THURSDAY, APRI L 14 , 2011

Regulators Issue Weak Consent Orders to

Whitewash Mortgage Abuses
Last week, we inveighed against an effort by Federal banking
regulators to undermine the 50 state attorney general
settlement negotiations on foreclosure and mortgage abuses.
This affair is becoming a pathetic spectacle, in that the state
initiative, which looks to be an exercise in form over
substance, still might prove to be enough of a nuisance to the
banks that the Powers that Be in Washington feel compelled
to do what they can to hamstring it. The first effort was to
have a joint settlement, which we dismissed as a barmy idea
given the disparity in state and Federal issues. Not
surprisingly, the Feds withdrew after the first negotiating
session with the banks.
The current end run is apparently led by the Ministry of Bank
Boosterism more generally known as the OCC and comes via
consent decrees that were issued Wednesday (weve made
that inference given the fact that John Walsh of the OCC
presented the findings of the so-called Foreclosure Task
Force, an 8 week son-of-stress-test exercise designed to give
the banks a pretty clean bill of health, as well as media
reports that the OCC was not participating in the joint state-
Federal settlement effort).
This initiative is regulatory theater, a new variant of the
ongoing coddle the banks strategy. It has become a bit more
difficult for the officialdom to finesse that, given the extent
and visibility of bank abuses. Accordingly, the final consent
decrees are more sternly worded and more detailed than the
drafts we saw last week, and also talk about imposing fines.
But reading them reveals that there is much less here than
meets they eye.
The Fed published an interagency report that gave an overview
of the Foreclosure Task Force effort and consent decrees
which confirms the regulators see no evil posture. It admits
the Foreclosure Task Force effort was inadequate:
While the reviews uncovered significant problems in foreclosure
processing at the servicers included in the report, examiners
reviewed a relatively small number of files from among the
volumes of foreclosures processed by the servicers. Therefore,
the reviews could not provide a reliable estimate of the
number of foreclosures that should not have proceeded.
Even more telling, not only was the examination insufficient in
scope, but it was also procedurally flawed:
The loan-file reviews showed that borrowers subject to
foreclosure in the reviewed files were seriously delinquent on
their loans. As previously stated, the reviews conducted by the
agencies should not be viewed as an analysis of the entire
lifecycle of the borrowers loans or potential mortgage-
servicing issues outside of the foreclosure process. The
reviews also showed that servicers possessed original notes
and mortgages and, therefore, had sufficient documentation
available to demonstrate authority to foreclose.
The interesting question is whether the regulators are as dumb
as that paragraph indicates, or merely playing dumb on the no
doubt accurate assumption that the vast majority of readers
wont detect what is amiss. As we said we suspected earlier,
and this text confirms, the authorities made no independent
verification of whether the charges were warranted; their
review merely confirmed that the banks own records did show
borrowers to be in arrears. There was no effort to check
servicer records against borrower payments (an issue in a
case we highlighted yesterday which led a bankruptcy court
judge to sanction both Lender Processing Services and the
foreclosure law firm) or whether the charges resulted from
improper deduction of fees first (by contract and Federal law,
borrower payments are to be credited to principal and interest
first, fees second), padded or double charged fees, force
placed insurance, and other abuses that can greatly increase
the amount a borrower allegedly owes.
Similarly, the authorities are playing dumb as far as chain of
title issues are concerned, and are accepting the American
Securitization Forum party line that possessing the note is
sufficient to initiate a foreclosure, when courts in many
jurisdictions are responding favorably to chain of title issues.
Its simply impossible that the regulators involved in this review
havent heard of the Massachusetts Supreme Judicial Court
Ibanez decision, but there is absolutely no admission that
servicers are having considerable difficulty foreclosing when
challenged due to their inability to produce properly endorsed
notes.
The Fed document also provides an overview of the consent
decrees, but we thought readers might enjoy reading the
actual text of one (the example is Bank of America):
Bank of America Servicing Consent Order
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UNITED STATES
OF AMERICA

