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by Paul Kiel
ProPublica, Oct. 19, 2012, 9 a.m.

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The idea behind the Independent Foreclosure Review seems simple. During the peak of the foreclosure crisis, the banks broke laws and made errors that hurt homeowners. In response, the government mandated they compensate the victims.

But there is growing evidence some banks are playing a major role in identifying the victims of their own abuses, raising the question of whether the review is compromised by conflicts of interest.
Our FAQ on the Foreclosure Reviews

Answers to homeowners’ questions about the Independent Foreclosure Review.
Do You Work in Mortgage Servicing or as a Foreclosure File Reviewer?

If you’ve worked for a servicer or on the Independent Foreclosure Review, contact our lead reporter.
ProPublica’s Foreclosure & Loan Mod Facebook Page

Ask questions, share your experiences, and connect with fellow homeowners on ProPublica’s new foreclosure Facebook page.
Resources

The State of HAMP
See the performance of all the mortgage servicers.
Making Home Affordable.gov
The administration’s web site for the foreclosure prevention program. Provides an FAQ, homeowner examples, and other tools to see whether you might qualify for the program.
Foreclosure Avoidance Counselors
A list of HUD-approved housing counseling agencies nationwide.
FTC Tips for Mortgage Servicing Consumers
Tips for homeowners from the Federal Trade Commission.
Program Guidelines for Mortgage Servicers
These rules lay out how mortgage servicers are supposed to conduct the program.
Calculated Risk
A finance and economics blog that provides news and metrics on the state of the housing market.

Did Your Bank Wrongfully Seek to Foreclose on You?

We’d like to hear from current and former homeowners who wrongfully faced foreclosure in the last couple of years.
Do You Work in Mortgage Servicing or as a Foreclosure File Reviewer?

If you’ve worked for a servicer or on the Independent Foreclosure Review, contact our lead reporter.

Last week we reported that Bank of America, according to bank employees and internal memos and emails, is performing much of the work itself. Now, a ProPublica examination of contracts that outline what work the banks would do on the review shows that America’s four largest banks all planned to participate heavily in evaluating whether homeowners were harmed. Three of the four banks would even help set how much compensation victimized homeowners would receive.

The four banks — Wells Fargo, Citibank, JPMorgan Chase, and Bank of America — together account for about three quarters of the 4.4 million homeowners eligible for the program.

The review was designed to work like this: Each bank or mortgage servicer would hire an “independent consultant” to evaluate that bank’s foreclosure cases, identify who was harmed and determine how much compensation each victim deserved. The maximum cash compensation a homeowner can receive through the review is $125,000. No money has been awarded yet.

However, the secrecy of the program makes it impossible to know for sure how it’s actually being conducted. After being pushed by Congress and borrower advocates, bank regulators publicly posted the contracts between each bank and the consultant each hired last year to provide the “independent” review of foreclosure cases. It’s these contracts that show that the banks planned to perform much of the work themselves.

Yet the main regulator for the biggest banks, the Office of the Comptroller of the Currency (OCC), said the contracts don’t accurately describe how the reviews work now. “Much has changed,” OCC spokesman Bryan Hubbard told ProPublica.

The OCC did confirm that some banks’ mortgage servicing divisions are coming up with “self-identified findings of harm/no harm” and presenting them to the independent consultants. But the OCC would not specify which banks are doing this.

Moreover, said Hubbard, any such finding by the banks “does not influence the consultant.”

Advocates disagree. “It’s hard to imagine that it doesn’t influence the outcome,” said Alys Cohen of the National Consumer Law Center. “The consultant is supposed to act like an arbiter between the mortgage servicer and the homeowner — except the consultant is not only paid by the servicer, the servicer can put their finger on the scale. Meanwhile, the homeowner is totally in the dark once they send in their application.”

What the Contracts Say

Like Bank of America, the other three big banks hired their “independent consultants” last year. Their contracts all describe a similar process for handling homeowner claims: After a homeowner submits a form detailing the bank’s ostensible errors or abuses, the bank itself would perform a review of the case to determine if the homeowner was victimized by the bank’s own practices. The bank would then pass on its findings to the consultant, which would make the final decision of how much compensation, if any, the homeowner would receive. The program launched in November of 2011, a couple of months after the contracts were signed.

Two companies — Promontory Financial Group and PricewaterhouseCoopers (PwC) — won half of the contracts awarded so far: Promontory is handling the reviews for three banks, PwC for four.

Wells Fargo’s contract with Promontory states that the bank would “process the complaint, prepare a recommended disposition, and provide the complaint, the recommendation, and supporting documentation to Promontory for independent review and decisioning [sic].”

Promontory, which is also serving as the consultant for Bank of America’s foreclosure review, referred ProPublica back to the same comment it made in response to our previous story and declined to comment further. In response to Bank of America internal documents that indicated Promontory would be relying on Bank of America’s analysis for its determinations, a Promontory spokeswoman called the bank’s work merely “clerical” and said Promontory employees analyze the material assembled by Bank of America “independently with no involvement from the servicer.”

Wells Fargo did not directly respond to ProPublica’s questions about whether its employees were analyzing homeowners’ files. Instead, spokeswoman Vickee Adams said the bank’s role “is focused on providing relevant documents and information to the independent consultants, clarifying or confirming facts or findings and providing all details surrounding the events that occurred related to the foreclosure process.”

Citibank’s contract language with its consultant, PwC, is very similar to Wells Fargo’s. “It is the responsibility of Citibank to prepare the case file and conduct the initial review of the complaint,” it states. “Citibank will then forward the in-scope complaints, a report of Citibank’s findings and its proposed resolution to PwC for independent review.”

A PwC spokesperson declined to comment. Citi spokesman Mark Rodgers said only, “We are compliant with the process we agreed to with the regulators.”

Chase’s contract with Deloitte & Touche (D&T) is a little different. It says that the consultant would do its own review of homeowner complaints, while Chase “will also conduct its own review. D&T may consider the results of [Chase’s] review in preparing its findings.”

Neither Chase nor Deloitte responded directly to ProPublica’s questions about the bank’s role in the reviews. “We continue to work closely with the Independent Consultant, the regulators and the consortium [of banks involved in the program] on the final steps in the Independent Foreclosure Review process,” was the entire response from Chase spokeswoman Amy Bonitatibus.

“We are conducting an independent review of the files and it is that review alone that will drive our recommendations,” said Deloitte spokesman Jonathan Gandal. “Beyond that, we are not at liberty to discuss matters pertaining to our services.”

Smaller Banks

The contracts of many smaller banks are different. The contracts of four banks — Ally Financial/GMAC, MetLife Bank, U.S. Bank, and Sovereign Bank — have clauses that say the banks would gather documents for the consultant’s review, but there is no mention of their employees actually analyzing the files and forwarding recommendations to the independent consultants. One bank, OneWest, had no language at all in its contract about bank employees gathering documents or reviewing files. OneWest declined to comment.

The contract between GMAC Mortgage, the fifth largest servicer, and PwC states that GMAC is “responsible for assembling the documents necessary for the review” and should see which files require “immediate action.” (The parent company for GMAC Mortgage, which declared bankruptcy earlier this year, is Ally Financial.)

GMAC spokeswoman Susan Fitzpatrick said the servicer only reviewed complaints when the homeowner had not yet been foreclosed on. The purpose of those reviews, she said, was to postpone the foreclosure sale before it occurred if it appeared that any errors had taken place. Regulators have said homeowners who submit complaints while still in foreclosure will “receive expedited attention.”

GMAC is not reviewing the files of homeowners who have already lost their homes, said Fitzpatrick, and the servicer “will not propose borrower resolutions,” she said. PwC alone makes the final assessment, she said.

PwC declined to comment.

Regulators Differ

The OCC is the primary regulator for most of the 14 banks conducting the foreclosure reviews, but the Federal Reserve oversees four of them. The Fed says that none of its banks are performing regular analyses of the borrower complaints.

But some of the banks overseen by the Fed do have language in their contracts saying the banks themselves would be reviewing the homeowners’ complaints. SunTrust, for instance, has language in its contract very similar to what’s in Bank of America’s. The Fed is also overseeing the review for a subsidiary of Chase, EMC Mortgage Corporation, which has the same language in its contract that Chase does for its main servicing divisions.

Federal Reserve spokeswoman Barbara Hagenbaugh said that regardless of the contracts, none of the servicers it is overseeing are forwarding analyses of the homeowner files to the consultant. “For a brief period of time early in the process, we understand one servicer forwarded a preliminary analysis of files to its consultant,” she said. “The consultant has assured us these files were not relied on for its assessments and those analyses are no longer forwarded.

“Federal Reserve examiners are monitoring the consultants and servicers closely to ensure the process remains independent.”

By contrast, the OCC described a general procedure followed by the banks it oversees that includes the bank analyzing the homeowners’ files and forwarding that analysis to the consultant.

“[The] servicer generally performs its own review of how it administered the file, and will communicate its rationale and self-identified findings of harm/no harm to the independent consultant,” the OCC’s Hubbard wrote in an email to ProPublica. “The independent consultant may review the servicer’s rationale/findings, but will conduct its own review and draw its own conclusions.”

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Friday, October 19, 2012 7:03 AM
To: Charles Cox
Subject: TILA does not require a loan servicer to identify who owns a loan, unless the servicer owns the loan by assignment

TILA does not require a loan servicer to identify who owns a loan, unless the servicer owns the loan by assignment

· Sheppard Mullin Richter & Hampton LLP

· Alejandro E. Moreno and Shannon Petersen

·

· October 16 2012

·

·

In Gale v. First Franklin Loan Services, 686 F.3d 1055 (9th Cir. 2012), the Ninth Circuit held that a borrower has no right under the federal Truth in Lending Act (“TILA”) to require a loan servicer to identify the owner of a loan obligation. TILA requires a servicer to identify the owner of the loan only when the servicer owns the loan, and only when the servicer owns the loan by assignment.

In Gale, the borrower refinanced his home mortgage with First Franklin Loan Services, which both originated the loan and serviced it. After the borrower became delinquent, he demanded First Franklin identify the “true” owner of the obligation. First Franklin ignored the requests and proceeded with foreclosure. The borrower filed suit claiming, in part, a violation of TILA. The trial court dismissed the TILA cause of action as a matter of law, and the Ninth Circuit affirmed.

On appeal, the borrower argued that the plain language of TILA, 15 U.S.C. Section 1641(f)(2), required First Franklin to respond to his inquiries regarding the identity of the owner of the loan. That section states that upon written request, “the servicer shall provide the obligor . . . with the name, address, and telephone number of the owner of the obligation . . .” The Ninth Circuit explained that this provision does not apply to all loan servicers, but only those servicers who are owners of the loan by assignment after loan origination. In this case, First Franklin was both the original lender and the servicer, so this section did not apply.

The Ninth Circuit also noted that, since a 2010 amendment to the Real Estate Settlement Procedures Act, all servicers must identify the owner of a real estate loan if requested, under all circumstances. This change, however, does not apply retroactively to claims (like the claim in Gale) that accrued prior to 2010.

