Congressmen Criticizing OCC Mortgage Settlement, While More Misrepresentations and Coverups Emerge

Last week, the Wall Street Journal publicized that the OCC cooked the books in its incredible claim that only 4.2% of the files examined in the recently shuttered foreclosure reviews showed harm. It looked like a case of lying with statistics, in that the Journal noticed that they had cited a higher error rate at the time of the settlement (6.5%), and then added a bunch of JP Morgan completed reviews to the sample. And why was that helpful? It looks like JP Morgan didn’t finish its review of all those drecky Bear Stearns loans, so only the prettier JP Morgan-originated ones got counted. How convenient.

And that’s before you get to the fact, as Dave Dayen stressed, “The numbers reported by the banks to OCC merely reflect how successful they were at controlling the review process and limiting the finding of borrower harm.” He contrasted the simply miraculous error rate claimed by JP Morgan of 0.6% when a small sample examined by the HUD inspector general found a 97.2% error rate.

The Journal today reports that a lot of Democratic congressmen are unhappy about the botched settlement process but are unlikely to do more than beef because the new Comptroller of the Currency, Tom Curry, was selected by Obama. Huh? This is his first major act in office and it’s a disaster. He was presented with a mess, but as we’ll discuss below, he played his hand badly.

But the more people poke at the settlement, the more creepy crawlies emerge. Tonight, the New York Times tells us that the banks ‘fessed up that they foreclosed improperly on 700 active duty servicemembers. The reason this is a big deal is that in 2011, the Veterans Affairs Committee got wind of these violations of laws dating back to World War I on prohibitions against foreclosures actions against active duty soldiers. This was a much bigger threat to the banks than being hauled up, say, before the Senate Banking Committee, since for the most part, they don’t make lavish campaign donations to these representatives. But it turns out the bank lied in a major way back then as to how many servicemembers they had foreclosed on illegally. And to add insult to injury, they entered into a settlement with the Department of Justice based on these misrepresentations. (This is the Department of Justice’s fault. One of the big rules of negotiating is never settle when you haven’t investigated the underlying conduct. Relying on the say-so of banks was a way to give them yet another slap on the wrist punishment).

From the New York Times:

Complaints that active military personnel and National Guard members were losing their homes while deployed in war zones set off national outrage and prompted Congressional hearings in 2011…

In 2011, JPMorgan settled claims that it inappropriately foreclosed on 18 military service members and overcharged 6,000. Bank of America and Morgan Stanley also struck a pact with the Justice Department to settle claims they foreclosed on 178 military members between 2006 and 2009…

When regulators forced them to take a close look at their loans, JPMorgan, Wells Fargo and Bank of America, the largest loan servicers, each discovered about 200 military members whose homes were wrongfully foreclosed on in 2009 and 2010, according to the people with direct knowledge of the findings. Citigroup had at least 100 such foreclosures.

First, the banks lied to Congress, and grossly understated the amount of servicemembers they’d abuses. JP Morgan told the whopper that it had foreclosed on less than 1/10 the number of military personnel that it is now willing to ‘fess up to. The number at Bank of America looks to have been understated by at least 50%. And why should we believe any of these new, improved figures? The OCC said when it shut the foreclosure reviews down that only 1/3 of them had been completed. It turns out it was less that 20%.* At JP Morgan, the cleaner files were the ones that got done faster and are thus disproportionately represented among the results. So logically, you’d expect higher defect rates in the ones that remain (the flip side is that the fear of the military industrial complex might have impelled the servicers to look carefully among the complaint letters that had not been processed and pull out the SCRA-realted ones and process them).

Now let’s look at the further proof of what a terrible job the OCC did in negotiating the settlement, which it repeatedly has touted as tough. Remember how we said to pay attention only to the cash portion of the settlement, $3.6 billion, an ignore the other goodies, which bring the total to a more impressive-sounding $9.2 billion? The New York Times confirms our reading:

When problems emerged and relief was delayed, the regulators halted the review in January, opting instead to strike a settlement with the banks. Under the terms of the deal, banks will have to provide $3.6 billion in cash and $5.7 billion worth of other assistance to 4.2 million homeowners.

At the time, regulators still did not have a full window into the flawed foreclosures.

