06/19/2013 12:39 am ET Updated Jun 19, 2013

National Mortgage Settlement Monitor Finds Few Flaws As Consumer Advocates Cry Foul

The government-appointed monitor overseeing mortgage practices as part of last year’s robo-signing settlement between five big U.S. banks and dozens of government agencies found few violations after grading the banks’ compliance with ambitious new standards, according to court documents filed Tuesday.

The finding of just three audited failures by Joseph Smith, the government-appointed watchdog heading the Office of Mortgage Settlement Oversight, may prompt criticism by borrower advocates, consumer attorneys, and members of Congress after numerous reports by state attorneys general and housing advocates of pervasive noncompliance with the new mortgage servicing rules the banks agreed to implement as part of the 2012 settlement.

Smith plans to point out five additional unaudited violations that were self-reported by the banks, according to people who have reviewed a report he plans to release on Wednesday. His office has yet to double-check the findings.

The deal, struck in February 2012, was supposed to reform how Bank of America, JPMorgan Chase, Citigroup, Wells Fargo and Ally Financial (formerly GMAC) treat troubled borrowers who fall behind on their monthly payments, in part to ensure that practices such as robo-signing don't recur.

Over the last few years, consumer advocates and government officials have repeatedly complained of banks losing borrowers’ documents and forcing them to wait months for basic decisions on applications for loan modifications.

Regulators, including Sarah Bloom Raskin and Daniel Tarullo of the Federal Reserve, also have bemoaned the sad state of mortgage servicing, which generally gives banks incentives to provide the least amount of service due to the fixed compensation they receive regardless of whether borrowers make payments on time or fall behind.

The settlement for the first time legally requires the five banks to meet a variety of timelines when dealing with borrowers. In return for fixing their business practices and providing tens of billions of dollars in aid to distressed homeowners, the agreement largely absolved the banks from civil liability for allegedly abusing borrowers and wrongly seizing homes using shoddy documents.

Government officials have publicly celebrated the amount of reported mortgage aid provided to borrowers in distress, which the banks claim exceeds $50 billion through a combination of refinancings, debt forgiveness, loan modifications and other measures.

But in recent weeks, state prosecutors from Illinois, Massachusetts, New York and Florida have either publicly criticized the banks for failing to adhere to the settlement’s servicing standards or have sent letters to Smith and the banks’ attorneys noting numerous violations. Eric Schneiderman, New York attorney general, threatened to sue BofA and Wells.

Strict timelines are being ignored, homeowners are confronting banks’ ill-prepared mortgage specialists, and written letters from the banks often have misleading or confusing information, state officials have said.

At-risk homeowners seeking to ease the terms of their loans continue to be given the runaround by the nation’s largest banks, according to regulators from several states.

“The new servicing standards were supposed to eliminate headaches for homeowners,” Lisa Madigan, Illinois attorney general, said last month. “But unfortunately, it seems we’re hearing about the same frustrating experiences.”

Smith was supposed to grade each of the five banks on 29 key standards from the settlement as pass or fail, for a total of 145 audited grades. Instead, due in part to the time it took the banks to implement the new measures, the banks received less than half of that total, or 69 combined grades, court records show.

Smith found just three potential violations based on a statistical sample of loan files, one each at Wells, JPMorgan and Citi. The banks achieved passing grades on the remaining 66 measures, for a pass rate of 96 percent.

Citi failed to timely notify borrowers who applied for loan modifications if they had deficient documents or records, according to Smith’s report. Auditors found an error rate exceeding 53 percent when 5 percent is passable. The report noted that noncompliance on this measure was “widespread.”

JPMorgan failed to quickly refund premiums to borrowers when their force-placed insurance contracts were canceled. Wells also failed to observe the settlement’s requirement that it promptly alert loan modification applications of deficient documents.

Citi was ordered to nearly double to 225 the number of staff it employs to review documents. The bank told Smith it fixed the problem. A bank spokesman said it became aware of “certain process flaws” last year and soon began to fix them.

A Wells spokesman said it missed its requirement “by a small margin” and that it “promptly initiated an action plan to improve our response to borrowers on their loan modification applications.” The bank’s internal reviews show it is now meeting that requirement, the spokesman added.

A JPMorgan spokeswoman said the bank met all requirements of the settlement. She added that the bank “quickly fixed” the potential violation cited by Smith in his report -- something Smith’s report also acknowledges.

Smith’s report to be issued Wednesday found another five or so violations, two each at BofA and Citi and an additional flaw at JPMorgan, according to people who reviewed the report. However, because those findings have not been audited, they’re not yet official and thus do not trigger special mechanisms that could lead to court-ordered fines.

Mark Rodgers, Citi spokesman, said: “We are currently working to implement corrective actions as soon as possible under the direction of the monitor.”

