[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
                   MORTGAGE SERVICING: AN EXAMINATION
                   OF THE ROLE OF FEDERAL REGULATORS
                   IN SETTLEMENT NEGOTIATIONS AND THE
                 FUTURE OF MORTGAGE SERVICING STANDARDS

=======================================================================

                             JOINT HEARING

                               BEFORE THE

                       SUBCOMMITTEE ON FINANCIAL

                    INSTITUTIONS AND CONSUMER CREDIT

                                AND THE

                            SUBCOMMITTEE ON

                      OVERSIGHT AND INVESTIGATIONS


                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              JULY 7, 2011

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-44



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

                   Larry C. Lavender, Chief of Staff
       Subcommittee on Financial Institutions and Consumer Credit

             SHELLEY MOORE CAPITO, West Virginia, Chairman

JAMES B. RENACCI, Ohio, Vice         CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
EDWARD R. ROYCE, California          LUIS V. GUTIERREZ, Illinois
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JEB HENSARLING, Texas                RUBEN HINOJOSA, Texas
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
THADDEUS G. McCOTTER, Michigan       JOE BACA, California
KEVIN McCARTHY, California           BRAD MILLER, North Carolina
STEVAN PEARCE, New Mexico            DAVID SCOTT, Georgia
LYNN A. WESTMORELAND, Georgia        NYDIA M. VELAZQUEZ, New York
BLAINE LUETKEMEYER, Missouri         GREGORY W. MEEKS, New York
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             JOHN C. CARNEY, Jr., Delaware
FRANCISCO ``QUICO'' CANSECO, Texas
MICHAEL G. GRIMM, New York
STEPHEN LEE FINCHER, Tennessee
              Subcommittee on Oversight and Investigations

                   RANDY NEUGEBAUER, Texas, Chairman

MICHAEL G. FITZPATRICK,              MICHAEL E. CAPUANO, Massachusetts, 
    Pennsylvania, Vice Chairman          Ranking Member
PETER T. KING, New York              STEPHEN F. LYNCH, Massachusetts
MICHELE BACHMANN, Minnesota          MAXINE WATERS, California
STEVAN PEARCE, New Mexico            JOE BACA, California
BILL POSEY, Florida                  BRAD MILLER, North Carolina
NAN A. S. HAYWORTH, New York         KEITH ELLISON, Minnesota
JAMES B. RENACCI, Ohio               JAMES A. HIMES, Connecticut
FRANCISCO ``QUICO'' CANSECO, Texas   JOHN C. CARNEY, Jr., Delaware
STEPHEN LEE FINCHER, Tennessee


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 7, 2011.................................................     1
Appendix:
    July 7, 2011.................................................    71

                               WITNESSES
                         Thursday, July 7, 2011

Calhoun, Michael, President, Center for Responsible Lending (CRL)    54
Date, Raj, Associate Director for Research, Markets, and 
  Regulations, Consumer Financial Protection Bureau, U.S. 
  Department of the Treasury.....................................    16
Pearce, Mark, Director, Division of Depositor and Consumer 
  Protection, Federal Deposit Insurance Corporation..............    14
Stevens, David H., President and CEO, Mortgage Bankers 
  Association (MBA)..............................................    52
Strange, Hon. Luther, Alabama Attorney General...................    18
Williams, Julie L., First Senior Deputy Comptroller and Chief 
  Counsel, Office of the Comptroller of the Currency.............    12

                                APPENDIX

Prepared statements:
    Calhoun, Michael.............................................    72
    Date, Raj....................................................    86
    Pearce, Mark.................................................    95
    Stevens, David H.............................................   106
    Strange, Hon. Luther.........................................   123
    Williams, Julie L............................................   128

              Additional Material Submitted for the Record

Capito, Hon. Shelley Moore:
    Written statement of the Board of Governors of the Federal 
      Reserve System.............................................   146
    Written statement of the National Association of REALTORS...   171
Neugebauer, Hon. Randy:
    E-mail exchanges and charts..................................   176
Hinojosa, Hon. Ruben:
    Supplemental Directive 11-06 dated July 6, 2011, ``Making 
      Home Affordable Program--Updates to Servicer Incentives''..   209
Calhoun, Michael:
    Written responses to questions submitted by Representative 
      Baca.......................................................   213
Date, Raj:
    Written responses to questions submitted by Representative 
      Baca.......................................................   214
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   215
Williams, Julie L.:
    Written responses to questions submitted by Representative 
      Baca.......................................................   216


                   MORTGAGE SERVICING: AN EXAMINATION
                   OF THE ROLE OF FEDERAL REGULATORS
                   IN SETTLEMENT NEGOTIATIONS AND THE
                 FUTURE OF MORTGAGE SERVICING STANDARDS

