotper-sonallycheckthedocumentsforaccuracyorpos-sessthelevelofknowledgeoftheinformationthattheyattestedtointhoseaffidavits.Inaddition,someforeclosuredocumentsindicatedtheywereexecutedunderoath,whennooathwasadminis-tered.Examinersalsofoundthatthemajorityoftheservicershadimpropernotarypracticeswhichfailedtoconformtostatelegalrequirements.Thesedeterminationswerebasedprimarilyonser-vicersself-assessmentsoftheirforeclosurepro-cessesandexaminersinterviewsofservicerstaffinvolvedinthepreparationofforeclosuredocuments.

Documentationpractices.Examinersfoundsomebutnotwidespreaderrorsbetweenactualfeeschargedandwhattheservicersinternalrecordsindicated,withservicersunderchargingfeesasfre-quentlyasoverchargingthem.Thedollaramount


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4 April2011

ofoverchargedfeesascomparedwiththeser-vicersinternalrecordswasgenerallysmall.

Third-partyvendormanagement.Examinersgener-allyfoundadequateevidenceofphysicalcontroland

possession

of

original

notes

and

mortgages.

Examinersalsofound,withlimitedexceptions,thatnotesappearedtobeproperlyendorsedandmortgagesanddeedsoftrustappearedproperlyassigned.6Thereviewdidfindthat,insomecases,thethird-partylawfirmshiredbytheservicerswerenonethelessfilingmortgageforeclosurecom-plaintsorlost-noteaffidavitseventhoughproperdocumentationexisted.

Qualitycontrol(QC)andaudit.Examinersfoundweaknessesinqualitycontrolandinternalauditingproceduresatallservicersincludedinthereview.

SummaryofSupervisoryResponseTheagenciesrecognizethatanumberofsupervisoryactionsandindustryreformsarerequiredtoaddresstheseweaknessesinawaythatwillholdservicersaccountableforestablishingnecessarygovernanceandcontrols.Measuresthattheservicersarebeingrequiredtoimplementaredesignedtoensurecompli-ancewithapplicablelaws,promoteforeclosurepro-cessinginasafeandsoundmanner,andestablishresponsiblebusinesspracticesthatprovideaccount-abilityandappropriatetreatmenttoborrowers.6 Theagenciesexpectfederallyregulatedservicerstohavethenec-

essarypoliciesandproceduresinplacetoensurethatnotesareproperlyendorsedandmortgagesareproperlyassigned,sothatownershipcanbedeterminedatthetimeofforeclosure.Wherefederallyregulatedservicersserveasdocumentcustodiansforthemselvesorotherinvestors,theagenciesrequirecontrolsandtrackingsystemstoproperlysafeguardthephysicalsecurityandmaintenanceofcriticalloandocuments.

Atthistime,theagenciesaretakingformalenforce-mentactionagainsteachofthe14servicersandpar-entbankholdingcompaniesbecausethedeficienciesandweaknessesidentifiedduringthereviewsrepre-sentunsafeorunsoundpracticesandviolationsofapplicablelaw.Theforeclosure-filereviewsshowedthatborrowersinthesampledpoolwereseriouslydelinquent.Thereviewsalsoshowedthattheappro-priatepartybroughttheforeclosureaction.However,alimitednumberofmortgagesshouldnothavepro-ceededtoforeclosurebecauseofaninterveningeventorcondition.Nevertheless,theweaknessesinser-vicersforeclosureprocesses,asconfirmedbythereviews,presentsignificantrisktothesafetyandsoundnessofmortgageactivities.Thefailuresanddeficienciesidentifiedaspartofthereviewsmustberemediedswiftlyandcomprehensively.Theagencieswillcontinuetoassessandmonitorcor-rectiveactionsandwilladdressservicersfailurestocorrectidentifieddeficiencieswherenecessary.Goingforward,servicersmustdevelopanddemon-strateeffectiveriskmanagementofservicingopera-tionstopreventarecurrenceofdeficienciescitedinthisreport.Theagenciesarecurrentlyengagedinanefforttoestablishnationalmortgage-servicingstan-dardstopromotethesafeandsoundoperationofmortgage-servicingandforeclosureprocessing,includingstandardsforaccountabilityandrespon-sivenesstoborrowerconcerns.SuchaneffortwillincludeengagingtheGovernmentSponsoredEnter-prises,privateinvestors,consumergroups,theservic-ingindustry,andotherregulators.Part4ofthisreportprovidesageneraloverviewofthecoreprin-ciplesthatshouldbeincludedinfuturenationalmortgage-servicingstandards.


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Figure1.Concentrationofthemortgage-servicingIndustry

32%

68% 14 examined servicers

All other servicers

Source:FederalReservestaffestimatesoftheconcentrationofservicingvolume,basedondatafromInsideMortgageFinance.

Part1:BackgroundandRisksAssociatedwithWeakForeclosureProcessandControls

Mortgageservicingplaysacentralroleintheman-agementofmortgageloansfromoriginationtofinaldisposition.Themortgageserviceristheintermedi-arybetweenborrowersandtheirlenders.Whentheborrowerispayingasagreed,theservicersdutiesareministerial:collectingpayments,distributingpay-mentstoinvestors,managingcashandadministeringfundsinescrow,andreportingtoinvestors.Whenaloanisindefault,thedemandsontheservicerneces-sarilyexpand,requiringadditionalresourcesandmuchmoresophisticatedriskmanagement.Aneces-saryconsequenceofthegrowthinforeclosuressince2007isincreaseddemandsonservicersforeclosureprocesses.Theresidentialmortgage-servicingmarketishighlyconcentratedamongafewservicers.Thefivelargestmortgageservicersbyactivityvolumeincludedamongthe14servicerssubjecttothereviewsaddressedinthisreportaccountfor60percentofthe

industrys

total

servicing

volume.

