More Rot in the OCC Foreclosure Reviews
Michael Olenick, Gretchen Morgenson, and Yves Smith have all written pretty damning things about the foreclosure reviews persuant to the OCC consent orders with major mortgage servicers. (For my own previous thoughts, see here and here.) I've just started to peruse some of the engagement letters with the firms conducting the reviews, and the rot is even worse that these other critics portray.
What follows is in no way a comprehensive cataloging of the problems in the OCC foreclosure review process--this is just what I spotted from the briefest of perusals. Yet it is clear that there are two types of serious problems: conflicts of interest and flawed substance of the review process. I'll lay both out below and then give some thoughts as to what could and should be done to remedy this farcical process in order to ensure some accountability to the public and justice for homeowners. The post concludes with some thoughts about the core problem--the OCC--and what can be done to remedy it.
(1) The Allonhill letter has seemingly strict conflict of interest rules. But then it grants various conflicts-of-interest exceptions to Allonhill. What's more ridiculous is that it's all being done on the honor system. That just doesn't work with conflicts of interest.
(2) There's a lot of subcontracting mentioned in these opinion letters. That alone raises all kinds of other conflicts issues. For example, Promontory Financial Group is subcontracting to Allonhill for the Wells Fargo review, even as Allonhill is doing its own review for Aurora. There's nothing wrong with subcontracting, but that raises a whole set of further unanswered questions.
(3) There's also engagement of law firms as part of the reviews. This is really problematic. The law firms seem to be engaged in two ways: first, to provide general counsel, and second to provide opinions on what state law was at the time of the foreclosures. The general engagements seem to be going to law firms with serious conflicts of interest in the issue, as they are major securitization firms. The most glaring example is SNR Denton, which is engaged by Allonhill. SNR Denton was involved in the securitization of the mortgages and probably has opinion letter liability on the securitizations. It has also made clear that it thinks there is "nothing to see here folks" on the chain of title issue, and that it thinks Ibanez was a radical and wrong outlier decision. SNR Denton has also represented the American Securitization Forum. Hardly neutral counsel.
A similar problem exists for McDermott Will & Emery--it's representing BoA in a foreclosure-related class action and representing PNC here. Not a per se conflict, but come on--it's the same damn issue. You can't be arguing that there's no problem in one forum and then be overseeing a neutral review in another.
And then there's Hudson Cook, a pocket firm for the financial services industry, which is providing opinions on what state law was at the time of the foreclosures. Any doubts what they'll be opining? I suspect that this is just the surface of all of this.
(4) Many of the conflicts provisions (in Wells and BoA letters, e.g.) are redacted. The OCC has made these letters available so that the public can evaluate them. But how can we if the information is all redacted? How can we possibly tell if there is a serious conflict or not?
(5) For Allonhill, the indemnification and liability limitations terms on pp. 28-30 are redacted. Those are pretty key terms for determining Allonhill's independence.
(1) It's clear that none of the reviews will look at PSAs and trust law. The OCC doesn't want anyone looking at this issue. It's OK if the reviews find some SCRA violations and the banks pay a few dollars here and there. But the chain of title issues are too sensitive and OCC has made them a no-go.
(2) The review is based on the assumption that the note is a negotiable instrument. (See p. 29 of Appendix A to Allonhill.) But they aren't. The prepayment notification provision in the stanard Fannie/Freddie note is an additional undertaking that makes a note non-negotiable under UCC 3-104. In other words, it's just a regular contract, albeit one governed by UCC Article 9 for its transfer. That makes the evidentiary burden for foreclosure MUCH higher. It also means that there is no Holder in Due Course status possible; there's assignee liability, which is the basic rule of contract law. So there's an incorrect fundamental assumption in the reviews.
(3) The reviews are based on pre-2010 state law. On the one hand, this makes sense--that was the law at the time of the foreclosures. But pretty no state had addressed any of the current foreclosure issues head-on before 2011. There wasn't definitive law in most cases. And that makes it easy to say "no problem." Had these cases been litigated, there might well have been a different result, but that's not what the review will do.
(4)Check out the assumptions and exceptions on pp. 13-16 in the JPMorgan-Deloitte letter. Some are kind of heroic, like that there was proper service. I testified about a "sewer service" problem before the House and Senate in November 2011. It's not a non-issue. Or how about that notarizations took place on the date claimed. We know that isn't always the case--that's what started the whole robosigning scandal.