Yves here. Let us stress that is unforgivably incompetent negotiating. Never settle when you don’t know the extent of the bad behavior. Back to the Times:

Under the settlement, banks receive credit for the size of the outstanding loan balance, rather than the amount of actual assistance provided. For example, if a bank cut a borrower’s $100,000 mortgage debt by $10,000, the lender could then reduce its commitment under the settlement by $100,000. In a previous foreclosure settlement, the banks received credit only for the $10,000.

The example, of the bank action delivering a benefit of only 10% of the headline number, is actually high. Banks are to be given credit for writing off deficiency judgments. If they still have them on 2009 and 2010 foreclosures, they are presumably worthless (they would have sold them by now, and even then they are only worth pennies on the dollar).

The OCC has provided the banks with another stealth gimmie, a “heads I win, tails you lose” review process that affects the borrowers who will likely be entitled to the biggest payouts**, SCRA violations and foreclosures when the borrower was not in default. I picked Bank of America’s updated consent order:

(4) With respect to reviews involving borrowers in the In-Scope Borrower Population who may have been entitled to protection under Sections 521 or 533 of the Servicemembers’ Civil Relief Act, (the “SCRA”), 50 U.S.C. App. §§ 521 or 533, and borrowers who may not have been in default during the foreclosure process, the Bank shall either: (a) place the borrower into the applicable category within the Borrower Waterfall, which will result in the borrower automatically receiving payments made from the Fund in accordance with the Distribution Plan for such category; or (b) instruct the Bank’s IC to complete file reviews for such borrowers to determine financial injury related to Sections 521 or 533 or to not being in default. For files reviewed under (b), the borrower will receive payments from the Fund in amounts specified in the June 21, 2012 Financial Remediation Framework where the IC makes a determination of “harm.” For files reviewed under (b) where the IC makes a determination of “no harm,” the Bank will place the borrower into the next highest Borrower Waterfall category for which such borrower is eligible, which will result in the borrower receiving payment from the Fund in accordance with the Distribution Plan for such category.

(5) With respect to the borrowers in the In-Scope Borrower Population who may have been subject to interest rate protections under Section 527 of the SCRA, 50 U.S.C. App. § 527, as part of the Borrower Waterfall placement, the Bank shall either: (a) place the borrower into the highest category within the Borrower Waterfall for which the borrower is eligible, which will result in the borrower automatically receiving payments made from the Fund in accordance with the Distribution Plan for such category; or (b) instruct the IC to complete file reviews for such borrowers to determine financial injury related Section 527. For files reviewed under (b), the borrower will receive payments from the Fund, as calculated pursuant to the methodology outlined in Department of Justice (“DOJ”)/Department of Housing and Urban Development (“HUD”) National Mortgage Settlement (“NMS”) Exhibit H (Consent Judgment entered April 4, 2012), where the IC makes a determination of “harm.” For files reviewed under (b) where the IC makes a determination of “no harm,” the Bank will place the borrower into the next highest Borrower Waterfall category for which such borrower is eligible, which will result in the borrower receiving payment from the Fund in accordance with the Distribution Plan for such category.

When you parse this language, it says that for SCRA violations and when the borrower was not in default but was foreclosed on anyhow, the bank can ask for his pet independent consultant to review the file. If the consultant finds no harm, the borrower is bumped to a lower compensation category, but the borrower cannot appeal to have his case moved to a higher category (the word “appeal” does not appear in the BofA consent order). Now this might seem not so terrible After, all, if the independent consultant finds no harm and the borrower gets a payment anyhow, isn’t this a freebie? Not until you look at the lengths our whistleblowers told us Promontory went to to find no harm. For instance:

….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.

This is simply a regulatory version of Catch-22.

But the banks are busy trying to persuade the public of the reverse, that all sorts of undeserving parties are about to get payouts. Adam Levitin shellacks that claim:

Apparently part of the bank flaks’ talking points regarding the foreclosure reviews is that to the extent homeowners harmed by wrongful foreclosures, they were actually drug dealers. The message: we didn’t foreclose on anyone who didn’t deserve it….

Running a meth lab in your basement may be an event of default on a mortgage–but if that’s going to be the default that triggers a foreclosure, the bank is going to have to prove that you’ve been running a meth lab on the property. The lender’s relationship with the borrower is contractual, not moral. If the borrower does something morally objectionable, it only matters if there is a breach of the contract. If sanctity of contract matters as a social principle, then even meth lab owners rights’ must be respected. We have criminal forfeitures to the government, but that doesn’t result in civil forfeitures to private lenders other than pursuant to contract. We’ve seen this vigilante foreclosure line before.

