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Independent Foreclosure Review -- The GAO Report


The Independent Foreclosure Review remains the biggest failure of our regulatory system. It turns out that it was an even bigger failure than previously thought.

When the IFR was largely discontinued last year, the OCC stated that it was taking too long to perform the reviews. As a result, the majority of the banks involved entered into a settlement agreement where homeowners would be cut checks. As you may recall, that didn't work out too well. The first wave of checks bounced. Many people didn't receive the correct compensation. On the whole, it was a mess.

At the time the IFR settlement was announced, federal regulators stated that the error rate in the reviewed files was roughly 6.5%. A new report from the Government Accountability Office shows that the error rates were much higher. One, unidentified bank had an error rate as high as 24%. The bank had completed more file reviews than the 11 banks that settled last year--it is very possible that those banks had a significantly higher error rate. According to the New York Times, the banks that settled last year had completed 2% of their file reviews. The bank with the 24% error rate had completed 57% of its file reviews.

According to the GAO's summmary of its report:

  • Regulators' ability to achieve the goals of the foreclosure review was affected by the complexity of the reviews, as well as by overly broad regulator-issued guidance and limited monitoring for the consistency and sufficiency of consultants' review activities. For example, regulators' statistical sampling approach did not include mechanisms to allow the regulators to monitor consultants' progress toward finding as many harmed borrowers as possible. .... Without using objective measures to compare review methods or assess sampling among consultants, regulators' ability to monitor progress toward achievement of foreclosure review goals was hindered.

Quite simply, the OCC did not provide concrete criteria for measuring progress. "Reasonable" efforts are inherently subjective. Without measurable criteria in place, it makes it next to impossible to regulate behavior. Apparently, what's true for children also applies to federal regulators.

How poorly conducted was the IFR? According to Rep. Elijah Cummings (D-Md.), his office conducted a review that revealed a 60% error rate for Bank of America and a 21% error rate for PNC bank. This means that in 60% of the BofA files reviewed, there was a foreclosure-related servicing error. Rep. Cummings has requested a hearing to get to the heart of when wrong with the IFR. His ten-page letter is worth a read.

In other IFR-related news, EverBank has finally decided to settle with the OCC as opposed to continue its file reviews. According to the Washington Post, the servicer will issue checks to customers regardless of whether any harm was found during its file review. Why is this a failure? Because when "token" checks were cut by other parties to the settlement, many homeowners received payments as small as $300. EverBank customers will get checks starting at a value of $1,050. While it's good news for EverBank customers, it's basically a slap in the face to everyone else.

On the whole, the IFR was a regulatory failure of epic proportions. If Rep. Cummings gets his hearing, we may find out just how deep the rabbit hole goes.