                              ----------                              


                         Thursday, July 7, 2011

             U.S. House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                      and Subcommittee on Oversight
                                and Investigations,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittees met, pursuant to notice, at 10:03 a.m., 
in room 2128, Rayburn House Office Building, Hon. Shelley Moore 
Capito [chairwoman of the Financial Institutions and Consumer 
Credit Subcommittee] presiding.
    Members present from the Subcommittee on Financial 
Institutions and Consumer Credit: Representatives Capito, 
Renacci, Royce, Manzullo, Hensarling, McHenry, Pearce, 
Luetkemeyer, Huizenga, Duffy, Grimm, Canseco, Fincher; Maloney, 
Ackerman, Hinojosa, Baca, Miller of North Carolina, Scott, and 
Carney.
    Members present from the Subcommittee on Oversight and 
Investigations: Representatives Neugebauer, Fitzpatrick, Posey, 
Hayworth; Capuano, Waters, and Himes.
    Ex officio present: Representatives Bachus and Frank.
    Also present: Representatives Stivers, Schweikert, Garrett; 
Perlmutter and Green.
    Chairwoman Capito. This hearing will come to order.
    I would like to thank my ranking member, Mrs. Maloney, as 
well as the chairman of the Oversight and Investigations 
Subcommittee, Chairman Neugebauer--I am sure he will be here in 
just a few minutes--and his ranking member, Mr. Capuano, for 
their cooperation in organizing this joint hearing.
    Many Members have expressed a great interest in having a 
hearing on the topic of mortgage servicing. And it is my hope 
that today's hearing will provide a forum for Members to cover 
a multitude of subjects involving mortgage servicing.
    We were all shocked to hear the news last fall of 
allegations that major mortgage servicers had engaged in robo-
signing and falsifying documents in order to expedite 
foreclosures.
    Last November, the Housing and Community Opportunity 
Subcommittee held a hearing on deficiencies in the foreclosure 
process. In the months following, Federal regulators have 
embarked upon an effort to assess the damage caused by these 
irresponsible actions, determine the need for national 
servicing standards, and if appropriate, establish penalties 
for these institutions.
    Today's hearing is an opportunity for Members to question 
regulators that have been at the forefront of these 
negotiations. As these regulators consider remedies for the 
problems, it is important that we first identify who has been 
harmed by the actions of the servicers.
    A survey by the regulators of the 2,800 mortgage 
foreclosure files demonstrated that there were, indeed, 
weaknesses in the procedures, but failed to show evidence that 
borrowers had been significantly harmed.
    It is my hope that the consent orders agreed to by the 
agencies and the servicers will provide further clarity about 
the extent of the harm to borrowers, as well as improved 
systems.
    Some have raised questions about the role of the Consumer 
Financial Protection Bureau (CFPB) in the ongoing negotiations 
with servicers and the State attorneys general. Our witnesses 
from these respective parties can add further clarity on the 
role that each had played in these negotiations.
    Recent news accounts indicate that a monetary settlement is 
immanent between major servicers and the State attorneys 
general. I am interested to hear from our witnesses if all 
State attorneys general are active in these negotiations.
    If the settlement is reached, there must be strict 
oversight as to how the money is distributed and what 
classifies as harm for borrowers. The proposed settlement 
between these parties will have a direct impact on servicing 
standards going forward.
    Our second panel will provide information about steps that 
servicers have already taken to address deficiencies in their 
systems, as well as the need for national servicing standards.
    The input of both industry and consumer representatives is 
critical in this endeavor. A national servicing standard will 
have an effect on the mortgage market and we must work together 
to ensure that new servicing standards, coupled with the 
proposed qualified residential mortgage standard and other 
efforts, do not unintentionally impede the recovery of the 
mortgage market.
    I would like to recognize the ranking minority member of 
the Financial Institutions Subcommittee, the gentlelady from 
New York, Mrs. Maloney, for the purpose of giving an opening 
statement.
    Mrs. Maloney. Thank you, Chairwoman Capito and Chairman 
Neugebauer. And I welcome all of the witnesses today.
    Last fall, reports emerged that mortgage servicers were 
taking shortcuts in processing foreclosure notices and 
violating the law. Specifically, it was reported that servicers 
were using inadequate documentation to foreclose some 
borrowers.
    And it was revealed that many servicers were engaging in 
large scale foreclosures without personal knowledge of the 
condition of the loan or the borrower's independent financial 
circumstances.
    In addition, we now know that lenders forged signatures and 
improperly notarized documents in the rush to foreclose on 
homeowners. These allegations led to a 50-State investigation 
into the matter of robo-signing and forged signatures.
    And just in April, the Federal regulators entered into a 
consent decree with the largest servicers requiring them to 
submit their action plans for foreclosure mitigation. I 
understand they are due tomorrow or this week.
    This is a step in the right direction for the industry, and 
most importantly for the consumers and our overall economy. But 
rather than holding a hearing about the need for servicing 
standards and about intervention on behalf of the Federal 
regulators, many of my colleagues appear more interested in 
defending the status quo, and suggesting that the States and 
the Federal regulators stand down.
    I thought that no one disputed that things need to change 
in the servicing industry. Because from where I sit, it is 
clear that left to their own devices, many servicers have 
engaged in abusive and unfair behavior and have literally 
violated the law. And they would have continued to do that if 
there had not been exposure.
    Yet, my colleagues are eliminating Federal programs such as 
HAMP, which was very successful in helping people renegotiate 
their loans. But I understand there is a movement that they may 
extend the HAMP program for a period of time. I hope it is 
true. And questioning Federal intervention in the industry, the 
same industry that got us into the mess to begin with.
    My friends on the other side of the aisle are essentially 
criticizing the State AGs for investigating these matters, even 
though they are investigating potential violations of State law 
with respect to foreclosure processes and rules.
    I had assumed the party of States' rights would support 
their right to do this, not say their actions are 
inappropriate. Are they really saying that the servicers 
shouldn't be held accountable for violating laws of all 50 
States and the District of Colombia?
    States such as Illinois, California, Utah, and Connecticut 
are engaging in independent investigations, separate and apart 
from the settlement negotiations, because they too recognize 
the need to intervene.
    My colleagues are entitled to question things, but they are 
certainly not entitled to their own facts. And the servicing 
issue has certainly been a problem in the whole recovery.
    For me, the hearing is not about the role of the CFPB 
during settlement negotiation. It should be about allegations 
of abuse in the mortgage servicing industry. These abuses are 
yet one more reason why we need the CFPB and why it has 
assembled a team that will work on servicing standards once it 
opens its door on July 21st.
    For me, this hearing is about making sure that this type of 
abuse never happens again. My time has expired. I look forward 
to your testimony.
    Chairwoman Capito. Thank you.
    I would like to recognize the chairman of the Oversight 
Subcommittee, Mr. Neugebauer, for the purpose of an opening 
statement.
    Chairman Neugebauer. Yes. Thank you, Chairwoman Capito.
    We are holding this important hearing today to better 
understand the appropriate role of regulators in addressing the 
failings of some of the Nation's largest mortgage servicing 
firms.
    There is no doubt that documentation, internal controls, 
and processing were seriously deficient at some of the Nation's 
servicing firms, and that remedial steps to secure these 
deficiencies are necessary. As a result, the OCC, the Fed, and 
the OTS entered into a consent agreement with the servicers to 
address many of these weaknesses in the mortgage foreclosure 
process in April of this year.
    While I will not comment directly on the regulatory 
settlement, it is worth noting that prudential regulators led 
investigations of the mortgage servicers and to remediate 
deficiencies seems appropriate.
    Unfortunately, the State attorneys general and political 
appointees at the Department of the Treasury and the DOJ are 
pursuing a separate, more far-reaching settlement. 
Participation of political appointees, especially that of 
Elizabeth Warren at the CFPB, an agency with no regulatory or 
enforcement authority, raises serious concerns about the 
settlement process.
    When political appointees involve themselves in enforcement 
matters, that may pressure regulatory agencies to advance a 
particular agenda.
    The breadth and the terms of the term sheets presented to 
the mortgage servicers, which includes a potential $20 billion 
settlement--we are hearing that could be a $60 billion 
settlement--for a principal reduction fund, magnifies these 
concerns that the Administration and some State AGs are 
attempting to legislate through enforcement.
    Speaking more directly, a review of the term sheet brings 
some words to mind including ``coercion'' and ``extortion.''
    Even yesterday, the New York Post reported that the 
principal reduction fund, as I said, could be nearly $60 
billion. The settlement proposal requires the resuscitation of 
policies and programs that have not worked or that Congress has 
explicitly rejected. For example, the proposed term sheet seeks 
to revive HAMP, a failed Administration initiative that 
requires principal write-downs, a policy rejected both in the 
House and the Senate.
    All of this would be funded by the mortgage servicers, with 
the tab in the tens of billions of dollars.
    While restitution for victims specifically harmed by 
misconduct is completely appropriate, there is no evidence that 
borrowers have been significantly harmed by the servicers' 
actions. In fact, the interagency review conducted by the Fed 
and the OCC found that in all of the 2,800 mortgage files that 
were examined, the borrowers were seriously delinquent and the 
servicer had the legal authority to foreclose.
    It would be interesting to hear from some of the witnesses 
as to why a large scale principal write-down fund would be 
appropriate punishment, especially since there is no evidence 
that servicer malfeasance caused financial hardship to victims.
    Thank you, Chairwoman Capito, for this hearing.
    Chairwoman Capito. Thank you.
    I would like to recognize the ranking member of the full 
committee, Mr. Frank, for 3 minutes.
    Mr. Frank. First, let us be clear why we are so concerned 
about this, because there are two reasons. The first is a 
consideration of fairness for individuals. My colleague has 
just said that there is no evidence that anyone was harmed by 
the failure of the servicers to follow the law.
    Usually, we hold people to a standard of following the law 
without a burden of proof on us to show specific harm in 
specific cases. In fact, the servicers as a group are quite 
culpable here.
    First, many of them were engaged in making loans that 
shouldn't have been made. And then they compounded that by 
being inadequately staffed to deal with the problems that 
arose. I have seen few things done as incompetently as the role 
of the mortgage servicers. And to exonerate them and say, ``no 
harm, no foul,'' I think is inappropriate.
    I also was surprised to hear my colleague be so critical of 
political appointees. For Members who are elected to office and 
run every 2 years to talk about ``political'' as if that was 
something bad seems to me quite inconsistent with our mandate.
    The notion that political appointees are somehow not to be 
treated as serious policymakers is not only inaccurate; that is 
called ``democracy.'' I would say, and this hearing will, of 
course, make it clear, if people really believe that things 
should be handled totally non-politically, they should not ask 
that 535 politicians make the decisions, which is us.
    I would also say I was surprised to hear this criticism of 
the State attorneys general. I shouldn't say I was surprised, 
because it has been a constant theme in this committee, where 
there has unfortunately been a party difference on respect for 
the role of the States. It is a kind of a total reversal.
    Conservatives used to talk about States' rights, but there 
has been a consistent move on the part of many on the other 
side to diminish and minimize the role of the State. Finally, 
let's be very clear again that we are doing this not just 
because of individuals, but the mortgage problem, the 
combination--and a lot of people were responsible. A lot of 
people were guilty.
    At this point, though, a failure to respond more 
appropriately is causing great harm economically. And one of 
the things we need to do to improve the rate of recovery--we 
are in a recovery, but it is much too slow--is to deal with 
this problem of the rate of foreclosures.
    So I very much look forward to this testimony. But I would 
reject the notion that somehow it is inappropriate for 
policymakers, people who have elections and are appointed by 
people who are elected, including the State attorneys general 
and high ranking Federal officials, to be involved.
    And finally, this continued effort to demonize Elizabeth 
Warren because she has advised people--not ordered anybody, not 
insisted--of what to do--is, I think, bizarre.
    Chairwoman Capito. Thank you.
    I would like to recognize the chairman of the full 
committee, Mr. Bachus, for 2 minutes.
    Chairman Bachus. Thank you, Chairwoman Capito. I have 
listened to my colleagues on both sides. And there is actually 
some agreement and some consensus, despite what you may have 
heard. We all recognize that there have been shortcomings, 
shortcuts, and shoddy paperwork by some of the mortgage 
servicing companies.
    In fact, Chairman Neugebauer mentioned that the OCC and the 
Federal Reserve acted to correct these in April. And I think 
all members of this committee supported that.
    Our concern is not the concern that Ranking Member Frank 
expressed. Our concerns have been the same for the last 2 or 3 
years.
    And one of those concerns is that the government's efforts 
in the housing markets have actually--in many cases, they have 
had mixed results. So let us just say that to be kind, they 
have been expensive, but they have often been 
counterproductive.
    The HAMP program is a good example, where billions of 
dollars have been spent to try to prevent foreclosures. The 
target was 4 million foreclosures. And I think it has come in 
at about a half a million. And of those, many of them have gone 
back into foreclosure.
    I do think on both sides of the aisle, we agree that we 
need to work through this backlog of foreclosures. And that is 
good for all of us. The housing market needs to see a proper 
level.
    In fact, here is what Chairman Bernanke said before our 
committee about 6 months ago: ``I would like to see further 
efforts to modify loans where appropriate, and where not 
appropriate.'' And that is what we are talking about, ``where 
not appropriate.'' Many times, it is not appropriate.
    That is what we worry about with this settlement. People in 
houses who aren't paying their mortgages, and yet the mortgage 
companies are not only being stopped from foreclosing on it, 
but these people continue to be in their homes and not pay 
their mortgages.
    And we don't think it is appropriate for people who are not 
paying their mortgages or who can't pay their mortgages to 
receive all the focus. We believe, and I think the American 
people believe, that their neighbors who are paying their 
mortgage--the vast amount of Americans who are paying their 
mortgage or have not gotten into these mortgages.
    And we have advocated fairness for these people. Let me 
close by saying Chairman Bernanke, and I agree with him, he 
says that, ``We need to speed the process of foreclosure and 
the disposition of foreclosed homes in order to clear the 
housing market and have a recovery.''
    That is what we have advocated all along, fairness for 
those Americans who are paying their mortgage and fairness for 
those Americans who are attempting to make their mortgage 
payments, not all the focus and all the money being spent on 
those who aren't paying their mortgage payments.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    The Minority is going to continue to reserve their time.
    Mr. Frank. May I have 1 minute?