7The

14

ser-vicersincludedintheinteragencyreviewcollectively

representmorethantwo-thirdsoftheservicingindustry(seefigure1),ornearly36.7million

8mortgages.

Attheendofthefourthquarterof2010,nearly54millionfirst-lienmortgageloanswereoutstand-ing,2.4millionofwhichwereatsomepointintheforeclosureprocess.Additionally,twomillionmort-gageswere90ormoredayspastdueandatanelevatedriskofforeclosure.Newforeclosuresareonpacetoapproach2.5millionbytheendof2011.Inlightofthenumberofforeclosuresandcontinuedweaknessinoverallmortgageperformance,theagen-ciesareconcernedthatthedeficienciesinforeclosure7 ThefivelargestmortgageservicersinorderareBankof

America,WellsFargo,JPMorganChase,Citibank,andAllyBank/GMAC.

8 FederalReservestaffestimates54millionfirst-lienmortgagesoutstandingasofDecember31,2010.

processingobservedamongthesemajorservicersmayhavewidespreadconsequencesforthehousingmarketandborrowers.

ImpactonBorrowersWeaknessesinforeclosureprocessesandcontrolspresenttheriskofforeclosingwithinaccuratedocu-mentation,orforeclosingwhenanotherinterveningcircumstanceshouldintercede.Evenifaforeclosureactioncanbecompletedproperly,deficienciescanresult(andhaveresulted)inviolationsofstatefore-closurelawsdesignedtoprotectconsumers.Suchweaknessesmayalsoresultininaccuratefeesandchargesassessedagainsttheborrowerorproperty,whichmaymakeitmoredifficultforborrowerstobringtheirloanscurrent.Inaddition,borrowerscanfindtheirloss-mitigationoptionscurtailedbecauseofdual-trackprocessesthatresultinforeclosuresevenwhenaborrowerhasbeenapprovedforaloanmodi-fication.Theriskspresentedbyweaknessesinfore-closureprocessesaremoreacutewhenthosepro-cessesareaimedatspeedandquantityinsteadofqualityandaccuracy.


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ImpactontheIndustryandInvestorsWeaknessesinforeclosureprocessesposeavarietyofriskstothefinancialservicesindustryandinvestors.Theserisksextendbeyondthefinancialcostofrem-edyingproceduralerrorsandre-filingaffidavitsandotherforeclosuredocuments.Servicersmayalsobearlegalcostsrelatedtodisputesovernoteownershiporauthoritytoforeclose,andtoallegationsofproce-duralviolationsthroughtheuseof inaccurateaffida-vitsandimpropernotarizations.Servicersmaybesubjecttoclaimsbyinvestorsasaresultofdelaysorotherdamagescausedbytheweaknesses.Further-more,concernsabouttheprevalenceof irregularitiesinthedocumentationofownershipmaycauseuncer-taintyforinvestorsofsecuritizedmortgages.Ser-vicersandtheiraffiliatesalsofacesignificantreputa-tionalriskwiththeirborrowers,withthecourtsys-tem,andwithregulators.

ImpactontheJudicialProcessWeaknessesinforeclosureprocesseshaveresultedinincreaseddemandsonjudicialresourcestoresolveavarietyofforeclosure-relatedmatters,includingnoteownership.Inaddition,courtsrelyextensivelyonaffidavits(usuallyaffidavitsofindebtedness)submit-tedbyservicerstodecideforeclosureactionsonasummarybasiswithoutrequiringin-persontesti-mony.9Ifsuchaffidavitswerenotproperlypreparedorexecuted,courtsmayloseconfidenceinthereli-abilityoftheaffidavitsaspersuasiveevidencefiledonbehalfofservicers.109 Thebasicaffidavitof indebtednesstypicallysetsforththename

ofthepartythatownstheloan,thedefaultstatus,andtheamountsdueforprincipal,interest,penalties(suchaslatecharges),andfees.Thisaffidavitisfrequentlytheprincipalbasisuponwhichacourtispermittedtoorderaforeclosurewithoutrequiringin-persontestimony.Similardocumentationmayberequiredinbankruptcyproceedings.

10 Mortgageforeclosuresoccurundereitherajudicialoranonju-dicialprocess.Judicialforeclosuresarecourt-supervisedandrequirethelendertobringacourtactiontoforeclose.Nonjudi-cialforeclosures(alsoknownaspowerofsale)involvelittleor

ImpactontheMortgageMarketandCommunitiesWeaknessesinforeclosureprocessesledseveralser-vicers

to

slow,

halt,

or

suspend

foreclosure

proceed-ingsinlate2010,and,inmanycases,re-fileforeclo-

suredocuments.Delaysinforeclosureprocessing,whichaveraged450daysinthefourthquarterof2010,slowtheclearingofexcessinventoryoffore-closedpropertiesandleadtoextendedperiodsofdepressedhomeprices.11Suchdelaysalsoimpedetheefficientdispositionofforeclosedhomesandtheclearingofseriouslydelinquentmortgages,particu-larlyingeographicregionswithgreaterconcentra-tionsofvacantandabandonedproperties.Thisout-comeactsasanimpedimentforcommunitieswork-ingtostabilizelocalneighborhoodsandhousingmarkets.

