Yesterday, various news and financial sites picked up the release last Friday of a report by the Treasury’s Inspector General titled “SAFETY AND SOUNDNESS: OCC’s Supervision of National Bank’s Foreclosure Practices“. The media accounts are workman-like summaries with titles like “Bank oversight office failed to spot foreclosure fraud, Treasury inspector general says.”
The problem is that these various accounts are narrowly accurate (in that they summarize the report) but missed the real story. First is that this tamely critical report was released well after the mortgage settlement was completed, even though its text has marks of it being finished before then. Notice this section:
The regulatory environment surrounding mortgage servicing continues to evolve. Developing national mortgage servicing standards has been suggested and certain state attorneys general are working toward a comprehensive settlement with some banks that, among other goals, would define standards of servicer
This strongly suggests the report was completed prior to the settlement and not updated.
That in turn means there’s good reason to suspect that this official confirmation of what numerous critics had claimed, that the OCC was not at all on top of servicing bad practices, was held back until the settlement was no longer deemed news. Why? Well, the OCC and other regulators maintained they had a solid grasp of what was wrong; this was critical to believing they were competent to negotiate a settlement. Thus this inspector general report undermines the legitimacy of the settlement (not that anyone who is not part of the problem believes it was adequate).
Both the summaries and the IG report’s overall conclusion are narrowly accurate (actually, it’s an encouraging sign that the Washington Post calls what used to be described as at most “foreclosure abuses” as “foreclosure fraud”). But is telling the public that the OCC missed the looming problems in foreclosure-land hardly qualifies as news. So the real question is whether the IG audit did an adequate job in assessing the OCC’s epic fail on foreclosure fraud and recommending improvements. The answer is a resounding no.
Second, this report is an exercise in Potemkin oversight. It enables a deeply pro-bank agency to stay on its present path; it’s meant to persuade the chump public that the Administration is serious about remedying regulatory fiascoes.
To understand why this audit was defective, all you need to do is look at the discussion of methodology, which is on pages 14-15. In the period November 2010 (right after the robosigining scandal broke) to March 2011, the Treasury IG reviewed foreclosure supervisory coverage at three banks: Bank of America, JP Morgan Chase, and Wells Fargo. These were the measures taken:
• Reviewed the OCC’s Mortgage Banking Comptroller’s Handbook, related bulletins, regulations and guidance.
• Interviewed OCC management responsible for the supervision of national banks with large mortgage servicing portfolios.
• Interviewed OCC examiners in charge and mortgage lead examiners at the banks in our sample.
• Interviewed the OCC Ombudsman and reviewed complaint reporting generated by OCC’s Customer Assistance Group.
• Reviewed OCC supervisory strategies covering the mortgage banking function at the banks in our sample for the period 2008 through 2010.
• Reviewed OCC supervisory letters to determine the scope of targeted reviews touching upon the default administration or foreclosure function during the audit period.
• Reviewed OCC examination documentation related to the banks’ internal risk monitoring functions’ (i.e., internal audit, quality assurance) coverage of foreclosure and, as necessary, OCC monitoring of these functions.
• Reviewed OCC supervisory letters documenting the results of procedures performed during the inter-agency horizontal review of mortgage foreclosure at major mortgage servicers.
This is a strictly internal look. There was NO effort, zero, zip, nada, to do any reality testing of the adequacy of the OCC’s work. How do you know how badly deficient the OCC’s efforts were unless you develop an independent basis for what it takes to do an adequate job of overseeing servicers and then looking at what the OCC found pre the robosigning scandal versus what they ought to have found? The IG is certain not to have an informed view of what the legal and operational issues are. Looking only at OCC documents and talking only to OCC management is a garbage in, garbage out process. This, by the way, is in keeping with the other Federal post-robosigning initiatives, in particular, the eight week multiagency foreclosure reviews, which similarly looked only at bank loan files, and did nothing in the way of verification. As we discussed, this is sort of abuses that the multiagency review missed. Note that the Treasury IG review would similarly not ascertain whether the OCC was doing an adequate job of finding these problems at banks:
This is all a limited review of the servicers’ internal records, with no external validation. This process is inherently incapable of capturing numerous abuses flagged in the media and in this and other blogs, including document forgeries (production of allonges to cover for the failure to convey notes correctly), loss or deliberate late application of payments; the application of “junk fees” and impermissible fee pyramiding; notes held at the originator rather than the trust (notice the failure to audit trustees), lack of cross checking of servicer claims re servicing with borrower experiences. The HAMP fiascoes alone, with repeated servicer false claims of document losses, should lead to serious skepticism about servicer claims about the integrity of their internal processes.
Moreover, the former acting Comptroller of the Currency, John Walsh, has made the credulity-straining assertion in Congressional testimony that servicers have the standing to foreclose. The IG’s deficient process means they tacitly accepted that view (indeed, the IG used the findings of the laughably deficient foreclosure reviews as one of its major source documents).
