Let’s take a look at the enforcement in the foreclosure fraud settlement. How will the servicers be made to meet their obligations?
This is all covered in Exhibit E of the settlement documents. This starts out by telling us that the servicers will have up to 180 days to actually phase in the implementation of both the servicing standards (more on that later) and the consumer relief.
In addition to the Servicing Standards and any Mandatory Relief Requirements that have been implemented upon entry of this Consent Judgment, the periods for implementation will be: (a) within 60 days of entry of this Consent Judgment; (b) within 90 days of entry of this Consent Judgment; and (c) within 180 days of entry of this Consent Judgment. Servicer will agree with the Monitor chosen pursuant to Section C, below, on the timetable in which the Servicing Standards and Mandatory Relief Requirements (i) through (iv) will be implemented. In the event that Servicer, using reasonable efforts, is unable to implement certain of the standards on the specified timetable, Servicer may apply to the Monitor for a reasonable extension of time to implement those standards or requirements.
So six months from now, elements of this settlement may not be implemented, and servicers can ask for an extension beyond six months.
But wait! There’s a monitoring committee. Joseph Smith, the former Obama Administration nominee for FHFA Director, and the current banking regulator for North Carolina, becomes the enforcement monitor under the settlement. And he will lead a committee made up of members from the offices of the state AGs and banking regulators, DoJ and HUD. The servicers will pay for this committee, and they will have oversight responsibilities over the settlement. We’re told that the monitors “shall be highly competent and highly respected” (really, that’s in there) and that they can have no relationships with the banks they will oversee. The monitor can fine banks for $1 million on a first violation and up to $5 million for additional violations.
You can make this sound great (senior officials did to reporters), and make it sound the way it actually will go. So here’s a stab at the latter. While the monitor’s job is defined as determining “whether the Servicer
is in compliance with the Servicing Standards and the Mandatory Relief Requirements,” that starts with a review delivered by the banks themselves on their own conduct.
Page E-3 details the “internal review group”:
Servicer will designate an internal quality control group that is independent from the line of business whose performance is being measured (the “Internal Review Group”) to perform compliance reviews each calendar quarter (“Quarter”) in accordance with the terms and conditions of the Work Plan (the “Compliance Reviews”) and satisfaction of the Consumer Relief Requirements after the (A) end of each calendar year (and, in the discretion of the Servicer, any Quarter) and (B) earlier of the Servicer assertion that it has satisfied its obligations thereunder and the third anniversary of the Start Date (the “Satisfaction Review”). For the purposes of this provision, a group that is independent from the line of business shall be one that does not perform operational work on mortgage servicing, and ultimately reports to a Chief Risk Officer, Chief Audit Executive, Chief Compliance Officer, or another employee or manager who has no direct operational responsibility for mortgage servicing.
So the bank can take their own employees out of another part of the bank and have them conduct a quarterly review, which then gets passed to the monitors and becomes the initial basis for enforcement. Even if you believe these will be “independent” internal reviews, we’ve seen with the OCC foreclosure reviews that those independent reviewers paid for and hired by the banks typically write bank-friendly reports. In fact, a later note indicates that “The Internal Review Group may include non-employee consultants or contractors working at Servicer’s direction.”
We’re talking about a baseline here. Instead of empowering the monitor to hire inspectors to determine whether the servicer is meeting the obligations of the settlement, the banks deliver that information through a quarterly self-report. Only after the self-report, three months after the conduct described in it, can the monitor judge the veracity of it. Obviously that starts things on a far different baseline than a monitor-directed review.
Then we have to talk about “Threshold Error Rates.” There are allowances made for errors in the servicing of loans, set forth in Schedule E-1. For example, they can have a 1% error rate for “foreclosure sale in error.” There are allowable wrongful foreclosures in this framework. Incorrect modification denials jump to a 5% threshold error rate. That’s the error rate for notifying borrowers of their ability to seek a modification, consistency of fees and timely posted payments. This settlement codifies a fair number of errors built into the servicing process.
The monitor then gets to look at the reports after they get filed, to determine compliance. They get to see all the work papers associated with preparing the report, but really it’s a job of checking the bank’s work, rather than actually inspecting compliance for themselves. The monitor only can initiate a review after the fact, “If the Monitor becomes aware of facts or information that lead the Monitor to reasonably conclude that Servicer may be engaged in a pattern of noncompliance with a material term of the Servicing Standards that is reasonably likely to Relief Requirements.” The monitor can also move to a third-party review at that time.
These sound suspiciously similar to the Treasury Department’s oversight of HAMP, which has resulted in no actual sanctions despite documented evidence of abuse (some of which was folded into this settlement). If this is such a good idea, we should stop sending out food inspectors and let agribusiness self-report their findings on tainted meat and produce, and the inspectors will sit back in Washington and check the work.
And check it out, the servicers have the right of appeal over the monitor!
Prior to issuing any Monitor Report, the Monitor shall confer with Servicer and the Monitoring Committee regarding its preliminary findings and the reasons for those findings. Servicer shall have the right to submit written comments to the Monitor, which shall be appended to the final version of the Monitor Report. Final versions of each Monitor Report shall be provided simultaneously to the Monitoring Committee and Servicers within a reasonable time after conferring regarding the Monitor’s findings. The Monitor Reports shall be filed with the Court overseeing this Consent Judgment and shall also be provided to the Board of Servicer or a committee of the Board designated by Servicer.
How sporting of them. Servicers also have the “right to cure” any violation found within a certain time period.
Oh, and by the way, this all sunsets in three years:
Sunset. This Consent Judgment and all Exhibits shall retain full force and effect for three and one-half years from the date it is entered (the “Term”), unless otherwise specified in the Exhibit. Servicer shall submit a final Quarterly Report for the last quarter or portion thereof falling within the Term, and shall cooperate with the Monitor’s review of said report, which shall be concluded no later than six months following the end of the Term, after which time Servicer shall have no further obligations under this Consent Judgment.
So the blather about how this will change servicing as we know it only holds until 2015. All bets are off after that. Of course, CFPB now has enforcement responsibilities over servicers, and the authority to write standards and rules. But if that’s the case, then the servicing standards in the settlement are superfluous.