Critical weaknesses in servicers’ foreclosure governance processes

The Federal Reserve Systemn has found critical weaknesses in servicers’ foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third-party vendors, including foreclosure attorneys.

While it is important to note that findingsvaried across institutions, the weaknesses at each servicer,individually or collectively, resulted in unsafe and unsound practices and violations of applicable federal and state law and requirements.4

This report captures only the significant issues found across servicers reviewed, not necessarily findings at each servicer. The results elevated the agencies’ concern that widespread risks may be presented—to consumers, communities, various market participants, and the overall mortgage market. The servicers included in this review represent more than two-thirds of the servicing market. Thus, the agencies consider problems cited within this report to have widespread consequences for the national housing market and borrowers.

The interagency reviews identified significant weaknesses in several areas.

Foreclosure process governance.
Foreclosure governance processes of the servicers were underdeveloped
and insufficient to manage and control operational, compliance, legal, and reputational risk associated with an increasing volume of foreclosures.
Weaknesses included:
• •
inadequate policies, procedures, and independent control infrastructure covering all aspects of the foreclosure process;
• •
inadequate monitoring and controls to oversee foreclosure activities conducted on behalf of servicers by external law firms or other third-party vendors;
• •
lack of sufficient audit trails to show how information set out in the affidavits (amount of indebtedness, fees, penalties, etc.) was linked to the servicers’ internal records at the time the affidavits were executed;
• •
inadequate quality control and audit reviews to ensure compliance with legal requirements, policies and procedures, as well as the maintenance of sound operating environments; and
• •
inadequate identification of financial, reputational, and legal risks, and absence of internal communication about those risks among boards of directors and senior management.
• • Organizational structure and availability of staffing. Examiners found inadequate organization and staffing of foreclosure units to address the increased volumes of foreclosures.
• • Affidavit and notarization practices.
Individuals who signed foreclosure affidavits often did not personally check the documents for accuracy or possess the level of knowledge of the information that they attested to in those affidavits. In addition, some foreclosure documents indicated they were executed under oath, when no oath was administered.
Examiners also found that the majority of the servicers had improper notary practices which failed to conform to state legal requirements.

These determinations were based primarily on servicers’ self-assessments of their foreclosure processes and examiners’ interviews of servicer staff involved in the preparation of foreclosure documents.

Documentation practices.
Examiners found some— but not widespread—errors between actual fees charged and what the servicers’ internal records indicated, with servicers undercharging fees as frequently as overcharging them. The dollar amountof overcharged fees as compared with the servicers’ internal records was generally small.

Third-party vendor management.
Examiners generally found adequate evidence of physical control and possession of original notes and mortgages. Examiners also found, with limited exceptions, that notes appeared to be properly endorsed and mortgages and deeds of trust appeared properly assigned.

The agencies expect federally regulated servicers to have the necessary policies and procedures in place ensure that notes are properly endorsed mortgages assigned, so ownership can be determined at time of foreclosure.Where serve as document custodians for themselves or other investors, require controls tracking systems safeguard physical security maintenance critical loan documents.

The agencies expect federally regulated servicers to have the necessary policies and procedures in place ensure that notes are properly endorsed mortgages assigned, so ownership can be determined at time of foreclosure. Where serve as document custodians for themselves or other investors, require controls tracking systems safeguard physical security maintenance critical loan documents.

The review did find that, in some cases, the third-party law firms hired by the servicers were nonetheless filing mortgage foreclosure complaints or lost-note affidavits even though proper documentation existed.
• • Quality control (QC) and audit.
Examiners found weaknesses in quality control and internal auditing procedures at all servicers included in the review.

Source: Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS)