PREFACE
If anyone has any doubt that good, old fashioned, long-form, investigative journalism is alive and well, at least in some places within the progressive blogosphere, they obviously haven’t been reading Naked Capitalism Publisher Yves Smith’s five-part (give or take—four parts of the series have been published over the past 10 days, with at least one more chapter scheduled for publication on her blog, over the next few days) series on the blatant corruption and regulatory/deep capture associated with the just-concluded federal Independent Foreclosure Review.
[NOTE: I’m cross-posting Parts I, II, and IV here (Part III is broken down into two chapters/pieces, Parts A and B, and it’s even more granular than the rest of the series), but I strongly recommend you click upon the complete set of links, further down below, for the full series and context. (Also, some of her graphics are no longer properly linked, but they do appear in her original versions of her posts.) And, I will re-publish/crosspost Part V soon after it appears on her blog, over the next few days.]
Yves has been covering this story—like so many other stories she’s authored regarding Wall Street transgressions against Main Street for so many years--since the so-called “Independent…Review,” which readers will learn was anything but that, was still in its formative stages, for almost two years! Potential problems with it were also briefly discussed by the Pulitzer Prize-winners’ over at ProPublica, this past October.
As someone who’s been heavily involved in journalism, media and technology since I was all of 15 years old, I truly stand in awe of Yves’ extremely detailed, exceptionally incriminating and tremendously compelling work on this project.
More importantly, and while you might not hear them tell you about this often enough, we’re just about 10 days into this “anatomy of a ‘control fraud’” (as Bill Black helped coin the term over the past few years) and people like Massachusetts Senator Elizabeth Warren and U.S. Representatives Elijah Cummings and Maxine Waters are quite well aware of her recent work on this subject, too!
Yves’ work is a call to action. (Speaking of which, HERE ARE LINKS to Senator Elizabeth Warren's offices, via Kossack greenbird's comment, down below.) And, apparently, lo and behold, there’s a real response to this in Washington!
So, here we are, less than 72 hours after Yves published her most recent chapter concerning this latest Wall Street transgression against the 99 percent, and in the interim it’s now morphed into an explosive story in the MSM, less than five weeks after this “Independent Review” was concurrently shoved down the throats of Main Street when it was concluded.
This time, however — maybe for once, and as fellow Kossack Lawrence Lewis just noted in a highly-rec’d post within this community — payback to Main Street from Wall Street, in our make-believe world of “shared sacrifice,” just might be a bit of a bitch!
This is my definition of “change I can believe in!”
If it is, we’ll have a blogger named Yves Smith to thank for handing over highly-detailed facts relating to Wall Street transgressions—specificially as they relate to Bank of America, at least—on a silver platter to some of the few remaining progressives that represent us in Washington, these days.
The NY Times’ Jessica Silver-Greenberg and Ben Protess scratch the surface (of the root of the problem, since they don’t highlight the revolving door/regulatory capture aspect of this), as they’ve written about it on the front page of Friday’s edition:
Doubt Is Cast on Firms Hired to Help Banks
By JESSICA SILVER-GREENBERG and BEN PROTESS
New York Times Page A1
February 1, 2013
(Originally posted at the Dealbook blog on the NYT’s website: January 31, 2013, 9:06 pm)
Federal authorities are scrutinizing private consultants hired to clean up financial misdeeds like money laundering and foreclosure abuses, taking aim at an industry that is paid billions of dollars by the same banks it is expected to police.
The consultants operate with scant supervision and produce mixed results, according to government documents and interviews with prosecutors and regulators. In one case, the consulting firms enabled the wrongdoing. The deficiencies, officials say, can leave consumers vulnerable and allow tainted money to flow through the financial system…
…
…The pitfalls were exposed last month when federal regulators halted a broad effort to help millions of homeowners in foreclosure. The regulators reached an $8.5 billion settlement with banks, scuttling a flawed foreclosure review run by eight consulting firms. In the end, borrowers hurt by shoddy practices are likely to receive less money than they deserve, regulators said.