Now to the specific failings of the Treasury IG’s report. It’s sufficiently abstract that it’s difficult to point to concrete objections, save to the reliance on a badly outdated supervision manual, from 1998. This doesn’t merely mean that the OCC’s review practices did not reflect the existence of MERS; it means, more importantly, that it failed to incorporate the ugly revelations of Fairbanks, a servicer that acquired portfolios of with lots of distressed borrowers. It entered it a consent decree with the FTC because it engaged in predatory servicing to boost profits. But the OCC has simply never taken predatory servicing seriously.
Moreover, the OCC clearly has an anti-consumer bias, and the Treasury IG fails to challenge it:
OCC reviewed the coding of foreclosure-related consumer complaints and determined that the current coding was sufficient to identify consumer concerns. OCC commented that most complaints are not so specific as to identify documentation, process, or breach of state law as the basis for complaint, but if a consumer did complain on that basis, the system has the ability to capture those issues in the record. OCC also commented that complaint data alone would be unlikely to identify something so specific and invisible to the customer as documentation or process issues and absent such granularity in the complaints, additional coding would not improve its understanding of servicer performance.
Translation: consumers and their attorneys are idiots and not to be trusted. Notice that the IG is merely reporting on the OCC’s conclusion. In fact, there is evidence the OCC has tolerated, arguably taken, active efforts to make sure consumer complaints can be rejected as insufficiently specific. This has occurred post the period of the IG report, in a consumer foreclosure review process that looked designed to give servicers a free pass (via its narrow definition of what would constitute a problem) even before you got to the issues flagged in a whistleblower’s account. From Abigail Field:
Right around the time our Bank Housing Secretary was pitching the OCC reviews as social justice, a person temping for Promontory Compliance Solutions LLC (an affiliate of Promontory Financial Group) on the Wells Fargo OCC “independent” review project was telling Mandelman what a complete charade it was. The insider’s description exposes the reviews as the fraud on the public that they are.
The full revelations of the temp hired, trained and supervised by Promontory Compliance Solutions, working on the Wells Fargo’s OCC independent foreclosure reviews project, are available as a Mandelman blog post and a Mandelman Podcast. But here’s a few highlights to show how rigged the process is:
“I have found errors that should be moved up through the ranks, but am told “quit digging so deep”…”put your shovel away”…Focus on the questions “in scope”… The review forms are set up so no harm could ever be found. It’s equivalent of an attorney presenting his case to a judge with just 20% of the evidence.”
“The foreclosed victims don’t realize if they do not provide specific dates on the intake forms… their complaints are considered “general comments” out of scope.
The kicker? The forms don’t tell people their information will be ignored if the complaints are not dated.
Mandelman reports that the insider
“also says that the questions on Promontory’s form are worded in such a way that it makes it very difficult to ever find fault. For example, by using compound questions, he is often told to answer “no,” when the first part of the question would be a “yes.””
A last, flashing neon sign announcing the reviews will protect banks and do no justice is who has been hired to do the reviews. See, here’s the insider that’s willing to talk, and it’s probably why he’s willing to talk:
I have 15 years industry experience in all facets of the mortgage & title industry, and just needed a job at the moment.
But this is who he’s working with and for:
some of the people brought in with me do not know the difference between a truth in lending statement, and a note. It’s a shame, these are your reviewers!!! The supervisors don’t want any trouble…they are mostly temps too, just trying to get a promotion to full time.
Sounds like no bailed-out bank will be held accountable and no homeowner compensated.
In addition, many consumers did in fact submit detailed, sufficiently specific accounts of erroneous servicer action that should have, but did not, trigger action from the OCC. Lisa Epstein wrote detailed letters describing how multiple servicers tried foreclosing on her house. The reaction? Her report was “in review” with the OCC for months, then kicked over to her servicer, Chase, which predictably said nothing was amiss. But this is hardly surprising. Remember the John Walsh/OCC worldview, that servicers have standing to foreclose. If you take that position, then chain of title problems, bogus assignments, and document fabrications are mere “sloppiness” and documentation problems, not symptoms of serious deficiencies.
But remember, the OCC’s risk assessment focus is on bank safety and soundness, as the heading of the Treasury IG report underscores. In servicing, banks act as agents for investors. Even though investors have and are continuing to lose in a major way as a result of self-serving servicers, they’ve been remarkably loath to sue. Some of it is that many theories of action require 25% of the investors in a particular bond to team up in order to have standing. But other barriers are just as large. Institutional investors are agents, and similarly lack incentives to bother (they can’t readily recoup the hard costs and time required) and are reluctant to ruffle banks (one lawyer said that if Jamie Dimon killed the children of investors, and they’d be afraid to call the cops). So it should be no surprise that it, and the Treasury IG, find very little to see here, even when a basic Internet search would show otherwise.