Gale v. First Franklin Loan Se.docx

From: Charles Cox [mailto:charles@ldapro.com]
Sent: Monday, October 15, 2012 8:01 AM
To: Charles Cox
Subject: Weekly legal newsletter – Leave to Amend Pleading or Compulsory Cross-Complaint

By Stan Burman:

The topic of this issue of the newsletter is a brief discussion about requesting leave of court to file a compulsory cross-complaint in the State of California. Many times during the course of litigation, particularly during the discovery process, a party will discover facts that support affirmative claims for relief which evolve from "a series of acts or occurrences logically interrelated", which are therefore related causes of action subject to forfeiture if not pleaded in the action.

Code of Civil Procedure § 426.50 states that, “A party who fails to plead a cause of action subject to the requirements of this article, whether through oversight, inadvertence, mistake, neglect, or other cause, may apply to the court for leave to amend his pleading, or to file a cross-complaint, to assert such cause at any time during the course of the action. The court, after notice to the adverse party, shall grant, upon such terms as may be just to the parties, leave to amend the pleading, or to file the cross-complaint, to assert such cause if the party who failed to plead the cause acted in good faith. This subdivision shall be liberally construed to avoid forfeiture of causes of action”.

Note that section 426.50 also allows a party to request leave of court to amend their cross-complaint to add additional causes of action at any time during the course of the action.

A California Court of Appeal has ruled that a motion for leave of court to file a cross-complaint at any time during the course of an action must be granted unless bad faith of the moving party is shown.

See Silver Organizations Ltd. v. Frank (1990) 217 Cal.App 3d 94, 98-99 which stated that, “The legislative mandate is clear. A policy of liberal construction of section 426.50 to avoid forfeiture of causes of action is imposed on the trial court. A motion to file a cross-complaint at any time during the course of the action must be granted unless bad faith of the moving party is demonstrated where forfeiture would otherwise result. Factors such as oversight, inadvertence, neglect, mistake or other cause, are insufficient grounds to deny the motion unless accompanied by bad faith”

The Court also ruled in Silver Organizations Ltd. v. Frank, at 100, that “Our review of the entire record fails to reveal, directly or inferentially, any substantial evidence of bad faith by the appellants. Looking at the entire period between the filing of the complaint and the denial of the section 426.50 motion, a time frame of less than six months, we find nothing in appellants’ words or conduct remotely suggesting dishonest purpose, moral obliquity, sinister motive, furtive design or ill will”.

In Silver Organizations Ltd. v. Frank the Court of Appeal ruled that a time period of less than six months between the filing of a complaint and a motion to file a compulsory cross-complaint did not constitute bad faith

While other cases have ruled that a lengthy delay of over six months may constitute bad faith, the decision in Silver Organizations Ltd. v. Frank has not been disapproved or otherwise disagreed with in any other published case in the State of California as of the date of this newsletter. In fact, several up to date legal treatises mention Silver Organizations Ltd. v. Frank in their 2012 edition, including the Rutter, Cal. Practice Guide: Civ. Pro. Before Trial CH. 6-D, D. Cross-Complaint, and California Civil Practice Procedure s 9:125, Time for filing cross-complaints.

Howver a party should file their motion within six months or less to avoid the possibility of the court denying their motion.

The author of this newsletter, Stan Burman, is a freelance paralegal who has worked in California civil litigation since 1995.

Since the Fed can create unlimited money, why not pay off every mortgage in the land? That’s only $9.7 trillion, and if the Fed wanted to unleash an orgy of spending, that would certainly do it. Trillions in losses would be filled with “free money,” since the Fed would pay the full value of all mortgages. —- Charles Hugh Smith, Of Two Minds

It is really up to each of us to demand, require and force an accounting for the money that has been taken out of the system and stolen from creditors and borrowers BEFORE we allow another foreclosure. — Neil F Garfield, www.livinglies.me

Editor’s Note: The article below by Charles Hugh Smith from Of Two Minds, strikes with great clarity at the heart of the nonsense we are calling “foreclosure”, and which is corrupting title for decades, taking the confidence in the U.S. economy and the U.S. dollar down with it.

This is the first article I have received that actually addressed the issue that the mortgages, especially the worst ones, were paid off in full. They were paid in full because the supposed mortgage bonds that included shares of the mortgage loans were sold to the Federal Reserve 100 cents on the dollar. Now either those mortgage bonds were real or they were not real. There is nothing in between. What we know for a fact is that the entire financial industry is treating them as real.

The ownership of the bonds was transferred from the trusts, therefore, to the Federal Reserve. While there is little documentation we can see that reveals this, there is no other logical way for the Federal reserve to even claim that it was “buying” the mortgage bonds and the loans.

Either each trust became a trust solely for the Federal Reserve, or the Federal Reserve, bought the bonds directly from the investors.  But since everyone is treating the trusts as valid REMIC entities that do not exist for tax or other business purposes, then the trust did not own the bonds, and only the investors owned the bonds. But they were not paid. The Banks were paid and still allowed to foreclose — but for who?

If the banks took payments on behalf of the REMICs, then they owe a distribution to the investors whose losses, contrary to the reports from the banks become fully cured. That means the creditor on on the mortgage bond has been paid off in whole or in part. That in turn means, since a creditor can only be paid once on a debt, that the amount that SHOULD have been credited to the investors  SHOULD have reduced the receivable. The reduction in the receivable to the creditor should correspondingly reduce the payable due from the borrower. Thus no “principal reduction” should be required because the loan is already PAID.

Why then, is anyone allowing foreclosure of the mortgage loans except in the name of the Federal Reserve? This article explains it. For the full article go to Smith Article on Rule of Law

From the Smith Article:
In a nation in which rule of law existed in more than name, here’s what should have happened:

1. The scam known as MERS, the mortgage industry’s placeholder of fictitious mortgage notes, would be summarily shut down.

2. All mortgages in all instruments and portfolios, and all derivatives based on mortgages, would be instantly marked-to-market.

3. All losses would be declared immediately, and any institution that was deemed insolvent would be shuttered and its assets auctioned off in an orderly fashion.

4. Regardless of the cost to owners of mortgages, every deed, lien and note would be painstakingly delineated or reconstructed on every mortgage in the U.S., and the deed and note properly filed in each county as per U.S. law.

That none of this has happened is proof-positive that the rule of law no longer exists in America. The term is phony, a travesty of a mockery of a sham, nothing but pure propaganda. Anyone claiming otherwise: get the above done. If you can’t or won’t, then the rule of law is merely a useful illusion of a rapacious, corrupt, extractive, predatory neofeudal Status Quo.

The essence of money-laundering is that fraudulent or illegally derived assets and income are recycled into legitimate enterprises. That is the entire Federal Reserve project in a nutshell. Dodgy mortgages, phantom claims and phantom assets, are recycled via Fed purchase and “retired” to its opaque balance sheet. In exchange, the Fed gives cash to the owners of the phantom assets, cash which is fundamentally a claim on the future earnings and productivity of American citizens.

Some might argue that the global drug mafia are the largest money-launderers in the world, and this might be correct. But $1.1 trillion is seriously monumental laundering, and now the Fed will be laundering another $480 billion a year in perpetuity, until it has laundered the entire portfolio of phantom mortgages and claims.

The rule of law is dead in the U.S. It “cost too much” to the financial sector that rules the State, the Central Bank and thus the nation. Once the Fed has laundered all the phantom assets into cash assets and driven wages down another notch, then the process of transforming a nation of owners into a nation of serfs can be completed.

Here’s the Fed’s policy in plain English: Debt-serfdom is good because it enriches the banks. All hail debt-serfdom, our goal and our god!

In case you missed this:

The Royal Scam (August 9, 2009):

Once all the assets in the country had been discounted, the insiders then repatriated their money and bought their neighbor’s fortunes for pennies on the dollar, finding cheap, hungry, competitive labor, ready to compete with even 3rd world wages. The prudent, hard-working, and savers (the wrong people) were wiped out, and the money was transferred to the speculators and insiders (the right people). Massive capital like land and factories can not be expatriated, but are always worth their USE value and did not fall as much, or even rose afterwards as with falling debt ratios and low wages these working assets became competitive again. It’s not so much a “collapse” as a redistribution, from the middle class and the working to the capital class and the connected. …And the genius is, they could blame it all on foreigners, “incompetent” leaders, and careless, debt-happy citizens themselves.

But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime. Frederic Bastiat, 1850

Background and Purpose of Evaluation The FDIC has supervisory responsibilities for ensuring that the financial institutions it supervises comply with fair lending, privacy, and various other consumer protection laws and regulations. The FDIC uses its compliance examination process to ascertain the effectiveness of an institution’s program for complying with consumer protection laws and regulations. The compliance examination and follow-up supervisory attention to violations and other deficiencies help to ensure that consumers and businesses obtain the benefits and protection afforded them by law. The objective of our audit was to determine whether the FDIC’s Division of Supervision and Consumer Protection (DSC) adequately addresses the violations and deficiencies reported in compliance examinations to ensure that FDIC-supervised institutions take appropriate corrective action.

Results of Audit DSC identified and reported 9,534 significant compliance violations during 2005. Of the 1,945 financial institutions examined in 2005, 1,607 (83 percent) had been cited with compliance violations deemed significant by the FDIC. Also, 837 (43 percent) of the 1,945 financial institutions examined had repeat, significant violations, of which 708 (85 percent) institutions were rated “1” or “2.” According to DSC officials, of the institutions examined in 2005, 96 percent were rated “1” or “2,” indicating a strong or generally strong compliance position, while 4 percent were rated “3,” “4” or “5,” indicating various levels of concern. DSC officials stated that the FDIC’s supervisory approach is to increase the level of attention as an institution’s compliance position worsens, and during 2005, DSC downgraded 297 institutions’ compliance ratings, issued 72 informal and 36 formal enforcement actions for compliance, and made 43 compliance referrals to the Department of Justice or other authorities. However, DSC had not adequately ensured that the financial institutions in our sample had taken appropriate corrective actions for repeat, significant violations that had been cited during examinations. In many cases, consistent with the flexibility allowed by DSC guidance for “1” or “2” rated institutions, DSC waited until the next examination to follow up on repeat, significant compliance violations that had been identified in multiple examinations before taking supervisory action. Specifically, we found that: of the 51 reports of examination (ROE) we reviewed for 14 sampled institutions, DSC had cited 431 significant violations related to 8 consumer protection laws and regulations; 47 of the 51 ROEs reviewed identified significant compliance violations; 5 of the 47 ROEs resulted in informal supervisory actions and prompted follow-up activities, and 1 visitation for a new FDIC-supervised institution also prompted follow-up activities, but DSC did not follow up on the remaining 41 ROEs until the next examination; 11 of the 14 sampled institutions had repeat, significant violations; and all 14 sampled institutions had deficiencies and weaknesses noted in their compliance management system (CMS) in at least 1 ROE. Also, DSC had identified serious deficiencies and weaknesses in some of the institutions’ CMSs that remained uncorrected for extended periods. As a result of repeat, significant violations, consumers and businesses of the affected institutions may not obtain the benefits and protection afforded them by consumer protection laws and regulations. We also identified certain other matters for DSC’s attention relating to (1) performance goals associated with supervisory actions taken for compliance violations and (2) consideration of an institution’s training program in compliance ratings. Recommendations and Management Response The report makes three recommendations for DSC to strengthen its monitoring and follow-up processes by revising guidance on follow-up, considering supervisory action when an institution’s corrective action is not timely or when significant violations recur, and revising its performance goal. DSC’s management will reevaluate applicable guidance; analyze the prevalence and scope of repeatedly cited, significant violations over the next year; and make enhancements or clarifications as necessary. Management’s planned actions are responsive to the recommendations.

