Today's Trends in Credit Regulation

Deficient Foreclosure and Servicing Practices – Federal Agencies Enforcement Actions and State AGs Settlement Terms Proposal
By Lisa C. DeLessio

On April 13, the Federal Reserve Board, Office of the Comptroller of the Currency, and the Office of Thrift Supervision announced formal enforcement actions requiring 14 banks to address deficient practices in residential mortgage loan servicing and foreclosure processing. The announcement had been expected for several weeks.

How did we end up here?

Attorneys General Actions

The enforcement actions stem from foreclosure practices that came to light last Fall when then Attorney General Richard Cordray sued GMAC Mortgage, LLC and its parent, Ally Financial, Inc. alleging that the company had engaged in “robo-signing” affidavit practices. The complaint alleged that bank employees engaged in fraudulent activity by signing and filing thousands of affidavits without the requisite knowledge and information, and came after a GMAC employee testified in deposition that he had signed thousands of affidavits without personal knowledge, signed approximately and did not verify the accuracy of the information in them. At the time suit was filed, the Ohio Attorney General also notified other banks about concerns that they, too, had engaged in similar practices.

In the wake of that lawsuit, 49 state Attorneys General, in conjunction with state bank and mortgage regulators, announced that they planned to investigate allegations that mortgage loan servicers had submitted fraudulent affidavits in support of mortgage foreclosure proceedings. Although there were a few investigations by a handful of state attorneys general or regulators, there was no comprehensive or organized investigation by the Attorneys General group. In early March, while we were still awaiting the investigation, the press reported that the Attorneys General group had served several large banks with “Proposed Settlement Terms.”

The 27 page Settlement Term sheet was surprising for a couple of reasons. First, it was directed to the banks and not licensees regulated by the states; two, there are no findings of fact in the Settlement Terms; three, the proposal goes far beyond robo-signing and foreclosure practices; and four, it was not (and still is not) clear how the proposal could affect servicers not served. The first eight pages of the Settlement Terms address foreclosure and bankruptcy related practices, including affidavit signing practices. The rest of the proposal reaches other servicing practices, including loss mitigation practices, restrictions on servicing fees, force-placed insurance, prohibition on unfair or deceptive practices, monetary relief for borrowers subject to misconduct (but no dollar value), and an agreement to have servicing practices reviewed and monitored. At this point, no bank served has agreed to the Settlement Terms, and some state Attorneys General have even announced that they do not support the Settlement Terms.

Federal Agencies Actions

A few weeks later, on April 13, the federal Agencies released the consent orders against 14 banks, along with the Interagency Review of Foreclosure Policies and Practices, (the “Interagency Review”) which summarizes the findings on which the Agencies based the enforcement actions.

In contrast to the Settlement Terms, the Interagency Review explained that examiners evaluated each servicer’s self-assessments of their foreclosure policies and processes; assessed each servicer’s foreclosure operating procedures and controls; interviewed servicer staff involved in the preparation of foreclosure documents; and reviewed, collectively for all servicers, approximately 2,800 borrower foreclosure files that were in various stages of the foreclosure process between January 1, 2009, and December 31, 2010. They also considered, among other things, quality control and audits and use of third party vendors including foreclosure counsel.

The Interagency Review reports that the Agencies found critical weaknesses in servicers’ foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys. Specifically, the servicers were understaffed to manage and control the volume of foreclosures; had inadequate controls to monitor and oversee foreclosure activities handled by third party vendors and foreclosure counsel; lacked sufficient audit trails to show how information set out in the affidavits (amount of indebtedness, fees, penalties, etc.) was linked to the servicers’ internal records at the time the affidavits were executed; and lacked adequate quality control and audit reviews to ensure compliance with legal requirements, policies and procedures, as well as the maintenance of sound operating environments.

Inadequate affidavit notarization practices were also scrutinized as part of the review. The Agencies found that individuals who signed foreclosure affidavits often did not personally check the documents for accuracy or possess the level of knowledge of the information that they attested to in those affidavits. In addition, some foreclosure documents indicated they were executed under oath, when no oath was administered. According to the report, the examiners also found that the majority of the servicers had improper notary practices which failed to conform to state legal requirements. These determinations were based primarily on servicers’ self-assessments of their foreclosure processes and examiners’ interviews of servicer staff involved in the preparation of foreclosure documents.

Remediation under Agencies’ Orders

In response to its findings, the formal enforcement actions will require mortgage loan servicers, among other things, to:

  • Compliance program: Establish a compliance program to ensure mortgage servicing and foreclosure operations, including loss mitigation and loan modification, comply with all applicable legal requirements and supervisory guidance, and assure appropriate policies and procedures, staffing, training, oversight, and quality control of those processes.
  • Foreclosure review: Retain an independent firm to conduct a review of residential foreclosure actions that were pending at any time from January 1, 2009, through December 31, 2010, to determine any financial injury to borrowers caused by errors, misrepresentations, or other deficiencies identified in the review, and to remediate, as appropriate, those deficiencies.
  • Dedicated resources for communicating with borrowers/single point of contact: Ensure effective coordination of communication with borrowers related to foreclosure, loss mitigation, and loan modification activities, including (among other things) that communications are timely and appropriate and designed to avoid borrower confusion, continuity in the handling of borrower cases during the loan modification and foreclosure processes, reasonable and good faith efforts, consistent with applicable law and contracts, to engage in loss mitigation and foreclosure prevention for delinquent loans where appropriate, and that decisions concerning loss mitigation or loan modifications will be made and communicated in a timely manner.
  • Third-party management: Establish policies and procedures for outsourcing foreclosure or related functions to ensure appropriate oversight and that activities comply with all applicable legal requirements, supervisory guidance, and the servicer’s policies and procedures, including the appropriate selection and oversight of all third-party service providers, including external legal counsel, Default Management Service Providers, and MERS.
  • Management information systems: Improve management information systems for foreclosure, loss mitigation, and loan modification activities that ensure timely delivery of complete and accurate information to facilitate effective decision making.
  • Risk assessment: Retain an independent firm to conduct a written, comprehensive assessment of risks in servicing operations, particularly in the areas of foreclosure, loss mitigation, and the administration and disposition of other real estate owned, including but not limited to operational, compliance, transaction, legal, and reputational risks.

What Next?

The undertaking by servicers will require substantial resources. The statistics reported in the Interagency Review are daunting. The Agencies report that at the end of the fourth quarter of 2010, nearly 54 million first-lien mortgage loans were outstanding, 2.4 million of which were at some point in the foreclosure process. The Agencies further reported that two million mortgages were 90 or more days past due and at an elevated risk of foreclosure. New foreclosures are on pace to approach 2.5 million by the end of 2011.

With these numbers in mind, and given the public scrutiny, all servicers need to evaluate their policies, practices and procedures. For servicers not subject to the consent orders, they are on notices that best practices will be more important than ever as they face examinations by state regulators who could use the Interagency Review as a road map to upcoming examinations.

And what about the Attorneys General Settlement Terms proposal? We’ll just have to wait and see, but we should all stay tuned for more to come on that.

Lisa C. DeLessio is a partner in the Maryland office of Hudson Cook, LLP. Lisa can be reached at (410) 865-5437 or by email at

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