In the executive summary to this series, we provided an overview of OCC/Federal Reserve foreclosure reviews which were abruptly settled at the beginning of January. Critics anticipated that the flawed design, of having supposedly “independent” review firms hired by the banks themselves, meant the reviews were highly unlikely to find much if any damage to homeowners. Leaks during the course of the reviews confirmed these concerns, revealing that the review process at many of the major servicers was chaotic and the reviews were designed and scored so as to make a finding of harm virtually impossible.
As bad as that sounds, the reality is even worse. We obtained extensive review documentation from whistleblowers at Bank of America and debriefed them at length. They provided compelling evidence that the foreclosure reviews were plagued by persistent, widespread efforts by Bank of America to avoid any finding of borrower harm. These efforts were supported and enabled by its “independent” review firm, Promontory Financial Group.
The whistleblowers, all of whom were told their role would be to act as investigators and help borrower get compensation they deserved, described the review process as seriously flawed. Yet even with those obstacles, they saw abundant evidence of serious damage to borrowers. The whistleblowers reviewed 1600 borrower files in a “live” environment, and saw hundreds more in the attenuated start-up period. Reviewer estimates of harm varied widely primarily because they worked on different tests and thus focused on different documents and issues (see Appendix II to the Executive Summary for a description of tests). Whistleblowers were asked to estimate the percentage of harm and serious harm in the files they reviewed. The lowest estimate of harm was 30% and the highest estimate of serious harm was 80% of files reviewed.
We said we would set forth the support for our major findings, in a series of additional posts. These findings are:
Overwhelming evidence of widespread, systematic abuses . No interviewee estimated harm as occurring in less than 30% of the files they reviewed; one put it at 80%. The interviewees did not simply describe individual borrower suffering in graphic terms (as one put it, “I saw files that would make your stomach turn.”) Multiple interviewees would describe widespread, sometimes pervasive patterns of impermissible conduct.
OCC’s badly flawed review structure compounded by complex, chaotic, and undermanaged implementation by Promontory. By delegating so much of the review process to “independent” firms (many of whom had little or no experience with servicing and foreclosure), the OCC doubled down on the same incompetence and poor standards that Bank of America and the other servicers already had in their servicing departments. Many of the flaws in the review process (compartmentalized reviews, conflicted supervisors, poor senior review for issues or disputes) were mirror images of the problems at the servicer. These problems were made worse by a bizarre management structure and frequent changes to test content and directives.
Concerted efforts to suppress finding of harm. The organizational design, the way the reviewers were managed, the elimination of areas of inquiry, and evidence of records tampering with Bank of America records all point to a multifacted, if not necessarily well orchestrated, program to make sure as much damaging information as possible was not considered or minimized.
Dubious role of Promontory. Promontory was a poor choice to perform the review. It had virtually no internal expertise in serivcing, provided little or no supervision, and, either by design or incompetence, managed to politicize the review process rather than make it independent.
We discuss the first major finding below.
Overwhelming Evidence of Widespread, Systematic Abuses
In many cases, the abuses unearthed, as borrowers suspected, would be significant enough in and of themselves to qualify it for one of the large award categories, which for completed foreclosures would be either getting their home back plus $15,000 or $125,000 plus any equity in the home. As we will see, reviewers often saw foreclosures that looked to be the direct result of the predatory practices or sheer negligence.
We have limited our compilation below to the activities that the reviewers saw often enough to suggest they were a frequent, if not pervasive, outcome for similarly situated homeowners. Many of these systematic abuses have also been flagged as widespread by foreclosure defense attorneys.
Major abuses include:
Nine circles of modification hell. We have jokingly depicted Timothy Geithner’s comment that the widely criticized HAMP mortgage modification program was simply intended to “foam the runway” evokes the image of an overloaded B52 landing with its wheels up on airstrip covered with borrowers lying down, side by side, who are then crushed to a bloody pulp. It turns out that picture is not far off the mark.