12

Moreover,localpropertyvaluesmaybeadverselyaffectedifforeclosedhomesremainvacantforextendedperiods,particularlyifsuchhomesarenotproperlymaintained.13Widelypublicizedweaknessesinforeclosureprocessesalsoadverselyaffecthomebuyerandinvestorconfidence.Assuringrobustandcredibleremedialprogramsformortgageservicerssothatforeclosureprocessescanoperateandmarketscanclearwithoutimpedimentsorinterventionscon-tributestoattainingastablenationalhousingmarket.

nocourt

oversight

and

generally

are

governed

by

state

statutes.

Evenforeclosuresthatareinstitutedoutsidethejudicialprocesscanbechallengedincourt,however,andthenbecomesubjecttocourtactions.

11 SeeLenderProcessingServicesAppliedAnalytics(Decem-ber2010,www.lpsvcs.com/RiskMgmt).Currenttimeframestomoveapropertytoforeclosuresalehaveincreasedfromanaver-ageof250daysinfirstquarter2008to450daysbyfourthquar-ter2010.

12 Industrydatashowapproximatelyfourmillionpropertiescur-rentlylistedthathavebeenforeclosedinthepastfewyears.SeeMortgageBankersAssociation,NationalDelinquencySurvey,(November18,2010,www.mbaa.org/NewsandMedia/PressCenter/74733.htm) .

13 Campbell,JohnY.,StefanoGiglioandParagPathak(July2010)ForcedSalesandHousePricesManuscript,HarvardUniversityDepartmentofEconomics(kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdf).
http://www.lpsvcs.com/RiskMgmthttp://www.lpsvcs.com/RiskMgmthttp://www.mbaa.org/NewsandMedia/PressCenter/74733.htmhttp://www.mbaa.org/NewsandMedia/PressCenter/74733.htmhttp://www.mbaa.org/NewsandMedia/PressCenter/74733.htmhttp://www.mbaa.org/NewsandMedia/PressCenter/74733.htmhttp://kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdfhttp://kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdfhttp://kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdfhttp://kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdfhttp://kuznets.fas.harvard.edu/~campbell/papers/forcedsales072410.pdfhttp://www.mbaa.org/NewsandMedia/PressCenter/74733.htmhttp://www.mbaa.org/NewsandMedia/PressCenter/74733.htmhttp://www.lpsvcs.com/RiskMgmt


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Part2:ReviewFindings

Thereviewsfoundcriticalweaknessesinforeclosuregovernanceprocesses,foreclosuredocumentprepara-tionprocesses,andoversightandmonitoringofthird-partylawfirmsandothervendors.Theseweak-nessesinvolveunsafeandunsoundpracticesandvio-lationsofapplicablefederalandstatelawsandrequirements,andtheyhavehadanadverseeffectonthefunctioningofthemortgagemarkets.Byempha-sizingspeedandcostefficiencyoverqualityandaccuracy,examinedservicersfosteredanoperationalenvironmentcontrarytosafeandsoundbankingpractices.Inconnectionwiththereviewsofsampledfilesandassessmentsofservicerscustodialactivities,examin-ersfoundthatborrowerswhosefileswerereviewedwereseriouslydelinquentontheirmortgagepay-mentsatthetimeofforeclosureandthatservicersgenerallyhadsufficientdocumentationavailabletodemonstrateauthoritytoforecloseonthoseborrow-ers

mortgages.

14Nevertheless,

examiners

noted

instanceswheredocumentationintheforeclosurefilealonemaynothavebeensufficienttoproveowner-shipofthenoteatthetimetheforeclosureactioncommencedwithoutreferencetoadditionalinforma-tion.Whenadditionalinformationwasrequestedandprovidedtoexaminers,itgenerallywassufficienttodetermineownership.Inaddition,reviewoftheforeclosurefilesshowedthatservicerswereincontactwiththedelinquentborrowersandhadconsideredloss-mitigationalter-natives,includingloanmodifications.Examinersalsonotedasmallnumberofforeclosuresales,however,thatshouldnothaveproceededbecauseofaninter-14 Aspreviouslynoted,examinerswerelimitedtothedocuments

intheforeclosurefiles.Thosedocumentsmaynothavedis-closedcertainfactsthatmighthaveledexaminerstoconcludethataforeclosureshouldnothaveproceeded,suchasmisappli-cationofpaymentsthatcouldhaveprecipitatedaforeclosureactionororalcommunicationsbetweentheborrowerandser-vicerstaffthatwerenotdocumentedintheforeclosurefile.

