Findings from a review done on foreclosures by the United States Government Accountability Office (GAO) found that errors made by banks might have been much higher than believed. In September 2010, amid allegations of inappropriately signed documents, federal coordinators began on-site reviews of servicers to evaluate foreclosure processes.
The interest from the GAO came after a 2012 agreement between the Federal Reserve and the OCC with 16 mortgage servicers. The agreement required the servicers to hire consultants to review foreclosure files for errors, and to take actions to prevent harm to borrowers.
In 2013, regulators changed the orders, ending the review of files related to foreclosures citing increasing costs, while most banks had not completed the examination of their mortgage modification and foreclosure practices. The servicers were then required to provide $3.9 billion in cash payments to roughly 4.4 million borrowers.
Additionally, $6 billion was earmarked for foreclosure prevention actions, such as loan modifications.
The recent report from the GAO examined the new consent order process.
"With the adoption of the amended consent orders, regulators and servicers moved away from identifying the types and extent of harm an individual borrower may have experienced and focused instead on issuing payments to all eligible borrowers based on identifiable characteristics," the GAO said.
The GAO found, "Most Federal Reserve examination teams have not begun their verification activities and the extent to which these activities will incorporate additional evaluation or testing of servicers' implementation of the principles is unclear."
Furthermore, "OCC and the Federal Reserve are verifying servicers' foreclosure prevention policies, but are not testing policy implementation."
Congresswoman Maxine Waters (D-California), one of the four members of Congress that requested the review of the Independent Foreclosure Review (IFR), said, "I'm troubled by the recent GAO report, which shows that just as the Department of Justice deliberately overstated its investigation and prosecution of mortgage fraud cases, regulators claimed six billion dollars of settlement payments that never truly occurred."
She continued, "I'm concerned with these findings by GAO, which also show that the settlement was reached without adequate investigation into the harms committed by the servicers. Many of the files did not contain complete data, making it impossible to know whether borrowers were disqualified from the possibility of the greatest cash payouts."
The GAO believes that the absence of information on the processes of how cash payments were determined creates "risks to public confidence in the mortgage market, the restoration of which was one of the goals of the file review process."