By Peter Schroeder - 04/04/13 12:12 AM EDT
The Government Accountability Office (GAO) is criticizing bank regulators for mishandling a review of mortgage servicers and their foreclosure proceedings.
The Office of the Comptroller of the Currency (OCC) and the Federal Reserve gave mortgage servicers and their consultants too much leeway in reviewing their mortgage loans, resulting in a complex and widely varied process that made it difficult to oversee as a whole, according to a draft GAO report obtained by The Hill.
In January, regulators announced that they had scrapped the review process with most of the servicers and instead struck a $9 billion settlement with the banks involved. Ten percent of the mortgages initially under the review process are still being reviewed.
While the report explicitly does not weigh that specific decision, the GAO did find that the review process was complex and bogged down by a host of factors. Millions of mortgages were up for review, and the process ended up involving dozens of institutions, including 14 servicers, 14 third-party consultants from seven different firms (some with subcontractors), and more than 10 law firms.
The servicer review began in 2011 after bank regulators said they wanted to figure out the number of borrowers that should be compensated for mortgage mistakes, including foreclosure proceedings.
As part of that process, regulators ordered servicers to hire consultants to identify harmed borrowers, and reach out to other borrowers who may have been harmed for a review of their loan documents.
Consultants were given freedom to establish their own techniques for conducting the review, as regulators maintained that the differences among servicers nationwide was too varied to allow for a universal approach.
But that meant that consultants adopted a host of analytical approaches to identifying harmed borrowers. For example, the GAO found that some consultants selected 100 loans in a certain category as a statistical sample, while others chose nearly four times that many. Allowing for a range of statistical activities made it difficult for regulators to achieve any broad empirical findings from the review, GAO said.
The report also found that while regulators did release more information with the review order than they typically do in such matters, limited communication with the public and borrowers "adversely impacted" confidence in the proceedings. The report found that borrowers waited nearly a year after submitting a request for review before receiving an update on their claim.
Rep. Maxine Waters (D-Calif.), the ranking member of the House Financial Services Committee who criticized the previous decision to halt the review, called the leaked report a "wake up call."
"The report confirms what I had long suspected – that the OCC’s oversight of the supposedly independent consultants hired by the servicers was severely deficient," she said in a statement. “In the months since I called for the GAO report, it has become more and more apparent that the Independent Foreclosure Review was deeply flawed."
Waters added that she was calling for a hearing to explore the issue, and planned to introduce legislation that would ensure outside contractors involved in government enforcement work would not be paid by the subjects under scrutiny, as was the case in the foreclosure review.
An OCC spokesman did not respond to a request for comment.