    Chairwoman Capito. The ranking member is recognized for 1 
minute.
    Mr. Frank. First of all, we agree that some mortgages 
should have to be paid. I have never been supportive of this in 
every case.
    But there are some very worthy cases, including those who 
are unemployed. And I heard last night and it was mentioned 
today in USA Today--I guess Secretary Donovan is now having a 
hearing on it--the Administration is extending, for people who 
are entitled to do this and are able to deal with it, the 
foreclosure moratorium for the unemployed and for those in the 
HAMP program to 12 months.
    Some of us have been asking for an extension. There has 
been a 3-month moratorium.
    They are in the process of announcing right now that the 
moratorium will be extended 12 months. And to take the point of 
the chairman, that is not for everybody. That will be for some. 
It would certainly not make sense if there was no chance of 
people repaying, where you are talking about the unemployed.
    But many of us have felt that the 3 months where other 
criteria were met, where people were appropriately given that 
kind of forbearance, was not nearly enough time. And I think 
the 12-month extension will help very much.
    Chairman Bachus. Madam Chairwoman, can I have 1 minute just 
to respond? And I want to agree with the ranking member.
    I do want to say this: there is some good news out there 
for all of us. One in 20 American families wants to buy a home 
today. And they have good credit. Our concern is that those 
families who want to get into mortgages, we don't want the 
government efforts to prevent them or drive up the cost for 
them to buy a home.
    We want those families who are looking for homes to be able 
to get into those homes. And we believe that the focus ought to 
be on them and not on those who can't make payments or do not 
have proper credit.
    I think we can all get there. And I want to commend the 
regulators. We all acknowledge we were too loose in 2006 and 
2007 with our underwriting standards.
    But two wrongs don't make a right. And being too tight 
today or responding inappropriately today with too tight 
standards or settlements that really don't help those Americans 
who want to buy a home is counterproductive.
    Thank you.
    Chairwoman Capito. Thank you.
    I would like to try to get back in my rhythm here, so I am 
going to recognize Mr. Fitzpatrick, the vice chair of the 
Oversight Subcommittee, for 1 minute.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman.
    For my constituents in the eighth district of Pennsylvania, 
few issues could be more relevant or important than those that 
are dealing with the usual foreclosure. Our economic situation 
is both a symptom and a result of our Nation's housing woes.
    So as we work together to repair the damage, improve the 
economy, and ensure that these failures won't happen again, we 
cannot forget about those victims who have already been 
affected.
    Foreclosure puts a unique strain on a family. And the 
damage can linger for years.
    This committee and this body have a responsibility to make 
sure that the mechanisms in place to avoid this catastrophic 
event are functioning. Mortgage servicers are on the frontline 
of this battle. Issues with our mortgage finance system aside, 
servicers are the primary point of contact for most homeowners.
    Our constituents' service staff works closely with 
servicers in an attempt to avoid foreclosure. We count on the 
servicers to be responsive to our efforts and the regulators to 
be helpful toward that end.
    So, Madam Chairwoman, I look forward to this hearing.
    I am hopeful we are going to hear that progress has been 
made in this area. But more importantly, I want to hear that 
improvements are going to continue.
    I yield back.
    Chairwoman Capito. Thank you.
    I would like to recognize Ms. Waters from California for 
1\1/2\ minutes to make an opening statement.
    Ms. Waters. Thank you very much, Chairwoman Capito and 
Chairman Neugebauer, for holding this hearing.
    Mortgage servicing was a topic of intense focus for me when 
I was chairwoman of the Housing and Community Opportunity 
Subcommittee. And it is good to have a joint hearing on this 
topic today.
    I think it is a little late, but we really do have to deal 
with this subject.
    And while I am pleased to have the opportunity to question 
our witnesses today, I am a bit perplexed as to why the 
subcommittee has decided not to invite any servicers to 
testify. After all, it is their corner-cutting and even fraud 
that causes us to be in this hearing today. I would really like 
to hear from them.
    Every Member here today has undoubtedly heard from 
constituents complaining about servicers not telling them the 
truth on the phone, losing back paperwork, and incorrectly 
assessing fees, among other improper practices.
    So make no mistake, the servicers were allowed to have 
these botched operations because regulators failed to rein them 
in, despite continuous pleadings from the advocates.
    As a result, this failure to act has now culminated in 
regulators and State attorneys general trying to make up for 
lost time by setting up the industry standards and compensating 
borrowers who have been jerked around, often losing their life 
savings in the meantime.
    While some of my colleagues will no doubt characterize 
these settlements as some sort of a shakedown, I see it as an 
attempt to disgorge servicers of wrongful profits accrued 
through years of running botched, deliberately understaffed 
operations.
    This is in addition to the untold damage done to the 
securities market in this country by the failure of these banks 
to properly establish the legal ownership of the mortgages they 
packaged and sold.
    So, thank you very much, Madam Chairwoman.
    I look forward to hearing from our regulators.
    Chairwoman Capito. I thank the gentlewoman.
    I would like to make a point of clarification. Both Mrs. 
Maloney and I felt strongly about having servicers at this 
hearing as well. They declined because of the pending legal 
settlement and legal discussions going on, and that is why they 
are not in attendance at this meeting today.
    Ms. Waters. Thank you very much.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. Royce for 1 minute.
    Mr. Royce. Thank you, Madam Chairwoman.
    According to the New York Times, 2 weeks ago, they said in 
New York State, it would take lenders 62 years at the current 
pace to repossess the 213,000 houses now in severe default or 
foreclosure. In New Jersey, they said it would take 49 years.
    Economists often argue that a single clearly defined set of 
rules would be part of the solution to effective regulation and 
certainly to clearing the market. I think it is no wonder that 
the housing market continues to sputter.
    And I think we add to the problem, given the hodgepodge of 
statutes and rules, none of which are the same, by the way.
    But we have RESPA, TILA, Dodd-Frank, 50 State laws, local 
ordinances, Federal regulations, State regulations, court 
rulings, enforcement actions, FHA requirements, VA 
requirements, and rural housing service requirements. You have 
the Fannie Mae standards and the Freddie Mac standards.
    So, at a minimum, the lack of a single clearly defined set 
of rules has added to the confusion. It has delayed much of the 
market from clearing. It has discouraged private capital from 
coming back into this sector.
    Economists are right about this. And we could be part of 
the solution here if we assist it.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize the ranking member for the 
remaining time.
    Mrs. Maloney. Okay. I will use some time and yield some 
time to the gentleman from Georgia.
    I agree with Chairman Bachus that we need to work through 
this backlog that is flowing in our economy. Economists say 
housing is roughly 25 percent of our economy. As long as it is 
there, we are going to have a problem with our economy.
    But we need to do it in a fair way. And I don't think 
anyone on this panel or this room agrees with the robo-
signature or moving to evict people from their homes without 
meeting with them, telling them of a program for possibilities 
that are there, working with them or even finding out if they 
have the money in the bank to help move through the process.
    So we need to move through it, but in a fair way. And, 
again, I look forward to the rules and standards that will be 
coming out tomorrow.
    And I yield to the great man from Georgia.
    Mr. Scott. Thank you very much.
    I think I have a few seconds here. But I do want to just 
share with the committee that I have just come out of working 
on a major home foreclosure prevention event. And we had 
phenomenal success.
    As many of you may know, Georgia now ranks fourth in the 
number of home foreclosures in this Nation. In one of my 
counties--Clayton County--1 out of every 70 homes is in some 
form of foreclosure.
    But we had a very, very effective event in Atlanta, 
Georgia, about 2 weeks ago. And because we were able to get the 
information there and get under one roof the loan servicers--
which is so important for them to have been here today, but I 
understand they had some disagreement with their situation and 
could not.
    But let me just say, I take my hat off. We had some 
outstanding loan servicers there from Bank of America, and 
Wells Fargo, and Citizens, and Regions Bank, and SunTrust, all 
major servicers.
    We were able to save 2,107 homes in one shot over that 
weekend, with Treasury's help and HUD's help. And the reason 
for it was we were able to get the information processed 
adequately.
    This has been one of the major reasons why we have had such 
a high rate of home foreclosure, because there have been 
inadequate information on the parts of exchange from the loan 
servicers.
    This has not historically been an area of high profit 
opportunity for the loan servicers. So they have high turnovers 
within the people who are providing the service to the 
homeowner.
    A homeowner may call one day, come back, get an answer on 
his phone, answer it, call back, and there is somebody else 
handling their case. But when we can sit down with the loan 
servicers and with the homeowners themselves and make sure that 
proper information is processed, we can get this problem 
licked.
    I can't begin to tell you. We had line after lines of 
thousands of people, people in wheelchairs, people on canes, 
senior citizens, everyone coming at the convention center and 
leaving with tears in their eyes, so happy that they were able 
to get their problem addressed.
    So there is hope out there. There is success out there.
    But we have to get the right information and get the loan 
servicers to be able to interact properly with the homeowners. 
And I wanted to share that positive news. We have a ways to go.
    And I look forward to this hearing.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you.
    I would like to recognize Mr. McHenry for 1 minute.
    Mr. McHenry. Thank you, Chairwoman Capito.
    There is no doubt the robo-signing debacle uncovered 
problems in the mortgage settlement process used by the 
Nation's largest servicers. But what is clear is that any 
proceeds of a settlement need to recover losses for those who 
are actually harmed, and make sure that the management of the 
foreclosure process has improved.
    Instead, it seems certain folks in the position of 
influence to negotiate this deal are working out of the 
mentality of ``never let a good crisis go to waste.''
    Judicial Watch recently uncovered extensive involvement by 
the CFPB, and specifically Ms. Warren, in her attempts to step 
well outside of her position as an adviser to both the 
President and the Treasury Secretary, providing a detailed 
framework for the structure of a settlement and holding 
``emergency meetings'' with State attorneys general.
    This is troubling. I find this in-depth involvement very 
troubling.
    I look forward to the rest of the hearing.
    Chairwoman Capito. Thank you.
    Mr. Grimm, for 1 minute?
    Mr. Grimm. Thank you, Chairwoman Capito and Chairman 
Neugebauer, for holding this hearing.
    I appreciate the witnesses' time.
    As everyone is aware, the real estate market in the United 
States remains very, very weak. It makes it very difficult for 
the economy to experience a strong and robust recovery.
    And at the same time, the government is either directly or 
indirectly underwriting over 90 percent of new home loans in 
this country. That is a situation that obviously is 
unsustainable.
    So in order for the real estate to recover and to stabilize 
over the long term, we must get private capital back into the 
mortgage market. This is the reason the mortgage servicing 
standard is so important to the future of housing finance.
    Investors in new mortgage loans must have confidence that 
their principal and interest statements will be received in a 
timely manner and that their positions will be protected in the 
event that a borrower defaults or of a foreclosure, if it 
unfortunately occurs.
    Without such assurances, I fear that private capital cannot 
and will not and will continue to be reluctant to return to the 
mortgage market.
    Therefore, again, I thank the witnesses. And I look forward 
to the rest of this hearing.
    Chairwoman Capito. Thank you.
    Mr. Canseco, for 1 minute?
    Mr. Canseco. Thank you, Madam Chairwoman, and Chairman 
Neugebauer.
    The ongoing foreclosure crisis in this country is one of 
the largest challenges facing our economy. Since home prices 
began their decline in 2006, millions of Americans have had 
their homes foreclosed. And there doesn't seem to be an end in 
sight for this cycle.
    Last fall, some troubling revelations came out about the 
servicers' industry, an industry which is dealing with an 
unprecedented amount of workflow due to the crippling housing 
market.
    As with any other government action towards an industry, 
we, as a Congress, must keep a close watch on the regulatory 
response to ensure it is targeted and does not make the problem 
worse.
    I have great concern that potential rules prescribed by 
Federal regulators, rules designed to apply to the largest 
mortgage servicers, will ultimately impact the smaller 
servicers who will find the rules too onerous to stay in the 
servicing business.
    I am also concerned that the purported State attorney 
general settlement with the largest servicers could open the 
door to perverse incentives that could make the foreclosure 
problem worse.
    With this in mind, I look forward to your testimony. Thank 
you.
    Chairwoman Capito. Mr. Fincher, for 1 minute?
    Mr. Fincher. Thank you, Madam Chairwoman.
    When the mortgage crisis hit our economy a few years ago, 
it left many homeowners questioning their American dream. Their 
mortgages were now more than their homes were worth. Many 
homeowners looked to their lenders, to State governments, and 
to Washington to find the answers.
    Our number one priority should be not to cripple our 
financial institutions, but to find the happy medium to prevent 
another mortgage crisis while ensuring that the approach taken 
will not impede our economic recovery.
    We don't want to fall into the trap, as Chairman Bachus 
said a few minutes ago, of overreaching and unintended 
consequences.
    So I thank the witnesses for coming, and I look forward to 
your testimony.
    I yield back.
    Chairwoman Capito. Thank you.
    That concludes our opening statements. I would like to 
introduce our first panel of witnesses for the purpose of 
giving a 5-minute opening statement.
    I would like to yield to the chairman of the full 
committee. He would like to introduce his witness really 
quickly and then--
    Chairman Bachus. Thank you.
    It is my pleasure to introduce a good friend of mine, 
Luther Strange, who is the new attorney general in Alabama. 
General Strange was named one of the South's leading economic 
development attorneys prior to being elected to his position as 
attorney general.
    I have read his testimony before this committee. And I 
think he offers an awful lot.
    He is committed to consumer protection. He is also 
committed to a strong economy and to seeing that our Nation 
recovers.
    I think what he has laid out--and he has some strong 
reservations about the settlement that he is being led into, 
that it may have some unintended consequences.
    Luther and Melissa, his wife, have two sons. And Luther is 
normally the tallest guy in the room. He was the starting 
center at Tulane University. But he is actually maybe the third 
tallest person in the room today because I see Luke and Kane, 
his two sons.
    Luke works for Joe Bonner, one of our colleagues. And Kane 
works for Senator Sessions. And they are the two guys who are 
just as tall as Luther back there, sticking way up in the 
audience.
    So you have a cheering section, Luther. We welcome you. It 
is really a pleasure to have you. And you are doing a fine job 
as attorney general.
    Your testimony is very insightful. Thank you.
    Chairwoman Capito. Thank you.
    I would first like to recognize Ms. Julie Williams, First 
Senior Deputy Comptroller and Chief Counsel, Office of the 
Comptroller of the Currency.
    Welcome.

