Last week, we inveighed against an effort by Federal banking regulators to undermine the 50 state attorney general settlement negotiations on foreclosure and mortgage abuses. This affair is becoming a pathetic spectacle, in that the state initiative, which looks to be an exercise in form over substance, still might prove to be enough of a nuisance to the banks that the Powers that Be in Washington feel compelled to do what they can to hamstring it. The first effort was to have a joint settlement, which we dismissed as a barmy idea given the disparity in state and Federal issues. Not surprisingly, the Feds withdrew after the first negotiating session with the banks.
The current end run is apparently led by the Ministry of Bank Boosterism more generally known as the OCC and comes via consent decrees that were issued Wednesday (we’ve made that inference given the fact that John Walsh of the OCC presented the findings of the so-called Foreclosure Task Force, an 8 week son-of-stress-test exercise designed to give the banks a pretty clean bill of health, as well as media reports that the OCC was not participating in the joint state-Federal settlement effort).
This initiative is regulatory theater, a new variant of the ongoing coddle the banks strategy. It has become a bit more difficult for the officialdom to finesse that, given the extent and visibility of bank abuses. Accordingly, the final consent decrees are more sternly worded and more detailed than the drafts we saw last week, and also talk about imposing fines. But reading them reveals that there is much less here than meets the eye.
The Fed published an interagency report that gave an overview of the Foreclosure Task Force effort and consent decrees which confirms the regulators “see no evil” posture. It admits the Foreclosure Task Force effort was inadequate:
While the reviews uncovered significant problems in foreclosure processing at the servicers included in the report, examiners reviewed a relatively small number of files from among the volumes of foreclosures processed by the servicers. Therefore, the reviews could not provide a reliable estimate of the number of foreclosures that should not have proceeded.
Even more telling, not only was the examination insufficient in scope, but it was also procedurally flawed:
The loan-file reviews showed that borrowers subject to foreclosure in the reviewed files were seriously delinquent on their loans. As previously stated, the reviews conducted by the agencies should not be viewed as an analysis of the entire lifecycle of the borrowers’ loans or potential mortgage-servicing issues outside of the foreclosure process. The reviews also showed that servicers possessed original notes and mortgages and, therefore, had sufficient documentation available to demonstrate authority to foreclose.
The interesting question is whether the regulators are as dumb as that paragraph indicates, or merely playing dumb on the no doubt accurate assumption that the vast majority of readers won’t detect what is amiss. As we said we suspected earlier, and this text confirms, the authorities made no independent verification of whether the charges were warranted; their review merely confirmed that the bank’s own records did show borrowers to be in arrears. There was no effort to check servicer records against borrower payments (an issue in a case we highlighted yesterday which led a bankruptcy court judge to sanction both Lender Processing Services and the foreclosure law firm) or whether the charges resulted from improper deduction of fees first (by contract and Federal law, borrower payments are to be credited to principal and interest first, fees second), padded or double charged fees, force placed insurance, and other abuses that can greatly increase the amount a borrower allegedly owes.
Similarly, the authorities are playing dumb as far as chain of title issues are concerned, and are accepting the American Securitization Forum party line that possessing the note is sufficient to initiate a foreclosure, when courts in many jurisdictions are responding favorably to chain of title issues. It’s simply impossible that the regulators involved in this review haven’t heard of the Massachusetts Supreme Judicial Court Ibanez decision, but there is absolutely no admission that servicers are having considerable difficulty foreclosing when challenged due to their inability to produce properly endorsed notes.
The Fed document also provides an overview of the consent decrees, but we thought readers might enjoy reading the actual text of one (the example is Bank of America):
Note that the overview document, after ‘fessing up to doing a less than adequate job of investigating, then fobs the effort over to the miscreants themselves. They are supposed to hire an “independent consultant” to investigate “certain residential foreclosure actions” from January 1, 2009 to the end of December 2010.
You can drive a truck through this language. First, anyone competent to do this job will not be independent. They will have or want to develop a relationship with the servicer. Second, “certain residential foreclosure actions” means only a subset need to be examined, and their is no language requiring that the sample be representative or even of meaningful size. A review of 5 foreclosures would meet the standard set forth in the text. Admittedly, the OCC gets to review the engagement letter, and the section discussing what goes in the letter indicates they expect a statistical sample will be used. But let’s not kid ourselves as to what is really going on. As Adam Levitin wrote:
So here’s what’s going down. The bank regulators are going to provide cover for the banks by pretending to discipline them very hard, but not really doing anything. The public will see a stern C&D order, but there won’t be any action beyond that. It’s as if the regulators are saying so all the neighbors can hear, “Banky, you’ve been a bad boy! Come inside the house right now because I’m going to give you a spanking!” And then once the door to the house closes, the instead of a spanking, there’s a snuggle. But the neighbors are none the wiser. The result will be to make it look like the real cops (the AGs and CFPB) are engaged in an overzealous vendetta if they pursue further action.
The tipoff to the lack of seriousness of this effort is the timelines. The engagement letter is submitted for review after the consultant is hired, meaning that the officials expect to change it as at most only around the margins. The review is supposed to be concluded 120 days after the letter is approved. Given that it will probably take 2-3 weeks to develop and review the final report with the client before submitting it to the regulators, that allows only a bit over three months to do the investigation, which is insufficient if it were to be done in sufficient depth.
Some other faux tough features:
1. A compliance committee which has a majority of non-bank employees as members. See our earlier comment re independence. There are plenty of people who’d be delighted to have a sinecure like this and be amenable to not rocking the boat
2. Auditable trail requirement. This could be a nuisance and entail costs.
3. Review of customer complaints. Any properly run business would be doing that now; presumably, it gets kicked over to the compliance committee.
4. The fines. These could in theory be onerous but in practice, since they come out of a self-administered exam, I’d not get my hopes up here.
Lenders Processing Services and MERS are getting separate consent orders, but since they are perceived to be critical infrastructure to the mortgage industrial complex, expect them to get a kid glove treatment as well.
For the most part, the consent orders throw a lot of stern language but little in the way of real teeth around requirements to follow existing law. Since that servicers have violated past consent orders, and there’s no reason to think anything has or will change, this looks to be yet another example of Potemkin reforms.