On Thursday, Senator Elizabeth Warren, Democrat of Massachusetts, and Representative Elijah Cummings, Democrat of Maryland, announced that they would open an investigation into the foreclosure review, seeking “additional information about the scope of the harms found.”
Critics concede that regulators have little choice but to hire outsiders for certain responsibilities after they find problems at the banks. The government does not have the resources to ensure that banks follow the rules. Still, consultants like Deloitte & Touche and the Promontory Financial Group can add to regulators’ headaches, the government documents and interviews indicate. Some banks that work with consultants continue to run afoul of the law. At other times, consultants underestimate the extent of the misdeeds or facilitate them, preventing regulators from holding institutions accountable…
As Yves understated it, when referencing
THIS HuffPo article, early Friday morning:
”Some people in a position to know think our series helped.”
Elizabeth Warren, Elijah Cummings, Maxine Waters Call For More Transparency On Failed Foreclosure Reviews
Ben Hallman
Huffington Post
Posted: 01/31/2013 3:38 pm EST Updated: 01/31/2013 5:03 pm EST
Three influential lawmakers on Thursday called for bank regulators to disclose more details of the $8.5 billion foreclosure abuse settlement reached earlier this month and to reveal what happened during the case-by-case review program it abruptly replaced…
Hallman reports how Senator Elizabeth Warren and Representative Elijah Cummings sent a letter to the Office of the Comptroller of the Currency and the Federal Reserve, in which they noted…
…"additional transparency" was necessary to ensure the confidence necessary "to speed recovery in the housing markets." They asked regulators to turn over the results of the performance reviews of the independent contractors hired to examine the loan files, as well as detailed information about the reviews' preliminary results, to determine the extent of the harm to the 500,000 people who applied to the program.
In a separate letter, Rep. Maxine Waters (D-Calif.) called the sudden end of the foreclosure reviews "troubling" and asked that an independent monitor be named to oversee the new deal…
…
…Those foreclosure reviews, which began in earnest in the spring of 2012, were troubled from the start. As The Huffington Post previously reported, contractors hired to review loans were poorly or inconsistently trained and it wasn't always clear whether they were sufficiently independent from bank influence. Bank of America, for example, hired thousands of temporary workers to do preliminary loan reviews -- work that many assumed would be done by Promontory Financial, the outside consultant. Many of these former contract employees said that the process was so compromised by mistakes and misconduct that the results of the reviews were not reliable.
As part of their request for information, Cummings and Warren asked for documents indicating the number of reviews completed as of Jan. 7, the number of files in which "unsafe or unsound" practices were found and the amount of remediation that contractors had determined those borrowers should receive...
…
…Waters, the ranking member on the House Committee on Financial Services, requested that the regulators report demographic and other data to determine how the $3.3 billion is distributed. She asked that homeowners be permitted to appeal decisions if they think their payment is improper. She also asked regulators to prioritize preventing avoidable foreclosures among the subset of those eligible to receive a settlement payment. Regulators have said that the mortgage companies will begin contacting homeowners in March.
Waters's concerns echo those of housing activists, and even former foreclosure review contractors…
And,
Wikipedia gives credit where it’s due…
…There have been Allegations that the Banks themselves have a heavy hand in the review process. According to news sources, who are citing Emails, employee interviews and contracts, are suggesting that the biggest offenders -- Bank of America, Wells Fargo, Citigroup and JPMorgan Chase -- appear to be conducting much of the review work themselves. Making the review Independent in name only. [4]
Yves Smith, in her financial blog Naked capitalism, has written a thorough analysis of the Independent Foreclosure Review, interviewing several former reviewers on the practices used both by Bank of America, and its review contractor Promontory Financial Group.
Her findings show, in her words:
1. After extensive debriefing of Bank of America whistleblowers, we found overwhelming evidence that the bank engaged in certain abuses frequently, in some cases pervasively, in its servicing of delinquent mortgages.
