Potemkin Regulation: Servicing Fraud Cease & Desist Orders

There appear to be forthcoming cease-and-desist orders on servicing fraud from some of the bank regulators, and the American Banker has a draft C&D order up.

The draft C&D order is a regulatory equivalent of a Potemkin Village. (In truth, the better analogy for bank regulation has the inmates running the asylum.) On the surface it looks like a very serious thing--C&D orders are an extraordinary regulatory response in the banking world, where a lot of regulation is done informally. They typically indicate a very serious problem. But when one looks at the substance of the C&D order, one is struck by how empty it is. All sizzle, no steak.

The C&D order basically tells banks to set up lots of internal procedures and controls within the next few months and then to tell their regulators what they have done. The reporting on these internal controls to the regulators will be non-public (like all safety-and-soundness review issues), so it will be impossible to judge whether the controls are adequate and whether the regulators are being sufficiently demanding. The result, I suspect, is that in a few months the bank regulators will declare that everything is fine.

(Even if the regulators think the internal controls are inadequate, it's not clear what the consequence would be. My guess is that it just results in the bank regulator telling the bank to revise and resubmit.)

By far the most interesting bit in the draft C&D order is the bit requiring the banks to engage independent foreclosure review consultants to review "certain" foreclosures that took place in 2009-2010. There is no specification as to which foreclosures are to be reviewed or precisely what the standards for review are. But that's all kind of irrelevant. Who do you think the banks are going to engage to do these reviews? Someone like me? Not a chance. They're going to find firms that signal loud and clear that if they get the job, they won't find anything wrong. It's just recreating the auditor selection problem, but without even the possibility of liability for a crony audit.

Frankly, this sort of regulatory outsourcing is pretty astounding--the OCC has resident examiner teams at the major servicer banks. Shouldn't they be the ones auditing the internal controls and performance, not a third-party compensated by the bank? (Oh wait, I forgot that the OCC is paid by the banks--it's budget comes from chartering fees and assessments on the banks is regulates. Indeed, I was struck in some places by the linguistic similarities between the proposed C&D order and the banks' counterproposal to the AGs. It's impossible to know who was cribbing from whom, but the similar language is revealing.) 

So here's what's 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 won't be any action beyond that. It's as if the regulators are saying so all the neighbors can hear, "Banky, you've been a bad boy!  Come inside the house right now because I'm going to give you a spanking!" And then once the door to the house closes, the instead of a spanking, there's 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.

Don't buy it--this is Potemkin regulation, plain and simple. The C&D orders are a barely a slap on the wrist for the largest consumer financial fraud case in history. The CFPB estimates that servicers made at least $25B by failing to comply with the law.  And that's with very conservative assumptions. The idea that requiring the internal controls that should already exist in any well-run financial institution is a sufficient penalty for fraud of this magnitude is chutzpah to a degree that one could not expect except from an agency like the OCC.

Comments

[Jeffrey Goodrich]

And yet nobody is watching. Tonight "60 Minutes" finally got around to described the outright fraud and perjury that all the rest of us learned about months ago from multiple sources on the internet. Yet there the only trial I see for perjury is the prosecution of Barry Bonds.

[Mike Dillon]

Via Robin Williams Live at the MET:
http://www.youtube.com/watch?v=8N1Hz2_gdh4&feature=related

@ 1:30
"You know in England if you commit a crime, the police don't have a gun and you don't have a gun. So if you commit a crime: "Stop! Or, or I'll say stop again!"

We've been here at LEAST three times already with regard to "federal" action: USA/Curry v. Fairbanks, FTC v. EMC/Bear, FTC v Countrywide/BACHLS.

HOW DID THOSE ACTIONS WORK OUT FOR THE BORROWERS/VICTIMS?

DID ANYONE ACTUALLY MONITOR ANY OF THOSE ACTIONS FOR COMPLIANCE - OR, more importantly LACK THEREOF?

For whatever BearingPoint was hired to do in USA/Curry v. Fairbanks it doesn't seem that it did squat to help the victims.

Roughly 585,000 victims in those three actions. $176,000,000.00 in "restitution." Do the math. The individual victims' legal rights weren't even worth the value of the ink, paper and trees killed to print the motions or the order.

AG Tom Miller was receiving constituent complaints about Fairbanks and Mortgage Servicing Fraud as far back as 2002. I've got at least one constituent complaint addressed to him. He (and virtually every other AG office) are absolutely no strangers to Mortgage Servicing Fraud.

This. "Settlement". Is. PATHETIC.

[Constant Diligence]

Adam,

I asked you to post something to give us hope the Banks are going to be held accountable... and boy did you come through! What agencies will be responsible and how do you see Warren jumping back into the fray?