veningeventorcondition,suchastheborrower:(a)wascoveredbytheServicemembersCivilReliefAct,(b)filedbankruptcyshortlybeforetheforeclo-sureaction,or(c)wasapprovedforatrialmodification.Asummaryofthemajorfindingsidentifiedduringthereviewsissetforthbelow.ForeclosureProcessGovernanceExaminersfoundgovernanceateachexaminedser-vicerinneedofsubstantialimprovement,andoftencitedtheabsenceofsoundcontrolsandineffectivemanagementofforeclosureprocesses.Foreclosurepoliciesandproceduresatmanyoftheservicerswereeitherweakorneededsubstantialexpansiontopro-videeffectiveguidance,control,andongoingmoni-toring.Asnotedabove,examinersconcludedthatthemajorityofservicersreviewedhadinadequateaffida-vitandnotary-signingprocessesthatdidnotensureproperattestation(orverification)oftheunderlyingdocuments.Examinersfoundthatmostservicershadinadequatestaffinglevelsandtrainingprogramsthroughouttheforeclosure-processingfunctionandthatalargeper-centageofthestaff lackedsufficienttrainingintheirpositions.Thereviewsalsorevealedthatalloftheservicersreliedheavilyonoutsourcingarrangementswithoutsidecounselandotherthird-partyvendorstocarryoutforeclosureprocesseswithoutadequateoversightofthosearrangements.Someservicersfailedtoenterintocontractswiththeforeclosurelawfirmsperformingcriticalstepsintheforeclosurepro-cess,includingaffidavit- andnotary-preparationandsigningprocesses.Auditandquality-assurancecon-trolsandself-assessmentreviewsatalloftheexam-inedservicerslackedcomprehensivenessandfailedtoidentifyspecificweaknessesandprocessgaps.Detailsontheseareasofweaknessareincludedbelow.


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8 April2011

OrganizationalStructureandAvailabilityofStaffingAtthetimeofthereview,amajorityoftheservicershadinadequatestaffinglevelsorhadrecentlyaddedstaffwithlimitedservicingexperience.Inmostinstances,servicersmaintainedinsufficientstafftoappropriatelyreviewdocumentsforaccuracy,andprovidedinadequatetrainingforaffidavitsigners,notaries,andquality-controlstaff.Examinersalsonotedweakcontrols,undueemphasisonquantitativeproductionandtimelines,andinadequateworkloadmonitoring.

AffidavitandNotarizationPracticesDeficienciesinservicersprocesses,procedures,con-trols,andstaffingresultedinnumerousinaccurateaffidavitsandotherforeclosure-relateddocuments.Examinersfoundthatmostservicershadaffidavitsigningprotocolsthatexpeditedtheprocessesforsigningforeclosureaffidavitswithoutensuringthattheindividualswhosignedtheaffidavitspersonallyconductedtherevieworpossessedthelevelofknowl-edgeoftheinformationthattheyattestedtointhoseaffidavits.Examinersconfirmedthesedeficienciesthroughinterviewswithindividualswhosigneddocu-ments,aswellasthroughareviewofservicersself-assessments.Examinersalsofoundthemajorityoftheservicershadimpropernotarypracticesthatfailedtoconformtostatelegalrequirements.Exam-inersnotedsomeservicersfailedtomaintainanaccu-ratelistofapprovedandacceptablenotariesthatindividualssigningdocumentsdidnotdosointhepresenceofanotarywhenrequired,andthatdocu-mentsoftenwereexecutedinamannercontrarytothenotarysacknowledgementandverificationofthosedocuments.Inaddition,someforeclosuredocumentsindicatedtheywereexecutedunderoathwhennooathwasadministered.Again,examinersconfirmedthesedeficienciesbyinterviewingnotariesandreviewingservicersself-assessments.Attheexaminedservicers,anywherefrom100tomorethan25,000foreclosureactionsoccurredpermonthbetweenJanuary1,2009,andDecember31,2010,withthequantitydependinguponthesizeoftheservicersoperations.Itwascommontofindaninsufficientnumberofstaffassignedtoreview,sign,andnotarizeaffidavits.Atsomeoftheservicers,examinersfoundthatinsufficientstafforthelackofspecifiedguidancetostafforexternallawfirmson

affidavitcompletioncontributedtothepreparationandfilingof inaccurateaffidavits.Inthesampleofforeclosurefilesreviewed,examinerscomparedtheaccuracyoftheamountslistedonaffidavitsofindebtednesstothedocumentationinthepaperfore-closurefileorcomputerizedloanservicingsystems.Althoughborrowerswhoseforeclosurefileswerereviewedwereseriouslyindefaultatthetimeoftheforeclosureaction,someservicersfailedtoaccuratelycompleteorvalidateitemizedamountsowedbythoseborrowers.Atthoseservicers,thisfailureresultedindifferencesbetweenthefiguresintheaffidavitandtheinformationintheservicingsystemorpaperfile.Innearlyhalfofthoseinstances,thedifferenceswhichweretypicallylessthan$500wereadversetotheborrower.Whiletheerrorratesvariedamongtheservicers,thepercentageoferrorsatsomeservicersraisessignificantconcernsregardingthoseservicersinternalcontrolsgoverningforeclosure-relateddocumentation.

DocumentationPracticesDuringtheforeclosure-filereviews,examinerscom-paredtheaccuracyofamountslistedontheser-vicersaffidavitsof indebtednesswithdocumentationonfileormaintainedwithintheelectronicservicingsystemofrecord.Formostoftheservicers,examin-erscitedthelackofaclearauditabletrailinreconcil-ingforeclosurefilingstosourcesystemsofrecord.Insomecases,examinersdirectedservicerstofurtherauditforeclosurefilingstoverifytheaccuracyofinformationandcompliancewithlegalrequirements.Likewise,inconnectionwiththefilereview,examin-ersalsodeterminedwhethercriticalforeclosuredocu-mentswereintheforeclosurefiles,andwhethernotesappearedproperlyendorsedandmortgagesappearedproperlyassigned.Examinersnotedinstanceswheredocumentationintheforeclosurefilealonemaynothavebeensufficienttoproveauthoritytoforeclosewithoutreferencetoadditionalinformation.15Whenmoreinformationwasrequestedandprovided,itgenerallywassufficienttodetermineauthority.Withsomeexceptions,examinersfoundthatnotesappearedproperlyendorsed,andmortgagesappearedproperlyassigned.16Examinersalsotrav-15 Servicersfrequentlymaintainedcustodyoforiginalmortgage

documents,althoughinsomecasesthird-partytrusteesorcus-todiansheldoriginaldocuments.Custodiansareentrustedtomanagetheoriginaldocumentsthatestablishnoteownership,and,whennecessary,producetheoriginaldocumentsforafore-closureaction.

