By David Dayen
To help settle a probe into illegal mortgage practices, servicers were ordered to review all foreclosures between 2009 and 2010. The senator from Massachusetts thinks the public has a right to know what they found.
Since the start of the new Congress, liberal Democrats have anxiously awaited senior Senator from Massachusetts Elizabeth Warren’s initial moves. Celebrity entrants into the Senate—from Hillary Clinton to Al Franken—have tended to take a modest approach, immersing themselves in committee work and issues of local importance, building relationships with their colleagues, and operating as a “workhorse, not a show horse.” By contrast, Warren said during the campaign that she wanted to use her new position as a platform for her ideas. And one of her first actions suggests she will spend her time as Senator much the way she did as chair of the TARP oversight panel and at the Consumer Financial Protection Bureau: shedding light on the harm caused by unscrupulous financial interests. (Editor's note: Warren's daughter, Amelia Warren Tyagi, is a member of the Prospect's governing board).
Last Thursday, Warren teamed with the Democratic ranking member of the House Oversight Committee, Elijah Cummings, to launch an investigation into the Independent Foreclosure Reviews. Almost two years ago, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve ordered the reviews to help settle a probe into illegal mortgage practices that shortchanged homeowners and, in some cases, improperly kicked people out of their homes. Under the order, 14 of the biggest mortgage servicers had to give all borrowers who received a foreclosure notice in 2009 and 2010 the opportunity to have a neutral third party look at their files to see if the servicer had made errors. Borrowers would then be entitled to compensation for the mistakes. Of the 3.8 million eligible borrowers, around 500,000 submitted requests for review.
But the independent reviews turned out to be neither independent nor reviews. As whistleblowers have pointed out, the banks handpicked and paid the salaries of the reviewers, third-party consultants who have increasingly become a substitute for government bank examiners. The data from the borrower files, as well as the guidelines for review, all came from the banks, and in many cases the banks made the determinations of harm themselves, leaving the reviewers to merely check their work. Managers overseeing the consultants overlooked entire categories of borrower harm, even obvious ones like servicers rejecting loan-modification payments from a borrower with a signed agreement, or tallying up impermissible fees. The managers also steered the ground-level reviewers, most of whom were temporary employees with little or no expertise in mortgages or foreclosures, away from reporting significant mistakes. Banks could even appeal whatever errors did get through (borrowers, of course, could not). Meanwhile, the complex rules for scrutinizing the documents extended the time it took to examine each loan file, which was good news for the consultants who raked in well over $1 billion at last count.
The new OCC leadership, which inherited this debacle, put a stop to the reviews and instead said it would compensate homeowners with a cash settlement. The 3.8 million foreclosure victims from 2009 and 2010 would split $3.3 billion, which amounts to less than $1,000 per foreclosure. No effort would be made to use the data gained from the reviews in parceling out the funds; an as-yet-unknown process, determined largely by the servicers, will dole out a fixed amount to borrowers whose loans fit certain general characteristics. Another $5.2 billion would go toward reducing loan balances for borrowers still in their homes. OCC head Thomas Curry claimed that the review process became too costly, diverting money from homeowners to the consulting firms, and that the new settlement would provide the best way to get the most compensation in the hands of foreclosure victims quickly.
Warren’s belief in the power of transparency—which in this case means releasing public data whose collection the government mandated—to improve public policy has been a driving force even before she reached the Senate.
Enter Senator Warren. She and Representative Cummings have asked OCC and the Federal Reserve for all performance reviews the two agencies conducted during the program before nixing it; the amount of money the banks paid their third-party reviewers; and the total number of reviews, along with the percentages of those in which errors were found. “Public confidence in the banking system has been badly undermined by a widespread concern that large financial institutions are not held fully to account when they break the rules—and that consumers are not sufficiently compensated,” Warren and Cummings wrote in their letter to the OCC and the Fed last week. “It is critical that the OCC and the Federal Reserve disclose additional information about the scope of the harms found to establish confidence in the sufficiency and integrity of the settlement.” Warren’s belief in the power of transparency—which in this case means releasing public data whose collection the government mandated—to improve public policy has been a driving force even before she reached the Senate. For example, the CFPB Consumer Response Center—an initiative Warren championed when standing up the agency—makes available data from the organization’s complaint hotline about consumer-credit abuses and is an integral part of the supervision process.
While the information in the Independent Foreclosure Reviews may be flawed, it’s critical to know what was gathered. Too often in post-financial-crisis settlements with Wall Street banks, regulators settle on a remedy without determining or taking into account the level of harm. What’s more, without an accounting of the mortgage-servicer industry’s previous practices, it will be nearly impossible to fix the broken mortgage-servicer industry.
A thorough investigation of the entire failed review process would uncover much about the current system of bank regulation. It would expose the growing use of consultants; show the need for more funding so that regulators instead of consultants can conduct independent reviews; and highlight the need for additional standards and rules against the mortgage servicers, tailored to exactly what abuse they heaped on borrowers through 2009 and 2010. It could also put some much-needed focus on OCC, historically a light-touch bank regulator which has been embarrassed by this mess, to the extent that it’s overhauled its senior leadership. Right now the investigation is in its early stages—Warren is still getting her transition to the Senate in order. But there’s a lot under the surface, particularly the startling information from the whistleblowers, waiting to be uncovered. Combined with a forthcoming Government Accountability Office report on the reviews, which revealed a significant number of errors, policymakers and foreclosure victims could finally get the investigation of this industry that they deserve.
The request for the review data has let regulators and banks know that Warren will not be a silent, go-along-to-get-along Senator. There’s a certain value in just having a threat of congressional oversight, particularly from a high-profile figure who can stir public opinion. Cummings has worked on the foreclosure crisis for years, and House Financial Services Committee ranking Democrat Maxine Waters, who sent her own letter to OCC seeking more information, yesterday asked Republican chair Jeb Hensarling for hearings on the matter. But Warren, by virtue of her large following, can raise attention to the issue, which fits with a key principle of her nascent political career: whether government will bother to stand up when the middle class gets ripped off.
Posted by Carlos Marroquin