DEPARTMENT OF
THE TREASURY

COMPTROLLER
OF THE
CURRENCY

)
In the Matter of:
)
) AA-EC-11-12
Bank of America,
N.A. )
Charlotte, NC )
)
)
CONSENT ORDER
The Comptroller
of the Currency
of the United
States of America
("Comptroller"),
through his
national bank
examiners and
other staff of the
Office of the
Comptroller of
the
Currency
("OCC"), as part
of an interagency
horizontal review
of major
residential
mortgage
servicers, has
conducted an
examination of
the residential
real estate
mortgage
foreclosure
processes of Bank
of America, N.A.,
Charlotte, NC
("Bank"). The
OCC has
identified certain
deficiencies and
unsafe or
unsound practices
in residential
mortgage
servicing and in
the Banks
initiation and
handling of
foreclosure
proceedings. The
OCC has
informed the
Bank of the
findings resulting
from the
examination.
The Bank, by and
through its duly
elected and acting
Board of
Directors
("Board"), has
executed a
Stipulation and
Consent to the
Issuance of a
Consent Order,
dated April 13,
2011
(Stipulation and
Consent), that is
accepted by the
Comptroller. By
this Stipulation
and
Consent, which is
incorporated by
reference, the
Bank has
consented to the
issuance of this
Consent Cease
and Desist Order
("Order") by the
Comptroller. The
Bank has
committed to
taking all
necessary and
appropriate steps
to remedy the
deficiencies and
unsafe or
unsound
practices
identified by the
OCC, and to
enhance the
Banks residential
mortgage
servicing and











foreclosure
processes. The
Bank has begun
implementing
procedures to
remediate the
practices
addressed in this
Order.
ARTICLE I
COMPTROLLE
RS FINDINGS
The Comptroller
finds, and the
Bank neither
admits nor denies,
the following:
(1) The Bank is
among the largest
servicers of
residential
mortgages in the
United States,
and services a
portfolio of
13,500,000
residential
mortgage loans.
During the recent
housing
crisis, a
substantially large
number of
residential
mortgage loans
serviced by the
Bank became
delinquent and
resulted in
foreclosure
actions. The
Banks
foreclosure
inventory grew
substantially from
January 2009
through
September 2010.
(2) In connection
with certain
foreclosures of
loans in its
residential
mortgage
servicing
portfolio, the
Bank:
(a) filed or caused
to be filed in state
and federal courts
affidavits
executed by its
employees or
employees of
third-party
service providers
making various
assertions, such
as
ownership of the
mortgage note
and mortgage, the
amount of the
principal and
interest due, and
the fees and
expenses
chargeable to the
borrower, in
which the affiant
represented that
the
assertions in the
affidavit were
made based on
personal
knowledge or
based on a review
by the
affiant of the
relevant books
and records,
when, in many
cases, they were
not based on such
personal
knowledge or
review of the
relevant books
and records;
(b) filed or caused
to be filed in state
and federal
courts, or in local
land records
offices, numerous
affidavits or other
mortgage-related
documents that
were not properly
notarized,
including those
not signed or
affirmed in the
presence of a
notary;
2











(c) litigated
foreclosure
proceedings and
initiated non-
judicial
foreclosure
proceedings
without always
ensuring that
either the
promissory note
or the mortgage
document
were properly
endorsed or
assigned and, if
necessary, in the
possession of the
appropriate party
at the appropriate
time;
(d) failed to
devote sufficient
financial, staffing
and managerial
resources to
ensure proper
administration of
its foreclosure
processes;
(e) failed to
devote to its
foreclosure
processes
adequate
oversight, internal
controls, policies,
and procedures,
compliance risk
management,
internal audit,
third party
management, and
training; and
(f) failed to
sufficiently
oversee outside
counsel and other
third-party
providers
handling
foreclosure-
related services.
(3) By reason of
the conduct set
forth above, the
Bank engaged in
unsafe or
unsound
banking practices.
Pursuant to the
authority vested
in him by the
Federal Deposit
Insurance Act, as
amended, 12
U.S.C. 1818(b),
the Comptroller
hereby ORDERS
that:
ARTICLE II

COMPLIANCE
COMMITTEE

(1) The Board
shall maintain a
Compliance
Committee of at
least three (3)
directors, of
which at least two
(2) may not be
employees or
officers of the
Bank or any of its
subsidiaries or
affiliates. In the
event of a change
of the
membership, the
name of any new
member shall be
submitted to the
Examiner-in-
Charge for Large
Bank Supervision
at the Bank
(Examiner-in-
Charge). The
Compliance
Committee shall
be responsible for
monitoring and
coordinating the
3











