Audit Finds GSEs’ Regulator Let Complaints Slip Through the Cracks

Servicers have been ordered to institute a clear resolution process for consumer complaints as part of the robo-signing settlement with federal regulators.

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Accountability when it comes to dealing with distressed borrowers has become a central focus of mortgage servicing reform, but an audit conducted by the ""Federal Housing Finance Agency’s"":http://www.fhfa.gov (FHFA) Office of the Inspector General (OIG) found that the GSEs’ regulator is itself lacking in this area.

The audit found that the federal agency has let complaints alleging fraud, abuse, and waste, many of which involved possible improper foreclosure actions, slip through the cracks with no oversight of their resolution. The inspector general says FHFA also failed to refer potentially criminal allegations to law enforcement authorities.

In response to ""the OIG report"":http://www.fhfaoig.gov/Content/Files/AUD-2011-001.pdf, FHFA has said it will take actions to remedy the issue.

The OIG’s report notes that the current housing crisis has left millions of borrowers, communities, and investors struggling with delinquent and defaulted mortgages, loan modifications, and foreclosures.

Consumers suffering from the effects of the crisis have increasingly filed complaints with the GSEs and FHFA, of which about three-fourths directly pertained to Fannie and Freddie. These complaints run the gamut from difficulties obtaining information from the GSEs to allegations of criminal activity, according to the inspector general.

The report cites an “increased number of repeat complaints and increased number of consumers"" complaining of unresponsiveness over the audit period, from July 30, 2008 (the date FHFA was established) through October 31, 2010.

The OIG says FHFA did not have a “sound internal control” system in place for handling consumer complaints, nor did the agency give complaint processing sufficient priority. FHFA had assigned two individuals from its public relations staff to deal with incoming grievances and did not oversee the resolution process.

“As a result, FHFA lacks assurance that complaints, including those alleging fraud, waste, or abuse, such as improper foreclosures, were appropriately addressed in an efficient and effective manner in order to minimize risks,” the OIG report said.

FHFA’s practices for processing consumer complaints varied according to the means of their communication and their subject matter. Written, email, and telephone

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complaints were processed separately and differently; many telephone complaints were not logged correctly.

Because of the inconsistency and lack of documentation, the inspector general said it was unable to get a true grasp on the scope or number of complaints received or resolved.

FHFA could not “accurately report â€" or even provide summary information â€" concerning the volume or type of written complaints received…, the number of unresolved complaints, the average amount of time to resolve a complaint, or how complaints were resolved,” the report said.

The OIG was able to get its hands on 585 consumer complaints emailed to FHFA during the 27-month audit period. Of these, 115 were retained by the agency for internal processing, which in some cases that constituted a determination of no action, and the remaining 470 complaints were referred to the GSEs.

The inspector general also determined that 27 complaints included allegations of fraud and 68 contained allegations of improper foreclosures.

The report says it was FHFA’s practice to refer email complaints alleging fraud, waste, or abuse to the Office of General Counsel (OGC), but according to the staff there, no records exist showing how many referrals were sent or their resolution. OGC confirmed that no complaints were referred to law enforcement authorities during the audit period.

In one particularly telling instance, the inspector general found evidence that an investigative reporter emailed FHFA’s predecessor, the Office of Federal Housing Enterprise Oversight (OFHEO), in June 2008, alerting the agency of information from a former Taylor Bean & Whitaker (TBW) employee that the lender was defrauding Freddie Mac.

The complaint was neither pursued, nor was it referred to law enforcement authorities for investigation. (OIG says OFHEO senior managers who were aware of the situation became FHFA senior managers when OFHEO was consolidated into FHFA at the end of July 2008 and were in possession of the email after that time).

More than a year later, TBW shut its doors and federal authorities executed a search warrant on the lender’s office, and within the past few weeks, seven high-ranking TBW executives have been convicted on federal charges or pleaded guilty to participating in a multi-billion dollar fraud scheme.

FHFA acknowledged that since the housing crisis set in, it has received an “elevated level of public inquiries and complaints” and the agency had “no dedicated staff nor procedures in place to handle the new responsibility.”

FHFA also underscored the fact that in 2010, it conducted its own audit. The final report on this evaluation was received just last month, and FHFA says it is intended to help the agency develop policies and procedures, as well as automated tools to support external communications.

FHFA says it will have written policies, procedures, and controls in place; complete a thorough assessment of the staff and resources needed to implement the new functions; and will review unresolved complaints alleging fraud by December 31, 2011.