The Government Accountability Office has issued a damning report about the foreclosure review process undertaken by the Office of the Comptroller of the Currency and the Federal Reserve. OCC and the Fed, through a consent order with 14 mortgage servicers, sought third-party reviews of all foreclosures in 2009 and 2010. But they did so by sending out direct mail-style appeals to borrowers to turn in information on their foreclosures for review. There’s not even a real sense of how much the borrower would benefit from a review; indeed, small changes in how the foreclosure was process and what documents were introduced at what stage vary the penalty wildly. This all predictably led to a low takeup; only about 200,000 borrowers, 5% of the total, have responded so far.
GAO faults the regulators for their poor outreach to these communities.
Conducting readability tests or using focus groups are generally considered best practices for consumer outreach, but regulators and servicers did not undertake these activities. Staff at the Board of Governors of the Federal Reserve System (Federal Reserve) said that this was, in part, a trade off to expedite the remediation process. Regulators also did not solicit input from consumer groups when reviewing the initial communication materials. Readability tests found the initial outreach letter, request-for-review form, and website to be written above the average reading level of the U.S. population, indicating that they may be too complex to be widely understood. Regulatory staff noted limitations to such readability tests and told us they discussed using plain language, but that the use of some complex mortgage and legal terms was necessary for accuracy and precision. Clear language on the independent foreclosure review website is particularly important as current outreach encourages borrowers to submit requests for review online. Communication materials developed by mortgage servicers with input from regulators and consultants included information about the purpose, scope, and process for the foreclosure review and noted that
borrowers may be eligible for compensation. However, the materials do not provide specific information about remediation—an important feature to encourage responses as suggested by best practices and reflected in notification examples GAO reviewed. Without informing borrowers what type of remediation they may receive, borrowers may not be motivated to participate.
In general, borrowers get something in the mail that looks like a scam letter. It doesn’t specify what they could receive from this government review of their foreclosure. Even the most savvy borrower – if they can be found, since they probably don’t live in the same house that they did before the foreclosure – would be hard-pressed to read it and respond. That’s especially true because this community has been inundated with scams and grifts, and they are at least attuned to that possibility. GAO writes that borrowers “did not understand who provided the information and believed the materials were fraudulent.”
As Yves Smith writes, GAO basically accuses OCC and the Fed for violating federal “plain language” rules in communications with the public. Sending out jargon-heavy direct mail with no sense of who wrote them and who requested the information is a sure way to have nobody respond. And then the regulators can say that their reviews turned up no problems in the “vast majority” of the cases. This also saves servicers, who are paying for the so-called “independent” reviews, a lot of money, because less requests for review means less reviews for them to fund.
We already knew pretty well that the foreclosure reviews were a sham. And that could be driving the low takeup rate as well. The reviews are designed to minimize problems with the industry and give servicers a clean bill of health that they don’t deserve. Given that, maybe it’s good that so few borrowers aren’t taking OCC up on their offer.