Foreclosures are getting a lot of attention right now. In early February the news was that foreclosure-related documents were being signed and processed without being read. On April 13, 2011 the federal bank regulatory agencies took enforcement action against 14 financial institutions for engaging in a pattern of misconduct and negligence related to foreclosures. There are also rumblings of fair lending problems related to foreclosures.
So why is the spotlight on foreclosures? It is a volume issue. Wherever you find a large volume of activity you will also find a higher volume of problems. When a large volume of problems exist Congress and the regulators will jump in with new requirements.
In this past decade we have seen huge growth in home loans, particularly subprime loans. As the volume of subprime loans increased, Congress and the regulators added new laws and regulations. Now that bulge of subprime loans is moving into foreclosure and once again it is attracting new attention from the big boys.
Foreclosure Enforcement Actions
The Comptroller of the Currency, Federal Reserve Board, Federal Deposit Insurance Corporation and the Office of Thrift Supervision announced a series of formal enforcement actions against banking organizations and third-party service providers, ordering them to address a pattern of misconduct and negligence related to deficient practices in residential mortgage loan servicing and foreclosure processing. The institutions have not been penalized yet, but Congress appears disappointed that penalties were not assessed. So stay tuned for further action.
The agencies also published a summary of the reviews they conducted, the corrective action required and a list of steps all institutions can take to minimize the likelihood of having similar problems. The list of positive steps includes:
Governance and Oversight
• implement and routinely audit sound enterprise-wide policies and procedures to govern and control mortgage-servicing and foreclosure processes
• develop quality controls for effective management of third-party vendors who support mortgage-servicing and foreclosure processing
• strengthen the governance standards intended to ensure compliance with applicable federal and state laws and company policies and procedures
• develop company standards that emphasize accuracy and quality in the processing and validation of foreclosure and other servicing-related documents throughout the entire foreclosure process
Organizational Structure, Staffing, and Technology
• increase staffing to adequate levels and provide them with requisite training to effectively manage the volume of default loans and foreclosures
• upgrade information systems and practices to better store, track, and retrieve mortgage-related documents
Accountability and Responsiveness Dealing with Consumers
• ensure borrowers are offered appropriate loss-mitigation options
• ensure proper custody and control of borrower documents related to the servicing of the mortgage
• increase coordination between loss mitigation and foreclosure-processing units to prevent inappropriate foreclosures
• improve communication with borrowers and establish measurable goals and incentives for delivering accurate information and responsive assistance
• develop complaint-resolution processes that are routinely monitored and measured for quality assurance
Fair Lending Implications
The rumor mill is buzzing with the news that the agencies’ foreclosure reviews had uncovered evidence that loss mitigation efforts and foreclosure actions undertaken by financial institutions had resulted in disparate treatment for certain groups of borrowers. The recent enforcement action by the regulators does not reflect this outcome. However the report indicates a general lack of control and supervision in many of the institutions reviewed. Those conditions are generally breeding grounds for fair lending problems.
We may hear more on this issue in the coming months. The recommendations listed above should also be effective in preventing fair lending problems in the areas of loss mitigation and foreclosure.
The agencies are obviously looking at loss mitigation and foreclosure efforts, so you should be as well. The volume of loan losses, foreclosures and related actions are at all time highs. The volume of these actions increases the likelihood that problems will occur. Take the time to review this area of operations now, and resolve any problems before examiners begin to sniff around.