STATEMENT OF JULIE L. WILLIAMS, FIRST SENIOR DEPUTY COMPTROLLER 
  AND CHIEF COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY

    Ms. Williams. Thank you. Chairwoman Capito, Chairman 
Neugebauer, Ranking Member Maloney, Ranking Member Capuano, and 
members of the subcommittee, I appreciate the opportunity to 
appear this morning on behalf of the OCC to discuss issues 
related to mortgage servicing.
    My testimony focuses on three areas. First, my written 
statement describes the examinations by the OCC and the other 
Federal banking agencies of defects in foreclosure processes at 
the 14 largest federally-regulated mortgage servicers.
    Although these examinations found that the loans in the 
sample examined were seriously delinquent, the exams also found 
serious deficiencies of different degrees at each of these 
servicers in the areas of foreclosure governance, foreclosure 
document preparation, and the oversight of third-party service 
providers.
    These deficiencies constitute unsafe and unsound banking 
practices. To address them, the OCC and the other banking 
agencies issued cease-and-desist orders.
    The sample of foreclosures reviewed in the exams exposed 
serious flaws in the banks' foreclosure processes. But as a 
sample it could not, of course, quantify the individual 
borrowers who might have suffered financial harm due to these 
defects.
    That is why the orders issued by the agencies require a 
comprehensive and independent review of foreclosure actions 
during a 2-year look-back period.
    The independent review will seek to identify financially 
harmed borrowers who had a pending or completed foreclosure in 
2009 or 2010 through two distinct means: one, notice and 
outreach to those borrowers of their right to file a complaint, 
and to have that complaint reviewed by an independent 
consultant; and two, targeted review of the loans of borrowers 
who are in identifiable high-risk segments, which will provide 
an additional opportunity to detect borrowers who suffered 
financial harm.
    The orders require that the servicers submit detailed 
action plans to revamp major aspects of their mortgage 
servicing and foreclosure operation. For example, action plans 
are required to implement comprehensive revisions of mortgage 
servicing, loan modification, and foreclosure processes.
    The orders also address the elimination of dual tracking 
and require the establishment of a single point of contact 
system, to ensure that borrowers can contact a live person 
throughout the process.
    The second portion of my written statement discusses the 
relationship between the implementation of our enforcement 
orders and the separate negotiations that are being conducted 
by other authorities. Most notably, the Department of Justice 
is coordinating settlement discussions involving DOJ, a group 
of other Federal agencies, and State attorneys general.
    The scope of these discussions includes issues outside the 
scope of our orders, but it also includes areas of mortgage 
servicing and foreclosure procedures that overlap with the 
scope of action plans that are required under our orders.
    Other initiatives also are under way that will affect 
mortgage servicing standards. In particular, the newly 
announced GSE delinquency management and default prevention 
standards will have a substantial effect on servicing 
practices, since those standards, for the foreseeable future, 
will govern an overwhelming portion of the mortgage market.
    These different initiatives will subject servicers to more 
rigorous standards and provide borrowers greater protection. 
But they also raise the prospect of multiple and potentially 
inconsistent standards.
    We have strongly urged the value of achieving a common set 
of standards, whereby servicers can satisfy not only the terms 
of any settlement agreements but other applicable requirements 
as well, such as the GSE standards.
    In order to help achieve this result, in consultation with 
DOJ, we have adjusted the deadline for servicers' submission of 
various action plans that are required under our order to 
facilitate synchronization with the DOJ-led settlement effort.
    In the final portion of my testimony, I discussed the 
current interagency effort to develop comprehensive and uniform 
servicing standards. The goal here is to establish rigorous, 
uniform standards for responsible servicer conduct that reach 
beyond the servicers covered by the current enforcement action.
    It will be critically important to ensure that any 
standards that are adopted apply to and are implemented by all 
firms engaged in mortgage servicing, not just the federally-
regulated depository institutions, and that there is strong 
oversight of all servicers' compliance.
    I appreciate the opportunity to appear before the 
subcommittees this morning to discuss these important topics. 
And I look forward to answering your questions.
    Thank you.
    [The prepared statement of Ms. Williams can be found on 
page 128 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Mark Pearce, Director, Division of 
Depositor and Consumer Protection, FDIC.
    Welcome.

 STATEMENT OF MARK PEARCE, DIRECTOR, DIVISION OF DEPOSITOR AND 
   CONSUMER PROTECTION, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Pearce. Great. Thank you, Chairwoman Capito, Chairman 
Neugebauer, Ranking Members Maloney and Capuano, and members of 
the subcommittee.
    Thank you for the opportunity to testify today on behalf of 
the FDIC about the ongoing need to address and resolve 
challenges in mortgage servicing.
    The issues involved continue to impact our housing market, 
borrowers, and communities across the Nation. As you know, the 
FDIC is not the primary Federal regulator of the largest 
financial institutions and mortgage servicers, where major 
servicing and foreclosure deficiencies have been found.
    Nevertheless, as the insurer of deposits of these 
institutions, we remained concerned about the potential 
ramification of these deficiencies, not only on these 
institutions, but on the housing and mortgage markets overall.
    Last fall, in the wake of allegations of robo-signing, the 
primary Federal regulators invited the FDIC to participate in 
interagency review of the foreclosure practices of 14 of the 
largest mortgage servicers. These reviewers identified 
significant deficiencies in the foreclosure processes of all 14 
institutions.
    These deficiencies included the filing of inaccurate 
affidavit and other documentation in foreclosure proceedings, 
inadequate oversight of attorneys and other third parties 
involved in the process, inadequate staffing and training of 
employees, and the failure to effectively coordinate the loan 
modification and foreclosure process to ensure effective 
communications with borrowers seeking to avoid foreclosures.
    In April of this year, the primary Federal regulators took 
an important first step in addressing the deficiencies by 
issuing enforcement orders related to foreclosure practices by 
these largest mortgage servicers.
    The FDIC is hopeful these orders will put services on a 
path to having the staffing, management and operational control 
necessary to work effectively with homeowners to fairly and 
efficiently resolve mortgage defaults. To do so, regulators 
will need to closely monitor the servicers to ensure the orders 
are implemented as they are intended to be.
    In particular, the review of past foreclosures must be able 
to convince the skeptical public that homeowners harmed by 
servicer errors have been identified and compensated, as 
promised by the primary Federal regulators.
    Even if implemented fully, the consent orders are only a 
partial resolution to mortgage servicing deficiencies. The 
interagency review of foreclosure practices did not purport to 
examine loan modification practices or other potential errors 
in mortgage servicing.
    As such, the FDIC supports the Federal-State collaboration 
between the Department of Justice, other Federal agencies, and 
the State attorneys general to address a broader range of 
issues regarding the servicing process.
    A comprehensive resolution for past servicing errors is 
essential to the recovery of the housing market and the greater 
economy. Past servicer errors had given rise to a multitude of 
actual and potential claims from litigation, placing a cloud of 
uncertainty over recent foreclosures and transfers of title.
    Market anxiety regarding the ownership rights and the 
obligation of borrowers and investors dampens expectations 
regarding the housing market's recovery and discourages the 
return of private capital to the mortgage market.
    Accordingly, the FDIC has encouraged the Financial 
Stability Oversight Council to continue its efforts in 
examining the potential financial systemic risks surrounding 
mortgage servicing and foreclosures.
    Furthermore, until servicers improve their practices and 
processes, some current homeowners will miss the opportunities 
to avoid foreclosure, while others will be able to delay the 
inevitable. Given the continuing fragility of the housing 
market, effective servicing is as important as ever.
    In conclusion, the mortgage servicing system over the past 
few years has ill served all parties involved--borrowers, 
neighborhoods, and investors--and has impaired the health and 
the recovery of the housing and mortgage markets.
    Market reforms are needed to align the incentives for 
effective servicing.
    In addition, the FDIC will continue to work with our 
Federal colleagues to develop sensible and balanced servicing 
standards, tempered by the knowledge that community banks have 
not demonstrated the type of deficiencies and errors present in 
the largest institutions.
    Thank you for the opportunity to testify on these issues 
before you today. I look forward to responding to your 
questions.
    [The prepared statement of Mr. Pearce can be found on page 
95 of the appendix.]
    Chairwoman Capito. Thank you.
    Our next witness is Mr. Raj Date. He is the Associate 
Director of Research, Markets, and Regulations at the Consumer 
Financial Protection Bureau, U.S. Department of the Treasury.
    Welcome.

    STATEMENT OF RAJ DATE, ASSOCIATE DIRECTOR FOR RESEARCH, 
MARKETS, AND REGULATIONS, CONSUMER FINANCIAL PROTECTION BUREAU, 
                U.S. DEPARTMENT OF THE TREASURY

    Mr. Date. Thank you.
    Chairwoman Capito, Chairman Neugebauer, Ranking Members 
Maloney and Capuano, thanks for inviting me to testify today 
about mortgage servicing.
    My name is Raj Date. I serve as the Associate Director for 
Research, Markets, and Regulations at the CFPB.
    Our mission at the CFPB is clear: to make consumer finance 
markets work for the American people. That means ensuring that 
consumers have the information they need to make financial 
decisions that are right for them.
    It means promoting fairness and transparency and 
competition in consumer finance. It means setting and enforcing 
clear, consistent rules that allow banks and other firms to 
compete on a level playing field.
    The Bureau is not yet open for business. But 2 weeks from 
today, on July 21st, pursuant to last year's Dodd-Frank Act, 
the Bureau will receive transferred authority from seven 
existing regulators to administer Federal consumer financial 
protection laws.
    And on that day, I am happy to report we will be--
    Chairwoman Capito. Excuse me, Mr. Date. Could you move the 
microphone a little closer?
    Mr. Date. Certainly.
    Chairwoman Capito. Thank you.
    Mr. Date. On July 21st, I am happy to say that the Bureau 
will be ready. And on that day, mortgage servicing will be one 
of the CFPB's priorities.
    That is because mortgage servicing is important. It is an 
enormous market, with some $10.4 trillion of unpaid principal 
balances.
    It is, moreover, marked by two structural features that 
make it unlikely that market forces alone can suffice to 
protect consumers.
    The first of those structural features is simple. In the 
vast majority of cases, consumers can't actually choose their 
mortgage servicers, at least not over time.
    Let me introduce the importance of that, just as an 
example. Last week, I had the occasion to go to a drugstore. If 
my pharmacist had made me stand in a long line, or if she was 
rude, or if she was losing my paperwork, or if she was 
impossible to find on the phone, or if she gave me guidance 
that was wrong, I would just go to a different pharmacist next 
time.
    That is how most consumer-facing markets work.
    I get to choose my drugstore. I typically don't get to 
choose my mortgage servicer, at least not over time.
    The second structural feature of mortgage servicing that 
relates to consumer protection is that under the current system 
of servicer compensation, taking on the servicing of a mortgage 
resembles a bet on credit.
    If a loan remains performing, then servicing the loan 
remains profitable. But if the borrower becomes delinquent, 
then the cost of properly servicing the loan is likely to be 
greater and perhaps substantially greater than the revenue from 
servicing that loan.
    If a servicer's portfolio, therefore, contains many more 
non-performing loans than the servicer expected, the servicer 
tends to lose money.
    Faced with that unfortunate financial reality, when they 
encountered an upswing in mortgage delinquencies, servicers 
apparently started cutting corners. Rather than making 
necessary investments in capacity, they have loosened 
operational protocols, even to the point of violating State and 
Federal laws.
    The evidence of this is striking. In the examinations of 14 
major servicers this spring, the Fed, the OCC, and the OTS 
discovered critical weaknesses in governance, in foreclosure 
processing, and in vendor management.
    They discovered unsafe and unsound practices. They found 
violations of State and Federal law. They discovered these 
weaknesses and deficiencies in all 14 of the 14 servicers 
examined, together accounting for more than \2/3\ of the entire 
mortgage market.
    In the Dodd-Frank Act, Congress took important steps that 
will correct flaws in Federal regulation of mortgage servicing, 
in particular the lack of comprehensive Federal standards for 
mortgage servicers and the lack of direct full Federal 
oversight over independent non-depository servicers.
    The CFPB, when it has its full authority, will have the 
tools to address both of those problems.
    And to make sure that we deeply understand the markets we 
will be regulating, our team has already been in contact with a 
range of stakeholders, community banks, credit unions, big 
banks, consumer groups, academics, and many others.
    But while the CFPB can and will address consumer 
protection, a comprehensive approach that also protects 
investors, the financial sector and the economy and the housing 
market as a whole requires the coordinated action of a larger 
group of Federal agencies, including the prudential regulators.
    The Bureau will be working together with those agencies to 
the maximum extent possible. Because, after all, both consumers 
and the industry will benefit when regulatory action is 
careful, and it is coordinated, and it is coherent.
    Two weeks from now, the Bureau will be ready to start 
helping make the consumer finance markets work for the American 
people. And I am confident that the result of our efforts, 
coordinated with those of the other agencies, should make the 
servicing market work better for everyone.
    Thank you for the opportunity to testify.
    [The prepared statement of Mr. Date can be found on page 86 
of the appendix.]
    Chairwoman Capito. Thank you.
    Our final witness on this panel has already been introduced 
by Chairman Bachus, but he is the Honorable Luther Strange, 
Attorney General of the State of Alabama.
    Welcome.