Other assumptions are strange. The review will only consider 2 federal statutes and state statutes, not local mediation requirements, etc. Sure, it makes the reviews easier. But those requirements are the law too. You can't pick and choose which parts of the law to comply with.
(5) Other ridiculous points--Allonhill will rely on Lexis/Nexis for bankruptcy information. Who knows just how accurate that is? There's no need to find out--why the heck not use the official on-line court docket system? Oh, they might have to pay the courts for doing so...
It's been apparent from day one that the OCC consent orders and review process were going to be a charade. Yes, an expensive charade, but still a charade, and a far cheaper one than real justice would require. Now, you might reasonably object that the standard I am demanding is unreasonably high and that the burden of doing serious borrower-by-borrower examinations of foreclosures is not worth the candle. I agree. The solution to the foreclosure fraud problem cannot be individualized reviews. It's just too cumbersome, is likely to go off the rails at too many points, and creates tremendous cost for little benefit. That's why we need a comprehensive global settlement of the entire mortgage crisis. That's why the OCC and other bank regulators doing separate consent orders was so damaging--they undermined the prospects of a more workable settlement. It's not realisitic to expect perfect justice here. But we need a lot more justice and we need a process that gives the homeowner a limited no-contest amount of compensation, with the bank and the homeowner both permitted to challenge it to seek lower or higher payouts (in most cases they won't bother, but it protects against egregious injustice).
But that's not where we are, or in DC-dialect, where we're at. We're stuck dealing with a sham review process as part of Potemkin consent orders. It's still possible to salvage something. At the very least, we should have some transparency in the process. The OCC should report to the public for each servicer (and naming names), how many errors were found, what types, affecting how many borrowers, how many were considered to have caused financial harm, and what compensation was offered. The OCC should also prohibit the banks from extracting any releases from borrowers as part of the compensation. Ideally, there would also be a cross-check imposed on the process. The gold standard for integrity here would be constituting a truly independent Team B to conduct its own review of randomly selected files and cross-checking the Team B results against those found by the consulting firms. The cost of doing so would be quite small (I know a lot of people who would do this for free). The public is owed transparency and accountability in this process; I hope that Congress continues to keep the heat on the OCC to try and salvage something from this farce.
The real problem here is not the particulars of the foreclosure reviews, but the OCC itself. The OCC has repeatedly shown itself to be a failed regulator. It regulates for the industry, rather than regulating the industry. It's not clear to me why the OCC, but not OTS, escaped the axe in Dodd-Frank. But then, the problem really wouldn't be solved just by abolishing the OCC. The root of the capture problem here is that the OCC's budget is paid by the banks. I don't know about you, but when I pay for a hotel, I expect service. So do the banks. And service they get. The OCC waged an all-out war against state attempts to reign in predatory lending practices in financial services, it coddled the credit card industry for years, it permitted its banks' subsidiaries to engage in abusive mortgage lending and securitization, and it continues to turn a blind eye to payday-type lending by major banks. And those are just the highlight from the indictment against this failed regulator. We should probably only have a single federal prudential bank regulator (with the insurance fund kept separate), but let's get to the heart of the issue--bank regulators that regulate for banks, not for the public's welfare.
If we want the OCC to start listening to the public, not just the banks, we need the OCC to be subjected to appropriations. (But Adam, how can you then say the CFPB shouldn't be subject to appropriations? Aren't you speaking out of both sides of your mouth? No. The CFPB is different. The CFPB isn't getting its money by signing up banks for its stable. It gets a share of the Fed's operating budget, most of which doesn't come from the banks. That means the CFPB is insulated from capture in this form and from political interference. To make this model work for the OCC is possible, but there'd still be a serious legacy problem with personnel, especially at the top level.)
There are definitely problems that would come from putting the OCC under appropriations--I don't relish the thought of politicized bank regulation. But the choice isn't between politicized bank regulation and perfect bank regulation. Instead, the choice is between politicized bank regulation and captured bank regulation. And I'd take the former 7 times a week and twice on Sundays. Politicized bank regulation wouldn't necessarily mean wild see-saws. Instead, I might keep the OCC in check and moderate because the OCC would know that there's an election every two years, so it had best not get out of hand either way.
Whatever happens with the foreclosure reviews, I think it's important to keep the larger problem in sight: something will eventually have to be done about the OCC if banks are to be subject to the law in the United States. This is not just a problem of consumer protection. That's today's flavor. It's also a problem of systemic risk. When the banks call the shots on enforcement, no amount of Dodd-Franking can provide protection against future crises.