In April 2011, regulators entered into consent orders with 14 mortgage servicers. Complexities of the Foreclosure Review Process and Limitations in Regulators’ Guidance and Monitoring May Have Hindered Achievement of Goals

According to regulators, the goals of the foreclosure review were for  consultants to identify as many harmed borrowers as possible, to treat  similarly situated borrowers across all 14 servicers similarly, and to help  restore public confidence in the mortgage market. Regulators reported that more than  160,000 borrowers had submitted requests-for-review as of April 30,  2012. In addition to consistent consent orders and guidance, OCC and Federal  Reserve staff implemented regular communication mechanisms to help  foster consistency in the reviews. For example,  some third-party consultants planned to review all rescinded  foreclosures, whereas others proposed reviewing a sample of those  loans. Broad Guidance and Limited Monitoring of Inconsistencies Increased Risks of Different Treatment for Similar Borrowers

According to third-party consultants, regulators’ guidance did not address  certain aspects of the foreclosure review and consultants had to use  additional judgment and interpretation when applying certain guidance,  increasing the risks of inconsistency among review results. The Foreclosure Review Highlighted the Importance of Planning and Monitoring Progress toward Goals

Our analysis of the foreclosure review process identified challenges in  regulators’ planning for the foreclosure review. Limited Communication Hindered Transparency for Individual Borrowers and the General Public

Regulators publicly released information on the foreclosure review  process beyond what is typically disclosed in connection with a consent  order, including engagement letters between servicers and consultants  and some guidance provided to the consultants. Despite these disclosures, some stakeholders perceived gaps in key  information about how the file reviews were conducted. OCC  and the Federal Reserve staff said that they considered releasing  additional guidance to the public, but both regulators refrained from doing  so because of concerns that releasing detailed information risked  disclosure of confidential or proprietary information. In letters to OCC and the  Federal Reserve, consumer groups indicated that these borrowers were  frustrated by the lack of information on their particular file review. Our prior work establishing a lessons-learned process also has  found that assessing and using lessons learned from previous experience  can provide a powerful method of ensuring that beneficial information is  factored into the planning and work processes of future activities. GAO’s internal control  standards state the importance of relevant, reliable, and timely  communications within an organization as well as with external  stakeholders. In the absence of a clear communication strategy  to direct external communications, including public reporting and direct  communication with individual borrowers, regulators face risks to  transparency and public confidence similar to those experienced in the  foreclosure review process. Further, regulators announced  agreements that led to the amended consent orders and ended the  foreclosure review with 11 servicers without a clear communication  strategy, and the information that will be provided to borrowers and  the general public remains unclear. Recommendations for Executive Action

We are making three recommendations to the regulators:  (1) To better ensure that the goals of the foreclosure review are realized  for servicers that are not subject to amended consent orders, we  recommend that the Comptroller of the Currency and the Chairman of the  Board of Governors of the Federal Reserve System, as appropriate,  improve oversight of sampling methodologies and mechanisms to  centrally monitor consistency, such as assessment of the implications of  inconsistencies on remediation results for borrowers in the remaining  foreclosure reviews. (3) To better ensure transparency and public confidence in the activities  under the amended consent orders and results of the continuing  foreclosure reviews, we recommend that the Comptroller of the Currency  and the Chairman of the Board of Governors of the Federal Reserve  System develop and implement a communication strategy to regularly  inform borrowers and the public about the processes, status, and results  of the activities under the amended consent orders and continuing  foreclosure reviews. As we  discussed in the report, developing and using objective measures to  monitor and assess consistency among the continuing reviews is  important. Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to assess: (1) challenges to the  achievement of the goals of the foreclosure review, (2) the extent of  transparency in the foreclosure review process, and (3) lessons that could  be useful for activities under the amended consent orders and continuing  reviews. We  were in the process of reviewing various aspects of the foreclosure review  when the Office of the Comptroller of the Currency (OCC) and the Board  of Governors of the Federal Reserve System (Federal Reserve)  announced agreements with 11 of the 14 servicers to discontinue the  foreclosure review and replace it with a broad payment process.
Why GAO Did This Study

