Federal authorities plan to issue a stinging critique of how banking regulators responded to wide-ranging foreclosure abuses, blaming officials for a bureaucratic maze that delayed relief to homeowners.
In a long-anticipated report, the Government Accountability Office will take aim at the Federal Reserve and the Office of the Comptroller of the Currency for their role in cleaning up flawed foreclosures at the nation’s biggest banks, according to a preliminary draft of the document provided to DealBook. The regulators, the G.A.O. report found, failed to properly coordinate a review of foreclosed loans and even potentially allowed some errors to go undetected.
The regulators did not comment on the report. In a letter to the G.A.O., however, the Comptroller’s office said it “appreciates your understanding of the complexity†of the foreclosure review process and the “intent of your recommendations.†The agency added that it would incorporate suggestions from the the report into its future oversight of the banks.
People briefed on the report cautioned that it was not yet final and could still be changed. The G.A.O. is expected to release the report in the coming days.
The report stems from an investigation that began in 2011 at the behest of Congressional Democrats, including Representative Maxine Waters, who is now the ranking Democrat on the House Financial Services Committee. Ms. Waters raised concerns about the use of private consultants to conduct a sweeping review of the foreclosures. The consultants, tasked with unearthing whether homeowners were wrongfully evicted, had close ties to both the regulators and the banks they were expected to examine.
The report shows that lawmakers had reason to worry. The review was fraught from the start, according to the G.A.O., as consultants racked up more than $2 billion in fees while only reviewing a fraction of the loans in question.
Much of the report, though, traces problems to the regulators, not the consultants. From failing to coordinate teams of consultants to creating few clear guidelines for the review, the regulators shoulder much of the blame, according to the copy of the report.
Throughout the review, the regulators provided inconsistent guidance to consultants, the report said. As a result, even borrowers who suffered similar kinds of harm were treated differently. For example, regulators ordered the consultants to comb through loans to spot whether borrowers were charged fees for lawn care or property inspections that were not “reasonable†and “customary.†But the consultants were using “different versions†of what fees fell into that category.
The report also highlighted broad breakdowns in communications that led the review to stagnate, delaying relief to homeowners. Struggling borrowers, the agency said, submitted requests for relief and “waited nearly a year before receiving an update.â€
The lack of direction, the report found, prevented the consultants from efficiently scouring the loan files to spot the most number of borrowers potentially harmed. The flaws also created “timeliness trade-offs†the report said. Under the review guidelines outlined by the regulators, whole swaths of loans that may have had problems were potentially overlooked, the report found.
Regulators, the agency found, also failed to provide “objective monitoring measures.â€
There was no metric, for example, for consultants to figure out when to stop a review, the report found. As such, the report said, there was confusion in assessing the “extent of borrower harm.â€
Without clear guidelines from regulators, the report found that there were troubling differences in how loans for each bank were assessed. Some consultants looked at a “100 loans in a sampled loan category†while others looked at more than three times that number. “Based on our analysis, the loan categories used by consultants for their analysis varied from review to review,†the agency found.
