naked capitalism

We’ve mentioned that the FDIC has been pushing to reform the securitization process, including imposing standards on servicers. That has put it at odds with the bank-friendly Treasury and Office of the Comptroller of the Currency (the SEC has proposed securtization reforms but of a much more modest nature than the FDIC’s). This behind the scenes battle is heating up further because Dodd Frank calls on bank regulators to draft new rules to improve the operation of the mortgage securitization market. The FDIC intends to include mortgage servicer behavior in those provisions and want the rules ready in January.

The pressure to take action has increased with a spate of hearings last month (two Senate Banking Committee, one House Financial Services, the Senate Judiciary Committee, HUD, plus the release of a blistering COP report and related chat with Geithner) and the FCIC report due out next month. The publication of a letter to banking regulators signed by 50 experts urging action was joined by a letter by Representative Brad Miller, which is apparently also garnering Congressional support. The trigger for both missives is the failure of the authorities to act on provisions in Dodd Frank related to securitizations:

Representative Brad Miller 941 Letter

However, other banking regulators are not exactly keen to move ahead. From the Huffington Post:

Nevertheless, the Fed and the OCC are pushing back, according to a source at the FDIC. Spokespeople from both the Fed and the OCC said their agencies support new mortgage servicing standards but declined to comment on the new rules being advocated by the FDIC. A spokesman for the Treasury Department said the Treasury supports regulating mortgage servicers, but was unable to comment on the FDIC plan by press time.

This is a tad disingenuous. Per American Banker:

If the Federal Deposit Insurance Corp. has its way, federal regulators would not wait for Congress to create national servicing standards, but instead write such rules as part of risk retention guidelines set to be released soon.

The agency’s idea has divided the banking agencies, with the Federal Reserve Board and Office of the Comptroller of the Currency arguing risk retention is not the place for new servicing standards. But FDIC officials said that with all the problems in the servicing industry, regulators must act now.

“We shouldn’t wait for legislation,” said Michael Krimminger, FDIC acting general counsel, in an interview. “In Dodd-Frank, Congress instructed us to apply the risk retention rules to help ensure high quality risk management practices, and servicing standards are critical to achieve this. If Congress wishes to adopt further servicer standards that may be a good thing, but we have a rule in Dodd-Frank that applies across the board.”

An aside: Krimminger spoke at the American Securitization Forum early this year on securitization reform proposals. He was reportedly very well informed and not particularly sympathetic towards typical industry rationalizations as to why a broken status quo needed to be left alone. No wonder banks are pushing back through friendlier channels.

And the obvious issue with claiming that further Congressional approval is that this is simply cover for acceding to bank wishes. Any “further approval” guarantees inaction, given the even-more-bank-friendly composition of the incoming legislature.

As the role of servicer abuses in foreclosures is finally coming to the attention of Congress and the media, so to is this ongoing turf battle. A story in the Huffington Post indicates why this matters. Efforts are starting to collect better data about poor servicer practices. Some attorneys representing homeowners have reported that anywhere from 50% to as many as 70% of the defendants they represent are in foreclosure due to servicer error and malfeasance. On the one hand, there’s some sample bias here; borrowers who fight foreclosures typically feel they can afford their home, either on a going-forward basis or with a mod. Borrowers who are hopelessly under water aren’t typically the sort to put up a fight.

The Huffington Post reports on the efforts to improve the sampling:

Last week, the National Consumer Law Center and the National Association of Consumer Advocates published a survey of 96 foreclosure attorneys from around the country, attesting that servicers have pushed 2,500 of their clients into the foreclosure process, even as the borrowers were negotiating loan modifications with the same servicers.

Notice this is merely one type of abuse, one that was a major focus of fraud cases filed by the attorneys general of Arizona and Nevada against Countrywide. This does not get at the type too often seen by foreclosure defense attorneys, that of banks applying payments late or compounding one or two late payments through the incorrect application of subsequent payments and junk fees into an arrearage so large that the homeowner is a goner. It’s very hard to get to the bottom of these abuses (no joke, it’s a battle merely to get the internal records), which of course makes it well nigh impossible to ascertain how often they occur.

Another section of this story is simply astonishing:

On December 8, community outreach officials from the OCC and the Fed met with dozens of housing counselors from around the country and acknowledged that complaints about mortgage servicing abuses have been coming to their offices for years. Nevertheless, at a recent hearing, Comptroller of the Currency John Walsh said his agency didn’t know about the outright fraud being committed by servicers until press reports emerged this fall.

Huh? This is “see no evil, hear no evil, speak no evil” in action. We’ve commented on this 2007 article by Chapman University School of Law professor Kurt Eggert before. From its abstract:

This article discusses the opportunistic and abusive behavior of some servicers of residential mortgages toward the borrowers whose loans they service. Such abuse includes claiming that borrowers are in default and attempting to foreclose even when payments are current, force-placing insurance even when borrowers already have a policy, and mishandling escrow funds.

Earth to base. An academic is in a far less advantaged position to detect abuses than regulators. The idea that that at least some of the complaints received by the OCC and Fed would not have led a neutral party to wonder about fraud is hard to swallow. Even with our very limited contact with Fed officials, they have shown a strong bias against consumers.

It’s not surprising to see bank-friendly regulators looking for any and every excuse to justify past and current inaction. What is astonishing is that they continue to see this as a viable course in the face of the mounting economic and social devastation created by the foreclosure crisis.

Update: The bone of contention is whether Section 941 of Dodd Frank extends to the regulation of bank servicers. Here is the FDIC’s legal analysis:

FDIC Legal Arguments for Residential Servicing Standards