In an interesting case of one federal regulatory agency accusing another, the inspector general of the Treasury Department released a report that faulted the Office of the Comptroller of the Currency for failing to recognize or crack down on widespread foreclosure fraud practices.
As foreclosures skyrocketed across the country in the wake of the financial crisis, banks routinely filed flawed and fraudulent legal documents in a rush to keep up with the wave of defaults. But officials at the Office of the Comptroller of the Currency largely missed the fact that the mortgage servicers were cutting legal corners on such a large scale, according to Friday’s report.
“During this time OCC did not consider foreclosure documentation and processing to be an area of significant risk and, as a result, did not focus examination resources on this function,” the report stated. Rather, it said, the OCC relied too heavily on the banks’ internal auditing and quality-control reports. “We believe this reliance was misplaced,” the report stated.
The phrase “ineffective supervision” assumes there was any supervision at all by OCC. It’s beyond clear that this hasn’t happened at all for many years. OCC has become fully captured by bank interests; in the time scrutinized by this Treasury IG report, OCC was led by John Walsh, the deputy to former bank lobbyist John Dugan.
The entire Treasury report is here (PDF), and it’s actually a fairly passive affair. Though it does accuse OCC of a total lack of interest in fraudulent foreclosure practices, it chalks this up to a mere underestimation of risk, and the lack of updates to the Mortgage Banking Comptroller’s Handbook since the late 1990s. The handbook offers guidance to bank examiners for their supervision, and obviously it should be updated. But you don’t need a road map when you have reports coming in from all over the country about forged, back-dated and robo-signed signatures on foreclosure documents submitted to courts. Bank examiners aren’t complete idiots; they don’t need “look for Linda Green’s signature” in a handbook to recognize the problem. They’d have to be actively avoiding it.
We know from several whistleblowers that they contacted OCC and just about every other state and federal regulator with evidence of foreclosure fraud during this period. OCC was particularly brazen in ignoring the signals, and they were the main regulator for the banks involved, so I have no problem shouldering them with the blame. But this was a system-wide effort to ignore the largest consumer fraud in history.
The recommendations from Treasury for OCC are pretty weak tea:
We are recommending that OCC (1) continue initiatives to enhance examiner focus on operational risk in its examination planning, (2) determine whether a more specific coding of foreclosure related complaints would enhance OCC’s ability to identify potential concerns with servicer performance, (3) update the Mortgage Banking Comptroller’s Handbook, and (4) develop policies requiring the periodic review and update of Comptroller’s handbooks.
Again, this isn’t about a handbook, or coding. It’s about a worldview that banks are to be trusted more than even clear evidence of their wrongdoing.
By the way, this set of evidence that OCC fell asleep on their responsibilities to recognize foreclosure fraud does not speak well about their subsequent “foreclosure review” effort.