TABLE OF CONTENTS

This report presents the results of our audit of the FDIC Division of Supervision and Consumer Protection’s (DSC) supervisory actions taken for compliance violations of consumer protection laws and regulations. The overall audit objective was to determine whether DSC adequately addresses the violations and program deficiencies reported in compliance examinations to ensure that FDIC-supervised institutions take appropriate corrective action. Over 20 consumer protection laws and related regulations are addressed by FDIC compliance examinations. For purposes of this audit, we focused on compliance violations related to eight specific areas.^{[ 1 ]} Appendix I of this report discusses our objective, scope, and methodology in detail.

BACKGROUND

The FDIC has supervisory responsibilities for ensuring that the financial institutions it supervises comply with fair lending, privacy, and various other consumer protection laws and regulations. The compliance examination is the primary means by which the FDIC determines the extent to which a financial institution is complying with these requirements. The FDIC also conducts visitations and investigations. Visitations are used to review the compliance posture of newly chartered institutions coming under FDIC supervision or to follow up on an institution’s progress on corrective actions. Investigations are used to follow up on a particular consumer’s inquiries or complaints.

The compliance examination and follow-up supervisory attention accorded to violations and other program deficiencies^{[ 2 ]} helps to ensure that consumers and businesses obtain the benefits and protections afforded them by law. In addition, violations of some of the laws and regulations give rise to possible civil liability for damages and, in TILA cases, administrative adjustments for understated finance charges or annual percentage rates (APR) on loans. For example, TILA requires institutions to reimburse customers when disclosure errors are identified involving an inaccurate APR or finance charge and that error has resulted in “gross negligence” or a “clear and consistent pattern or practice of violations.” These violations, in certain cases, can also result in civil money penalties. Effective examinations and supervision should help to identify violations and preclude or minimize their recurrence, thereby reducing the potential for penalties or reimbursements.

The presence of violations and the absence of an effective compliance management system (CMS)^{[ 3 ]} to manage a financial institution’s compliance responsibilities also reflect adversely on the institution’s senior bank management and board of directors and may carry over into other areas of management responsibility. Additionally, DSC considers compliance with fair lending, privacy, and other consumer protection requirements when reviewing an application for entry into or expansion within the insured depository institution system.

DSC examiners follow the revised Compliance Examination Procedures (Transmittal No. 2005-035, dated August 18, 2005) in examining institutions for compliance with consumer protection laws and regulations. The FDIC’s compliance examinations blend risk-focused and process-oriented approaches. Risk focusing involves using information gathered about a financial institution to direct FDIC examiner resources to those operational areas that present the greatest compliance risks. The compliance examination procedures state that “a financial institution must develop and maintain a sound CMS that is integrated into the overall management strategy of the institution.” Concentrating on the institution’s internal control infrastructure and methods, or the “process,” used to ensure compliance with federal consumer protection laws and regulations acknowledges that the ultimate responsibility for compliance rests with the institution and encourages examination efficiency.

Compliance examinations are conducted every 12-36 months, depending on an institution’s size and the compliance and Community Reinvestment Act (CRA) ratings assigned at the most recent examination. The FDIC follows the Uniform Interagency Consumer Compliance Rating System approved by the Federal Financial Institutions Examination Council (FFIEC) in 1980. Appendix II discusses the rating system and describes how consumer compliance ratings are defined and distinguished.

RESULTS OF AUDIT

DSC identified and reported 9,534 significant^{[ 4 ]} compliance violations during 2005.^{[ 5 ]} Of the 1,945 financial institutions examined in 2005, 1,607 (83 percent) institutions had been cited with compliance violations deemed significant by the FDIC. Also, 837 (43 percent) of the 1,945 financial institutions examined had repeat,^{[ 6 ]} significant violations, of which 708 (85 percent) institutions were rated “1” or “2.”

According to DSC officials, of the institutions examined in 2005, 96 percent were rated “1” or “2,” indicating a strong or generally strong compliance position, while 4 percent were rated “3,” “4” or “5,” indicating various levels of concern. DSC officials stated that the FDIC’s supervisory approach is to increase the level of attention as an institution’s compliance position worsens, and during 2005, DSC downgraded 297 institutions’ compliance ratings, issued 72 informal and 36 informal enforcement actions for compliance, and made 43 compliance referrals to the Department of Justice or other authorities.

However, DSC had not adequately ensured that the financial institutions in our sample had taken appropriate corrective actions for repeat, significant violations that had been cited during examinations. In many cases, consistent with the flexibility allowed by DSC guidance for “1” or “2” rated institutions, DSC waited until the next examination to follow up on repeat, significant compliance violations that had been identified in multiple examinations before taking supervisory action. Specifically, we found that:

• of the 51 reports of examination (ROE) we reviewed for 14 sampled institutions, DSC cited 431 significant violations related to 8 consumer protection laws and regulations;
• 47 of the 51 ROEs reviewed identified significant compliance violations;
• 5 of the 47 ROEs resulted in informal supervisory actions^{[ 7 ]} and prompted follow-up activities, and 1 visitation for a new FDIC-supervised institution also prompted follow-up activities, but DSC did not follow up on the remaining 41 reports until the next examination;
• 11 of the 14 sampled institutions had repeat, significant violations; and
• all 14 sampled institutions had deficiencies and weaknesses noted in their CMS in at least 1 ROE. Also, DSC had identified serious deficiencies and weaknesses in some of the institutions’ CMSs that remained uncorrected for extended periods.

As a result of these repeat, significant violations, consumers and businesses of the affected institutions may not obtain the benefits afforded them by consumer protection laws and regulations.

We also identified certain other matters that warrant management attention relating to (1) performance goals associated with supervisory actions taken for compliance violations and (2) consideration of an institution’s training program in compliance ratings.

FOLLOW-UP FOR COMPLIANCE VIOLATIONS

DSC often identified and reported significant compliance violations and program deficiencies in multiple examinations over a period of years before taking supervisory action to address repeat violations. DSC’s guidance does not require follow-up between examinations or enforcement actions for institutions that repeatedly violate consumer protection laws and regulations in a manner cited as significant by FDIC examiners. Instead, DSC’s guidance gives staff the flexibility to wait until the next examination to follow up on significant violations, unless the institution is rated a “4” or “5.” As a result, consumers and businesses of the affected institutions may not obtain the benefits and protection afforded them by these laws and regulations.

DSC Compliance Examination Guidance

DSC’s revised Compliance Examination Procedures state that compliance examinations are the primary means the FDIC uses to determine whether a financial institution is meeting its responsibility to comply with the requirements and proscriptions of federal consumer protection laws and regulations.

The Compliance Examination Procedures do not require follow-up between examinations on significant compliance violations. Significant violations include those violations that meet any of the following criteria:

1. recurrent and outstanding for an extended period of time;
2. affect, or could affect, a large number of transactions or consumers in a way that has, or could have, severe consequences for the consumers or the financial institution;
3. continuation of a violation cited at the previous examination and is repeated in exactly the same manner at the current examination; or
4. willful act or omission to defeat the purpose of, or circumvent, law or regulation.

The Compliance Examination Procedures state that recommendations by the examiner-in-charge (EIC) for corrective actions that address the specific deficiencies noted in the narrative of the ROE should be appropriate in light of the size and complexity of the institution’s operations. The recommendations should enable the institution to resolve current CMS deficiencies and regulatory violations and to minimize future violations by making improvement to its CMS. Ultimately, the board of directors and management of the institution are responsible for determining the actions they will take to address the examination findings. The EIC should consider identifying by name those individuals who commit to specific corrective actions, in order to assist in follow-up at future examinations.

Follow-up on Identified Violations

For 41 (80 percent) of the 51 ROEs in our sample, DSC did not follow up until the next examination, usually 2 or 3 years later, to determine whether the institution had corrected its significant violations. Of the remaining 10 ROEs, 5 ROEs resulted in informal supervisory action, such as bank board resolutions (BBR)^{[ 8 ]} and memoranda of understanding (MOU)^{[ 9 ]} requiring banks to provide DSC with memoranda or progress reports documenting corrective actions; 2 ROEs were visitations;^{[ 10 ]} and 3 ROEs contained no significant violations.

As shown in Table 1 below, of the 431 significant violations we reviewed, 111 (26 percent) violations were TILA violations and 103 (24 percent) violations were for RESPA violations. Both of these statutes are intended to provide consumers with certain rights dealing with credit and real estate transactions. TILA requires that institutions disclose their terms and cost to consumers who receive credit. The statute also gives consumers the right to rescind certain credit transactions that involve a lien on a consumer’s principal dwelling, regulates certain credit card practices, and provides a means for fair and timely resolution of credit billing disputes. RESPA requires that institutions provide consumers with pertinent and timely disclosures regarding real estate settlement costs. Further, RESPA is intended to protect consumers against certain abusive practices, such as kickbacks, and places limitations on the use of escrow accounts.

Table 1: Total Significant Violations for the Sampled Institutions

Source: OIG analysis of ROEs for the 14 sampled institutions.

Repeat, Significant Violations

Of the 14 institutions we selected for review, 11 (79 percent) had repeat, significant violations. Seven institutions violated the same consumer protection laws and regulations during three or more consecutive examination cycles. No informal actions were taken for 6 of the 11 institutions. The remaining five institutions were subject to informal supervisory actions. Further, three of the five institutions were again cited with repeat, significant violations when the informal actions were terminated by DSC management.^{[ 11 ]} Consequently, the supervisory actions were not always effective in ensuring that these institutions were in compliance with consumer protection laws and regulations.

According to DSC, examiners consider the circumstances in determining whether a violation is a repeat violation and indicative of a weakness in procedures or a failure to take appropriate corrective action. Often, a violation code can be used in ROEs many times, but its use could be indicative of a number of distinct issues, problems, or causes. DSC violation codes were developed broadly, and DSC stated that a repeat violation at one examination can result from a different set of circumstances than had been in place at the prior examination. Repeat violations may also arise when regulatory requirements are changed or amended. For example, the bank may have corrected the previous issue, but a regulatory change could result in a new infraction of the same code.