And Levitin tells us why this process is corrupt:

….what the OCC and Fed gave consumers was a jury-rigged, improvised kangaroo system. The avoidance of formal legal process is a hallmark of how bank regulators operate–no prosecutions, just consent decrees, informal supervisory feedback, etc….the independent foreclosure reviews were almost doomed to failure (although not necessarily as egregiously as we have seen) because their design lacked any legitimacy.

Levitin thinks the foreclosure reviews failed because a consumer matter was put in the hands of a produential regulator, meaning its priority was to protect the banks. But it is even worse than that. The OCC is a prudential regulator that should no longer exist. It has terrible incentives. It does not suffer any consequences when it is too generous to banks; it’s the FDIC and Fed that ride to the rescue. The Comptroller of the Currency wasn’t falling over from exhaustion doing serial bailouts during 2008. And precisely because it is set up to be the biggest pushover among the bank regulators, it is also the favorite target for the revolving door, as proven by how heavily OCC alumni are represented at the shadow bank regulator, Promontory Financial Group.

One post crisis reform plan that was scuttled was to fold various financial regulators into the Fed. That was scuttled, but it is time we revive it as far as the OCC is concerned. There’s no reason for it to exist, particularly given the damage it has done. It is time its duties are handed over to regulators who do have skin in the game, namely the FDIC and the Fed.

* The New York Times reports the reviews were completed on 104,000 files 495,000 borrowers asked for reviews, plus each bank was separately required to examine a large sample of additional loans (at Bank of America, for instance, an additional 35,000). Our source indicate at Bank of America, only 4,800 reviews out of a total of 140,000 to 150,000 borrower requests had been completed.
** These were in the highest payout categories in the original remediation framework.

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  1. William

    Excellent investigation and writing! Yves (I presume you are the author) you are doing the nation a great service. And your writing style makes the content, which for most readers would be rather dull and tedious, a very readable story. It seem you have hit upon a highly effective rhetorical style of presenting financial malfeasance that both informs and engages a wide spectrum of interested parties, most importantly persons of influence.

  2. Tim

    Why put this in the hands of the FDIC and Fed? They have an interest in solidifying bank balance sheets, which works against the interests of borrowers seeking compensation. Wouldn’t the more serious move be to have CFPB oversee a review project like this one?

    1. Yves Smith Post author

      You miss my point.

      As long as the OCC exists, it will be the favored place to end run other regulators. It has the worst incentives. That is precisely how these foreclosure reviews came about in the first place. There were joint negotiations among every relevant regulator on the Federal side (HUD, DoJ, the Fed, Treasury, OCC, with Warren participating even though the CFPB was in startup mode) plus the state AGs.

      The OCC broke from the negotations to try to beat the big negotiations to the punch and make them irrelevant. And this in turn was largely because Warren was involved and the banks were ripshit. And it almost worked out that way. One of our wrong calls in 2011 was that the Federal-state negotiations were dead because they sure looked and acted dead. But then Obama decided he needed to get them done, and when a President throws his weight behind something that is purely regulatory, there is pretty much no reason why he can’t make it happen.

      So even having the CFPB not involved because it could not really be but having an effective consumer representative involved led the OCC to try to sabotage the whole process.

      There are a lot of matters that will fall across regulators. The OCC is a prudential regulator and pretty much all of what it does would go to other prudential regulators, meaning the FDIC and Fed. All existing consumer related financial regulation has already been pulled out of the various regulators where it lived before and was consolidated in the CFPB.

      1. Cyrus Rex

        Yves, I get your point that the OCC has to go. However, it should be anywhere anywhere but the Fed. The Fed has proven itself over the years to be anywhere from dismal to outright criminal when it comes to regulating banks — particularly money center banks. The Fed always answers to its owners and they ain’t us.

  3. Bravo

    Adam Levitin and Yvex have it exactly right. But can someone answer the question, doesn’t an administrative judge out there have ultimate authority to approve this settlement? And if so, who is that judge? And couldn’t congress, this community, and others like it, make a concerted effort to at least put a spotlight on that one party who might still have the integrity and backbone to block a settlement whose foundation is a conflicted, poorly designed, and executed review process?