The numerous public stories of borrowers getting confused and often contradictory instructions, complying with all bank requests, making all required payments, and nevertheless being foreclosed on, are confirmed by over 450 borrower records reviewed by our whistleblowers on the modification tests (see “C and G Test” in the description of tests in Appendix II in the executive summary). For instance, one widespread complaint was that the servicers asked for borrower information, the borrower would fax it to the number given, the bank would then claim they had not gotten it, and would ask for it again, with this cycle repeating not once, but four, five or more times until the borrower was foreclosed upon. To add insult to injury, the justification often was that the borrower had failed to send in the requested documents. The reviewers found numerous examples where they could find notes of borrowers calling in to make sure documents were received, and the reviewer could find the records every time, but the borrower was told they could not be located. And that was far from the only problem:
We would put the numbers together to see whether they were offered the right modification and determine whether payments were actually made. And that was where a lot of the problems came in was they were oftentimes put into the wrong program, they would be told to make certain payments, then the bank would find out, “Oh, that’s the wrong program, let’s start all over again,” and in the meantime we’re six more months into it and it’s just getting uglier and uglier, or a borrower may be given two or three or sometimes four different kinds of modifications at once, get very confused as to what they’re supposed to be doing, told to make a payment on this and to make a payment on that, and so often the payment amount of the modification was more than the original mortgage payment anyway. So people would just, they’d get very confused and they would give up. They’d just let their homes go. “We can’t deal with this anymore.”
Another widespread problem was modifications not being counted as effective, despite having the borrower sign a modification letter and make timely payments on it, because it was not boarded properly (as in loaded into the servicing platform). And note also in this exchange with Reviewer D, this was not treated by Promotory or Bank of America as a borrower harm:
Reviewer D: Well, and I think that’s the biggest, the biggest disconnect about mods is, when we were looking at permissibility of fees, we were simply supposed to look at, compare each fee against each matrix and determine permissibility.
Yves Smith: Right.
RD: However, if I can clearly see on a file a signed modification –
RD: – I can tell that it was received on time.
RD: And I can tell that there’s no reason why that mod should not have been boarded into the account, but it wasn’t… And then the file ended up going into foreclosure.
RD: Technically, per our guidance, those fees are not impermissible. But don’t you and I both think that they should be all impermissible?
YS: Oh, and then, and then that wouldn’t go over to the mod people [the G test reviewers who examined whether modification were appropriate for the borrower and handled correctly] because there was – because if it wasn’t boarded it’s not considered to be a mod, so that whole category wouldn’t have been examined. You’re saying there’s a whole category that was basically missed…
RD: I do not believe the mod team was looking at that.
YS: Right. Right.
RD: So whether one hand talked to the other – you know, the mod team, even if it went over to test G or whichever one was doing the mods, and they were able to determine that the mod should have been boarded, whether or not they’ve been sent – I know they didn’t get then sent back to test E and decided to make the fees impermissible.
YS: Wow, so say that again, so say that again. On permanent mods – just repeat that. So on permanent mods you saw…
RD: So we would see files where a permanent mod looked like it should have been 100% a go.
RD: It was signed by the borrower, it looked like it was returned on time, the borrower sent in the first mod payment on time, but then for some reason it never got boarded onto the account.
RD: And then the foreclosure happened –
RD: – because it never got boarded. So it still looked like –
RD: – they were 90 days late or more.
RD: And so all resulting foreclosure-related fees, inspections, attorney fees, etc., were still on the account.
RD: According to each matrix, those fees were permissible because they fell within the guidelines of each matrix.
RD: However, based on logic and circumstance, those fees should not be permissible because the mod should have taken place and the foreclosure never should have happened.
And even seemingly straightforward cases of borrower harm would be rejected. The files all contained audit notes, and many of the reviewers would check what happened to the cases they worked on. Here is one example of how a borrower who sent in all of her required payments was nevertheless found to have suffered no damage:
It was a C test, so that was a Level III test, and this was one specific that the borrower had a trial mod that was granted. The trial mod was signed by both the bank and the borrower, and a copy of it was in the system. The borrower continued to make payments every month on the trial mod and the lender kept returning the payment.
So the actual reviewer, the level 3 reviewer that reviewed the loan, said that there was harm because the bank returned the agreed payment for the trial mod. So the QA reviewer [quality assurance, Bank of America staffers who would push back against reviewer finding of harm, more on that in later posts] found no harm. They disputed it and said that no harm was found because the borrower was not making the contractual payments according to the original loan mods. So that person didn’t, wasn’t even smart enough to realize that there was a whole new contract in place that amended the original one and this was the new payment.