2. This settlement, as intended, was yet another significant bailout to predatory servicers.
3. As we will demonstrate in later posts in this series, even making the most generous interpretation possible of the role played by Promontory, Promontory’s review at Bank of America completely omitted significant categories of borrower harm that were explicitly discussed both in the OCC consent order and Promontory’s engagement letter with Bank of America.
4. The organizational design, the way the reviewers were managed, the elimination of areas of inquiry, and evidence of records tampering with Bank of America records all point to a multifaceted, if not necessarily well orchestrated, program to make sure as much damaging information as possible was not considered or minimized…
And, here’s Yves summing it up, specifically, for Daily Kos…
1. Consumers were clearly hurt and the practices were SYSTEMATIC. This was a combination of greed and negligence.
2. No way were these reviews independent. They were a farce. The names of the OCC and Promontory should be mud.
3. The bad practices are CONTINUING. Nothing was fixed in any of these "settlements."
It isn't just that borrowers who were hurt are now not gonna’ get adequate compensation. Any borrower who becomes delinquent, even if it's just a mistake (“…mortgage check didn't get in envelope…”) can and probably will be rolled over by the servicer Sherman tank…
So, without additional preface, let’s begin…
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(NOTE: Naked Capitalism Publisher Yves Smith has provided written authorization to the diarist to reproduce her posts in this series in their entirety for the benefit of the Daily Kos community.)
Bank of America Foreclosure Reviews: Whistleblowers Reveal Extensive Borrower Harm and Orchestrated Coverup (Part I – Executive Summary)
Yves Smith
Naked Capitalism
January 22, 2013 12:50PM
On January 7, ten servicers entered into an $8.5 billion settlement with the Office of the Comptroller of the Currency and the Federal Reserve, terminating a foreclosure review process which was set forth in consent orders issued in April 2010. Borrowers who had had foreclosures that were pending or had completed foreclosure sales in 2009 and 2010 could request an investigation by independent reviewers, selected and paid for by the servicers but subject to approval by the OCC.
Some experts argued that the 2009 and 2010 time range was too narrow and excluded many borrowers who had been treated improperly. These professionals also questioned whether the investigators would operate independently and fairly. Nevertheless, the reviews were touted as delivering a measure of justice to abused homeowners, since any found to be have suffered wrongful foreclosures were to receive sizable monetary awards, and smaller payments would be made to those who experienced other forms of abuse. As HUD Secretary Shuan Donovan proclaimed:
For families who suffered much deeper harm — who may have been improperly foreclosed on and lost their homes and could therefore be owed hundreds of thousands of dollars in damages — the settlement preserves their ability to get justice in two key ways.
First, it recognizes that the federal banking regulators have established a process through which these families can receive help by requesting a review of their file. If a borrower can document that they were improperly foreclosed on, they can receive every cent of the compensation they are entitled to through that process.
Second, the agreement preserves the right of homeowners to take their servicer to court. Indeed, if banks or other financial institutions broke the law or treated the families they served unfairly, they should pay the price — and with this settlement they will.
Yet the foreclosure investigation was halted abruptly, with the OCC and the Fed failing to identify any methodology for how the portion of the settlement allotted to cash awards, $3.3 billion, would be distributed to homeowners who might have been harmed in 2009 to 2010, an astonishing lapse that will almost certainly result in small payments being made to large numbers of borrowers, irrespective of whether they deserved vasty more or nothing at all.†
But except from its hamhandedness, this outcome was no surprise to astute observers. The OCC consent orders had been launched in an unsuccessful effort to render the ongoing 50 state attorney general/Federal negotiations moot. Critics described how these orders were regulatory theater, with Georgetown law professor Adam Levitin comparing them to promising in public to spank a child, then taking him indoors and giving him a snuggle. Leaks during the course of the reviews confirmed these concerns, revealing deep-seated conflicts, limited competence among the review firms, half-hearted efforts to reach eligible homeowners, and aggressive efforts by the banks to suppress any findings of harm.