16 Onlyinrareinstanceswerecustodiansunabletoproduceorigi-


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9Part2:ReviewFindings

eledtoservicersdocumentrepositorylocationstoassesscustodialactivities.Examinersfoundthatser-vicersgenerallyhadpossessionandcontrolovercriti-calloandocumentssuchasthepromissorynotesandmortgages.Thereviewdidfindthat,insomecasespriorto2010,thethird-partylawfirmshiredbytheservicerswerenonethelessfilinglost-noteaffidavitsormortgageforeclosurecomplaintsinwhichtheyclaimedthatthemortgagenotehadeitherbeenlostordestroyed,eventhoughproperdocumentationexisted.

Third-partyVendorManagementTheagenciesfoundthattheservicersreviewedgener-allydidnotproperlystructure,carefullyconduct,orprudentlymanagetheirthird-partyvendorrelation-shipswithoutsidelawfirmsandotherthird-partyforeclosureservicesproviders.Failuretoeffectivelymanagethird-partyvendorsresultedinincreasedreputational,legal,andfinancialriskstotheservicers.ArrangementswithOutsideLawFirmsServicerstypicallyusedthird-partylawfirmstopre-pareaffidavitsandotherlegaldocuments,tofilecomplaintsandotherpleadingswithcourts,andtolitigateontheirbehalfinconnectionwithforeclosureand

foreclosure-related

bankruptcy

proceedings.

The

servicersreviewedgenerallyshowedinsufficientguid-ance,policies,orproceduresgoverningtheinitialselection,management,orterminationofthelawfirmsthathandledtheirforeclosures.Manyservicers,ratherthanconductingtheirownduediligence,reliedonthefactthatcertainfirmshadbeendesignatedasapprovedoracceptedbyinvestors.Servicersoftendidnotgoverntheirrelationshipswiththeselawfirmsbyformalcontracts.Instead,servicersfre-quentlyreliedoninformalengagementswithlawfirms,attimesrelyingoninvestorsbusinessrelation-shipswiththelawfirmsorthelawfirmscontractualrelationshipswithdefaultmanagementserviceproviders.InadequateOversightServicersalsodidnotprovideadequateoversightofthird-partyvendorlawfirms,includingmonitoringforcompliancewiththeservicersstandards.Several

nalloandocumentation,andinthoseinstancestheservicersgenerallywereabletoprovideadequateexplanations,includingthatcopiesinthepossessionofthecustodianwereacceptableunderapplicablelaw.

servicersexemptedthird-partylawfirmsfromtheservicersvendormanagementprogramsordidnotidentifythemasthird-partyvendorssubjecttothoseprograms.Insomecases,servicersassumedthatinvestorsperformedsuchoversight,inwhichcaseoversightwaslimitedtoensuringthatthelawfirmswereontheinvestorslistsofapprovedoracceptedproviders.Wheremonitoringof lawfirmswascon-ducted,itwasoftenlimitedtothingssuchasrespon-sivenessandtimeliness,checkingforliabilityinsur-ance,ordeterminingifanypowerofattorneygiventothefirmremainedvalidratherthanassessingtheaccuracyandadequacyof legaldocumentsorcom-pliancewithstatelawordesignatedfeeschedules.DocumentRetentionWeaknessesExaminersalsofoundthattheservicersdidnotalwaysretainoriginalsorcopiesofthedocumentsmaintainedbythethird-partylawfirmsthatcon-ductedtheirforeclosures.Instead,theservicersreliedonthefirmstomaintainthosedocuments.Theabsenceofcentralandwell-organizedforeclosurefilesbytheservicersandtheconsequentneedfortheexaminerstocollectforeclosuredocumentationderivedfromnumeroussourcesmadeitdifficultattimesforexaminerstoconductfullforeclosure-filereviewswhileon-site.Inadequateguidance,policies,procedures,andcontractsInaddition,examinersgenerallyfoundanabsenceofformalguidance,policies,orproceduresgoverningtheselection,ongoingmanagement,andterminationoflawfirmsusedtohandleforeclosures.Thisdefi-ciencyresultedinalackofclarityregardingroles,responsibilities,andperformanceparameters.Exam-inersalsoobservedanabsenceofwrittencontractsbetweencertainservicersandlawfirms,whichleftthoseservicerswithnocontractualrecourseforliabil-ityagainstthefirmsforperformanceissues.Thesedeficiencies,coupledwiththeoveralllackofadequateoversight,contributedtoinstancesinwhichservicersandlawfirmsfailedtoidentifyproblemswiththefirmsforeclosurepractices,therebyexpos-ingtheservicerstoavarietyofsignificantrisks.Thoseproblemsincludeinstancesinwhichlawfirmssigneddocumentsonbehalfofservicerswithouthav-ingtheauthoritytodoso,ortheychangedthefor-matandcontentofaffidavitswithouttheknowledgeoftheservicers.Thesedefectscould,dependinguponthecircumstances,raiseconcernsregardingthelegal-ityandproprietyoftheforeclosureeveniftheser-


