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Govt’s Loan Mod Program Crippled by Lax Oversight and Deference to Banks

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Posted on Jan 27, 2011

By Paul Kiel and Olga Pierce, ProPublica

(Page 2)

When government audits of banks' modification practices revealed they were frequently breaking the rules, Treasury officials worked through a process they call "remediation."

One audit, conducted on Treasury's behalf by the government-supported mortgage company Freddie Mac, found that 200,000 struggling homeowners had not been told they were eligible for the program, as servicers are required to do. Auditors also found 15 of the largest 20 participating servicers were incorrectly using the Treasury formula that determines if homeowners qualify for the program.

Rather than imposing penalties, Treasury simply asked the servicers to contact the homeowners that had been missed and rerun the numbers for those who had been wrongfully denied because of the formula error.

"The servicer says, 'you've caught me this time,' but it doesn't improve widespread non-compliance because there's no real penalty," said Alys Cohen of the National Consumer Law Center.

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Dawn Patterson, Treasury's chief of compliance for the program, explained that the idea was to allow servicers time to get "their programs built, their processes more shored up." Patterson says Treasury is continuing to use that approach.

Treasury’s own records call into question the impact of those efforts. Documents obtained by ProPublica via a Freedom of Information Act request show homeowner complaints to a Treasury-sponsored hotline have actually increased during the past year. The most common complaint is that the servicer has violated the program's guidelines.

Servicers have also at times been uncooperative with the government’s own auditors. Even getting the right documents from servicers has "been a cumbersome process," the head of the government's audit team, Paul Heran, said last year at an industry conference. It seemed, he added, the task was often relegated to low-level staff who didn’t understand the requests. Another manager in the unit, Vic O’Laughlen, said servicers tended to respond with “at best fifty percent of what we’re expecting to see.”

A Treasury spokeswoman said that "servicer operations, especially in larger organizations, are complex," and producing the documents can be difficult.

The government’s oversight has also been hampered by a lack of transparency by Treasury itself. The department has kept its audits of servicers secret. It also does not have a written policy for how it would address rule violations by banks, an omission criticized in a Government Accountability Office report last year and not yet addressed. Treasury says it does have a process for dealing with banks' noncompliance, just not a written one.

The lack of oversight has been particularly damaging, since mortgage servicers have little incentive to do modifications on their own.

Servicers handle homeowner payments for investors who own the loans. Since servicers don’t own the vast majority of the loans they service, they don’t take the loss if a home goes to foreclosure, making them reluctant to make the investments necessary to fulfill their obligations to help homeowners.

"By every metric, the failure of the largest servicers to carry out the program is obvious," said Prof. White. The noncompliance has gone unpunished, he said, because "Treasury staff are preoccupied with friendly relations with the banks. Sometimes it seems the banks own Treasury.”

Meanwhile, the industry has continued to lobby for changes in the program.

Last summer, Treasury significantly weakened a tool that would have helped keep servicers accountable after officials met with industry lobbyists, documents show.

When banks entered the program, they agreed to certify annually that they've followed the rules of the program. But lobbyists from the Financial Services Roundtable and the Mortgage Bankers Association suggested adding exemptions.

Instead of certifying that banks had followed all the rules, the industry proposed that they could ignore problems affecting less than five percent of homeowners eligible for the program. In the case of Bank of America, which handles more mortgages than any other bank, that meant the bank would not have to report an error that occurred nearly 20,000 times.

The industry also suggested that no matter how widespread a problem, servicers could assert they were complying with the law as long as they pledged to fix problems "to the extent practicable." The previously unreported proposal was disclosed through an administration policy of releasing lobbying contacts related to the TARP.

Later that month, the Treasury revised its certification requirements, making them similar to those the industry sought. Under the new rules, servicers can define for themselves what violations were significant enough to disclose.

The new policy is "not only like putting the fox in charge of the hen house," said Cohen of the National Consumer Law Center, "but asking the fox to fine itself for each chicken eaten."

A Treasury Department spokeswoman said the industry's lobbying did not affect the final guidance, because Treasury was already going to make several of the servicers' suggested changes. It was never the department’s intention that “a servicer submit a list of every individual instance of non-compliance.” If servicers give themselves inappropriate leeway, she said, Treasury would work with them to address the problem.

Unless servicers fear real penalties, the troubled program is unlikely to improve, said Richard Neiman, New York state's chief bank regulator. "There needs to be a greater effort on enforcement, on assigning sanction and fines where there has been noncompliance. We cannot rely solely on servicers to police themselves."


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By no credit check loans, April 25, 2012 at 1:49 am Link to this comment

This is so ridiculous, the President knows the banks are in control and they do not want to participate in any of these programs, and they don’t. Does he really think that people will get excited over this? Most people who need help are very aware of the guidelines that bank impose on borrowers and this does not change a thing. It won’t help a single person that couldn’t be helped before. The investors and banks are in full control while the President gives banks a slap on the wrist and the rest of us a slap in the face! Furthermore, the reason why foreclosures are down is because there is a moratorium on them until they figure out the paper work on each file and make sure there are no errors. From what I understand, they have not found many, if any, error free, files, which has caused the foreclosures to come to a screaming halt.

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By cash advances, January 31, 2012 at 4:36 am Link to this comment

This is so ridiculous­, the President knows the banks are in control and they do not want to participat­e in any of these programs, and they don’t. Does he really think that people will get excited over this? Most people who need help are very aware of the guidelines that bank impose on borrowers and this does not change a thing. It won’t help a single person that couldn’t be helped before. The investors and banks are in full control while the President gives banks a slap on the wrist and the rest of us a slap in the face! Furthermor­e, the reason why foreclosur­es are down is because there is a moratorium on them until they figure out the paper work on each file and make sure there are no errors. From what I understand­, they have not found many, if any, error free, files, which has caused the foreclosur­es to come to a screaming halt.

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By Tobysgirl, January 29, 2011 at 5:18 pm Link to this comment

What a relief it was to hear Michael Hudson on Free Speech Radio News on Friday (1/28) saying loud and clear that these goddamned crooks need to be imprisoned. I know it won’t happen but it is always such a relief to hear someone speak the truth.

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By felicity, January 28, 2011 at 1:44 pm Link to this comment

A woman recently called CSPAN.  This is her story. 
She purchased her home for $152,000 a number of years
ago: She paid down the loan to $101,000:  The lender
increased her interest rate to the point where she
couldn’t continue to make payments:  The lender
foreclosed: She was forced to move:  The lender
turned around and sold the house for $123,000.

And it was all perfectly legal.  And, I suspect such
unconscionable acts will continue to be ‘all
perfectly legal.’

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