As grim as this sounds, the conduct was worse than the leaks suggested. After extensive debriefing of Bank of America whistleblowers, we found overwhelming evidence that the bank engaged in certain abuses frequently, in some cases pervasively, in its servicing of delinquent mortgages. This is particularly important because Bank of America has been identified in previous settlements as far and away the biggest mortgage miscreant, paying over 40% of last year’s state/federal mortgage settlement among the five biggest servicers.
This settlement, as intended, was yet another significant bailout to predatory servicers. As we will demonstrate over our upcoming series of posts, conservative estimates of damages due to borrowers under the consent order who suffered improper foreclosures from Bank of America exceed $10 billion. That contrasts with the cash portion of the settlement amount for Bank of America of $1.2 billion.†† The amount owing for other abusive practices would have increased this total further.
The OCC gave two rationales for shutting down the reviews. The first was that they were costly to Bank of America and other serivcers, potentially diverting funds from borrowers. This argument is spurious. Those expenses were always contemplated as being in addition to compensating borrowers for the considerable damage they suffered. Moreover, as we will demonstrate, the high price tag for undertaking the reviews was due not only to fragmented and poorly documented borrower records and the servicers’ long-standing disregard for legal requirements, but significantly to an inefficient, poorly designed review process. The fees to the major firms engaged to conduct the reviews are so patently out of line that Caroline Maloney, a senior member of the House Financial Services Committee, has launched an inquiry.
Professional service firm clients, particularly ones as powerful as major banks, when faced with such egregious levels of cost overruns, would normally demand significant reductions in the bills from their vendors. Instead, the Fed and the OCC let Bank of America make its cost problem their cost problem.
The second reason given for shutting down the reviews is that the regulators claim few borrowers were harmed by impermissible foreclosure practices. An American Banker article last week quoted Morris Morgan of the OCC, who was overseeing the reviews from the regulators’ side:
“Do I think there were a significant number of people who were foreclosed on where the banks did not have a legal right to foreclose on them? At this point in time I don’t think that was a significant number,” he said. “But I would go further to say a very few number, and you could even argue one of those, is too many.”
This is both disingenuous and as we will demonstrate over our series, patently false. Borrowers could suffer wrongful foreclosures due to predatory or negligent foreclosure practices for reasons well beyond the servicer not having the “legal right to foreclose”. Moreover, the servicers were ordered to look well beyond that issue. The whistleblowers saw ample evidence of abuses of that could and typically did result in the loss of home within the scope of the reviews they performed. Moreover, they also presented evidence of persistent, sometimes pervasive, impermissible conduct at Bank of America which was simply not addressed in the tests or captured in related information gathering, yet clearly fell within the scope of the consent orders. As we will discuss, some of these abuses would likely result in an impermissible foreclosure or serious borrower harm.
Turn the issue around: why would the banks be willing to down the reviews if indeed they were finding so little in the way of damage to borrowers? They would be well served to spend a few billion dollars to be able to say that with a fair and exhaustive process, hardly any borrowers were harmed. If this claim was true, the costs of finishing the reviews still would have been lower than the cost of the settlement plus the expenses of the reviews to date.
The settlement is also a bailout for the “independent” foreclosure reviewer, Promontory Financial Group, which also played this role for Wells Fargo and PNC. Promontory occupies a unique role in Washington, DC. The firm, headed by former Comptroller of the Currency Gene Ludwig, is heavily staffed with former senior and middle level banking and securities regulators. For instance, former OCC chief counsel Julie Williams (who Ludwig hired when he was at the OCC) has just joined Promontory, and her replacement, Amy Friend, came directly from Promontory.
As we will demonstrate in later posts in this series, even making the most generous interpretation possible of the role played by Promontory, Promontory’s review at Bank of America completely omitted significant categories of borrower harm that were explicitly discussed both in the OCC consent order and Promontory’s engagement letter with Bank of America.
Scope of Our Investigation
We interviewed five contract workers at the largest Bank of America site where the foreclosure review work took place, Tampa Bay, Florida. All had worked on the project from relatively early on, and all had considerable knowledge of mortgage and foreclosure processes and documentation, with the least experienced having worked five years as a paralegal in small real estate-focused law firm. The majority had over ten years of relevant experience. Together they performed significant tests on over 1600 borrowers in a “live” mode, and ran preliminary versions of the tests on hundreds of additional borrower files (actual customer records from Bank of America systems, not dummied-up data) in the attenuated start-up phase.