  STATEMENT OF THE HONORABLE LUTHER STRANGE, ALABAMA ATTORNEY 
                            GENERAL

    Mr. Strange. Thank you very much, Chairmen Capito and 
Neugebauer, Ranking Members Maloney and Capuano, and members of 
the subcommittee, and my Congressman, Chairman Bachus.
    My name is Luther Strange, and I am the attorney general of 
the State of Alabama. Thank you for inviting me to testify 
today on the ongoing settlement negotiations with the mortgage 
servicing companies.
    In October of 2010, the Alabama Attorney Generals Office 
joined 49 other State attorneys general to form the so-called 
Foreclosure Multi-State Working Group. The purpose of the group 
is to investigate allegations that mortgage companies 
mishandled documents and violated laws when they foreclosed on 
homeowners across the United States.
    Like 26 other States, Alabama is a non-judicial foreclosure 
State. The other States have elected through their legislatures 
to adopt the judicial foreclosure process.
    In March of this year, the Working Group submitted a term 
sheet to the Nation's largest mortgage servicers, which was 
presented as a draft agreement on behalf of attorneys general 
and other State and Federal agencies. And it was intended to 
settle allegations related to improper foreclosure practices 
and loan servicing.
    The servicers have responded to the term sheet. And 
negotiations are currently under way between the States, the 
Federal Government, and the mortgage servicers.
    As I, as an attorney general, review any potential 
settlement agreement, I am guided by three overarching 
principles.
    First, the settlement must hold the mortgage servicers 
accountable for unlawful and deceptive practices under State 
law. Second, attorneys general are not responsible for 
legislating and setting policy. And the settlement agreement 
should not attempt to overreach into the area of State and 
Federal policy decisions.
    Third, the settlement must contain provisions that 
discourage and deter future illegal activity. Above all else, 
unethical mortgage servicers and any other bad actors in the 
mortgage servicing industry must be held accountable for any 
unlawful or deceptive practices they engaged in.
    Certain aspects of the term sheet, such as those dealing 
with single point of contact, dual-track foreclosures, robo-
signing, and verification of account information, contain many 
changes in practice that are beneficial to consumers. 
Enforcement agencies and the entire industry should have a 
vigorous debate on these proposals.
    My staff and I take our duty to protect consumers 
seriously. And we will work to investigate and prosecute bad 
actors to the fullest extent of the law.
    Any fines or penalties assessed on the servicers, pursuant 
to a settlement agreement, should be linked, in my opinion, in 
response to specific documented violations of State and Federal 
law.
    Protecting consumers, like many other goals of the 
Foreclosure Multi-State Working Group, is not only laudable, it 
is something that I consider my highest duty.
    But I am concerned that what started out as an effort to 
correct specific practices harmful to consumers has evolved 
into an attempt to establish an overarching regulatory scheme 
that fundamentally restructures the mortgage loan industry in 
the United States, an effort which is well beyond the scope of 
responsibility of attorneys general.
    Here are just a few specific concerns that I have. First, 
any ultimate settlement must not preempt State law sovereignty. 
Alabama, like the majority of other States, has made the policy 
decision to permit non-judicial foreclosures.
    I am skeptical of any agreement that essentially makes all 
States subject to the judicial foreclosure process without a 
legislative mandate.
    Second, mandated principal reduction is bad public policy 
and creates questions of fundamental fairness and justice. 
Mandated principal write-down would create an incentive for 
homeowners to default and seek a reduction of principal.
    Requiring lenders to reduce mortgage balances would remove 
incentives for banks to lend money and for investors to 
purchase mortgages, denying people access to the credit they 
need to purchase a home.
    Third, a settlement must not impair an efficient 
foreclosure process that clears local markets and facilitates 
economic recovery. I am very skeptical of any settlement that 
forces servicers to violate contracts with mortgage owners and 
abrogates the rights of second lien holders.
    Finally, a settlement must not impose onerous regulatory 
burdens on community banks. In my State of Alabama, we have 
over 130 community banks that are an important economic driver 
in the State.
    We must not increase their regulatory burden when it is 
clear they generally were not engaged in the conduct giving 
rise to the investigation.
    Thank you again for holding this important hearing. And I 
look forward to answering your questions.
    [The prepared statement of Mr. Strange can be found on page 
123 of the appendix.]
    Chairwoman Capito. Thank you. Thank you all.
    And I would like to begin questioning.
    Ms. Williams, one of the concerns that I have, and I think 
it has already come to light as we have had before or before in 
testimony, is we have the OCC over here, developing a standard.
    You mentioned in your statement that the GSEs had looked at 
a servicing standards. The State attorneys general want to make 
sure that there are no State preemptions, so they have 
servicing standards.
    Who is going to enforce all this? And what kind of singular 
standards--in my view, if we are going to move in this 
direction, a singular standard would certainly be better in 
terms of how the servicers meet those demands, but also in 
terms of the service provided to consumers.
    Could you comment on that?
    Ms. Williams. Certainly. As I indicated, a concern that we 
have with the processes under way right now is whether there 
will be, at the end of the day, multiple and potentially 
inconsistent sets of standards.
    And so we very strongly urge the effort to try to come 
together, at least on core principles and core elements of the 
servicing standards that are going to be the components of the 
different enforcement result here.
    And that would also, we think, carry over to the 
discussions that are on going at the banking agencies, the CFPB 
and FHFA, for example, with respect to developing uniform, 
consistent national standards that would apply to all 
servicers.
    So, I think the enforcement processes, in other words, will 
identify a body of core standards and some detail under those 
standards that hopefully will translate into significant 
portions of uniform standards that the agencies can adopt going 
forward.
    There are potentially different enforcers involved for the 
different entities subject to the standards, at the end of the 
day.
    Chairwoman Capito. I thank you for that.
    And I think you highlight properly that there can be some 
serious issues involved with trying to figure this all out, and 
deliver the best service, and stop some of the practices that 
have gone forward.
    The other thing I would like to ask about is the principal 
reduction. And I would like to ask all of you all this question 
briefly.
    The State attorney general, Mr. Strange, has already 
mentioned that he doesn't think this should be mandated. 
Principal reduction should not be part of a national servicing 
standard.
    Is this something that you are recommending?
    I will start with you, Mr. Date. What does the CFPB think 
about that?
    Mr. Date. Thank you, Chairwoman Capito.
    The way in which I try to think about the notion of 
principal reduction is within the broader context of loss 
mitigation within mortgages, which is, after all, largely 
speaking, a non-recourse secured lending market.
    In that kind of market, there is always a potential for 
moral hazard. And indeed, most of the loss mitigation 
techniques that are employed by servicers today in the 
marketplace involve some manner, appropriately, of economic 
concessions to a borrower in order to try to keep that borrower 
current.
    Principal reduction is one of those manners of economic 
concessions, and one that could very well, and indeed today 
does for some servicers play a part in the overall loss 
mitigation arsenal.
    Chairwoman Capito. So what you are saying is that it might 
be one of the tools in the toolbox, but it wouldn't be a 
requirement of a national servicing agreement?
    I think just a quick ``yes or no'' because I am running out 
of time here.
    Mr. Date. National servicing standards may or may not 
address any particular loss mitigation techniques. But I know 
that the interagency group is working hard to frame the issues 
and at least think about what those--
    Chairwoman Capito. Are you aware if this is already 
included in the settlement agreement that is being worked with 
the State attorneys general?
    Mr. Date. I am not specifically aware; I am not involved in 
the day-to-day conversations with mortgage servicers. That 
clearly is a process being led by the Department of Justice and 
State attorneys general.
    Chairwoman Capito. Thank you.
    Mr. Pearce, did you have a quick comment on that?
    Mr. Pearce. Yes. I think the way servicers look at whether 
to do a loan modification is to figure out whether doing a 
modification of some kind is better than the alternative of 
going to foreclosure and losing a significant portion of money 
there.
    And so I would agree--
    Chairwoman Capito. I guess I am asking for the mandatory 
issue.
    Mr. Pearce. Right.
    Chairwoman Capito. Do you think it should be a mandatory 
part of a national servicing standard?
    Mr. Pearce. Right. I think the attorneys general and the 
Department of Justice are really working out whatever voluntary 
agreement they can come to with the largest servicers on that. 
And so, I can't really speak to where they are in that process.
    But I don't think that sort of a mandatory process is 
something that--certainly the FDIC hasn't talked about, that 
people should make principal reductions when they don't make 
economic sense.
    Chairwoman Capito. Right. Thank you.
    Mrs. Maloney?
    Mrs. Maloney. For the overall economy, the large number of 
defaults, the losses, the servicer challengers are really 
putting up a barrier that could delay a broader recovery of our 
economy.
    So moving forward and getting this solved is critical. And 
I would like to Attorney General Strange and then Mr. Date and 
down the line about the servicing process.
    In New York, we had some of the highest numbers of subprime 
loans. But under the leadership of our Governor, we organized 
regional meetings with other elected officials, and banks and 
not-for-profits voluntarily participated. And we one-on-one 
worked out details that helped people stay in their homes.
    So, I would like to ask you, do you think that servicers 
have done a good job of communicating to borrowers about their 
loss mitigation policies and about their rights and options 
once they have gone into default?
    If not, what improvements need to be made? And what is the 
best mechanism to ensure that we have this improvement?
    Starting with Mr. Strange, then Mr. Date, and down the 
line.
    Mr. Strange. We have a consumer protection unit in our 
Office of the Attorney General. And we have received a number 
of complaints.
    We deal with those on an individual basis. I wouldn't say 
it is a crisis situation in Alabama. But we have State laws 
that deal with it.
    And I believe they work well. That is the decision we have 
gone with. As I mentioned, the non-judicial foreclosure 
process, which contains a number of protection for consumers.
    So, we are very diligent in making sure that those 
procedures are followed. And I think it is working fairly well 
in our State.
    Mrs. Maloney. Mr. Date?
    Mr. Date. Thank you.
    Mortgage servicing, because of its size and the relative 
diversity of the participants in it, naturally has a range of 
players in terms of how good they are, frankly, at some of the 
harder pieces of the business.
    Loss mitigation in particular and making sure that there is 
a high touch customer context during delinquency is a difficult 
skill. And there is no doubt in my mind that some firms happen 
to be quite better at it than others.
    The question of whether or not, therefore, there should be 
some manner of baseline expectation is exactly the kind of 
question that I would love to be addressed in this interagency 
dialogue on national mortgage servicing standards. It is 
precisely that kind of question.
    Mrs. Maloney. What do you think would be the baseline? 
Obviously, what we saw in the past was robo-signatures, moving 
to evict people from their homes without even meeting with them 
or telling them their options, or even looking at their bank 
accounts to see whether or not they could work it out.
    What kind of baseline would you suggest would be 
appropriate?
    Mr. Date. There is, obviously, the most rudimentary 
baseline, which is abiding by current Federal and State law. 
Despite, for example, the diversity in the standards across the 
various States and as promulgated by, for example, by the GSEs 
or FHA, the fact of the matter is there is no State in which 
falsely notarizing an affidavit is an acceptable thing to do.
    So there is that baseline. But, unfortunately, that 
baseline comes down to effective supervision and effective 
enforcement over time.
    With respect to mortgage servicing standards, more broadly, 
there are certainly mechanisms that one can use at a trigger 
point, in terms of number of days of delinquency, where if you 
are going to proceed, for example, to foreclosure, some other 
steps should have taken place.
    One form of that is restraints on so-called dual track 
