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TRANSCRIPT
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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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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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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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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
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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.
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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-
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14 April2011
rected,includingthatadequatepolicies,procedures, workstoidentifymorepromptlyandeffectivelytheandcontrolsareinplace.Theagencieswillcontinue potentialrisksinmortgage-servicingandotherbank-toexplorewaystoimprovetheirsupervisoryframe- ingoperations.
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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