A spokesman for BofA did not respond to requests for comment. A spokeswoman for Smith declined to comment.

The apparently glowing reviews the banks received in court filings clash with public statements and letters sent by state legal officers. Smith’s court filings also differ from reports by borrowers advocates in states, including New York and California, who found that the banks were failing to meet the settlement’s standards.

The California Reinvestment Coalition, a borrower advocacy group, said in April that its survey of housing counselors found widespread violations of the settlement. Housing counselors reported that banks were failing to honor the timelines spelled out in the settlement, were improperly denying loan modifications to borrowers, and were pursuing property repossessions while homeowners were awaiting answers on their loan modification applications, a practice known as “dual tracking.”

The survey prompted Sen. Barbara Boxer (D-Calif.) to write federal officials including Eric Holder, attorney general, and Shaun Donovan, housing secretary, and urge them to investigate and to “hold the banks accountable by taking strong enforcement actions.”

Last month, Josh Zinner, co-director of the Neighborhood Economic Development Advocacy Project in New York, said: “The banks are systematically violating the terms of the National Mortgage Settlement.”

Zinner’s organization submitted potential evidence of noncompliance to Schneiderman’s office, helping to prompt the lawsuit threat.

Martha Coakley, Massachusetts attorney general, told Smith in a letter last month that BofA’s process for reviewing borrowers’ applications for aid “has been riddled with inefficiencies and systemic problems.”

She added that BofA’s workers were “often undertrained and overworked,” though she noted that the bank had shown “great improvement.”

Coakley also singled out BofA for failing to promptly convert trial modification plans into permanently modified loans, and for misapplying payments made by borrowers.

BofA in particular is under intense scrutiny as the bank faces a lawsuit from aggrieved borrowers in federal court that includes sworn statements by former employees, who allege the bank rewarded workers with bonuses and gift cards for actions that ultimately harmed distressed homeowners.

Former BofA employees said in court documents that they were told to unnecessarily delay decisions on loan modification requests, improperly deny modifications, and unfairly place troubled homeowners into foreclosure proceedings. They also falsified records and misled the federal government when dealing with borrowers applying for loan workouts through the Home Affordable Modification Program, known as HAMP.

The bank has denied the allegations, arguing they are “rife with factual inaccuracies.”

On Tuesday, Rep. Maxine Waters (D-Calif.), the ranking member of the House Financial Services Committee, urged BofA’s primary regulators in Washington at the Office of the Comptroller of the Currency and the Fed to investigate the allegations.

Waters also called on the special inspector general for the Troubled Asset Relief Program, or SIGTARP, to investigate whether BofA “may have benefitted by misleading borrowers eligible for HAMP.”

BofA has received nearly $1 billion from taxpayers to modify mortgages as part of the Obama administration’s HAMP initiative, which allocates money as part of the bank-bailout program known as TARP.

In a February report, Smith said that he had received more than 600 complaints detailing shortcomings in the banks’ dealings with borrowers. The majority of them concerned issues such as failures to decide on loan modification requests within 30 days.

The settlement also calls for the banks to notify borrowers within three business days whether they have received loan modification applications and within five days if the application is missing key details or documents.

Smith said in February that of “particular concern” were reports that borrowers were having to submit documents multiple times to their mortgage servicers, sometimes with no response or followed by requests for the same documents yet again.

In his report to be issued Wednesday, Smith planned to say that his office’s findings are broadly in line with complaints he has received from borrowers and their advocates.

Officials said the fact that there are areas of noncompliance should demonstrate the rigorousness of the settlement’s servicing standards. Had the standards been more lenient, they argued, the banks would have passed the compliance test with flying colors.

“I don’t think there's any doubt that what we're seeing is pervasive noncompliance,” said Ira Rheingold, National Association of Consumer Advocates executive director.

Rheingold said that consumer advocates began warning federal and state regulators of mortgage servicing failures years before reports of robo-signing in late 2010 prompted banks to temporarily halt home seizures and forced regulators to comb through some loan files.

“The banks should’ve gotten their act together five years ago,” he said.

Alys Cohen, a former regulator at the Federal Trade Commission who now works as a staff attorney for the National Consumer Law Center, said the servicing standards in the 2012 robo-signing settlement set a “great example” by forcing companies to give borrowers basic protections.

“The problem is there is little compliance with those standards,” Cohen lamented.

UPDATE: 8:15 a.m. -- Dan Frahm, a BofA spokesman, provided the following statement after publication: "Bank of America was in full compliance with the servicing metrics of the national mortgage settlement through the reporting periods ending in December, and in the first quarter of this year we were in full compliance with 27 of the 29 metrics. While neither area of noncompliance resulted in inaccurate foreclosures or improper loan modification denials, we took immediate action and resolved one area and will soon return to compliance in the other."



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