As much as the banking industry has been revealed as corroded and broken over the past few weeks, the regulatory apparatus hasn’t fared much better. They’ve shown themselves to be asleep at the wheel on Libor, unable to stop money laundering at HSBC, and captured by the industry they’re supposed to regulate. And the latest discovery may be the worst yet.
I’ve gone on and on about camo-washing, the initiative by big banks to announce major compensation and debt relief for those victimized by violations of the Servicemembers Civil Relief Act, compared to the paltry relief (or outright abuse) for other homeowners. We’re talking about violations concerning banks foreclosing on members of the military while they served overseas, and illegal ratcheting up of their interest rates. These carry jail time in addition to fines. But to pre-empt this, banks have offered hundreds of thousands of dollars, free homes, and all sorts of other incentives to servicemembers.
But the key word there is apparently “offered.” A new report from the Government Accountability Office shows that federal regulators aren’t diligently monitoring banks for violations of the SCRA. In other words, even though banks have offered this restitution, the regulators haven’t done a good job of finding the violations that would spark such restitution. This places the burden on the individual servicemembers, and there are lots of indications that they are not getting the restitution that banks have announced.
The only way this changes is if someone actually bothers to enforce the settlement provisions of the SCRA. And that’s not happening, per GAO.
Federal regulators’ oversight of SCRA compliance has been limited. GAO estimates that from 2007 through 2011 prudential depository institution regulators—the Federal Deposit Insurance Corporation, Federal Reserve Board, National Credit Union Administration, and Office of the Comptroller of the Currency—reviewed 48 percent of all banks and credit unions for SCRA compliance. Of these institutions that were reviewed for SCRA compliance, only about half received examinations that involved testing of compliance by reviewing loan files. Further, GAO found that examiners had only reviewed loans identified by the institution as involving servicemembers and had not independently selected a statistical sample of loan files, which would have provided greater assurance of SCRA compliance. Without more testing, which examination and auditing guidance suggest provides increased verification, regulators are less likely to detect SCRA violations.
Furthermore, the Defense Department and the Department of Homeland Security, charged with informing servicemembers of their rights under SCRA (in the case of DHS, the Coast Guard), do nothing to assess their effectiveness in that task.
What little oversight that has been done by the regulators revealed 15,000 cases of banks illegally ratcheting up interest rates on servicemembers, and 300 cases of illegal foreclosures. Given the poor oversight, that’s just the beginning.
The Justice Department has entered into settlements, including in the larger foreclosure fraud settlement, with the banks on SCRA violations, which elicited these big offers of compensation. But according to Florida foreclosure defense attorney Matthew Weidner, no soldiers are benefiting from these settlements. “I’ve talked with my contacts at the American Bar Association and their Military Liason committee,” Weidner said in an email. “They know nothing about how soldiers are to receive the payments described in the settlement.”
Weidner also notes that soldiers risk losing their security clearances by entering into litigation with banks, making it difficult for them to raise these issues themselves. They require the federal government to engage in oversight and check the loan files for violations. The Justice Department is supposed to identify the borrowers eligible for relief. And as GAO finds, that’s not happening.
Calls to the Justice Department’s 800 number from this story, supposed to be set up for servicemembers to contact with their stories of potential violations, were not returned.
In a statement, House Oversight Committee ranking member Elijah Cummings said that more legislation was needed to secure relief for servicemembers. “These findings highlight the overwhelming need for Congress to take swift action to pass my legislation to provide enhanced protections for our men and women in uniform fighting overseas… Congress has a responsibility to ensure that our troops are not the victims of mortgage servicers’ failure to abide by the law.”
But so do the regulators, and they have simply not done the job. GAO recommends that the regulators conduct scrutinize the loan files on a more regular basis, and share information between departments. But the near-term problem is that banks are getting credit for offering these massive payouts for SCRA violations, and there’s no indication they’re actually giving anyone the rewards.