processing.
    Mrs. Maloney. Thank you. Mr. Pearce?
    Mr. Pearce. Certainly, in our participation, in our agency 
review, we found significant efficiencies throughout the 
foreclosure process to ease around staffing and training. And 
that is in my testimony.
    And I think one of the things that Mr. Date raises is that 
there are different departments in mortgage servicers. The 
larger mortgage servicers don't always communicate very well 
with each other. And that can present some real challenges for 
borrowers.
    That is why the FDIC has strongly supported the idea of 
having a single point of contact, to have a real individual 
person there who can answer a borrower's questions, regardless 
of whether they are in the process of foreclosure or in the 
process of a loan modification.
    We think that would really add a lot to making this process 
work smoother, in addition to the improvements in staffing and 
training.
    Ms. Williams. I think you are asking a question that has a 
couple of dimensions: one, how the borrowers are dealt with in 
their interactions with the servicers; and two, the outreach to 
the borrower in working out the problems that they have with 
their mortgagers.
    I think what we have seen over the course of the last 
couple of years is that the servicers got a slow start in both 
respects. They have done a lot to improve on the outreach part 
in the initiatives they have undertaken in themselves and in 
the way that they partner with local, regional and national 
community organizations in those sort of events that 
Congressman Scott described.
    And there have been significant improvements in the way 
that they have dealt in their internal operations with 
customers, the single point of contact being one example.
    In the complaints process that we envisioned in our orders 
to have the servicers reach out to borrowers who were in any 
stage of the foreclosure process during specified time periods, 
we are going to be requiring even more aggressive outreach in 
that process.
    Chairwoman Capito. Thank you.
    The gentlelady's time has expired.
    I would like to recognize Chairman Neugebauer for 5 minutes 
for questions.
    Chairman Neugebauer. Yes. Thank you, Madam Chairwoman.
    Just to restate, I think everybody agrees that if the 
mortgage servicers violated the law and didn't have good 
policies, that you have taken the appropriate action. And 
nobody is faulting that.
    We also need to understand, though, that these servicers, 
in many cases, did not originate these loans. And so, in many 
cases, we have to careful of what we are punishing them for.
    Are we punishing them for poor servicing? Or are we trying 
to punish them for some mistakes that were made up the food 
chain?
    What I am most concerned about, though, is clear evidence 
that this Administration has been trying to install into this 
settlement agreement policies that this Congress has rejected. 
And that is the point that I want to cover this morning.
    And, Mr. Date, if you recall, Chairwoman Capito and myself 
and others wrote Secretary Geithner to express our concern 
about Ms. Warren's involvement in promoting the State attorneys 
general settlement.
    The response we got back was that the request was basically 
limited to advice. Yet, when we received documents that were 
produced to this committee Tuesday night, those documents 
showed that Ms. Warren actually took a leadership role in the 
settlement talks.
    For example, emails showed that the CFPB convened an 
emergency meeting with certain attorneys general to push 
settlement solutions that focus on principal reduction 
modifications. Would you agree that activity constitutes a 
little bit more than advice?
    Mr. Date. Thank you for the question.
    With respect to the request that was made to the Treasury 
Department and to Professor Warren, with respect to her 
participation or the Bureau's participation in the mortgage 
servicing settlement conversation, I do feel that the response 
has been unambiguous over time.
    And I suppose that, for my own part, I would reiterate it 
again today. We have been asked by the Secretary of the 
Treasury to provide advice to those Federal and State agencies 
involved in this matter.
    We tried to do that. And in doing so, we were active and I 
hope engaged participants in that dialogue. That, I believe, 
was the response at that time, Mr. Chairman. And I believe it 
is my response now.
    Chairman Neugebauer. I don't think it is just this one 
event here. We can look at a series of emails between Ms. 
Warren, yourself, and U.S. Bank CEO Richard Davis, documenting 
meetings held on March 10, 2011, and March 11, 2011.
    What was the nature of these meetings? And was anything 
about the settlement discussed in those meetings?
    Mr. Date. Mr. Davis, as you say, is the CEO of U.S. Bank. 
And we have had the opportunity to talk on several occasions in 
the past about a variety of issues. The nature of my role in 
particular is to lead the division that is called Research, 
Markets and Regulations.
    And, indeed, my intent and our division's intent is to make 
sure that what we do from a policy point of view is 
simultaneously grounded in empirical analysis, on the one hand, 
and a deep grounding in the pragmatism of what actually happens 
in the marketplace.
    To my recollection, any conversations with Mr. Davis and/or 
his team has been with that in mind. And in particular, in the 
meeting that you are discussing, I recall Professor Warren 
actually prefacing that meeting with an explicit statement that 
what that meeting was about is about the market broadly and 
not--
    Chairman Neugebauer. Let me just refresh your memory a 
little bit. In that email, it describes this needs test to 
determine the eligibility for principal reductions in loan 
modifications.
    So, this loan modification discussion has been evidently 
going on for a long period of time.
    And, in fact, I think in one of those emails, Mr. Davis 
said--it goes into detail of this presentation that he has and 
discussions that you all had on determining who is going to get 
loan modifications.
    Mr. Date. Without talking about anything in particular as 
it relates to U.S. Bank, I would be happy to talk about the 
nature of that conversation with Mr. Davis. It is broadly known 
that the institution acquired through the FDIC institutions 
with what I would characterize as a deeply-troubled mortgage 
portfolio.
    They, like other mortgage participants, have thought about 
the range of loss mitigation devices to use therein. Loss 
mitigations are a form of economic concession. And if you don't 
carefully think about how they are offered, it can trigger 
moral hazard which, of course, as any kind of non-recourse 
secured lender, you want to avoid.
    Chairman Neugebauer. Yes.
    Mr. Date. He was talking about one of the means by which 
that is done.
    Chairman Neugebauer. My time has expired. But I think that 
you have done a great job of avoiding answering the question.
    The truth is that the CFPB has been extremely involved in 
these negotiations. And there is other email traffic here with 
other CEOs where they are wanting to know, can we meet off the 
record, because we are concerned about what we are reading in 
the paper.
    And so, I think that is the troubling part of what we see 
going on here, is the fact that this agency, which you say on 
July 21st which has no Director, by the way. And a lot of us 
question whether your agency can actually be up and running 
on--
    Chairwoman Capito. The gentleman's time has expired.
    Chairman Neugebauer. --July 21st or not, because of the 
fact that you don't have an acting Director or the Director has 
not been nominated and confirmed by the Senate.
    But I think it is troubling that we find the extent of the 
involvement, be it banal, by the CFPB of really having much 
input--
    Chairwoman Capito. The gentleman's time has expired.
    I would like to recognize Mr. Capuano for 5 minutes.
    Before I do that, I would like to ask unanimous consent to 
enter into the record a statement from the Board of Governors 
of the Federal Reserve System, and also a statement from the 
National Association of REALTORS.
    Without objection, it is so ordered.
    Mr. Capuano?
    Mr. Capuano. Thank you, Madam Chairwoman.
    Mr. Attorney General, I think you raised some interesting 
points. I just need some clarification.
    You or your predecessor--I assume it was you--voluntarily 
joined this lawsuit?
    Mr. Strange. That was my predecessor.
    Mr. Capuano. Your predecessor, voluntarily. He wasn't 
required by any law, so he voluntarily joined. And for any 
settlement, is there a way for you to step back and say, 
``Look, we were glad to be a part of it up until now, but we 
don't want to participate.''
    Mr. Strange. Yes.
    Mr. Capuano. So anything that is agreed to by, for the sake 
of discussion, 49 others or 5 others, you do not have to 
participate in it?
    Mr. Strange. That is correct. Yes, sir.
    Mr. Capuano. That is a fair point. Thank you.
    That is important because I think some of the points you 
raised are important and particularly when they are important 
to you. I totally agree on the sovereignty issue. No one should 
require any State to take action that they don't want to take.
    So, I think you just answered that question for me 
satisfactorily.
    When you have been involved with other cases like this, or 
even in this case itself, in the final analysis, how do 50 
States or 10 States, or whatever the number is going to be, how 
do you finally come to an agreement at the end?
    Do you vote on it? Or is it a general consensus? How is it 
generally done?
    Mr. Strange. I am relatively new to this, since I was not 
sworn in until January of this year. So I sort of inherited 
this.
    Mr. Capuano. Okay.
    Mr. Strange. And so, as I have weighed into it, I couldn't 
speak to the history of these things that are done. This 
particular case is being led by Attorney General Miller from 
Iowa, who has been extremely active in these types of things 
for many, many years.
    So, I am sort of learning about it. That is why I am really 
speaking in terms of principal--
    Mr. Capuano. In the end, though, the attorneys general who 
are left at the table, the ones who have not walked away will 
have a say in the final decision. Is that accurate?
    Mr. Strange. The way this is structured is with a sort of a 
working group within the AGs. So I think there are maybe seven 
or eight AGs who are actively involved. I have not personally 
been involved in--
    Mr. Capuano. But no one from the outside can force you to 
come to a decision. Is that a fair assessment?
    Mr. Strange. Yes, sir.
    Mr. Capuano. And that includes the CFPB?
    Mr. Strange. I don't think anyone can force the attorney 
general to do anything.
    Mr. Capuano. That is my understanding. When you have done 
other--before the attorney general, were you involved in these 
kinds of matters?
    Mr. Strange. I did a lot of different types of corporate 
business transactions over the years.
    Mr. Capuano. And when you were involved in things like this 
in the past, would you ordinarily reach out to people who may 
not be participants for their expertise, for their input, for 
their advice?
    Mr. Strange. In my experience, I was typically dealing with 
parties and negotiated arrangements. There were two parties 
with direct involvement in the situation.
    So I really don't have a lot of experience in dealing with 
these sort of global policy matters.
    Mr. Capuano. That is a fair answer.
    I would like to ask Ms. Williams or others, you have been 
involved in similar things? Is it ordinary for people to reach 
out either to you or for you to reach out to other people who 
might have expertise and knowledge in an area that you don't?
    Ms. Williams. My experience is in the interagency process 
with the banking agencies. And so, I don't know if that 
parallels the experiences of having a 50-AG negotiating group.
    Within the OCC, we reach out to experts within the 
different departments to provide support.
    Mr. Capuano. Yes.
    Mr. Pearce, at the FDIC, have others reached out to you 
when you were a party to a suit? Or have you reached out to 
others to find expertise that you may not have available?
    Mr. Pearce. Sure. I think especially, as Ms. Williams' 
points out in her testimony, we are trying to align these 
things up as much as possible. And so having interagency 
consultations is a key part of that process to understand.
    Mr. Capuano. Fair enough.
    And I believe it was you, Ms. Williams. I would like to 
clarify.
    Is it fair to say that everybody should have a general 
interest, not to give up any rights or abilities, but a general 
interest in coordinated oversight and regulation of the 
financial services industry?
    Has anybody ever heard of anybody who is interested in 
having a discoordinated oversight and regulation, to make sure 
that every bank, every financial service agency has 20 
different regulators? They have not even talked to each other.
    Has anyone on the panel ever heard anybody advocate that 
position?
    I didn't think so, because we all want coordinated 
oversight. Is there anyone here who disagrees that Mr. Date's 
comment that on July 21st, the CFPB, whether you like it or 
not--that the CFPB will take over a significant amount of the 
regulatory oversight of this particular aspect of the financial 
services industry?
    Does anybody disagree with that statement?
    Ms. Williams. Congressman, one thing that I would clarify 
here is the transfers that occur on July the 21st do not 
transfer the safety and soundness authorities of the banking 
agencies.
    Mr. Capuano. I understand that. But do you disagree that a 
significant portion of the oversight of this industry will be 