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10 April2011

vicerhadsufficientdocumentationavailabletodem-onstrateauthoritytoforeclose.ArrangementswithDefaultManagementServiceProviders(DMSPs)Inconnectionwiththeon-sitereviewsofservicers,theagenciesalsoconductedanon-sitereviewofLenderProcessingServices,Inc.(LPS),whichpro-videssignificantservicestosupportmortgage-servicingandforeclosureprocessingacrosstheindus-try.ThereviewofLPSinvolvedanumberof issuesthataresimilartothoseraisedinthereviewsoftheservicers,andtheLPSreviewcoveredissuesthatareuniquetotheoperations,structureandcorporategovernanceofLPS.DuringthereviewofLPS,theagenciesfounddeficientpracticesrelatedprimarilytothedocumentexecutionservicesthatLPS,throughitsDocX,LLC,andLPSDefaultSolutions,Inc.sub-sidiarieshadprovidedtoservicersinconnectionwithforeclosures.Toaddresstheseissues,theagenciesaretakingformalenforcementactionagainstLPSundersection7(d)oftheBankServiceCompanyAct,12USC1867(d),andsection8(b)oftheFederalDepositInsuranceAct,12USC1818(b).InadequateContractsDuringthereviewofservicers,examinersassessedservicersrelationshipswiththird-partyvendorDMSPs,focusingprimarilyonDMSPsthatsup-ported

the

execution

of

foreclosure-related

docu-ments,suchasaffidavitsof indebtedness,lost-note

affidavits,andassignmentsofmortgages.17Examin-ersfoundthatcontractsbetweentheservicersandDMSPsgenerallywereinadequate,oftenomittingsignificantmatterssuchasservice-levelagreements.Contractsdidnotprovideforanappropriatelevelofoversightofthird-partyvendorlawfirmsinsitua-tionswheretheservicersreliedontheDMSPstoconductsuchoversight.InadequateOversightExaminersalsoobservedthatservicersgenerallydemonstratedanoveralllackofadequateoversightofDMSPs.Attimes,theservicersfailedtoidentifyDMSPsasvendorssubjecttotheservicersvendormanagementprogramsanddemonstratedaninabil-itytoprovidetheexaminerswithsufficientevidenceofduediligence.Examinersfoundnoevidencethatservicersconductedauditsofthedocumentexecu-tionoperationsoftheirDMSPs.

Notalloftheservicersengagedtheservicesofthird-partyvendorDMSPstoperformdocumentexecutionservices.

ThelackofsufficientoversightofDMSPs,coupledwiththecontractualdeficiencies,ledtoinstancesinwhichemployeesofthoseDMSPssignedforeclosureaffidavitswithoutpersonallyconductingtherevieworpossessingthelevelofknowledgeof informationthattheyattestedtointhoseaffidavits.EmployeesofDMSPs,liketheemployeesoftheservicersthem-selves,executeddocumentsinamannercontrarytothenotarysacknowledgementandverificationofthosedocuments.Inaddition,inlimitedinstances,employeesofDMSPssignedforeclosure-relateddocumentsonbehalfofservicerswithoutproperauthority.BecausesomeoftheservicersreliedonDMSPstooverseetheirthird-partyvendorlawfirms,thecontractualdeficienciesandlackofover-sightofDMSPscontributedtotheweaknessesiden-tifiedaboveregardingtheoversightofthird-partyvendorlawfirms.ArrangementswithMortgageElectronicRegistrationSystems,Inc.Inconnectionwiththeon-sitereviewsofservicers,theagencies,togetherwiththeFederalHousingFinanceAgency(FHFA),alsoconductedanon-sitereviewofMERSCORPanditswhollyownedsubsid-iary,MortgageElectronicRegistrationSystems,Inc.(collectively,MERS),which,asdetailedbelow,pro-videssignificantservicestosupportmortgage-servicingandforeclosureprocessingacrosstheindus-try.

The

review

of

MERS

involved

a

number

of

issuesthataresimilartothoseraisedinthereviewsoftheservicers,andtheMERSreviewcoveredissuesthatareuniquetotheoperations,structureandcor-porategovernanceofMERS.DuringthereviewofMERS,theagenciesandFHFAfoundsignificantweaknessesin,amongotherthings,oversight,man-agementsupervisionandcorporategovernance.Toaddresstheseissues,theagencies,togetherwithFHFA,aretakingformalenforcementactionagainstMERSundersection7(d)oftheBankServiceCom-panyAct,12USC1867(d),andsection8(b)oftheFederalDepositInsuranceAct,12USC1818(b).MERSstreamlinesthemortgagerecordingandassignmentprocessintwoways.First,itoperatesacentralizedcomputerdatabaseorregistryofmort-gagesthattrackstheservicingrightsandthebenefi-cialownershipofthemortgagenote.EachmortgageregisteredinthedatabaseisassignedaMortgageIdentificationNumber(MIN).Second,MERScanbedesignatedbyamember(anditssubsequentassignees)toserveinanomineecapacityasthemort-gageeofrecordinpubliclandrecords.Designating17