Banks
compliance with
the provisions of
this Order. The
Compliance
Committee shall
meet at
least monthly and
maintain minutes
of its meetings.
(2) Within ninety
(90) days of this
Order, and within
thirty (30) days
after the end of
each quarter
thereafter, the
Compliance
Committee shall
submit a written
progress report to
the
Board setting
forth in detail
actions taken to
comply with each
Article of this
order, and the
results and status
of those actions.
(3) The Board
shall forward a
copy of the
Compliance
Committees
report, with any
additional
comments by the
Board, to the
Deputy
Comptroller for
Large Bank
Supervision
(Deputy
Comptroller)
and the
Examiner-in-
Charge within ten
(10) days of
receiving such
report.
ARTICLE III

COMPREHENSI
VE ACTION
PLAN

(1) Within sixty
(60) days of this
Order, the Bank
shall submit to
the Deputy
Comptroller and
the Examiner-in-
Charge an
acceptable plan
containing a
complete
description
of the actions that
are necessary and
appropriate to
achieve
compliance with
Articles IV
through
XII of this Order
(Action Plan).
In the event the
Deputy
Comptroller asks
the Bank to revise
the Action Plan,
the Bank shall
promptly make
the requested
revisions and
resubmit the
Action
Plan to the
Deputy
Comptroller and
the Examiner-in-
Charge.
Following
acceptance of the
Action Plan by
the Deputy
Comptroller, the
Bank shall not
take any action
that would
constitute
a significant
deviation from, or
material change
to, the
requirements of
the Action Plan or
this
Order, unless and
until the Bank has
received a prior
written
determination of
no supervisory
objection from
the Deputy
Comptroller.
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Note that the overview document, after fessing up to doing a
less than adequate job of investigating, then fobs the effort
over to the miscreants themselves. They are supposed to hire
an independent consultant to investigate certain residential
foreclosure actions from January 1, 2009 to the end of
December 2010.
You can drive a truck through this language. First, anyone
competent to do this job will not be independent. They will
have or want to develop a relationship with the servicer.
Second, certain residential foreclosure actions means only a
subset need to be examined, and their is no language
requiring that the sample be representative or even of
meaningful size. A review of 5 foreclosures would meet the
standard set forth in the text. Admittedly, the OCC gets to
review the engagement letter, and the section discussing what
goes in the letter indicates they expect a statistical sample will
be used. But lets not kid ourselves as to what is really going
on. As Adam Levitin wrote:
So heres whats going down. The bank regulators are going
to provide cover for the banks by pretending to discipline
them very hard, but not really doing anything. The public will
see a stern C&D order, but there wont be any action beyond
that. Its as if the regulators are saying so all the neighbors
can hear, Banky, youve been a bad boy! Come inside the
house right now because Im going to give you a spanking!
And then once the door to the house closes, the instead of a
spanking, theres a snuggle. But the neighbors are none the
wiser. The result will be to make it look like the real cops (the
AGs and CFPB) are engaged in an overzealous vendetta if
they pursue further action.
The tipoff to the lack of seriousness of this effort is the
timelines. The engagement letter is submitted for review after
the consultant is hired, meaning that the officials expect to
change it as at most only around the margins. The review is
supposed to be concluded 120 days after the letter is
approved. Given that it will probably take 2-3 weeks to
develop and review the final report with the client before
submitting it to the regulators, that allows only a bit over three
months to do the investigation, which is insufficient if it were
to be done in sufficient depth.
Some other faux tough features:
1. A compliance committee which has a majority of non-bank
employees as members. See our earlier comment re
independence. There are plenty of people whod be delighted
to have a sinecure like this and be amenable to not rocking
the boat
2. Auditable trail requirement. This could be a nuisance and
entail costs.
3. Review of customer complaints. Any properly run business
would be doing that now; presumably, it gets kicked over to
the compliance committee.
4. The fines. These could in theory be onerous but in
practice, since they come out of a self-administered exam, Id
not get my hopes up here.
Lenders Processing Services and MERS are getting separate
consent orders, but since they are perceived to be critical
infrastructure to the mortgage industrial complex, expect them
to get a kid glove treatment as well.
For the most part, the consent orders throw a lot of stern
language but little in the way of real teeth around
requirements to follow existing law. Since that servicers have
violated past consent orders, and theres no reason to think
anything has or will change, this looks to be yet another
example of Potemkin reforms.