transferred to the CFPB on July 21st?
    Ms. Williams. That is correct.
    Mr. Capuano. So, what we have is a situation where people, 
who may or may have not certain expertise, have reached out to 
an agency that is still in the creation situation, to ask their 
advice and coordination.
    And when they did that, though CFPB has no authority, no 
right, nor have they ever said that they can force anyone to 
agree to anything, nor do they have a vote at the table, so 
that the big crime here is that someone actually reached out 
and asked for advice.
    Chairwoman Capito. That was your time, Mr. Capuano.
    Mr. Capuano. I would suggest that is not only not only a 
crime, but it would be a crime to do otherwise.
    Chairwoman Capito. I would like to recognize the chairman 
of the full committee, Mr. Bachus, for 5 minutes for questions.
    Chairman Bachus. Thank you. I would like to clarify 
something first.
    When Ms. Warren testified in March before our committee, I 
specifically asked her if she had participated in negotiations. 
Her response was that she gave advice when asked. I then wrote 
her after the hearing and asked her if she would like to 
clarify.
    And at that time, she did say that she had been an active 
participant with both Federal and State agencies. I consider 
that quite different from advice, because I had her asked her 
if she participated.
    She was forthcoming in response to my letter, although most 
of the headlines at that time said that she gave the same 
response she gave at the hearing. You would have to be 
illiterate to think that. I don't think people read her 
response and compared it to her testimony.
    In that letter in March, Mrs. Capito and I asked her for 
any documents pertaining to that participation. We didn't get 
those until last Tuesday night.
    A lot of the documents were put out by Judicial Watch about 
a month ago. But it was Tuesday night of this week when we were 
given information which other independent sources had picked 
up.
    I think the staff has handed you the ``Perspective on 
Settlement Alternatives.'' This is a settlement proposal that 
the Consumer Financial Protection Bureau gave the attorney 
general back in February, is it not?
    Mr. Date. This is a document, Mr. Chairman, that 
describes--lending not comprehensively but in a way that is 
meant to propose ideas, put those ideas in--
    Chairman Bachus. No, it is more than an idea. You actually 
proposed a settlement of at least $25 billion. You actually say 
a $25 billion settlement would not be sufficient, do you not?
    Mr. Date. Mr. Chairman, I apologize. Would you mind?
    Chairman Bachus. Look at page two, where you say that 
servicers saved $20 billion, and $20 billion plus a $5 billion 
settlement seems too low.
    Mr. Date. No, Mr. Chairman. My reading--I am looking now at 
the top of the page.
    Chairman Bachus. Yes.
    Mr. Date. The second sentence says, ``as a result, a 
notional penalty of roughly $5 billion would seem too low.''
    Chairman Bachus. Yes, but you say that they saved more than 
$20 billion. Were you all proposing a $5 billion settlement or 
saying $25 billion wouldn't be enough?
    Mr. Date. Oh, I see. Here is what was done here. Obviously, 
there are a variety of ways to calibrate any kind of monetary 
penalty.
    Chairman Bachus. I am sure. But what I am asking is, you 
were suggesting that $25 billion would not be enough, correct?
    Mr. Date. No, I believe it says that $5 billion is not 
enough.
    Chairman Bachus. For a penalty.
    Mr. Date. If I am looking at--
    Chairman Bachus. For a penalty.
    Mr. Date. That is right, a notional penalty of roughly $5 
billion is too low.
    Chairman Bachus. Okay. And you proposed that the settlement 
be used for principal reduction, correct?
    Mr. Date. Mr. Chairman, I would be happy to describe the 
analysis that underpins this document that, obviously, is in 
the public domain.
    Chairman Bachus. When you say, ``A principal reduction 
mandate could be meaningfully additive to HAMP'' on page six, 
and ``PRM would mandate 3 million permanent modifications,'' 
you are advocating for a program to be an addition to HAMP or a 
HAMP-like program? Is that correct?
    Mr. Date. To be clear, this would be a component of a 
voluntary settlement.
    Chairman Bachus. I understand. Yes. You are right. You are 
proposing components of a settlement. Is that right?
    Mr. Date. That is right.
    Chairman Bachus. Okay.
    Mr. Date. Not by any means comprehensive. But the notion, 
just to ground what is here a bit, if it is helpful, is that 
because there are different means by which to think about the 
size of the penalty, what this principally does is it tries to 
say, well--and the analogy would be, ``If I stole a car and it 
is your job to punish me for stealing that car, I don't know 
what the right way for you to punish me is, but you should 
probably take the car away.''
    That is, in general, the--
    Chairman Bachus. Sure. So you propose taking the $20 
billion that they saved plus a penalty?
    Mr. Date. That would be a way in which--
    Chairman Bachus. Right. I am not arguing with you about the 
merits. I am just saying that you suggested that they saved $20 
billion. So in addition to that, you believe they ought to pay 
a penalty, which--
    Mr. Date. Mr. Chairman, I don't think that is what is 
actually in this document. I am not contesting that reasonable 
people might think that. But I am just not sure I have seen 
that.
    Chairman Bachus. Yes. All right, let me close by saying 
this. You proposed that the money from this settlement be used 
for mortgage principal reductions, correct?
    Mr. Date. That is a facet of what is presented here.
    Chairman Bachus. Right. Okay.
    Are you aware that we have a law, the Miscellaneous Receipt 
Settlement, that says that a settlement needs to go into the 
Treasury to pay down on the debt, as opposed to being used to 
create a new program?
    Mr. Date. I would not be able to tell you the specifics 
with respect to that. But I--
    Chairman Bachus. So you wouldn't be opposed to that, would 
you, that we just pay down the debt with this settlement?
    Mr. Date. Mr. Chairman, again, I should not--
    Chairman Bachus. Instead of--
    Chairwoman Capito. The gentleman's time has expired.
    Chairman Bachus. I will close. But instead of a principal 
reduction, that would be an alternative, would it not?
    Chairwoman Capito. The gentleman's time has expired.
    Chairman Bachus. Thank you.
    Chairwoman Capito. The ranking member of the full committee 
is recognized for 5 minutes.
    Mr. Frank. I guess, I am here thinking of Claude Rains and 
his great role in ``Casablanca'' as the police chief. 
Apparently, my colleagues are shocked--shocked--that a leading 
consumer adviser to the President made suggestions about how we 
should deal with a major consumer problem.
    I am absolutely baffled by what this is all about. Yes, 
Elizabeth Warren, who is a very able, very thoughtful expert in 
the field, apparently made some suggestions.
    They weren't binding. They weren't coercive. She made some 
suggestions.
    And instead of talking about the merits of the issues, we 
are in this panic or outrage that she dared do that. This is 
the silliest thing I ever heard of. I am very pleased that Ms. 
Warren made these suggestions.
    Let me ask you, Attorney General Strange, were you attorney 
general in February of this year?
    Mr. Strange. Yes, sir.
    Mr. Frank. Did you feel coerced by Elizabeth Warren? Did 
she threaten you in any way? Did you need to get protection 
against her?
    Mr. Strange. I think I may have met her once in passing, 
but she didn't seem threatening.
    [laughter]
    Mr. Frank. Thank you. I appreciate the--
    Mr. Strange. Personally, anyway.
    Mr. Frank. Maybe some of my Republican colleagues will take 
heart from your courage in being willing to stand up against 
this incredible force, this Elizabeth Warren.
    I guess, maybe it is a play that we should be writing: 
``Who is afraid of Elizabeth Warren?'' She made suggestions. 
She actually made them in the form of coherent proposals.
    Maybe if she was incoherent or internally inconsistent, my 
colleagues would have been less threatened.
    And then, she had the temerity to suggest that those 
financial institutions, many of which made loans they shouldn't 
have made and packaged them into securities that shouldn't have 
been sold, and then incompetently serviced them, that they 
should pay some penalty.
    That is consistent, because my colleagues on the other side 
have, throughout this, been very protective of the financial 
assets of the large institutions. Indeed, there have been 
complaints about the money that has been spent in part of this.
    Under the bill that originally passed the conference 
committee last year, in the financial reform bill, there was a 
section that said $20 billion would come to administer this 
financial reform bill, including some of the mortgage relief 
for the unemployed and others, from an assessment on financial 
institutions that had $50 billion or more in assets.
    And to get the Republican votes we needed in the Senate to 
pass it, that was transferred from the large financial 
institutions to the taxpayer. So there has been a consistency 
here, in terms of worrying that the financial institutions 
would be somehow unfairly put upon.
    And the suggestion, apparently, the CFPB--actually, Ms. 
Warren suggested that the estimate be what they saved and a 
penalty. That might be wrong. That might be right. Maybe you 
want to do principal reduction. Maybe you don't.
    I have been a little skeptical of too broad a scale 
principal reduction. Although where we are talking about the 
unemployed, I think there is a very clear case for that.
    But the notion that it is improper for Elizabeth Warren to 
suggest that in a wholly non-coercive way--there is an 
obsession with Elizabeth Warren.
    And let's be clear where it comes from. It comes from 
people who never wanted an independent consumer bureau, who 
wanted consumer protection to continue to be with the 
regulators whose job, as the chairman said, was to serve the 
banks.
    They did not want independent consumer protection taken 
away from those regulators. We found in the Majority that the 
regulators had not done a good job, and we wanted to put 
consumer protection in an independent agency.
    Part of what they want to do is to take away that 
independence, and give the bank regulators the right to 
overrule the consumer agency. But they don't like the consumer 
agency.
    They haven't been able to make a head-on assault because it 
is kind of popular. Someone said what we have is, let us 
demonize Elizabeth Warren. Let us discredit the consumer agency 
by attacking the person who I think ought to be the head of it, 
and who had certainly played a major in coming up with the idea 
and worrying about it.
    And what did they convict her of? In fact, I guess Ms. 
Warren should take comfort in the fact that the worst thing 
they can say about her, people who are really determined to 
kind of diminish her reputation--as the chairman said once, 
this isn't about Elizabeth Warren. But I wouldn't take a lie 
detector test on that.
    The worst thing they can come up with to discredit 
Elizabeth Warren is that a woman charged with protecting 
consumers and looking out for consumer interests proposed a 
scheme, a plan for dealing with the mortgage situation.
    How terrible of her. Shame on her that she would actually 
sit down and try and figure out what she thought was good, and 
then submitted in a wholly non-coercive, suggestive way to 
others.
    I have to tell you that the attorney general wasn't 
intimated. I know Ms. Williams. Sometimes I wish I could 
intimidate her a little more than I have been able to.
    I don't think she was in any way frightened by this. They 
would have different rules on preemption if she were more 
easily influenceable. I don't think anybody has ever said, oh, 
that Elizabeth Warren, she threatened to beat me up. She did 
all this to me--
    Chairwoman Capito. Your time has expired.
    Mr. Frank. Come save me and protect me from Elizabeth 
Warren. And I hope--a little more time. To the chairman, 
another 10 seconds. I would just say this, I would like to--
    Chairman Bachus. Madam Chairwoman, I would like at least 30 
seconds to respond to the--
    Mr. Frank. I don't see why--
    Chairwoman Capito. Oh, hold it. Hold it. Hold it.
    Mr. Frank. Pardon me, but the gentleman--
    Chairwoman Capito. In respect to this, you can finish in 10 
seconds.
    Mr. Frank. The gentleman had 6 minutes. And I don't 
understand that we go back and forth and respond. That is not 
the 5-minute rule.
    But the point is this. I will now offer to anyone who feels 
threatened by Elizabeth Warren, let us know, and I will do 
everything I can to protect them from this menace of a consumer 
protection advisor making suggestions.
    Chairwoman Capito. Mr. Fitzpatrick for 5 minutes.
    Mr. Fitzpatrick. Thank you, Madam Chairwoman.
    Mr. Date, what is about the deficiencies of the mortgage 
servicers that justifies a principal reduction?
    Mr. Date. Thank you, Congressman, for the question.
    As you point out, the deficiencies of the mortgage 
servicers, which principally have been documented by the 
examination of our sister agencies, are troubling in that they 
are pervasive and, within the scope of the examinations, quite 
profound.
    And it is certainly a fair question to ask in those cases 
where violations, for example, of a law have taken place. So it 
would be a reasonable question, I suppose, to ask in a case of 
an active duty soldier who has been foreclosed upon in 
violation of the Service Members Civil Relief Act. What is the 
appropriate penalty for that kind of activity? And what is the 
