Review of Botched U.S. Foreclosures Beset by Missteps, GAO Says

A $2 billion search for U.S. foreclosure errors was hampered by poor planning from the regulators who demanded it, according to a review by the Government Accountability Office.

U.S. banking regulators provided insufficient guidance for the independent review of more than 4 million foreclosures by 14 mortgage servicers in 2009 and 2010, according to a draft of the report.

The review process, which was halted in January without providing compensation to any wronged borrowers, was ordered in 2011 by the Office of the Comptroller of the Currency and the Federal Reserve to compensate borrowers, some of whom lost their homes through foreclosures that relied on poor documentation. For all but three servicers, this process has since been replaced by a $9.3 billion settlement with banks including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.

“The complexity of the foreclosure reviews and limitations in regulators’ guidance and monitoring of the foreclosure review challenged their ability to achieve the stated goals,” the report concluded.

According to the GAO, third-party consultants hired by the servicers complained that the loan files and scope of the file review made the process “complicated and time-consuming.” The consultants -- among them Promontory Financial Group LLC, Ernst & Young LLP and PricewaterhouseCoopers LLP -- said some files contained as many as 50 documents, comprising more than 2,000 pages. They also reported that consultants spent as many as 50 hours to complete a full single file review.

Guidance Unclear

The GAO said changing guidance from the regulators, which “expanded the scope of the reviews and contributed to delays.” The Federal Reserve issued three clarifications of loan modification guidance while the OCC provided seven instances of informal guidance during the process. The lack of clarity in regulators’ guidance limited the “usefulness of the information obtained from the foreclosure review process,” the GAO said.

The federal agencies “may have been able to better define the scope of the activities and issue more complete guidance prior to commencing the foreclosure review process, thereby potentially reducing the number of revisions to the scope or guidance,” the GAO said in the report.

Bryan Hubbard, an OCC spokesman, and Eric Kollig, a Federal Reserve spokesman, declined to comment on the draft report.

The GAO examination was requested in a Jan. 13 letter from U.S. lawmakers, calling for a study of the “independence, transparency, accountability and consistency of this foreclosure review process.”

Legislation Promised

House Financial Services Committee ranking member Maxine Waters, a California Democrat who was among those who requested the study, said she plans to introduce legislation to address the “problem of relying on outside contractors for enforcement actions.”

“The report confirms that the Independent Foreclosure Review process was poorly designed and executed,” Waters said in a statement. “The GAO demonstrates that the projected error rates which were used to negotiate a settlement had little bearing in fact.”

A Senate Banking subcommittee plans to hold an April 11 hearing on the use of third-party consultants in enforcement actions. Representatives from the OCC, Fed, and the consultants from the foreclosure review will testify.

In a response to the findings included in the report, Comptroller of the Currency Thomas Curry said the OCC will continue to monitor the foreclosure review for consistency and apply the lessons learned to consent orders. Curry also said he recognizes the need to provide additional information to the public on the process, status and the result of the foreclosure review, and will issue two additional reports.

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