When it made it to Promontory, and Promontory’s response was the lender was returning the payment because the borrower was not making any. So I’m not sure how they were returning payments that were not made, but you would denote in the system where, you know, it would say received check number whatever and the amounts of this, you know, to apply towards trial payments, and then the next note you would see was, you know, an exception payment that would say “Please return this payment for this amount, it’s not enough for the contractual payment.” So it’s like they were not even recognizing that there was a trial mod in place, although there was.
This reviewer found a 100% rejection rate by QA on all the finding of harm on his files, not just the ones he logged, but also the ones recorded by other reviewers doing the other tests on the same file.
Suspense account abuses. “Suspense accounts” are when borrower funds are received and held by the bank but not applied. Funds may be held in suspense for a “reasonable” amount of time, which is considered to be only a few days and a key precedent in bankruptcy court has stipulated as the limit for “reasonable” if the amount in suspense equals or exceeds the full amount of the principal and interest due is 15 days. Yet foreclosure reviewers were not given this information and were told to treat funds held in suspense for months, even as long as 24 months, as reasonable. Of course the result of funds not being applied to interest and principal is an accumulation of late fees and eventual foreclosure. This problem occurred routinely with modifications. As one reviewer observed:
Let’s say someone made a payment and there seemed to be some very mass confusion among the bank employees themselves. The payment would be made and everything would be, the entire payment would be placed in or used to cover late fees. And then a letter would be sent to the borrower saying, you know, “You’re still in arrears,” or this or that, and sometimes it would be charged to principle. Sometimes it would just sit in a – what do they call it, the account – a suspense account for months, and then all of a sudden appear as an interest payment, or half to an interest payment, half to escrow, half to – or, and a portion to late fees. This went on all the time, and that was one of the biggest questions, even as level 3s, most of us having been underwriters, we would look at these and say, you know, “I don’t understand how this payment was broken up or why it sat in a suspense account for four or five months before anything was done with it. And it seemed the bank employees weren’t always very clear where it should go.
This extract is even more troubling than it appears. There is a very clear hierarchy for the application of borrower payments, set forth both in loan documents and Federal law: interest first, then principal, then late fees, then various other charges. The idea that a payment would be divided between interest and escrow is a sign of at best gross incompetence. And per Fannie guidelines, full payments are never to be put in suspense. The Consumer Finance Protection Bureau’s new guidelines track Fannie rules already in place:
Payments Promptly Credited: Servicers must credit a consumer’s account the date a payment is received. If the servicer places partial payments in a “suspense account,” once the amount in such an account equals a full payment, the servicer must credit it to the borrower’s account.
Obvious padding in capitalized fees in mortgage modifications. Two reviewers noted utterly implausible charges being wrapped into modifications. One did not keep close tabs but merely noted he saw overly large amounts too often. The other went into detail:
For a borrower that has merely been late, say 6 months, but let’s be generous and call it 12, since they might have been in arrears and got current in the past, there’s no way you can get to over $5000 of legitimate charges and fees, particularly since many states, as well as Fannie and Freddie, limit the biggest item, which is attorney fees. On my test, 40% to 50% of the files had mods, and on them, I’d see offers with capitalized charges of $10,000 or more, one of $85,000, more than 50% of the time. It was mainly $10,000 to $20,000.
I’d ask for a modification analysis to get a breakdown and see where this came from. I’d do an RFI [request for information] and I’d always get the answer back in 24 hours, “uncollectable” [RFI could not satisfy the request].
While it is possible some of these cases could be justified, the combination of high frequency, startlingly high charges, and no support for them does not pass the smell test.
