Bank Deal Ends Flawed Reviews of Foreclosures
Matthew Cavanaugh for The New York Times
A bank reversed the foreclosure of Christine Lucier, but her home, while empty, was vandalized.
By JESSICA SILVER-GREENBERG
Published: January 10, 2013 66 Comments
Federal banking regulators are trumpeting an $8.5 billion settlement this week with 10 banks as quick justice for aggrieved homeowners, but the deal is actually a way to quietly paper over a deeply flawed review of foreclosed loans across America, according to current and former regulators and consultants.
To avoid criticism as the review stalled and consultants collected more than $1 billion in fees, the regulators, led by the Office of the Comptroller of the Currency, abandoned the effort after examining a sliver of nearly four million loans in foreclosure, the regulators and consultants said.
Because they have no idea how many borrowers were harmed, the regulators are spreading the cash payments over all 3.8 million borrowers — whether there was evidence of harm or not. As a result, many victims of foreclosure abuses like bungled loan modifications, deficient paperwork, excessive fees and wrongful evictions will most likely get less money.
“It’s absurd that this money will be distributed with such little regard to who was actually harmed,” said Bruce Marks, the chief executive of the nonprofit Neighborhood Assistance Corporation of America.
While the comptroller’s office acknowledged flaws in the review, Bryan Hubbard, a spokesman for the agency, said the “settlement results in $3.3 billion being paid to consumers and that is the largest total cash payout of any settlement involving borrowers affected by foreclosures to date.”
The examination was plagued by problems from its start in November 2011, according to interviews with more than 25 people who reviewed foreclosures, 15 current and former regulators and 6 bank officials, who insisted on anonymity because they were not authorized to speak publicly or feared retribution.
Several former employees of a consulting firm doing reviews said that their managers showed bias toward the bank that hired them. Other reviewers said that the test questions used to evaluate each loan were indecipherable and in some cases the process failed to catch serious harm. Many borrowers said they had never heard of the review or were so baffled by the process that they gave up or dismissed it as just another empty promise.
The review, which was hastily dismantled this week, was mandated by bank regulators amid public outrage over accusations that banks were robo-signing mountains of foreclosure filings without verifying them for accuracy. The review was supposed to cover any loan in foreclosure in 2009 and 2010, regardless of whether there was evidence of dubious practices.
The comptroller and Federal Reserve ordered the banks to hire consultants for the review, and the regulators solicited claims from borrowers.
Patricia McIntosh, 46, said she would have jumped at aid to avoid the foreclosure on her home in Lynn, Mass., but never got notice of the review. “When you go through a foreclosure, you are sifting through so much junk mail and scams,” Ms. McIntosh said, “so I keep my eyes open and I never got anything.”
Ms. McIntosh said she believed she was eligible for relief after U.S. Bank foreclosed on her home in the midst of a loan modification.
Christine Lucier, 32, of Northbridge, Mass., is also in limbo, unsure of what aid she may receive now that the settlement will be widely disbursed. Of the $8.5 billion settlement, $3.3 billion will be shared among the 3.8 million borrowers, and the rest comes mostly from banks’ lowering of interest payments or loan amounts for homeowners. In March 2012, Ms. Lucier received a letter from Bank of America notifying her that she was behind on her mortgage payments and in foreclosure. She thought she was having a nightmare, because the bank had evicted her in 2008.
She learned the bank had inexplicably reversed her foreclosure in November 2010. Since then, the two-bedroom colonial house had been looted by vandals and stripped of its wiring and copper piping. “My life has been turned upside down and I have to go through foreclosure again,” Ms. Lucier said.
Now that the foreclosure review has been shut down, no one will know whether examples like Ms. Lucier are anomalies. Bank executives thought that the review would prove that, while their foreclosure procedures had deficiencies, they did not result in the widespread wrongful eviction of homeowners. And housing advocates thought that the examination would prove extensive wrongdoing by the banks.
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As of this week, the comptroller’s office said that it had identified 654,000 potentially problematic foreclosures — a combination of 495,000 claims submitted by borrowers and 159,000 files that the consultants flagged for review. The regulator said it was still determining the number of reviews completed, but the consultants said that only a third of the loans were fully reviewed.
A critical flaw from the start was that the federal government farmed out the work of scouring the millions of foreclosures to several consulting firms that charged as much as $250 an hour and outsourced work to contract employees, many of whom had no experience reviewing mortgages, according to the reviewers, regulators and bankers.
Oversight by the regulators was nearly nonexistent, the reviewers said. Some employees hired by one of the consultants, Promontory Financial, to pore over hundreds of thousands of Bank of America foreclosures said that without a watchdog some consultants worked to minimize the number of homeowners found to be harmed. One reviewer described how her supervisors routinely kicked back loans where she had identified harm. The reviewers would speak only if they were not named because they were searching for work.
Debra Cope, a spokeswoman for Promontory, said in a statement: “From Day 1, Promontory strove to conduct its review work as thoroughly and independently as possible. We adhered carefully to the scope and intent of the reviews prescribed by the O.C.C. enforcement actions, using a methodology that the O.C.C. approved. Our overarching concern at all times was to serve the best interests of borrowers.”
Mr. Hubbard, the comptroller’s spokesman, said “the O.C.C. and the Federal Reserve staff provided ongoing oversight, had regular meetings and conversations and were in the process of testing consultant findings.” He said that the agency recognized the reviews had shortcomings but that “maintaining the course would have resulted in billions more being paid to consultants and fewer dollars to consumers.”
At other banks, the reviews were hobbled by delays and inefficiencies. Deloitte, the consulting firm hired to examine foreclosures for JPMorgan Chase, brought in reviewers to look at the documents before the examination procedures were ironed out. The result: Employees sat around with no work for more than a month while collecting a paycheck. “We would just read our books,” one of the reviewers said.
“We strongly disagree with this characterization of the complex independent foreclosure review process and fully stand behind the quality of our work,” a Deloitte spokesman said.
Other reviewers said that entire days were wasted assessing files to determine whether the borrowers had been overcharged by minuscule amounts like $5 for lawn mowing.
Months before the review was scuttled, officials from the comptroller’s office dismissed concerns from consultants that such fee testing was distracting reviewers from assessing actual harm, according to several people who declined to be named discussing private conversations.
Stymied by unnecessary questions and stalled by work delays, employees said that a single review could take them up to 20 hours per file, more than double the eight hours the consultants originally promised regulators.
Even then, some abuses went overlooked. One borrower, for example, declined a loan modification because the proposed payment was twice as high as his existing mortgage. Fifteen months later, the homeowner won a reduced payment. The reviewer said: “We just had to say, Was the last modification correct? But that’s not the full story at all.”
Sheila C. Bair, who opposed the way the reviews were designed when she was chairwoman of the Federal Deposit Insurance Corporation said, “This thing is a big mess which was dumped into the lap of the current O.C.C. leadership. They are trying to make the best out of a very bad situation.”
A version of this article appeared in print on January 11, 2013, on page A1 of the New York edition with the headline: Bank Deal Ends Flawed Reviews Of Foreclosures.