14/18

MERSasthemortgageeisintendedtoeliminatetheneedtoprepareandrecordsuccessiveassignmentsofmortgageseachtimeownershipofamortgageistransferred.Rather,changesinbeneficialownershipofthemortgagenote(andservicingrights)aretrackedintheMERSregistryusingtheMIN.18AlloftheexaminedservicershadrelationshipswithMERS.InadequateOversightServicersexercisedvaryinglevelsofoversightoftheMERSrelationship,butnonetoasufficientdegree.SeveraloftheservicersdidnotincludeMERSintheirvendormanagementprograms.Intheseinstances,theservicersfailedtoconductappropriateduediligenceassessmentsandfailedtomonitor,evaluate,andappropriatelymanagetheMERScon-tractualrelationship.DeficienciesincludedfailuretoassesstheinternalcontrolprocessesatMERS,failuretoensuretheaccuracyofservicingtransfers,andfail-uretoensurethatservicersrecordsmatchedMERSrecords.InadequateQualityControlExaminersalsodeterminedthatservicersquality-controlprocessespertainingtoMERSwereinsuffi-cient.Insomecases,servicerslackedanyquality-assuranceprocessesandreliedinsteadontheinfre-quentandlimitedauditsthatMERSperiodicallyconducted.Otherdeficienciesincludedthefailuretoconduct

audit

reviews

to

independently

verify

the

adequacyofandadherencetoquality-assurancepro-cessesbyMERS,andtheneedformorefrequentandcompletereconciliationbetweentheservicerssys-temsandtheMERSregistry.SeveralservicersdidnotincludeMERSactivitiesinthescopeoftheirauditcoverage.IneffectiveQualityControl(QC)andAuditExaminersfoundweaknessesinquality-controlpro-ceduresatallservicers,whichresultedinservicersnot

WhileMERSmaintainsaregistryofthebeneficialownershipofthemortgagenote,thisregistryisnotasystemof legalrecord.TheownershipofthenoteisdeterminedbytheUni-formCommercialCode,and,ifachangeinownershipofanoteisnotrecordedinMERSorisrecordedincorrectly,thetransferisstillvalid.

Part2:ReviewFindings 11

performingoneormoreofthefollowingfunctionsatasatisfactorylevel: ensuringaccurateforeclosuredocumentation,

includingdocumentationpertainingtothefeesassessed;

incorporatingmortgage-servicingactivitiesinto

theservicersloan-levelmonitoring,testing,andvalidationprograms;

evaluatingandtestingcompliancewithapplicablelawsandregulations,courtorders,poolingandservicingagreements,andsimilarcontractualarrangements;and

ensuringpropercontrolstopreventforeclosureswheninterveningeventsorconditionsoccurthatwarrantstoppingtheforeclosureprocess(e.g.,bankruptcy

proceedings,

applicability

of

the

Ser-vicemembersCivilReliefAct,oradherencetoa

trialorpermanentloanmodificationprogram).Examinersalsofoundweaknessesininternalauditingproceduresatalltheservicersincludedinthereview.Whenperformed,thefewinternalauditsconductedbyservicersfailedtoidentifyfundamentalcontrolissuesthatledtotheforeclosureprocessbreakdowns.Failurestoperforminternalauditseffectivelyresultedinservicersinabilitytoidentify,address,andinter-nallycommunicateforeclosure-processingrisks.Thefailurestoidentifyandcommunicatetheserisksresultedinservicersnotstrengtheningthequalityofrisk-managementprocessestoalevelconsistentwiththenature,increasingsize,andcomplexityoftheser-vicersforeclosureactivities.Moreover,failuretocon-ductcomprehensiveauditstoidentifyweaknessesinforeclosureprocessesresultedinservicersnottakingsufficientcorrectiveactiontostrengthenpolicyandproceduralgaps,increasestaffinglevels,andimprovetraininginresponsetosharplyrisingforeclosurevol-umespriortotheagenciesforeclosurereviews.Thefailuretoidentifytherisksassociatedwithforeclo-sureprocessingalsoresultedinservicersnottakingactiontoimproveforeclosuredocumentation-relatedprocessesrangingfromcustodyandcontrolofdocu-mentstopropernotarizationprocesses,ortoenhanceoversightofthirdpartiesmanagingforeclosureactivitiesontheirbehalf.

18


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Thispageleftintentionallyblank.


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Part3:SupervisoryResponse

Atthistime,theagenciesaretakingformalenforce-mentactionsagainsteachofthe14servicersundertheauthorityofsection8(b)oftheFederalDepositInsuranceAct,12USC1818(b).Thedeficienciesandweaknessesidentifiedbyexaminersduringtheirreviewsinvolvedunsafeorunsoundpracticesandviolationsoflaw,whichhavehadanadverseimpactonthefunctioningofthemortgagemarkets.Further-more,themortgageservicersdeficientforeclosureprocessesconfirmedduringthereviewshavecompro-misedthepublictrustandconfidenceinmortgageservicingandhaveconsequencesforthehousingmarketandborrowers.Theformalenforcementactionswillrequireservicers,amongotherthings,to: Complianceprogram:Establishacompliancepro-

gramtoensuremortgage-servicingandforeclosureoperations,includinglossmitigationandloanmodification,complywithallapplicablelegalrequirementsandsupervisoryguidance,andassureappropriatepoliciesandprocedures,staffing,training,oversight,andqualitycontrolofthoseprocesses.