Impermissible charges in bankruptcy. Like the unboarded modifications and the suspense account abuses, this category was simply not captured, in part due to test design, but more important, active dissemination of misinformation. One abuse cited repeatedly by foreclosure defense lawyers and bankruptcy lawyers is impermissible fees being charged after a Chapter 13. During the period when a borrower payment plan is being approved and the 60 months under the plan, all creditors are “stayed”, meaning they cannot impose new charges on the borrower. All claims (principal, interest, any fees owed) must be submitted to the court prior to the negotiation of the plan. The borrower must make his 60 months of payments under the plan. Chapter 13 plans are very demanding and contemplate that the borrowers live meagerly. The borrower emerges with no debts and (unless he had an unexpected windfall) no savings.
Servicers often (too often) accumulate late fees or other fees during a bankruptcy, even though these fees are impermissible (payments made pursuant to a Chapter 13 are timely irrespective of what the mortgage originally specified), and hit the borrower with them shortly after emerging from Chapter 13 The borrower is by design broke and can’t afford court fees. Many borrowers lose their house this way.
Many of the reviewers were familiar with this issue, and asked about it in training. The only reference to it in the E test, on fees, was not even a question but a “tool tip” for how to answer the corresponding question next to it.
Note any additional items where potential harm could occur, including but not limited to: robosigning, bankruptcy issues, BPP errors, etc.
Reviewers report that trainers said that fees may be incurred to the borrower during a bankruptcy, but not charged to the borrower during that time. This is simply inaccurate. These instructions were repeated by the various subject matter experts (known as proficiency coaches) as well as Bank of America staff (unit managers and quality assurance, see Appendix I; we’ll discuss these roles in more detail in future posts). Reviewers who nevertheless were troubled enough to look at borrower records on this issue report not only late fees accruing during bankruptcy, but also more sizable charges, such as attorney fees. Entire categories of loans were treated improperly in bankruptcy. I asked whether borrowers would be hit with large back payments shortly after emerging from bankruptcy:
Reviewer B: That would show up, but there were no questions that we would answer that would – there were no questions regarding a bankruptcy and fees other than if the borrower, if the lender filed a motion for release for a proof of claim and they charged a fee for it, we would just make sure that that amount was not over any investor limit or against bank policy, but as far as fees being charged during a bankruptcy, we answered no questions regarding that. In addition to that, the way they applied payment – and my, most of my bankruptcy experience is with Florida –
RB: – and I know that it’s a f– you know, bankruptcy is federal, however each state can opt out of some federal things and choose to follow their local rules, but with payments being made, I’m not exactly sure how banks’ policies can trump federal law, but I was always under the understanding that when a person files bankruptcy, every post-decision payment they made should be filed to, should be applied to the current amount due and then any back payments are going to get paid through the trustees of the chapter 13 plan.
RB: Bank of America had a policy that that was the case with the exception of interest-only loans, adjustable-rate mortgages. They had like several exceptions to that. So there were a lot of people that had filed bankruptcies and the payments were never applied to post-decision payments. They were applying them to back payments that, you know, could have been two, three years in arrears.
YS: Oh, and those were supposed to be basically wiped out in the bankruptcy or addressed in the bankruptcy.
RB: Correct. And they said how – right, which then in turn would create those extra late fees that you were talking about.
YS: Mmhmm. Well that was one way those could be created. Okay. And how many cases like that did you see, or did you hear about those from your peers? I mean, how –
RB: I saw at least, almost every bankruptcy I looked at, when I was looking for fees and I was – and one of the questions too that we answered was, were payments applied, you know, according to the loan docs and were they applied according to investor guidelines and state laws, and almost every bankruptcy I looked at, I would say 95% of them, those payments were applied to back payments instead of current.
Reviewer E flagged widespread problems with bankruptcy charges:
RE: Their fees in their system and their fees in the paperwork they submit to the bankruptcy court don’t match.
YS: [indrawn breath alarmed huh]
RE: They don’t match. They’re not submitting full information to the bankruptcy court. And this is what I was told. “We just can’t charge the borrower while they’re in bankruptcy, but we can assess them.” I said, “So you can rack up $10,000 worth of fees and if you don’t bill till them until after the fore– after the bankruptcy, it’s legal?” They said, “That’s exactly correct.”
YS: Yeah. Yes, you’re correct. So basically you are saying, basically you’re saying that every bankruptcy you saw in the system was wrong? So that every bank–
RE: No, I can’t say every one.