However, the FDIC’s Compliance Examination Procedures specifically state that violations are significant if they had appeared in the Significant Violations section of the ROE for the previous examination and are repeated in exactly the same manner at the current examination. Isolated repeat violations are not categorized as significant in the examination reports. Further, for our analysis of the repeat, significant violations involving 11 institutions, we relied on the examiners’ description of the significant violations as “repeat violations” in the Significant Violations sections of the ROEs.

Supervisory Actions

Supervisory actions taken by DSC did not always ensure that institutions had corrected repeat, significant violations. Of the 14 institutions we reviewed, 5 institutions were subject to informal supervisory actions once their rating had changed from a “2” to a “3.” Table 2 below provides a summary of the actions.

Table 2: Supervisory Actions Taken for Significant Violations

^a These supervisory actions were still in effect as of the date of our review.
^b NA designates not applicable.

As shown in Table 2, repeat, significant violations still had not been corrected at three of the five institutions subject to informal supervisory actions when these actions had been terminated. Further, DSC concluded that the institutions had adequately complied with the provisions of the actions, even though the examinations of the institutions continued to identify repeat violations. Pages 8-10 of this report discuss, in detail, examples of the institutions in our sample that had been subject to informal supervisory actions and cited with repeat violations at the subsequent examination when the actions were terminated.

DSC’s revised Formal and Informal Action Procedures (FIAP) Manual, dated December 9, 2005, states that the FDIC generally initiates formal or informal corrective action against institutions with a composite safety and soundness or compliance rating of “3,” “4,” or “5,” unless specific circumstances warrant otherwise. Informal action is generally appropriate for institutions that receive a composite rating of “3” for safety and soundness or compliance. This rating indicates that the institution has weaknesses that, if left uncorrected, could cause the institution’s condition to deteriorate. Formal action^{[ 12 ]} is generally initiated against an institution with a composite rating of “4” or “5” for safety and soundness or compliance if there is evidence of unsafe or unsound practices and/or conditions or concerns over a high volume or severity of violations at the institution. In more serious situations, however, formal action could be considered even for institutions that receive composite ratings of “1” or “2” for safety and soundness or compliance examinations to address specific actions or inactions by the institution. The FIAP manual also states that informal actions are particularly appropriate when the FDIC has communicated with bank management regarding deficiencies and has determined that the institution’s managers and board of directors are committed to, and capable of, taking corrective action with some direction but without initiation of a formal corrective action. However, informal actions are voluntary and not legally enforceable. As shown in Table 2 on the previous page, imposing informal actions does not necessarily result in the correction of repeat significant violations.

Compliance Management System

DSC did not adequately ensure that the financial institutions in our sample corrected compliance program deficiencies. All 14 institutions we reviewed had deficiencies and weaknesses noted in at least 1 ROE. In addition, as discussed in the next section of our report, DSC identified serious deficiencies and weaknesses in some of these financial institutions’ CMSs that remained uncorrected for extended periods.

To determine whether an institution has an effective CMS, DSC evaluates three interdependent elements, including (1) board management and oversight; (2) the institution’s compliance program, including training and monitoring; and (3) a compliance audit.^{[ 13 ]} According to the Compliance Examination Procedures, when all elements are strong and working together, an institution will be successful at managing its compliance responsibilities and risks now and in the future. Noncompliance of consumer protection laws and regulations can result in monetary penalties, litigation, and formal enforcement actions. The responsibility for ensuring that an institution is in compliance appropriately rests with the institution’s board of directors and management.

Although the Compliance Examination Procedures do not cite a regulation requiring FDIC-supervised institutions to have a CMS, the FDIC expects every FDIC-supervised institution to have an effective CMS adapted to its unique business strategy. In June 2003, the FDIC issued guidance related to the Compliance Examination Procedures, informing institutions that the Corporation had revised its approach to examining institutions for compliance with consumer protection laws and regulations.^{[ 14 ]} The new approach combined a risk-based examination process with an in-depth evaluation of an institution’s CMS.

Examples of Repeat, Significant Violations; CMS Deficiencies; and Supervisory Actions

The following examples illustrate repeat, significant compliance violations; CMS program deficiencies; and cases in which DSC supervisory actions were not always effective in ensuring that institutions took timely and complete corrective action.

• From 1997 to 2005, DSC cited 47 significant violations for Institution A, in our sample, that included 13 (28 percent) repeat violations. During examinations conducted in 1998, 2001, and 2003, Institution A was repeatedly cited for RESPA, TILA, HMDA, and TISA violations. As a result, DSC downgraded the institution’s compliance rating from a “2” to a “3,” and imposed an MOU in 2003, about 5 years after the initial citations. During the subsequent 2005 examination, the institution was cited for the fourth consecutive time for the same RESPA violation that had been cited in the 1998, 2001, and 2003 examinations and was cited for the third consecutive time for the same TILA and HMDA violations that had been identified in the 2001 and 2003 examinations. However, DSC concluded in its 2005 ROE that the MOU had proven to be an effective tool for correcting the deficiencies identified at previous examinations. As a result of the improvements, DSC recommended that the MOU be terminated. In addition, DSC reported continued program deficiencies, which included training, during two consecutive examinations.
• From 1997 to 2005, DSC cited 77 significant violations for Institution B, in our sample, that included 17 (22 percent) repeat violations. During examinations conducted in 1999, 2001, and 2003, Institution B was repeatedly cited for flood insurance, RESPA and HMDA violations.^{[ 15 ]} As a result of the 2003 examination, DSC downgraded the bank’s compliance rating from a “2” to a “3.” The bank adopted a BBR in 2004, about 5 years after the initial citations, requiring that bank management correct all violations listed in the compliance report and initiate appropriate procedures to prevent their recurrence. In its March 2005 ROE, DSC states that Institution B had adequately addressed the requirements of the BBR, even though DSC cited the bank for the fourth consecutive time for the same HMDA violation that had been cited in the 1999, 2001, and 2003 examinations. Further, DSC reported program deficiencies in five consecutive examinations, citing weaknesses in the CMS program that included a lack of comprehensive review procedures, training, and the bank’s audit function.
• From 1997 to 2005, DSC cited 44 significant violations for Institution F, in our sample, that included 5 (11 percent) repeat violations. During examinations conducted in 1998, 2000, and 2003, Institution F was repeatedly cited for RESPA violations. In the 1998 examination, when the initial citation was made, the bank promised future compliance. However, the same violation was cited at the subsequent 2000 examination and again in the 2003 ROE. During the 2005 examination, Institution F was also cited for repeat TISA and ECOA significant violations. Program deficiencies were also noted during two consecutive examinations. DSC recommended that the institution adopt a written CMS program and internal review procedures to prevent the recurrence of the violations.
• From 1997 to 2005, DSC cited 44 significant violations for Institution C, in our sample, that included 7 (16 percent) repeat violations. During examinations conducted in 1997, 2003,^{[ 16 ]} and 2005, Institution C was repeatedly cited for TILA violations. In the 1997 ROE, when the initial citation was made, bank personnel promised future compliance. However, the same violation was subsequently cited for the third time in the 2005 ROE when DSC downgraded the bank’s compliance rating from a “2” to a “3” and the bank adopted a BBR. In addition, DSC described the institution’s CMS as lacking a compliance program and internal monitoring procedures and having inadequate training and review procedures identified by three consecutive examinations.
• From 1997 to 2005, DSC cited 58 significant violations for Institution D, in our sample, that included 6 (10 percent) repeat violations. During examinations conducted in 1997, 1999, and 2002, Institution D was repeatedly cited for RESPA and other significant violations. The total number of significant violations more than doubled between the 1999 and 2002 examinations and were categorized by DSC as “more serious.” As a result, DSC downgraded the compliance rating for Institution D from a “2” in 1999 to a “3” in 2002. The 2002 ROE stated that the prior ROE informed the bank’s board and management that the number of violations had doubled and repeat violations had occurred because the written compliance policy had not been implemented and effective program tools such as monitoring, audit, and training had not been established or implemented. An MOU was imposed on the institution in 2003, and DSC conducted a visitation during 2004 to assess the bank’s compliance with the MOU. In response, the bank corrected a majority of the violations cited during the 2002 examination, but some violations had not been corrected. For example, during the 2005 examination, the institution was cited for the third consecutive time for the same flood insurance violation that had been cited in the 1999 and 2002 examinations.

Conclusion

The FDIC’s Deputy to the Chairman and Chief Operating Officer has said publicly that the FDIC’s supervision and enforcement of consumer laws and regulations are part of ensuring public confidence in the banking system. Without effective enforcement, consumers and businesses may not obtain the benefits and protection afforded them by such laws and regulations. Consumer protection laws are intended to deter financial institutions from committing such acts as:

• discrimination based on race, color, religion, national origin, sex, marital status, and age in any aspect of a credit transaction, including residential real-estate-related transactions, such as making loans to buy, build, repair, or improve a dwelling;
• failure to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process; and
• inaccurate and unfair credit billing, credit card, and leasing transactions.

In addition, violations of consumer laws and regulations can give rise to civil liability for damages and, in TILA cases, administrative adjustments for understated finance charges or annual percentage rates.

Recommendations

We recommend that the Director, DSC, strengthen guidance related to the monitoring and follow-up processes for compliance violations by revising:

1. The Compliance Examination Procedures to require follow-up between examinations on repeat, significant compliance violations and program deficiencies.
2. The FIAP manual to require consideration of supervisory actions when any institution’s corrective action on repeat, significant violations is not timely or when repeat, significant violations are a recurring examination finding.

OTHER MATTERS

DSC’s 2005 Performance Goals

DSC does not have a performance goal^{[ 17 ]} associated with the supervision of institutions rated “1,” “2,” and “3” that are cited with repeat, significant compliance violations. Instead, one of DSC’s 2005 annual performance goals was to take prompt and effective supervisory action to monitor and address problems identified during compliance examinations of FDIC-supervised institutions that receive a “4” or “5” rating for compliance with consumer protection and fair lending laws. However, of the 837 institutions with repeat significant violations in 2005, 708 (85 percent) institutions were rated “1” and “2” and 126 (15 percent) institutions were rated “3.” Only three institutions were rated “4,” and none were rated “5.”

Examiners are instructed to document, for each violation and CMS program deficiency, corrective actions taken by management during the examination and commitments for future corrective action. DSC does not require a response from bank management on corrective actions unless the institution is rated a “3,” “4,” or “5.” According to DSC, a “1” or “2” rating indicates that the institution has a CMS that is sufficient for correcting violations and deficiencies in the normal course of business. However, examinations of institutions rated “1” or “2” are identifying numerous instances of repeat, significant violations. As a result, the FDIC’s performance goals did not address the majority of repeat, significant violations.

Recommendation

We recommend that the Director, DSC, revise:

3. DSC’s performance goals to focus more broadly on institutions with repeat, significant violations.

Ratings Consideration of Institution Compliance Training

As summarized in Appendix II of this report, each financial institution is assigned a consumer compliance rating predicated upon an evaluation of the nature and extent of its present compliance with consumer protection and civil rights statutes and regulations and the adequacy of its operating systems designed to ensure compliance on a continuing basis.