Since April 2011, OCC and the Federal Reserve had been overseeing the foreclosure review, a requirement of consent orders entered into by 14 mortgage servicers. This undertaking involved a review of loan files by thirdparty consultants to identify errors in servicing and foreclosure practices. More than 4 million borrowers were eligible for reviews. In January 2013, the regulators announced agreements with 11 of the servicers that replaced the reviews with a broad payment process to compensate borrowers in a more timely manner. Reviews continue for three remaining servicers. GAO has been reviewing various aspects of the foreclosure review process. This report addresses: (1) challenges to the achievement of the goals of the foreclosure review, (2) transparency of the process, and (3) lessons that could be useful for carrying out activities under the amended consent orders and continuing reviews. GAO analyzed third-party consultants' sampling plans, reviewed regulatory guidance and other documents, and interviewed representatives of third-party consultants and law firms, consumer groups, and regulators.

What GAO Found

Complexity of the reviews, overly broad guidance, and limited monitoring for consistency impeded the ability of the Office of the Comptroller of the Currency (OCC) and the Board of Governors of the Federal Reserve System (Federal Reserve) to achieve the goals of the foreclosure review--to identify as many harmed borrowers as possible and ensure similar results for similarly situated borrowers. Regulators said that coordinating among foreclosure review participants was challenging, and consultants said that the reviews were complex. In spite of regulators' steps to foster consistency, broad guidance and limited monitoring reduced the potential usefulness of data from consultants and increased risks of inconsistency. For example, GAO found that guidance was revised throughout the process, resulting in delays. Other guidance did not specify key sampling parameters for the file reviews and regulators lacked objective monitoring measures, resulting in difficulty assessing the extent of borrower harm. Good planning and collecting objective data during monitoring provide a basis for making sound conclusions. Without using objective measures to assess sampling or comparing review methods across consultants, regulators' ability to monitor progress toward achievement of foreclosure review goals was hindered.
Although regulators released more information than is typically associated with consent orders, limited communication with borrowers and the public adversely impacted transparency and public confidence. To promote transparency, regulators released redacted engagement letters and guidance on remediation. In addition, OCC released two interim progress reports. However, some stakeholders perceived gaps in key information and wanted more detailed information about how the reviews were carried out. Regulators stated they considered publicly releasing additional information, but expressed concerns that releasing detailed information risked disclosure of confidential or proprietary information. Further, borrowers who requested reviews experienced gaps in communication. For example, borrowers who submitted requests when the submission period opened waited nearly a year before receiving an update.
The foreclosure review activities to date highlight key lessons related to planning, monitoring, and communication. GAO's prior work shows that assessing and using lessons learned from previous experience can benefit the planning of future activities. The foreclosure review produced lessons in advanced planning and establishing mechanisms to monitor progress toward goals. Without assessing and applying relevant lessons learned, regulators might not address challenges in the continuing reviews or similar challenges in activities under the amended consent orders. In particular, regulators announced the agreements that led to the amended consent orders without a clear communication strategy. Although the regulators plan to release reports on the results of the amended consent orders and the continuing foreclosure reviews, neither regulator had made decisions about what information to provide to borrowers. GAO's internal control standards and best practices indicate that an effective communication strategy and timely reporting can enhance transparency and public confidence. Absent a clear strategy to guide regular communications with individual borrowers and the general public, regulators face risks to transparency and public confidence similar to those experienced in the foreclosure review.

What GAO Recommends

OCC and the Federal Reserve should improve oversight of sampling and consistency in the continuing reviews, apply lessons in planning and monitoring from the foreclosure review, as appropriate, to the activities of the continuing reviews and amended consent orders, and implement a communication strategy to keep stakeholders informed. In their comment letters, the regulators agreed to take steps to implement the recommendations.