Govt’s loan mod program crippled by lax oversight and deference to banks

The reason Treasury hasn’t changed them, Gordon said, is that Treasury is afraid servicers would drop out of the voluntary program, known as the Home Affordable Modification Program (HAMP), in the face of real penalties.

“If servicers don’t get paid for future modification activity, there is a risk that they will be less inclined to continue completing HAMP modifications or to follow HAMP guidelines to evaluate homeowners for all loss mitigation options before referring them to foreclosure,” said a Treasury spokeswoman.

Instead of getting tough with servicers, Treasury says they work with banks to make sure problems are fixed.

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.

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.

This data, obtained through a Freedom of Information Act request, comes from the HOPE Hotline, a help line for homeowners sponsored by the Treasury Department. Complaints are calculated as a percentage of total calls, excluding irrelevant calls like hang-ups and wrong numbers.

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.”