Foreclosurereview:RetainanindependentfirmtoconductareviewofresidentialforeclosureactionsthatwerependingatanytimefromJanuary1,2009,throughDecember31,2010,todetermineanyfinancialinjurytoborrowerscausedbyerrors,misrepresentations,orotherdeficienciesidentifiedinthereview,andtoremediate,asappropriate,thosedeficiencies.

Dedicatedresourcesforcommunicatingwithborrowers/singlepointofcontact:Ensurethefol-lowing:effectivecoordinationofcommunicationwithborrowersrelatedtoforeclosure,lossmitiga-tion,andloanmodificationactivities;assurancethatcommunicationsaretimelyandappropriateanddesignedtoavoidborrowerconfusion;conti-nuityinthehandlingofborrowercasesduringtheloanmodificationandforeclosureprocesses;rea-sonableandgoodfaithefforts,consistentwithapplicablelawandcontracts,toengageinlossmitigationandforeclosurepreventionfordelin-

quentloanswhereappropriate;andassurancesthatdecisionsconcerninglossmitigationorloanmodificationswillbemadeandcommunicatedinatimelymanner.

Third-partymanagement:Establishpoliciesandproceduresforoutsourcingforeclosureorrelatedfunctionstoensureappropriateoversightandthatactivitiescomplywithallapplicablelegalrequire-ments,supervisoryguidance,andtheservicerspoliciesandprocedures,includingtheappropriateselectionandoversightofallthird-partyserviceproviders,includingexternallegalcounsel,DMSPs,andMERS.

Managementinformationsystems:Improveman-agementinformationsystemsforforeclosure,lossmitigation,andloanmodificationactivitiesthatensuretimelydeliveryofcompleteandaccurateinformationtofacilitateeffectivedecisionmaking.

Riskassessment:Retainanindependentfirmtoconductawritten,comprehensiveassessmentofrisksinservicingoperations,particularlyintheareasofforeclosure,lossmitigation,andtheadministrationanddispositionofotherrealestateowned,includingbutnotlimitedtooperational,compliance,transaction,legal,andreputationalrisks.

Inadditiontotheactionsagainsttheservicers,theFederalReserveandtheOTShaveissuedformalenforcementactionsagainsttheparentholdingcom-paniestorequirethattheyenhanceonaconsolidatedbasistheiroversightofmortgage-servicingactivities,includingcompliance,riskmanagement,andaudit.Theagencieswillmonitorandassess,onanongoingbasis,thecorrectiveactionstakenbytheservicersandholdingcompaniesthatarerequiredbytheenforcementactionsandtakefurtheraction,whennecessary,toaddressfailures.Enforcementactionsandmorefrequentmonitoringwillremaininplaceateachserviceruntilthatservicerhasdemonstratedthatitsweaknessesanddeficiencieshavebeencor-


17/18

14 April2011

rected,includingthatadequatepolicies,procedures, workstoidentifymorepromptlyandeffectivelytheandcontrolsareinplace.Theagencieswillcontinue potentialrisksinmortgage-servicingandotherbank-toexplorewaystoimprovetheirsupervisoryframe- ingoperations.


18/18

Part4:IndustryReforms

Financialregulatoryagenciesaredevelopingstan-dardswithintheirauthoritytoimprovethetranspar-ency,oversight,andregulationofmortgage-servicingandforeclosureprocessingandtosetadditionalthresholdsforresponsiblemanagementandopera-tionofmortgage-servicingactivities.Moreover,auniformsetofnationalmortgage-servicingandforeclosure-processingstandardswouldhelppromoteaccountabilityandappropriatenessindealingwithconsumersandstrengthenthehousingfinancemarket.Industryreformsthatcouldimprovetheoversightandregulationofmortgage-servicingandforeclosureprocessingshouldgenerallyincludestandardsthatrequireservicerstoaddressmajorareasofweak-nesseshighlightedinthereview,includinginthefol-lowinggeneralareas:GovernanceandOversight implementandroutinelyauditsoundenterprise-

widepoliciesandprocedurestogovernandcontrolmortgage-servicingandforeclosureprocesses

developqualitycontrolsforeffectivemanagementofthird-partyvendorswhosupportmortgage-servicingandforeclosureprocessing

strengthenthegovernancestandardsintendedtoensurecompliancewithapplicablefederalandstatelawsandcompanypoliciesandprocedures

developcompanystandardsthatemphasizeaccu-racyandqualityintheprocessingandvalidation

offoreclosureandotherservicing-relateddocu-mentsthroughouttheentireforeclosureprocess

OrganizationalStructure,Staffing,andTechnology increasestaffingtoadequatelevelsandprovide

themwithrequisitetrainingtoeffectivelymanagethevolumeofdefaultloansandforeclosures

upgradeinformationsystemsandpracticestobet-terstore,track,andretrievemortgage-relateddocuments

AccountabilityandResponsivenessDealingwithConsumers ensureborrowersareofferedappropriateloss-

mitigationoptions ensurepropercustodyandcontrolofborrower

documentsrelatedtotheservicingofthemortgage increasecoordinationbetweenlossmitigationand

foreclosure-processingunitstopreventinappropri-ateforeclosures

improvecommunicationwithborrowersandestab-lishmeasurablegoalsandincentivesfordeliveringaccurateinformationandresponsiveassistance

developcomplaint-resolution processesthatareroutinelymonitoredandmeasuredforqualityassurance

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