YS: But every one you saw. There’s a difference. I mean, every one –
RE: But – oh, oh, well, yeah. Most of the files I looked at, they would submit minimal fees to the bankruptcy court. Or late fees assessed prior to the bankruptcy filing. Or they would, they were doublecharging fees. They would charge for the same thing and call it a bankruptcy fee and a foreclosure fee.
RE: And they would – they were– it’s ugly. And we were told not look at them.
YS: So –
RE: “We’re not looking at federal law. Federal law is not our problem.”
Note that the OCC’s order to Bank of America states the review will include:
(b) whether the foreclosure was in accordance with applicable state and federal law, including but not limited to the SCRA and the U.S. Bankruptcy Code;
Zombie title. It has only recently come to the public’s attention how much borrowers are hurt by “zombie title“, which is when a bank completes all the steps up to the sale of the home, including evicting the borrower, yet neither takes title itself nor sells the property to a third party. Recall that the reviews included foreclosure actions that started in 2009 and 2010 so foreclosures left in limbo that started during this period would be eligible for relief. Yet complaint letters that cited this sort of problem were rarely addressed properly and rejected when they were because they did not fit in the review template:
Reviewer A: I’ll give you an example of some, one in my case. I had a file that I had been working on and I had already answered the questions regarding modifications and so forth, but I had, something just wasn’t working as far as, in my opinion, because this particular borrower kept saying, “I’m being charged for the taxes. The county’s coming after me for taxes, but you foreclosed on my home.” And she kept writing and calling the bank and telling them, “Look, they’re dinging my credit, they’re coming after me, the county’s coming after me for taxes, you foreclosed on my home, you evicted me – why are you insisting that I pay the taxes?” Well, that took me off in a whole different direction and I wanted to understand why this woman was convinced that her house was foreclosed, because the bank was showing that it hadn’t been…
So I started digging, and I actually went to public records, which I wasn’t supposed to do, and I found that what had happened was that she had gone through the foreclosure process, everything had gone accordingly. When the house was sold at the foreclosure steps, or on the courthouse steps, the attorney of record never finished the sale. So there was a foreclosure deed, there was everything, but it was never notarized and recorded. But it was in the docket as an unfinished sale. So she technically did own the home, but she couldn’t sell it, she could do anything with it, because the bank had created a dirty title. So the bank wasn’t paying the taxes, because the sale never happened, even though it got all the way to the courthouse steps and was technically sold, so she was getting billed for all the taxes.
YS: What did your supervisor say when you found that?
RA: That it was irrelevant to the C test that I had been working on. I was digging too deep and I needed to stop. But my issue was, there’s serious harm here because the bank never finished, the bank and the attorney never finished the paperwork. She’s got her HOA all over her for not doing the maintenance, they’re suing her –
YS: When she’s been evicted.
RA: The county is – yeah, she’s been evicted. The county’s suing her for back taxes. I mean, her life is a shambles because you guys never finished the paperwork, there’s no harm. The bank’s position was there was no sale. Well, yeah, there was. There was enough to make the title cloudy. And made her life miserable. She couldn’t get credit. She couldn’t rent anyplace. She was living with friends. I’m sorry, there’s harm. “Well, that’s not relevant to the C test you’re working on. Quit digging.”
Force placed insurance and force place escrow. Reviewers reported frequent instances of force place insurance, which is not surprising given that Countrywide has a captive insurer and was a recognized leader in this dubious practice. Force place escrow occurred on modifications that were not completed, whether due to Bank of America not approving the mod or failing to board it properly. Escrow was a requirement for a mod if the borrower did not have one already. The borrower would get the worst of all possible worlds, facing new escrow charges while not getting their modification. Forced escrow was not captured in the fees test, and if a mod was not completed it would not show up in the modification tests. These charges could become significant to borrowers and reviewers on the fee related tests said they saw them often.
As this list indicates, all the abuses were widespread and often resulted in a foreclosure or a borrower experiencing other significant damage. Yet the OCC would have you believe that the reviews failed to uncover any real evidence of borrower harm.
The next post in our series will describe the chaotic and badly managed review process and how it revealed underlying severe and widespread weaknesses in Bank of America’s servicing platform.