    And what has happened to the GAO report that is expected to officially highlight the deficiencies of the review process? Have the banks pressured the GAO to hold back on the release of that report for strategic editing, or until the banks finish assigning loans to their 11 grossly limiting categories of borrower harm and sending out checks? Whichever judge signs off on this settlement is going to find themselves near the top of the Judicial Hall of Shame.

      1. 2little2late

        “I think it has been proven Judges have no shame.”

        Absolutely. And they routinely foam the bankster’s runways across the land. In my own federal suit, not only did the judge refuse to rule, he took it upon himself to seal all of my findings of notary fraud and perjury perped by BofA, thus keeping all this hard-earned research into their crime machine forever muted. This was done without a single motion by attorneys representing BofA.

        An astonishing display of unrequited love.

  4. Brian

    When will a majority stand up and declare that “because they didn’t come to take my home, I waited and watched” If you remember the holocaust, is there anything really different about the approach here?

    1. Richard Davet

      The taking of a life has been legalized………..abortion, euthanasia. The taking of your property via illegal foreclosures has been legalized….as reported here.

      What’s next? Life, property, then what?

  5. Richard Davet

    From Levitin’s Blog:

    ” I wonder, though, will the prudential bank regulators ever learn that they cannot keep dealing with banks through ad hoc, informal processes if they want political legitimacy? Do they even care? And if not, can we make them? ”

    It is obvious that they have no “political legitimacy”. If they “cared” they would not even have the job. Let’s have some dialog and suggestions on how “we can make them”.

  6. down2long

    Yves, I second what William said: You are astoningly good at clarifying these cases and making them accessible to those of us who did not toil on Wall Street/Capital Hill/Satan’s Playground. Thank you.

    One case to go for me – Wells Fargo servicer, BofA trustee (what a laugh that word is!) refused my court ordered payments for two years, refused to acknowledge the cramdown, has at various times sent out goons to clear out the tenant’s items from the exterior of property (where is GRanny when you need her “Get off my land or I’ll fill your BEhind full of Buckshot) and now has gone silent for a year.

    Thank God for that – now that my shameless BK judge unilaterally closed my reopened case, I can sue in CA state court – and we’ve (FINALLY) got some tough new laws on our sides. As you noted Yves, in CA foreclosures are down 75 percent since the new law took effect. EVERY violation costs the banks $7500 a pop. And the way they roll, that adds up fast.

    Thanks again Yves. Dare I hope we are gaining traction on this. RE: Curry. Wouldn’t it be fun if some Repugs got into this to make political hay. The Tea Party might, not the reg Repugs. It would be a winner. Shame Obomba, if that’s possible.

    1. down2long

      Never want to see another BK lawyer as long as I live. The most shameless, disgraceful bar, charging a king’s ransom to broke/bereft people while they themselves have no skin in the game beyond cleanint out the client, standing in front of corrupt judges who serve for five years and then go work for banker/creditor firms at $600k, or the few debtor-friendly judges (GOD BLESS THEM, I never saw one but I heard they exist, like angels) go to teach at law schools to be completely ignored by cub lawyers.

      To clarify, I don’t mean to cast aspersions on the rare debtor friendly judges. They should be carefully bred, or cloned, to produce more of the same.

  7. Kristina

    BofA is my servicer. Even though I was finally granted a HAMP loan mod two years after their blatant dual tracking in 2010, they have now tacked on to my loan balance all the misapplied payments (since I was booted out of HAMP for missing documents) interest, etc. for those two years PLUS foreclosure processing and foreclosure mill attorneys fees for a foreclosure that never should have happened. 46K !!!!!! RIP OFF criminals!!!!! Yet yesterday I got a notice from IFR that I don’t qualify for a review at all.

    The more I read Yves’ work, the angrier I get. Thank you so much for digging deep.

  8. Laughing_Fascist


    You said “never settle until you know the extent of the bad behavior.”

    It is almost a certainty based on the facts you present that the OCC did not want to know. You are being polite when you suggest mere incompetence.

    You noted the banks get a credit for writing off a deficiency judgment. And a credit for the entire mortgage balance if the bank agrees to reduce the balance by a few thousand dollars. This makes one wonder if we have fallen into a hole and now live in wonderland. If you think about it, these provisions of the settlement could result in virtually no borrowers receiving payments.

    If this story gets wider traction, Obama or Congress may have to do something. Like set up a commission. To investigate the investigation. I understand Mr Geithner is a regular citizen now. Perhaps he could be persuaded to volunteer his extraordinary expertise and credibility and be the chairman.