The FDIC’s compliance ratings standards specifically state, “An institution that is assigned a rating of ‘2’ is in generally strong compliance. Management is capable of administering an effective compliance program. Compliance training is satisfactory, and there is no evidence of practices resulting in repeat violations.”

While we are not questioning the assigned rating or the relative weighting given to the training component of the compliance program, we are nonetheless concerned about the apparent inconsistency between the ROEs and the ratings’ definitions. Specifically, we observed that the narratives for 29 (81 percent) of the 36 ROEs for institutions in our sample assigned a “2” rating appeared inconsistent with the definition of a “2” rating. All 29 of the ROEs identified the lack of training as the cause or a contributing factor for the significant violations identified in the ROEs. However, compliance ratings standards state that training has to be satisfactory for a “2” rating. In addition, 11 of the 14 institutions in our sample that were rated a “2” had repeat significant violations as identified by DSC. The examples below illustrate that the ROE narratives for these 29 institutions were not consistent with the definition of a “2” rating.

• Institution G’s 2005 ROE summary states, “The bank’s training program is generally adequate; however, several of the violations noted in this report are attributed to a lack of training. The lack of appropriate monitoring procedures and training has resulted in 15 violations including reimbursable violations of [TILA], repeat violations of Equal Credit Opportunity and Consumer Protection in the Sales of Insurance, and violations of Home Mortgage Disclosure and Flood Insurance, among others.”
• Institution H’s 1998 ROE summary states “The compliance program deficiencies include weak monitoring, poor audit coverage and response time, as well as inefficient training.” DSC cited seven significant violations, including RESPA, Flood Insurance, EFTA, and HMDA violations.
• During its 1997 examination, Institution D was cited for 18 significant violations that were attributed to management oversight and being unaware or misunderstanding the specific compliance requirements. In 1999, DSC cited Institution D for 19 violations, including a repeat RESPA violation. DSC reported that “The bank has a written, Board-approved compliance policy that calls for the development of compliance procedures, staff training, and periodic testing. However, the policy has not been implemented to any significant degree.” DSC further reported that “bank management should take immediate steps to reinforce the bank’s compliance efforts through some form of systematic training and the establishment of internal monitoring procedures.” In 2003, over 3 years later, DSC imposed an MOU on the bank, recommending that training be improved. DSC conducted a visitation in 2004 and reported that the institution had made good progress in improving its training system. The institution’s rating was upgraded to satisfactory in 2005, even though four significant violations were cited, and one was a repeat violation cited in the previous two examinations.

We are not making any recommendations on this observation. DSC officials told us that an FFIEC task force is reviewing the definitions of the compliance ratings for institutions. We encourage DSC to share our observation with the task force for its consideration when revising the compliance rating definitions.

CORPORATION COMMENTS AND OIG EVALUATION

On September 29, 2006, the Acting Director, DSC, provided a written response to a draft of this report. The DSC response is presented in its entirety in Appendix V. Overall, DSC agreed to take corrective actions that are responsive to the recommendations. Appendix VI contains a summary of management’s response to the recommendations. The recommendations are resolved but will remain open until we have determined that the agreed-to actions have been completed and are effective.

In response to recommendations 1 and 3, DSC stated that it intends to analyze the prevalence and scope of repeatedly cited, significant violations to determine whether any changes in DSC policies and/or performance goals are necessary. DSC will complete this analysis and implement appropriate actions by September 30, 2007.

In response to recommendation 2, DSC stated that current FDIC guidance already permits DSC to consider taking supervisory action against highly rated banks. Further, DSC stated that the FIAP manual presents a clear statement of DSC policy as follows:

In more serious situations, however, formal action could be considered even for institutions that receive composite ratings of “1” or “2” for safety and soundness or compliance examinations to address specific actions or inactions by the institution.

Nonetheless, DSC agreed to reevaluate current FDIC and FFIEC guidance to determine whether enhancements or clarifications are needed. DSC will complete this process by September 30, 2007. With regard to this recommendation, we encourage the FDIC to consider the full range of supervisory actions available to address repeat, significant compliance violations, not just formal actions as addressed in the FIAP manual.

In addition to specifically addressing the recommendations in our report, DSC’s response included general comments regarding our findings. The response also discussed DSC’s commitment to consumer protection and its response to significant violations discovered during compliance examinations.

In discussing its commitment to consumer protection, DSC stated that, during the 8-year period covered by our audit, DSC issued 1,075 formal and informal enforcement actions to ensure that institutions under FDIC supervision complied with consumer protection laws and regulations. DSC also stated that, over the same period, it required banks to refund over $10 million to 220,567 consumers as a result of TILA violations and to make over $5 million in reimbursement to consumers harmed by unfair and deceptive practices prohibited by the Federal Trade Commission Act.

With respect to violations discovered during compliance examinations, DSC pointed out that, although our report focused on repeat, significant violations cited in examination reports, all but five of these reports were assigned either a “1” or a “2” compliance rating to the banks involved. DSC further stated that it believes that institutions with a “1” or “2” compliance rating have “strong” or “generally strong” compliance programs and are capable of addressing problems. At the next examination, consistent with FDIC examination procedures, DSC follows up on institution efforts to correct violations. In addition, DSC believes that some violations represent less risk to consumers, which DSC takes into consideration as part of the evaluation process to determine the need for follow up.

While we take no exception to these comments, our view is that repeat, significant violations should be considered more serious for purposes of supervisory action and follow-up on corrective action by institutions. As noted in our report, our review of the 14 institutions in our sample found that 11 (79 percent) institutions had repeat, significant violations. As shown in our examples, the institutions repeatedly violated the same laws and regulations for several years before DSC took any supervisory action.

With respect to our report’s observation on ratings, DSC stated that the FDIC strives diligently to present examination findings in a consistent manner and validates the processes by secondary review and a strong internal control program. DSC also stated that each rating is based on a qualitative analysis of the factors comprising that rating, with some factors given more weight than others, depending on the situation. Finally, in its response to our report, DSC states that we say the ratings observation is outside the scope of our audit. In our report, we did not question the assigned rating or the relative weighting given to the training or other components of the compliance program or the process that resulted in those ratings. While these matters are within the scope of the audit, our intent was only to express concern about the possible inconsistency between the assigned ratings and the ratings’ definitions. We acknowledge that the FFIEC has a task force reviewing the ratings definitions and hope that this information is useful in that regard.

Objective

The objective of this audit was to determine whether DSC adequately addresses the violations and program deficiencies reported in compliance examinations to ensure that FDIC-supervised institutions take appropriate corrective action. For purposes of this audit, we made a distinction between corrective actions taken by bank management to address compliance violations and actions taken by the FDIC to ensure compliance. The FDIC’s actions include efforts to follow up with bank management after examinations, including correspondence, follow-up visitations or examinations, and the use of supervisory action. Supervisory action includes informal supervisory actions (such as BBRs or MOUs) and formal enforcement actions (such as cease and desist orders) to prompt management action. We performed our audit from January 2006 through July 2006 in accordance with generally accepted government auditing standards.

Scope and Methodology

We judgmentally selected for review 14 institutions with significant compliance violations in 2004 or 2005 from 3 DSC regions. The 14 institutions had a total of 431 significant violations for the period January 1, 1997 to December 31, 2005 and ranged in asset size from $34 million to $6.5 billion. We have provided the names of the referenced institutions to DSC under separate cover. We analyzed DSC’s process for identifying, reporting, and referring compliance violations and program deficiencies for appropriate corrective actions, and we assessed the adequacy of DSC actions to follow up and evaluate corrective actions promised and/or taken by bank management.

To achieve the audit objective, we interviewed FDIC officials in:

• DSC’s headquarters in Washington, D.C., and the Kansas City and Chicago Regional Offices responsible for conducting supervisory compliance examinations.

In addition, we did the following:

• Reviewed a prior OIG audit report, which is summarized in the Prior Coverage section of this appendix.
• Reviewed applicable FDIC rules and regulations, FDIC procedure manuals, DSC Regional Directors Memoranda, FILs, and DSC Internal Review Reports related to compliance examinations.
• Reviewed other government agency Web sites for information on laws and regulations pertaining to consumer rights and compliance violations.
• Verified with DSC our selection of the following categories of consumer protection laws and regulations:

1. EFTA
2. ECOA/FHA
3. Flood Insurance
4. HMDA
5. Privacy
6. RESPA
7. TILA
8. TISA

• Reviewed the FDIC Strategic Plan for 2005-2010 for performance measures related to consumer protection.
• Consulted the Counsel to the Inspector General to assist in verifying applicable criteria and researching potential legal issues.

Internal Controls

We identified DSC’s internal controls related to the risk-focused examination process for compliance examinations, including the identification of and follow-up on significant compliance violations and program deficiencies. We reviewed and assessed controls related to DSC follow-up on significant compliance violations and program deficiencies. Our review identified weaknesses in these areas as described in the findings section of our report. We did not assess the adequacy of controls over DSC’s examination process or the compliance ratings assigned during the examination. We also did not determine whether DSC should have taken more stringent enforcement actions (i.e., formal actions) with respect to significant repeat consumer violations.

Reliance on Computer-based Data

We determined through interviews and information available on the DSC Web site that the DSC SOURCE system is the primary tool DSC uses to track and document compliance examinations of FDIC-supervised institutions. During the audit, we conducted limited testing of SOURCE data to determine its accuracy as it related to tracking significant compliance violations identified in ROEs. Of the 431 violations reviewed in our sample, we identified 1 significant compliance violation that was reported during an examination but was not included in SOURCE. We brought this item to DSC’s attention. For the purposes of the audit, we did not rely on SOURCE system data. Our assessment centered on reviews of hardcopy ROEs, examination workpapers, and other documents such as progress reports and correspondence files. We also determined that DSC performs internal reviews to ensure that SOUCE data are accurate.

Compliance With Laws and Regulations

We reviewed DSC’s revised Compliance Examination Procedures (Transmittal No. 2005-035, dated August 18, 2005) to identify guidance for examiners to use when assessing an institution’s CMS, which must adequately address (through oversight, policies and procedures, training, monitoring, complaint process, and audit) all areas related to compliance rules and regulations. For purposes of this audit, we reviewed eight statutes: EFTA, ECOA/FHA, Flood Insurance, HMDA, Privacy, RESPA, TILA, and TISA. We did not identify any instances of FDIC noncompliance with these laws and regulations although our audit identified areas for strengthening DSC’s supervisory efforts for implementing and enforcing institution compliance with these laws.

Performance Measures

The Government Performance and Results Act of 1993 directs Executive Branch agencies to develop a strategic plan, align agency programs and activities with concrete missions and goals, manage and measure results to justify appropriations and authorizations, and design budgets that reflect strategic missions. In fulfilling its primary supervisory responsibilities, the FDIC pursues two strategic goals:

• FDIC-supervised institutions are safe and sound, and
• consumers’ rights are protected, and FDIC-supervised institutions invest in their communities.