The reviewers also provided comprehensive documentation from some of the major tests designed by Promontory and operated on its CaseTracker software program as well as other documents provided by Bank of America. We provide a brief overview of the various roles in the Tampa Bay and other Bank of America locations at the end of this post, in Appendix I, and a description of the major tests in Appendix II. We have reviewed the information and documents presented by the whistleblowers with recognized legal experts in foreclosures and securitizations, and have also reviewed relevant OCC materials and Bank of America disclosures.
Overview of Findings
The foreclosure reviews showed persistent, widespread efforts by Bank of America to avoid any finding of borrower harm. These efforts were supported and enabled by Promontory. The whistleblowers, all told their role would be to act as investigators and help borrower get compensation they deserved, described the review process as seriously flawed. Yet even with those obstacles, they saw abundant evidence of serious damage to borrowers.
We asked our five whistleblowers to estimate the amount of borrower harm they saw for the borrowers whose cases they reviewed, and what portion of that was serious harm (all reviewers will be described as male irrespective of gender):
Reviewer A: 90% harmed, with 30% to 40% suffering serious harm
Reviewer B: 30% harmed, including instances of serious harm; described multiple instances of serious harm on other tests performed on his borrowers but could not readily quantify
Reviewer C: 67% harmed on his test; like B, saw multiple instances of serious harm in the borrower history not captured on his test as harm; could not readily quantify but specific examples cited during interviews alone exceed 10%
Reviewer D: 95% harmed, with 30% to 40% suffering serious harm
Reviewer E: 100% harmed, with 80% suffering serious harm
This level is consistent with the findings of a never-published GAO report on the foreclosure reviews that the rushed settlement appeared intended to terminate. The GAO review selected a random sample of foreclosure files and found an 11% error rate. The files the reviewers saw came (depending on the reviewer) at least 80% and in most cases 100% from borrower requests for review through the IFR process or an executive request for review. One would expect to see a markedly higher level of serious problems in these files.
As we will describe in detail, these estimates considerably understate the actual harm suffered due to defects in the test design, active efforts to suppress findings of harm, and major gaps in Bank of America records. As one reviewer stated:
I really kind of went into it very naively, I guess, as a lot of us did, that we were actually there to do good and were being welcomed there to do good for people….I mean, I had gone from pretty gung ho to, “Hey, you guys need to knock this crap off. You guys are just – you’re, just, you’re turning this into a sham.”
Note that Bank of America and Promontory are likely to claim, as they did late last year when ProPublica published an article questioning the independence of the foreclosure reviews, that Promontory was doing the reviews and the contractors employed in Tampa Bay and other locations were simply doing document retrieval. In later posts, we will discuss in depth why this claim is ludicrous in light of how the organization was structured, how Bank of America managers interacted with the reviewers, and how the tests were designed and the reviewers were trained.
Overwhelming evidence of widespread, systematic abuses. No interviewee estimated harm as occurring in less than 30% of the files they reviewed; one put serious harm at 80%. The interviewees did not simply describe individual borrower suffering in graphic terms (as one put it, “I saw files that would make your stomach turn.”) Multiple interviewees would describe widespread, sometimes pervasive patterns of impermissible conduct.
The reviews confirm what both servicing experts and foreclosure defense attorneys have seen since the crisis: Bank of America’s servicing standards were poorly designed and thus unable to handle the deluge of troubled borrowers (suspense accounts, modifications, bankruptcy, etc.). In addition, BofA had a low level of competence in their servicing area and, as a result, the problems with their servicing was made worse. For instance, reviewers gave examples of types of behavior where Bank of America practices were clearly contrary to the law, yet the banks’ personnel confidently maintained that they were proper
OCC’s badly flawed review structure compounded by complex, chaotic, and undermanaged implementation by Promontory. By delegating so much of the review process to “independent” firms (many of whom had little or no experience with servicing and foreclosure), the OCC doubled down on the same incompetence and poor standards that Bank of America and the other servicers already had in their servicing departments. Many of the flaws in the review process (compartmentalized reviews, conflicted supervisors, poor senior review for issues or disputes) were mirror images of the problems at the servicer. These problems were made worse by a bizarre management structure and frequent changes to test content and directives.