    1. Stupendous Man - Defender of Liberty, Foe of Tyranny

      Thanks, I needed a good laugh today.

      “…volunteer his extraordinary expertise and credibility…”

    2. Yves Smith Post author

      A lot of people in DC are still saying Curry is a good guy. I don’t see how you can given how badly the settlement was handled.

  9. sk

    Now, it seems the issue is not even about the wrong doings by the banks alone. Even more urgent issue is to control and eliminate the corruption among the regulators and our elected and appointed officials including the Justice department.

    When these people are corrupt and aiding in cover up of bankers’ crimes, we need to prosecute and eliminate our officials. It is time to appoint a Special Prosecutor and go after all corrupt officials and the congress who are facilitating banker’s crime. It is just a wishful suggestion but we need someone like Neil Barofsky appointed to investigate and prosecute the regulators, prosecutors and corrupt members of Congress.

  10. Carla

    “JPMorgan, Wells Fargo and Bank of America, the largest loan servicers, each discovered about 200 military members whose homes were wrongfully foreclosed ”

    How perfectly symmetrical is that? They have to be lying AGAIN.

  11. Bill


    This is a bit off topic, but falls in the general catagory of wrongful foreclosure/abusive practices by servicers and/or investors.

    This is an excerpt from a motion and pleading I filed today in Columbus, Ohio on behalf of a buyer in a short sale transaction. The missing information is that the investor, who appears to be driving the bus in refusing to honor the short sale agreement between CitiMortgage and the primary defendant is Freddie Mac. And they definitely know what is going on. This is pretty outrageous conduct for an entity owned lock, stock and barrel by the US government. Please contact me if you wish to review the full pleading. Anyway, here is the excerpt, with names of individual litigants redacted:

    “This Motion to Intervene is based on the following facts: On or about June 18, 2012, Intervenor and Defendant entered into a Real Estate Purchase Contract (the “Contract”) for the real property that is the subject of this case. The Contract was subject to a “Short Sale Addendum” of even date that specified the Contract was contingent upon approval of the transaction by Plaintiff CitiMortgage and all other lienholders. A copy of the Contract and Short Sale Addendum is attached to Intervenors’ Answer and Counterclaim as Exhibit A as required by Civ.R. 24(C). The Contract and Short Sale Addendum were forwarded to Plaintiff’s loss mitigation department for review and approval. Defendant obtained transaction approval from lienholders other than the Plaintiff, and then obtained Plaintiff’s approval on January 3, 2013. A copy of Plaintiff’s approval letter is attached to Intervenors’ Answer and Counterclaim as Exhibit B. The following morning, Plaintiff’s counsel submitted an Entry and Order withdrawing the property from the Sheriff’s Sale that was scheduled for the same day. The Entry, a copy which is attached to Intervenors’Answer and Counterclaim as Exhibit C, was signed and filed with the Clerk of Court at 8:46 am, 14 minutes before the scheduled start of the Sheriff’s Sale. Unfortunately, Plaintiff failed to deliver a copy of the filed Entry to the Sheriff’s office, and the sale went forward as scheduled, with Plaintiff submitting the winning bid (see Exhibit D attached to Intervenors’ Answer and Counterclaim). Plaintiff has since refused Intervenors’ demand that Plaintiff move the court to vacate the Sheriff’s Sale and allow the short sale to proceed to closing.”

  12. Gaylord

    This is more evidence that the existing system needs to fail catastrophically in order for change to occur.

  13. LucyLulu

    Not only are the banks using deficiency judgements as credits against their fines but they are also widely using forgiveness of second liens they hold. Undoubtedly these are second liens that are junior to delinquent or foreclosed primary mortgages.

  14. Fancy_Nancy

    Thanks Susan Smith – you are a modern American hero.
    So glad you are on the story.
    I stopped paying $BAC in August 2010. Still in place, in a well-maintained, 4 BR pool home that is underwater about $75k.
    The criminal-bankers are smart enough to grasp how expensive upkeep and AC are in Fla. and have left us alone. I am sitting and waiting for f.c., they filed in June 2012 but dead silence since then.
    I will see them in court. Have a lawyer, have a buy-and-bail plan in place.
    Eff $BAC. Brian Moynihan, you should be disbarred. Watch that karma, dude. It’s a witch.

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