The FDIC’s strategic goals are implemented through the Corporation’s Annual Performance Plan. The annual plan identifies performance goals, indicators, and targets for each strategic objective. DSC’s 2005 Annual Performance Plan contained one goal related to the scope of our audit — to take prompt and effective supervisory action to monitor and address problems identified during compliance examinations of FDIC-supervised institutions that receive a “4” or “5” rating for compliance with consumer protection and fair lending laws. The Other Matters section of our report discusses our review of this area.

Fraud and Illegal Acts

The objective of this audit did not lend itself to testing for fraud and illegal acts. Accordingly, the survey and audit programs did not include specific audit steps to test for fraud and illegal acts. However, we were alert to situations or transactions that could have been indicative of fraud or illegal acts, and no such acts came to our attention.

Prior Coverage

In September 2005, the OIG issued Audit Report No. 05-038, Division of Supervision and Consumer Protection’s Risk-focused Compliance Examination Process. The overall objective was to determine whether DSC’s risk-focused compliance examination process results in examinations that are adequately planned and effective in assessing financial institution compliance with consumer protection laws and regulations. We found that examination documentation did not always show the transaction testing or spot checks conducted during the on-site portion of the examinations, including testing to ensure reliability of the institutions’ compliance review functions. Also, examiners did not always document whether the examination reviewed all the compliance areas in the planned scope of review.

By order of the Federal Financial Institutions Examination Council (FFIEC) in November 1980, each financial institution is assigned a consumer compliance rating predicated upon an evaluation of the nature and extent of its present compliance with consumer protection and civil rights statutes and regulations and the adequacy of its operating systems designed to ensure compliance on a continuing basis. The rating system is based on a scale of “1” through “5.” An institution rated a “1” represents the highest rating and has the lowest level of supervisory concern, while a “5” rating represents the lowest, most critically deficient level of performance and, therefore, the highest degree of supervisory concern. Consumer Compliance Ratings are defined and distinguished as follows.

A “1” Rating

An institution in this category is in a strong compliance position. Management is capable of, and staff is sufficient for, effectuating compliance. An effective compliance program, including an efficient system of internal procedures and controls, has been established. Changes in consumer statutes and regulations are promptly reflected in the institution’s policies, procedures, and compliance training. The institution provides adequate training for its employees. If any violations are noted, they relate to relatively minor deficiencies in forms or practices that are easily corrected. There is no evidence of discriminatory acts or practices, reimbursable violations, or practices resulting in repeat violations. Violations and deficiencies are promptly corrected by management. As a result, the institution gives no cause for supervisory concern.

A “2” Rating

An institution in this category is in a generally strong compliance position. Management is capable of administering an effective compliance program. Although a system of internal operating procedures and controls has been established to ensure compliance, violations have nonetheless occurred. These violations, however, involve technical aspects of the law or result from oversight on the part of operating personnel. Modification in the bank’s compliance program and/or the establishment of additional review/audit procedures may eliminate many of the violations. Compliance training is satisfactory. There is no evidence of discriminatory acts or practices, reimbursable violations, or practices resulting in repeat violations.

A “3” Rating

Generally, an institution in this category is in a less than satisfactory compliance position. A “3” rating is a cause for supervisory concern and requires more than normal supervision to remedy deficiencies. Violations may be numerous. In addition, previously identified practices resulting in violations may remain uncorrected. Overcharges, if present, involve a few consumers and are minimal in amount. There is no evidence of discriminatory acts or practices. Although management may have the ability to effectuate compliance, increased efforts are necessary. The numerous violations discovered are an indication that management has not devoted sufficient time and attention to consumer compliance. Operating procedures and controls have not proven effective and require strengthening. This may be accomplished by, among other things, designating a compliance officer and developing and implementing a comprehensive and effective compliance program. By identifying an institution with marginal compliance early, additional supervisory measures may be employed to eliminate violations and prevent further deterioration in the institution’s less-than-satisfactory compliance position.

A “4” Rating

An institution in this category requires close supervisory attention and monitoring to promptly correct the serious compliance problems disclosed. Numerous violations are present. Overcharges, if any, affect a significant number of consumers and involve a substantial amount of money. Often, practices resulting in violations and cited at previous examinations remain uncorrected. Discriminatory acts or practices may be in evidence. Clearly, management has not exerted sufficient effort to ensure compliance. Management’s attitude may indicate a lack of interest in administering an effective compliance program which may have contributed to the seriousness of the institution’s compliance problems. Internal procedures and controls have not proven effective and are seriously deficient. Prompt action on the part of the supervisory agency may enable the institution to correct its deficiencies and improve its compliance position.

A “5” Rating

An institution in this category is in need of the strongest supervisory attention and monitoring. It is substantially in noncompliance with the consumer statutes and regulations. Management has demonstrated its unwillingness or inability to operate within the scope of consumer statutes and regulations. Previous efforts on the part of the regulatory authority to obtain voluntary compliance have been unproductive. Discrimination, substantial overcharges, or practices resulting in serious repeat violations are present.

Source: OIG analysis and DSC’s tracking system, SOURCE.
^a  As of July 26, 2006.
^b Represents examination period January 1, 2005 through December 31, 2005.

The primary consumer-protection statutes and associated regulations discussed in this report are summarized below. There are other consumer-protection laws and regulations, but based on input from DSC, we limited our work to the following:

Electronic Fund Transfer Act (EFTA) – This Act establishes the basic rights, liabilities, and responsibilities of consumers who use electronic fund transfer services and of financial institutions that offer these services. The primary objective of the Act is the protection of individual consumers engaging in electronic fund transfers. The FRB’s Regulation E implements this statute.

Equal Credit Opportunity Act (ECOA) – ECOA prohibits creditor practices that discriminate based on race, color, religion, national origin, sex, marital status, or age. The Federal Reserve Board (FRB) issued Regulation B, which describes lending acts and practices that are specifically prohibited, permitted, or required under ECOA.

Fair Housing Act (FHA) – The FHA prohibits discrimination based on race, color, religion, national origin, sex, familial status, and handicap in residential real-estate-related transactions, including making loans to buy, build, repair, or improve a dwelling. Lenders may not discriminate in mortgage lending based on any of the prohibited factors. The U.S. Department of Housing and Urban Development (HUD) has issued regulations to implement the FHA; the FDIC has issued regulations at Part 338 of its Rules and Regulations (12 Code of Federal Regulations (C.F.R.) Part 338) regarding advertising and recordkeeping.

National Flood Insurance Act of 1968, National Flood – This Act established a nationwide flood insurance program and requires the identification of flood-prone areas and communication of such information. The bank regulators are to require lenders to notify borrowers of special flood hazards. The financial regulators have issued regulations that prohibit banks from providing or extending loans where the property securing the loan is in an area with special flood hazards, unless flood insurance has been obtained. The FDIC’s regulations are at (12 C.F.R. Part 339).

Home Mortgage Disclosure Act (HMDA) – HMDA was enacted to provide information to the public and federal regulators regarding how depository institutions are fulfilling their obligations towards community housing needs. FRB Regulation C requires depository and certain for-profit, non-depository institutions (such as mortgage companies and other lenders) to collect, report, and disclose data about originations and purchases of home mortgage, home equity, and home improvement loans. Institutions must also report data about applications that do not result in loan originations.

Gramm-Leach-Bliley Act of 1999 (Privacy) – According to title V, Privacy, of this Act, financial institutions are required to: ensure the security and confidentiality of customer information; protect against any anticipated threats or hazards to the security or integrity of such information; and protect against unauthorized access to, or use of, customer information that could result in substantial harm or inconvenience to any consumer. This Act provides the “privacy” protections covered in our report. The financial regulators have issued implementing regulations. The FDIC’s regulations are located principally at 12 C.F.R. Part 332.

Real Estate Settlement Procedures Act (RESPA) – RESPA requires lenders, mortgage brokers, or servicers of home loans to provide borrowers with pertinent and timely disclosures regarding the nature and costs of the real estate settlement process. The Act also protects borrowers against certain abusive practices, such as kickbacks, and places limitations upon the use of escrow accounts. HUD promulgated Regulation X, which implements RESPA. Also, the FRB’s Regulation Z addresses certain residential mortgage and variable-rate transactions that are subject to RESPA.

Truth in Lending Act (TILA) – TILA requires meaningful disclosure of credit and leasing terms so that consumers will be able to more readily compare terms in different credit and lease transactions. TILA also protects the consumer against inaccurate and unfair credit billing, credit card, and leasing transactions. FRB issued Regulation Z, which implements TILA. The regulation requires accurate disclosure of true cost and terms of credit. The regulation also regulates certain credit card practices, provides for fair and timely resolution of credit billing disputes, and requires that a maximum interest rate be stated in variable rate contracts secured by the consumer’s dwelling.

Truth in Savings Act (TISA) – The TISA requires the clear and uniform disclosure of the rates of interest, which are payable on deposit accounts by depository institutions and the fees that are assessable against deposit accounts, so that consumers can make a meaningful comparison between the competing claims of depository institutions with regard to deposit accounts. FRB’s Regulation DD implements this statute.

[ D ]

[ D ]

[ D ]

	Rec. Number		Corrective Action: Taken or Planned/Status		Expected Completion Date		Monetary Benefits		Resolved: [ a ] Yes or No		Open or Closed [ b ]
	1		DSC intends to analyze the prevalence and scope of repeatedly cited, significant violations over the next year. The substance and level of risk to consumers related to these violations will be used to evaluate whether any changes in DSC policies are necessary.		September 30, 2007		$0		Yes		Open
	2		DSC will review existing guidance related to identifying and documenting third-party residential mortgage lending relationships and, where necessary, issue revised guidance.		September 30, 2007		$0		Yes		Open
	3		DSC will remind examiners to use the checklist for HMDA data reviews within the framework of the FDIC’s refocused compliance examination procedures.		September 30, 2007		$0		Yes		Open

 updated 10/31/2006

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Friday, September 21, 2012 6:37 AM
To: Charles Cox
Subject: Recent Ninth Circuit decision emphasizes importance of remaining vigilant – and current – in connection with consumer finance regulation compliance

Recent Ninth Circuit decision emphasizes importance of remaining vigilant – and current – in connection with consumer finance regulation compliance

· Allen Matkins Leck Gamble Mallory & Natsis LLP

· Joshua A. del Castillo and Rachel M. Sanders

· USA

·

· September 17 2012

OVERVIEW

In the wake of the mortgage crisis, loan servicers are receiving increasing numbers of borrower inquiries made pursuant to a variety of federal statutes, including the Truth in Lending Act ("TILA") and the Real Estate Settlement Procedures Act ("RESPA"). A recent Ninth Circuit decision – Gale v. First Franklin Loan Servs., 2012 U.S. App. LEXIS 18545 (9th Cir. 2012) – emphasizes that loan servicers must remain vigilant and stay current on their statutory obligations.