Concerted efforts to suppress finding of harm. The organizational design, the way the reviewers were managed, the elimination of areas of inquiry, and evidence of records tampering with Bank of America records all point to a multifacted, if not necessarily well orchestrated, program to make sure as much damaging information as possible was not considered or minimized. To give one example: state law issues were eliminated from the in G test, which covered loan modifications (see Appendix II below), reducing it over time from 2200 questions to 500.
Dubious role of Promontory. Promontory was a poor choice to perform the review. It had virtually no internal expertise in serivcing, provided little or no supervision, and, either by design or incompetence, managed to politicize the review process rather than make it independent.
Promontory’s recent accomplishments include telling MF Global’s board that it had “robust enterprise-wide risk management” five months before it failed and finding only $14 million of Standard Chartered wire transfers in a money laundering investigation to be out of compliance, when the bank eventually admitted the amount was $250 billion. That is no typo, that is an over four order of magnitude difference.
Why does Promontory prosper despite such implausible, indeed, embarrassing performances? It’s because financial firms are eager buyers of extreme management-flattering positions that are seldom subjected to scrutiny thanks to Promontory’s roster of former regulators. Indeed, Promontory occupies a position no firm holds in any other heavily regulated space, that of being the dominant shadow regulator. As we will demonstrate in later posts, the claims made by Promotory about the review process as to its independence and completeness are at odds with considerable evidence on the ground.
We will present the evidence supporting each of the findings in successive posts in this series.
LINK: Bank of America Foreclosure Review Appendix I
LINK: Bank of America Foreclosure Reviews Appendix II
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† While the OCC maintains that some borrowers may still receive the maximum payment under the foreclosure reviews, $125,000, the abrupt termination of the foreclosure reviews at Bank of America and other banks and the dismissal of trained staff indicate that not further investigation will be made. That, in combination with the efforts we will describe to show how evidence of harm was not considered, minimized, or suppressed, suggest that the only people who might receive that level of payout will be ones that suffered not just egregious but easily identified harm and were also fortunate enough to get through the review process before the settlement was finalized.
†† We attribute very little value to the “required other amount of assistance” of $1.6 billion, which Bank of America can satisfy by extremely low cost actions, such as writing off deficiency judgments on foreclosed borrowers. A deficiency judgment occurs when, after a foreclosure, the borrower is still liable for the difference between the amount owed on the mortgage when it exceeds the amount recovered in the foreclosure sale. People who undergo foreclosures are almost always under severe financial stress (we have discussed elsewhere that the incidence of “strategic defaults”, ex on second homes, is greatly exaggerated). Banks historically have not pursued deficiency judgments; the cost of going after the borrower greatly exceeds what they might collect. At best, Bank of America might be able to sell them to debt collectors for a few cents on the dollar.
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Parts II, IIIA, IIIB, and IV of Yves Smith’s series at Naked Capitalism may be accessed via these links, below. (The link for Part V will be added to this list when it’s published.) Parts II, IV and V will also be cross-posted, in their entirety, at Daily Kos, over the weekend and into early next week. In the meantime, here are links to those posts over at Naked Capitalism…
Bank of America Foreclosure Reviews: Whistleblowers Reveal Extensive Borrower Harm and Orchestrated Coverup (Part II) 1/22/13
Bank of America Foreclosure Reviews: Why the Cover-Up Happened (Part IIIA) 1/29/13
Bank of America Foreclosure Reviews: Why the Cover-Up Happened (Part IIIB) 1/29/13
Bank of America Foreclosure Reviews: How the Cover-Up Happened (Part IV) 1/30/13