Federal bank regulators failed to get ahead of foreclosure documentation problems because much of their focus on mortgage servicing related to loan modifications, the Senate Banking Committee heard today.
Federal Reserve Board Governor Daniel K. Tarullo testified Wednesday that he became aware of incidences of robo-signing when GMAC Mortgage alerted its holding company, Ally Financial, that it had identified the procedural errors – only about one day before the revelations became public.
‘There were a lot of supervisory resources focused on servicers, but they were dominantly focused on modifications and the slow pace of modifications,’ Tarullo said.
The Office of the Comptroller of the Currency (OCC) which along with the Office of Thrift Supervision has released quarterly reports on loan modification efforts since 2008, was consistently pushing servicers to ramp up their loss mitigation staff, adopt federal loan modification programs and develop their own proprietary workout solutions, Acting Comptroller John Walsh testified.
The agency nonetheless relied heavily on servicers' internal audits of quality control and risk management processes, he said.
‘Clearly, the institutions failed in their oversight of, for example, third-party agents, law firms and others,’ Walsh said. ‘In hindsight, we should have seen that problems were going to occur successfully in each link of the [servicing] chain.’
Complaints received by the OCC from consumers in foreclosure overwhelmingly dealt with borrowers who believed they were unfairly denied loan modifications, Walsh said. The issue of flawed paperwork never emerged through consumer-outreach channels.
Tarullo also spoke in favor of national servicing standards Wednesday, suggesting the standards might apply to mortgage assignment recordation. The dual-track nature of loss mitigation and foreclosure is unnecessarily confusing to borrowers, he added in a point echoed by Walsh. Tarullo said the race between modification and foreclosure ‘has, more often than not, been won by the foreclosure process.’
‘We now know that race wasn't being run fairly in the first place,’ he said, adding later, ‘I think some sense of how that race is to be conducted needs to be set forth on a standardized basis.’
In what was likely his last hearing as Senate Banking Committee chairman, outgoing Sen. Chris Dodd, D-Conn., blasted the witness panel – which also included Federal Deposit Insurance Corp. Chairman Sheila Bair and Federal Housing Finance Agency Acting Director Edward DeMarco – for not addressing alleged servicing abuses in the confines of the Financial Stability Oversight Council (FSOC).
The FSOC was established under the Dodd-Frank Act to curb systemic risks in the financial system. Several of the witnesses Wednesday described robo-signing, loan modification failures and other servicing issues as having the potential to broadly impact the financial system.
In response to Dodd, Walsh explained that the most recent FSOC meeting included a private session about foreclosure and servicing matters.