SUMMARY OF CASE

In Gale, the plaintiff brought suit against his loan servicer pursuant to Section 1641(f)(2) of TILA – as it existed in 2008 when the suit was commenced – on the grounds that his servicer had failed to provide the name and address of the true owner of his loan or holder of his promissory note, along with the original note and an explanation of his servicer’s relationship to the owner of his loan. The plaintiff maintained that Section 1641(f)(2) of TILA, which provided in pertinent part that "[u]pon written request … the servicer shall provide … the name, address, and telephone number of the owner of the obligation, or the master servicer of the obligation[,]" required his servicer to provide the requested information and that its failure to do so gave rise to a cause of action for a TILA violation.

The Ninth Circuit disagreed, finding that the plaintiff’s position required reading the relevant TILA section totally out of context, stating that "[Plaintiff] places emphasis on the final sentence of § 1641(f)(2), but the context of the sentence within [the] subsection … and within § 1641 as a whole, indicates that liability for failing to respond attaches only to those servicers who are also assignees of the loan." (emphasis original). The court went further, emphasizing that only loan servicers who were actual assignees – as opposed to administrative assignees – bore any liability in connection with failing to respond to a request made under Section 1641(f)(2). In arriving at this conclusion, the court referred to the legislative record (H.R. Rep. No. 104-193) which stated that "[t]his provision clarifies that the loan servicer … is not an ‘assignee’ under the TILA unless the servicer is [also] the owner of the loan obligation." The Ninth Circuit concluded from this that "Congress did not intend that all servicers who owned loans would be liable as assignees … [and that] servicers who are only nominal assignees (that is, when a servicer is assigned ownership of the loan solely for ‘administrative convenience’) would not be liable on the same basis as actual owners of the loan." The court declined to accept the plaintiff’s argument that the term "creditor" in Section 1640(a) of TILA broadened liability to all creditors, including original creditors.

The Gale decision does not relieve loan servicers of their responsibilities to respond to borrower inquiries, however, including inquiries substantially similar to those made by the plaintiff in the case. Rather, the Ninth Circuit closed its analysis of TILA by observing that "[t]he servicer is often the only entity that the consumer is in contact with after the loan issues – unless the servicer is forthcoming, the homeowner may not know with whom to negotiate." It emphasized that, therefore, "Congress [has since] recognized the importance of" information such as that requested by the plaintiff, and directed the reader to Section 1463 of the Dodd-Frank Wall Street Reform Act, which amended RESPA "to require all servicers to respond to requests for information[.]" (emphasis added). Indeed, RESPA, 12 U.S.C. § 2605(k)(1)(D), now requires all servicers of a federally related mortgage to "respond within 10 business days to a request from a borrower to provide the identity, address, and other relevant contact information about the owner or assignee of the loan." Failure to comply with RESPA may lead to liability for actual and statutory damages.

LESSONS

At least two lessons can be drawn from the Ninth Circuit’s decision in Gale. First, lenders and loan servicers are subject to multiple regulatory obligations, which may or may not impose the same obligations and limitations. Thus, the mere fact that certain conduct is not required or prohibited by one statute does not mean that it is not addressed by another. Second, consumer finance laws are an area of significant focus for the current legislature (and enforcement agencies) and thus are developing rapidly at this time. It is therefore critical that lenders and loan servicers remain abreast of developments in this rapidly changing area of the law.

USCA 9th – Gale v. First Farnklin.pdf

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Wednesday, September 26, 2012 8:33 AM
To: Charles Cox
Subject: Are you interested? Hearing tomorrow on formation of a homeowner committee in the Res Capital – GMAC B/R

Posted by April Charney:

The attached (nonlawyer) amicus brief is the most recent to come across the internet. Matt Weidner is involved and has blogged about this case and his involvement and the need for the lawyers and their affected RES CAP/GMAC clients to make contact and to get involved. My understanding is that the lawyer bringing the motion is Robert Brown 718-979-9779.

All filings in this case can be found at: http://www.kccllc.net/rescap

see below for media coverage so far:

http://www.foxbusiness.com/news/2012/08/27/homeowners-want-their-own-committee-in-rescap-bankruptcy/

Homeowners Want Their Own Committee in ResCap Bankruptcy …<http://www.foxbusiness.com/news/2012/08/27/homeowners-want-their-own-committee-in-rescap-bankruptcy/>

http://www.foxbusiness.com/news/2012/08/27/homeowners-want-their-own-committee-in-rescap-bankruptcy/ – 55k – Cached<http://www.google.com/search?hl=en&q=cache:anF-XoEbhTEJ:http://www.foxbusiness.com/news/2012/08/27/homeowners-want-their-own-committee-in-rescap-bankruptcy/> – Similar pages<http://search.comcast.net/?cat=web&related=on&q=http://www.foxbusiness.com/news/2012/08/27/homeowners-want-their-own-committee-in-rescap-bankruptcy/&org_q=http://www.foxbusiness.com/news/2012/08/27/homeowners-want-their-own-committee-in-rescap-bankruptcy/>

Aug 27, 2012 … Homeowners with mortgages serviced by Residential Capital LLC want to form an official committee in the company’s bankruptcy case, which …

BANKRUPTCY WEEK AHEAD: ResCap Homeowners Seek Panel …<http://online.wsj.com/article/BT-CO-20120921-708324.html>

http://online.wsj.com/article/BT-CO-20120921-708324.html – 81k – Cached<http://www.google.com/search?hl=en&q=cache:oLUdsKWS68wJ:http://online.wsj.com/article/BT-CO-20120921-708324.html> – Similar pages<http://search.comcast.net/?cat=web&related=on&q=http://online.wsj.com/article/BT-CO-20120921-708324.html&org_q=http://online.wsj.com/article/BT-CO-20120921-708324.html>

4 days ago … Residential Capital LLC will square off Thursday with homeowners … a Manhattan bankruptcy judge to appoint an official committee to fight for …

Law360 : New York : Lawsuit Filings, Litigation, Settlements …<http://www.law360.com/newyork>

http://www.law360.com/newyork – 39k – Cached<http://www.google.com/search?hl=en&q=cache:GZm0Oj8AhHUJ:http://www.law360.com/newyork> – Similar pages<http://search.comcast.net/?cat=web&related=on&q=http://www.law360.com/newyork&org_q=http://www.law360.com/newyork>

Homeowners seeking a borrowers committee in Residential Capital LLC’s bankruptcy countered the debtor’s protests Friday, saying ResCap is wrongfully …

The GMAC Bankruptcy Borrower’s Committee- Will Consumers …<http://beforeitsnews.com/foreclosure-gate/2012/09/the-gmac-bankruptcy-borrowers-committee-will-consumers-finally-get-a-voice-2442830.html>

http://beforeitsnews.com/foreclosure-gate/2012/09/the-gmac-bankruptcy-borrowers-committee-will-consumers-finally-get-a-voice-2442830.html – 25k – Cached<http://www.google.com/search?hl=en&q=cache:sQxcYGvEhDMJ:http://beforeitsnews.com/foreclosure-gate/2012/09/the-gmac-bankruptcy-borrowers-committee-will-consumers-finally-get-a-voice-2442830.html> – Similar pages<http://search.comcast.net/?cat=web&related=on&q=http://beforeitsnews.com/foreclosure-gate/2012/09/the-gmac-bankruptcy-borrowers-committee-will-consumers-finally-get-a-voice-2442830.html&org_q=http://beforeitsnews.com/foreclosure-gate/2012/09/the-gmac-bankruptcy-borrowers-committee-will-consumers-finally-get-a-voice-2442830.html>

Sep 10, 2012 … Homeowners with mortgages serviced by Residential Capital LLC want to form an official committee in the company’s bankruptcy case, which …

Wall Street, Main Street: August 2012<http://www.wallstreetmainstreet.com/2012_08_01_archive.html>

http://www.wallstreetmainstreet.com/2012_08_01_archive.html – 137k – Cached<http://www.google.com/search?hl=en&q=cache:rb_b4ORhGD8J:http://www.wallstreetmainstreet.com/2012_08_01_archive.html> – Similar pages<http://search.comcast.net/?cat=web&related=on&q=http://www.wallstreetmainstreet.com/2012_08_01_archive.html&org_q=http://www.wallstreetmainstreet.com/2012_08_01_archive.html>

Homeowners Want Their Own Committee in ResCap Bankruptcy. Homeowners with mortgages serviced by Residential Capital LLC want to form an official …

GMAC Mortgage « Findsen Law<http://findsenlaw.wordpress.com/tag/gmac-mortgage/>

http://findsenlaw.wordpress.com/tag/gmac-mortgage/ – 38k – Cached<http://www.google.com/search?hl=en&q=cache:JSckkx_-FvUJ:http://findsenlaw.wordpress.com/tag/gmac-mortgage/> – Similar pages<http://search.comcast.net/?cat=web&related=on&q=http://findsenlaw.wordpress.com/tag/gmac-mortgage/&org_q=http://findsenlaw.wordpress.com/tag/gmac-mortgage/>

Sep 18, 2012 … There have been notices sent to homeowners with GMAC mortgages to … to the formation of a homeowner’s committee in the ResCap bankruptcy. … The case is In re: Residential Capital LLC, U.S. Bankruptcy Court, Southern …

GMAC AMICUS BRIEF FINAL.doc
GMAC EXHIBIT LIST.doc

Countdown to banks forcing Congress to protect MERS in 3,2,1…

—

State Court Ruling Deals Body Blow to MERS

Reprinted with permission.

(Reuters) – The highest court in the state of Washington recently ruled that a company that has foreclosed on millions of mortgages nationwide can be sued for fraud, a decision that could cause a new round of trouble for the nation’s banks.

The ruling is one of the first to allow consumers to seek damages from Mortgage Electronic Registration Systems, a company set up by the nation’s major banks, if they can prove they were harmed.

Legal experts said last month’s decision from the Washington Supreme Court could become a precedent for courts in other states. The case also endorsed the view of other state courts that MERS does not have the legal authority to foreclose on a home.

“This is a body blow,” said consumer law attorney Ira Rheingold. “Ultimately the MERS business model cannot work and should not work and needs to be changed.”

Banks set up MERS in the 1990s to help speed the process of packaging loans into mortgage-backed bonds by easing the process of transferring mortgages from one party to another. But ever since the housing crash, MERS has been besieged by litigation from state attorneys general, local government officials and homeowners who have challenged the company’s authority to pursue foreclosure actions.

A spokeswoman for MERS said the company is confident its role in the financial system will withstand legal challenges.

The Washington Supreme Court held that MERS’ business practices had the “capacity to deceive” a substantial portion of the public because MERS claimed it was the beneficiary of the mortgage when it was not.

This finding means that in actions where a bank used MERS to foreclose, the consumer can sue it for fraud. If the foreclosure can be challenged, MERS’ involvement would make repossession more complicated.

On top of that, virtually any foreclosed homeowner in the state in the past 15 years who feels they have been harmed in some way could file a consumer fraud suit.