I hope homeowners understand they are going to have to fight for themselves in this brawl!

We must all fight individually to compel a fair settlement at home. Educate and arm yourself then please step into the ring! The Banks may have unlimited resources but Americans have an unlimited will to fight for justice! Use all the leverage you can… Please let us help! http://diligencegroupllc.net/

American Middle-class Homeowner

-AMH

[The Diligence Group, LLC]

I believe it is clear to most intelligent folk, that all legislative solutions proposed to address the foreclosure crisis will be impotent by design. The Financial Cartel is currently in the process of cashing in all of those chips it amassed over the years, financing the US political campaigns of anyone and everyone who ever ran for office, and are busily attempting to sweep all of this mess under a very conveniently placed rug. The masses run around fearing the machinations of the Masons and the Illuminati; when in truth, whom they need to fear are the Financial Cartels that appear to be running the globe. The only faintly glimmering ray of hope, at least in the United States, appears to emanate from the judicial branch of the government. The number of jurists, who appear to realize the very real threat to property rights in the US, is growing, as are the number of jurists who are willing to take a firm legal stand - and I thank God for them.

What I find particularly intriguing is the public’s perception in all of this. If a government attempted to confiscate one’s property without due process, peasants with pitchforks would be rioting in the streets, and every lamppost would have a legislator swinging from it, covered in pitch and feathers. That the Financial Cartels are, in essence, being given full license to behave in a manner that rivals most totalitarian régimes, and that the American Public does not appear to recognize the treat to liberty in all of this, is astonishing to me.

Fortunately, or unfortunately, this battle is one that will be waged for years to come in our courts of law. New legal precedent is being set daily. Judges, for example, in the State of Florida are doing more than just tapping the wrists of Servicers who attempt to foreclose with shoddy, fraudulent paperwork – they are forgiving mortgages and siding with the homeowner. Judges in New Jersey, New York and other states are setting precedent and upholding the law as well. One wonders what form of assault the Financial Cartels are contemplating to combat the legal solution that is beginning to take form. In the meantime, let us hope that our fellow citizens stop playing “Sleeping Beauty,” wake up, and recognize the threat that has been stealthily advancing upon one of the basic tenants of our liberty – the right to own property without fear of confiscation, for truly, the resolution to this matter rests in our hands. In the meantime, we of The Diligence Group will continue to assit attorneys who represent homeowners, in every way we can, as solutions are available.

[Nancy]

I am sorry! But, this is no surprise. Sweep it under the rug....protect the criminals, slap them on the wrist and screw we citizens....again, again, and again. WHAT IS IT GOING TO TAKE. WHAT DO WE HAVE TO DO? We people who have lost homes cannot afford years for this to be dragged out by the people who make millions of dollars per year..I AM TALKING, MILLIONS OF DOLLARS...On our best day we are lucky of two incomes we earn what equals $100,000 per year.

I'm sorry, but were these multi-million dollar year salary plus even more in benefits individuals born with some super natural attributes that the rest of us don't have...NO...So, why are they worth this kind of money???? Why? If it cannot be proven to me that they are worth all this money compared the the rest of our Country....then each and every one of them are nothing but criminals, criminals who are sent to Federal prison for the rest of their natural lives as they have ruined the rest of ours...If the law enforcement for the government are criminals as well then they go to prison as well.....It is time WE citizens who have more brains, apparently, then they....will have to take charge ourselves.

I am so sick and tired of empty promises. There is not ONE person who has a political position who I would trust any further than I can throw him. They have all more than earned this mis-trust, yet it continues!....I for one have simply had it.

We used to be the strongest Nation in the WORLD, THE WORLD! They are all laughing at us or want to be except thanks to our corruption, other countries are watching their economy go down hill.

Is anyone out there with me on this???

Nancy

[Roy Blizzard III]

You have not only mortgage servicing fraud, but insurance fraud, forgery, theft, lying under oath, county tax evasion, state tax evasion, and federal tax evasion, SEC violations and more. All by the banks that are getting a free pass on all this by the AG's around the country. If you or I do any of this we go to jail for years. The banks get to do all this and go to the Bahamas. When will the courts wake up and protect the citizrns of this country and when will the citizens start unelecting these bozos in public office?

[Judge Roy Bean]

What everyone has failed to recognize in these matters is that it's not a political party issue - it's a class issue.

There is a privileged socioeconomic class that is simply not subject to the same moral obligations the average person is.

Becoming a member of that class (by whatever means) by-and-large insulates you from actual culpability. You're given opportunities to negotiate that are not afforded ordinary criminals.

There is nothing new here.