“This may be the beginning of a trend,” says Elizabeth Renuart, a professor at Albany Law School focusing on consumer credit law.

The company’s history dates back to the 1990s, when banks began aggressively bundling home loans into mortgage-backed securities. The banks formed MERS to speed up the handling of all the paperwork associated with recording the filing of a deed and the subsequent inclusion of a mortgage in an entity that issues a mortgage-backed security.

MERS allowed the banks to save time and money because it permitted lenders to bypass the process of filing paperwork with the local recorder of deeds every time a mortgage was sold.

Instead, banks put MERS’ name on the deed. And when they bought and sold mortgages, they just recorded the transfer of ownership of the note in the MERS system.

The MERS’ database was supposed to keep track of where those loans went. The company’s motto: “Process loans, not paperwork.”

But the foreclosure crisis revealed major flaws with the MERS database.

The plaintiffs in the Washington case, homeowners Kristin Bain and Kevin Selkowitz, argued that the problems with the MERS database made it difficult, if not impossible, to determine who really owned their loan. It’s an argument that has been raised in numerous other lawsuits challenging the ability of MERS to foreclose on a home.

“It’s going to be very easy for consumers to say they were harmed because it’s inherently misleading,” says Geoff Walsh, an attorney with the National Consumer Law Center. If consumers can’t identify who owns their loan, then they don’t know whom to negotiate with, and can’t even be certain of the legitimacy of the foreclosure.

In a statement, MERS spokeswoman Janis Smith noted that banks stopped using MERS’ name to foreclose last year. She added that the opinion will “create confusion” for homeowners in the state of Washington while the trial courts consider its effect on pending cases.

Meanwhile, MERS is attempting to remake itself. The company has a new chief executive and a new branding campaign. In Washington D.C. federal lawmakers have recognized the need to create a national mortgage-recording database that would track all U.S. mortgages. MERS is lobbying to build it.

The case is Bain (Kristin), et al. v. Mortg. Elec. Registration Sys., et al., Washington Supreme Court, No. 86206-1.

Related:

Court revives mortgage debt class-action lawsuit vs Goldman – Reuters

By Tiffany Sanders on September 17, 2012

Whether you’re a foreclosure defense attorney or a bankruptcy lawyer whose clients are frequently struggling with mortgage debt, thoroughly familiarizing yourself with the uniform Fannie Mae and Freddie Mac documents is a must for both client service and your own efficiency.  Of course, Fannie and Freddie hold a huge percentage of residential mortgage loans—Fannie alone had a 41% market share in 2011.  But use of the uniform documents is much broader; most players in the residential mortgage industry use these same instruments because it makes it facilitates sale in the secondary market.

Fortunately, unlike the Fannie and Freddie servicing guides, the uniform instruments don’t change often.  And, the document itself includes the date of the form.  Just a quick glance at that information will tell you quite a bit about your mortgage. For example, Fannie and Freddie didn’t buy daily interest mortgage loans after January, 2001, so if you’re looking at a form dated 01/01, you know that it’s a scheduled payment loan.

Reading the whole Uniform Note and Uniform Security Instrument several times and understanding them thoroughly will save a lot of legwork in the long run, since you’ll be operating under those same terms and definitions again and again.  While it’s important to do that full analysis yourself, here are a few key points to look out for:

• The definition of “loan” integrates the note and the security agreement, arguably destroying negotiability.
• The definition of “applicable law” contains no language that would exclude the U.S. Bankruptcy Code and associated rules, despite the arguments often set forth by opposing counsel.
• Understand the application of payment requirements set forth in Uniform Covenant 2; it’s standard for servicers not to comply with these provisions, but that failure gives rise to a breach of contract claim.
• Examine the legal fee provisions contained in Uniform Covenant 9.  Fee applications submitted by servicers are often in no way “reasonable and appropriate”—for example, a $200 legal fee for submission of a supplemental Proof of Claim for a $50 property inspection.

These few provisions are only the beginning. The Uniform Covenants are filled with rights and responsibilities for borrowers that consumer lawyers routinely overlook, not to mention the protections afforded by TILA, Rule 3002.1 and other state and federal laws.  So long as servicers aren’t challenged on those issues, they have no incentive to comply with these requirements and play fair with consumers.  It’s up to us as consumer lawyers to general enough inconvenience, legal fees, penalties and other pain points to make it unprofitable for servicers to continue the routine practices that harm homeowners across the country on a regular basis.  One important step in that direction is ensuring that you are well versed in what is required by the Fannie and Freddie uniform instruments and what remedies are available to your client when those obligations are breached.

From: Charles Cox [mailto:charles@ldapro.com]
Sent: Tuesday, September 04, 2012 6:27 AM
To: Charles Cox
Subject: Weekly legal newsletter – Demurrer to UD

The topic of this issue of the newsletter is filing a demurrer to an unlawful detainer (eviction) complaint.

A defendant in an eviction proceeding in California may file a demurrer to the complaint. See Code of Civil Procedure § 1170. The notice period for a demurrer is not set forth in the unlawful detainer statutes, Sections 1159 through 1179a of the Code of Civil Procedure.

However, Section 1177 provides that all provisions of law contained in Part 2 of the Code of Civil Procedure (the ones applicable to regular civil actions) are otherwise generally applicable to unlawful detainer actions, unless other procedures are specified in the unlawful detainer statutes.

Since the unlawful detainer statutes do not provide for the timing of a hearing on a demurrer, the timing for demurrers is governed by Code of Civil Procedure § 1005, which requires 16 court days notice of the hearing on the demurrer, plus five calendar days for notice by mailing. Court days means Monday through Friday, except for Court holidays. A defendant who wishes to file a demurrer should contact the Court clerk and obtain a hearing date 4-5 weeks from the date of filing, not later than thirty five (35) calendar days, or the earliest date the Court clerk has available.

One of the first things that any tenant served with a three day notice to pay rent or quit in California should do is closely examine the notice. The notice must contain the following information.

The exact amount of rent due must be stated clearly on the notice. If the amount is overstated the notice is fatally defective and will not support an eviction proceeding. See Ernst Enter., Inc. v Sun Valley Gasoline, Inc. (1983) 139 Cal.App.3d 355, 359. This is due to the fact that Code of Civil Procedure § 1161(2) requires the three-day notice to state the amount of rent that is due.

It must not be served until after the stated amount of rent becomes due. In other words it cannot be served on the date the rent is due. If the three-day notice alleged in the complaint was served before the stated rent amount became due it is fatally defective and will not support an unlawful detainer action. See Lydon v Beach (1928) 89 Cal.App. 69, 74.

It must have the entire street address of the premises, and must have the name, address and phone number of the person to pay the rent to, as well as the days of the week and hours in which the rent may be paid. If it does not state these items the notice is defective. And if the address given for the payment of rent does not allow for personal delivery then it shall be conclusively presumed that upon the mailing of any rent or notice to the owner by the tenant to the name and address provided, the notice or rent is deemed received by the owner on the date posted, if the tenant can show proof of mailing to the name and address provided by the owner), or the number of an account in a financial institution into which the rental payment may be made, and the name and street address of the institution (provided that the institution is located within five miles of the rental property), or if an electronic funds transfer procedure has been previously established, that payment may be made pursuant to that procedure. See Code of Civil Procedure § 1161(2).

So a tenant who cannot personally pay the rent because the address given is a post office box should mail the rent check, and get proof of mailing from the post office. That way the rent is considered paid on the date it is mailed.

If the three day notice is defective the best course of action is to file a demurrer to the complaint.

The landlord must wait the entire three days to allow the tenant to comply with the notice. If the last day to comply is a Saturday, Sunday or Court holiday the tenant has until the end of the next business day to comply with the notice. Saturday, Sunday and Federal and State holidays are NOT counted when calculating the three-day period.

For example, if the three-day notice was served on a Monday that is not a Federal or State holiday, then the three days are calculated as follows, Tuesday is the first day, Wednesday is the second day, and Thursday is the third day. The eviction complaint could be filed on Friday.

However, if the three-day notice was served on a Tuesday that is not a Federal or State holiday, then the three days are calculated as follows, Wednesday is the first day, Thursday is the second day, and Friday is the third day. The eviction complaint cannot be filed until the following Monday, unless that date is a Federal or State holiday in which case the complaint cannot be filed until the following day, which is Tuesday.

For more information you can check out Code of Civil Procedure §§ 12, 12a. Also see Lamanna v. Vognar (1993) 17 Cal.App. 4th Supp. 4, 7, 8

If the eviction complaint was filed even one day too early then you can object to that by filing a demurrer on the grounds that the eviction complaint is fatally defective and must be dismissed because it was filed before the cause of action accrued. Or in other words that as a matter of law, at the time the complaint was filed, there was no forfeiture or failure to pay rent because a condition precedent was not met. See Lamanna v. Vognar, supra at 8.

Once the tenant has been served with the Summons and Complaint they have only five (5) calendar days to respond. Court holidays are not counted in calculating the five days, and if the last day to respond is a Saturday, Sunday or Court holiday the tenant has until the end of the next business day to file a response with the Court.

It needs to be stressed that any missing or incorrect information in the three-day notice to pay rent or quit can be grounds for a demurrer. If the thee-day notice is defective then the unlawful detainer complaint fails to state a cause of action and the demurrer should be sustained without leave to amend because the law cannot presume that a new and proper notice would be served and that the defendant would then fail to comply with a new notice. This means that the landlord must prepare and serve a valid three-day notice to pay rent or quit, wait the appropriate amount of time, and then file another complaint if the notice is not complied with. See Hinman v. Wagnon (1959) 172 Cal.App 2d 24, 27.

Also a new cause of action for unlawful detainer on the basis of a new notice would result in a new cause of action that arose after the complaint was filed, and thus would not properly be an amended complaint but a supplemental complaint.

Yours Truly,

Stan Burman

The author of this newsletter, Stan Burman, is a freelance paralegal who has worked in California litigation since 1995.

Lydon v. Beach, 89 Cal. App. 6.docx
Lamanna v. Vognar, 17 Cal. App.docx
Hinman v. Wagnon, 172 Cal. App.docx

From: Charles Cox [mailto:charles@bayliving.com]
Sent: Wednesday, August 22, 2012 10:47 AM
To: Charles Cox
Subject: Demurrer reversed based on allegations of modification agreement alleging formation of contract

In a homeowner’s suit for breach of contract arising from the failed loan modification and eventual foreclosure sale of her home, trial court’s order sustaining a demurrer is reversed to the extent it is based on allegations regarding the parties’ modification agreement, as plaintiff alleged formation of a valid contract to modify her loan documents and sufficiently alleged breach of that modification agreement. Further, plaintiff should be permitted to allege a cause of action for breach of covenant and good faith and fair dealing based on breach of the modification agreement and also be permitted to amend the complaint to allege a cause of action for common law wrongful foreclosure based on the valid modification agreement.

Barroso v. Ocwen_Cal.App.4th.docx