appropriate remedy and how should it be structured?
    Of course, there are a range of alternatives with respect 
to these questions. And that is precisely why I have been glad 
that the Secretary of the Treasury has asked us to try to 
inform those deliberations amongst the agencies that have 
authority here.
    Mr. Fitzpatrick. For instance, do you see a causal link 
between robo-signing, on the one hand, and a particular 
mortgager or borrower being underwater? Is there a causal link, 
one to the other?
    Mr. Date. It is a good question, because the robo-signing, 
in the way that it is most customarily thought about, entails 
the systematically false provision of the affidavits with 
respect to various judicial mechanisms around mortgage 
servicing in particular.
    And because, after all this is not the furniture business--
it is not as if the paperwork is somehow ancillary to the main 
business. This is financial services. The paperwork is kind of 
the point, in that the documentation with respect to these 
transactions is meant to provide investors with the comfort 
that they have and that they need in order to put money into 
the system.
    And it is meant to provide borrowers with the confidence 
protection that they have with respect to the credit 
transaction that they have entered.
    Mr. Fitzpatrick. Attorney General Strange, you testified 
that you are concerned that the proposed settlement terms would 
force a State like Alabama, which is a non-judicial foreclosure 
State, to become a judicial foreclosure State. Can you expand 
on that?
    Mr. Strange. Yes, Congressman.
    My basic concern is that our State has chosen a method for 
handling home foreclosure. Our State legislature considered the 
alternatives and voted on it.
    My concern is that a settlement of some kind that imposes 
on not just my State, but the 26 or 27 other States, the 
majority of States that have chosen this path, is somehow 
altered or converted without the approval of the legislature 
that put in place the original plan.
    That is really my overarching concern. That kind of policy 
issue really to me seems to be a decision for the Members of 
the Congress here or for the members of the State legislature, 
not a group of attorneys general.
    Attorneys general are very good at enforcing the law and 
preventing future illegal activities. They are not very good, 
in my experience, economic policy experts.
    Mr. Fitzpatrick. Where you aware of the proposed settlement 
terms before they were sent to the mortgage servicers?
    Mr. Strange. I have not been in the loop in terms of the 
details of the settlement, no.
    Mr. Fitzpatrick. Do you believe it is the role of attorneys 
general to be involved in setting national servicing policies?
    Mr. Strange. I do not. I believe it is our job to enforce 
the law, to protect consumers. As I mentioned in my testimony, 
that is a top priority of ours.
    I believe the policy matters ought to be left to the 
policymakers, who are here in this room in the Congress and in 
the State legislatures.
    Mr. Fitzpatrick. Okay. I yield back. Thank you.
    Chairwoman Capito. The gentleman yields back.
    The gentlelady from California is recognized for 5 minutes.
    Ms. Waters. Thank you very much, Madam Chairwoman.
    I don't know if I have questions as much as I am perplexed 
about how this subprime meltdown, which has caused all of these 
foreclosures, and the so-called efforts to help homeowners has 
could fail so miserably.
    This review, I guess that was led by OCC--was it--that 
supposedly found about 14 loan modifications that have been 
turned down and haven't been done correctly. Where is that? Are 
you familiar with that, Ms. Williams?
    Ms. Williams. Congresswoman, are you referring to the--
    Ms. Waters. The interagency foreclosure review.
    Ms. Williams. The interagency foreclosure review.
    Ms. Waters. Are you familiar with that?
    Ms. Williams. I am familiar with that report, yes.
    Ms. Waters. Are you familiar with the fact that out of 
2,800 files, they found a small number of foreclosures that 
should not have proceeded because the borrower was a member of 
the military, covered by the Service Members Civil Relief Act?
    Is that what you understand they found?
    Ms. Williams. That is correct. But as I said in my 
testimony, the horizontal examinations--
    Ms. Waters. I can't hear you.
    Ms. Williams. The horizontal examinations that were done 
relied on a sample of loan files of each of the servicers. So 
there was a limited sample that was covered in those exams.
    Ms. Waters. We have basically projected out, with the 
number of foreclosures that have taken place, that exactly 
10,000 homeowners probably had been wrongfully foreclosed upon. 
Did you do those kind of projections?
    Ms. Williams. Congresswoman, the purpose of the look-back 
process that is part of the enforcement orders issued by the 
OCC and the other banking agencies is to specifically identify 
homeowners who were financially harmed as a result of the 
deficient practices.
    So we have not done a look back of the envelope 
extrapolation. What the enforcement orders require is a very 
robust process using independent consultants to identify 
homeowners who did suffer financial harm as a result of the 
petition.
    Ms. Waters. I am not so sure what that means, but let me 
tell you what I experienced in working with servicers. I did 
get some waivers from homeowners. We were bombarded with calls 
and we started calling trying to find out what was going on. 
And over a period of time, it was just unbelievable.
    First of all, they lost records. Was that identified, how 
many records get lost all the time? Is anybody aware of that?
    Ms. Williams. Yes.
    Ms. Waters. Also, are you aware of the problem of fees? 
Homeowners sometimes, even if they get to modification, by the 
time they pay the late fees, the attorney's fees, the brokerage 
price opinion fees, the process fees that the mortgages back 
up, the payments back up where they were before they got the 
loan modification. Are you familiar with that?
    Ms. Williams. The area of fees, whether fees were 
excessive, whether they were reasonable and customary, whether 
they were specifically authorized by the loan document that the 
borrower had with that particular lender, is an area that will 
be specifically looked at in this look-back process, pursuant 
to our enforcement order.
    Ms. Waters. Don't you think that consumers should have more 
protection than anyone should be able to say that you signed 
this document and you agreed to all of these fees. I am sure 
you are aware that most people don't know in that fine print 
that they have all of these brokerage price opinion fees and 
process fees.
    Most consumers don't know that. Wouldn't you agree?
    Ms. Williams. I think that consumer disclosures is an area 
where there is a lot of room for improvement in the financial 
services arena. And we strongly support that.
    Ms. Waters. Since we have three of the too-big-to-fail 
banks--Bank of America, Wells, and Chase--who have 60 percent 
of all servicing, don't you think we ought to be able to get 
our arms around that? They are the ones who are doing all of 
this servicing.
    In addition to all of the lost papers and the fees, etc., I 
discovered that many of these servicers were not very well 
trained. Has that been looked at? And has something been done 
about that?
    Ms. Williams. That has also been looked at. And there are 
provisions in our enforcement orders that specifically 
addressed staffing, both in terms of numbers and training of 
staff involved in the servicing loss mitigation, loan 
modification, and foreclosure process.
    Ms. Waters. Are you aware that at Bank of America, when one 
first calls to try and get some help, they go to a loss 
mitigation that is offshore, oftentimes?
    Ms. Williams. I am personally not aware of that.
    Ms. Waters. Would you check it out?
    Ms. Williams. I certainly can.
    Chairwoman Capito. The gentlewoman--
    Ms. Waters. Thank you. I yield back.
    Chairwoman Capito. Mr. Hensarling for 5 minutes for 
questions.
    Mr. Hensarling. Thank you, Madam Chairwoman.
    Ms. Williams, in your testimony, you talked about the 
examinations that were produced by your agency and several 
others, the prudential regulators. I believe there was a sample 
size of 2,800 borrower foreclosure cases, correct?
    Ms. Williams. Yes. That is correct.
    Mr. Hensarling. How was that sample chosen?
    Ms. Williams. First of all, the sample was 200 per 
servicer. It was a judgmental sample, determined by the 
examiners responsible for the particular institution. There was 
a mix of judicial and non-judicial States that were--
    Mr. Hensarling. Did the agencies consider it to be 
representational of the larger universe? As I understand it, 
there are 1 million, 2 million, maybe 3 million under the 
consent decree, foreclosure cases that the mortgage servicers 
are going to be required to reach out to. Is that correct?
    Ms. Williams. The samples were intended to be 
representative of the types of standards and of the processing 
centers and--
    Mr. Hensarling. Okay. On page four of your testimony, you 
say, ``In general, the examinations found that the loans in the 
sample were seriously delinquent.''
    So I think you are telling me that at least you consider 
the sample to be representational. The loans in the sample were 
seriously delinquent.
    I know that mortgage servicers have gone out and done a lot 
of bad and sloppy work. And now I am trying to figure out the 
extent of it.
    So, to some extent, what we are trying to figure out here 
is just how widespread this damage is. So it sounds like the 
vast majority of these loans, there are going to be foreclosure 
proceedings against these people anyway.
    I will ask anybody else on this panel, is there another 
sample size between the 2,800 borrower foreclosure cases that 
your agencies have examined? And what is the number of those 
who have been foreclosed upon who were not ``seriously 
delinquent.''
    Do you have a number, anybody else on the panel?
    So what we know is limited to this 2,800 sample size. And 
the conclusion is that these folks were seriously delinquent.
    Mr. Date, in your testimony, you say that the Bureau is not 
yet open for business. It sounds like you have been pretty busy 
for an agency that is not yet in business.
    In your term sheet, you clearly suggest a $20 billion 
settlement. I am looking at your term sheet dated February 
14th, although I don't see a page number. I am sorry, on page 
two, you suggest a $20 billion settlement.
    I guess my question is this, you have been charged with 
protecting consumers and you are also suggesting $20 billion in 
principal write downs, is that correct? And I believe you 
testified earlier that was ``an aspect to it.''
    Did I hear you correctly, Mr. Date?
    Mr. Date. Yes. But just to clarify, you are referring, I am 
assuming, to the presentation called, ``Perspective On 
Settlement''--
    Mr. Hensarling. Correct.
    Mr. Date. And not, by contrast, the 27-page State attorney 
general term sheet that I believe was--
    Mr. Hensarling. Wasn't this your perspective of what a term 
sheet should be?
    Mr. Date. The term sheet is rather more comprehensive than 
the--
    Mr. Hensarling. Okay.
    Mr. Date. That is the distinction I am trying to draw.
    Mr. Hensarling. Here is my question. If you are suggesting 
a $20 billion in principal write down, we know right now that 
already the taxpayers are out $150 billion so far in the GSEs. 
The Fed, I believe, has invested over a trillion or about a 
trillion dollars in mortgage-backed securities already.
    That deals with taxpayers not consumers. But every single 
investor group I know of in America is fearful of a government-
forced principal reduction.
    And so I guess my question is this. If you are there to 
protect consumers, does a robust private capital mortgage 
market--does the CFPB consider that to be part of consumer 
protection, yes or no?
    Mr. Date. Access to financial markets is a part of our 
mandate, Congressman. I am happy that it is.
    Mr. Hensarling. So would you be concerned if there was less 
private capital coming into the market because of this global 
settlement that you suggest?
    Mr. Date. Congressman, I am concerned that the pervasive 
and profound deficiencies in mortgage servicing have made it 
difficult for mortgage private label investors to have 
confidence in how it is that their assets are going to be 
serviced. I think we should all share that concern.
    Chairwoman Capito. The gentlemen's time has expired.
    The gentleman from Texas, Mr. Hinojosa
    Mr. Hinojosa. Thank you, Madam Chairwoman.
    I ask unanimous consent to insert into today's joint 
hearing record Supplemental Directive 11-06, entitled, ``Making 
Home Affordable Program--Updates to Servicer Incentives,'' 
dated July 6, 2011.
    Chairwoman Capito. Without objection, it is so ordered.
    Mr. Hinojosa. Thank you.
    Last month, the Treasury Department rated the performance 
of the 14 largest servicers participating in the Making Home 
Affordable Program, ranking them on three criteria: number one, 
identifying and contacting homeowners; number two, homeowner 
evaluation and assistance; and number three, program management 
reporting and governance.
    Treasury determined that six of the servicers needed 
moderate improvement and four needed substantial improvement in 
the first quarter of 2011. None of the servicers needed only 
minor improvement.
    The interagency review of foreclosure policies and 
practices found that, ``individuals who signed foreclosure 
affidavits often did not personally check the documents for 
accuracy or possess a level of knowledge of the information 
that they attested to in those affidavits.
    ``In addition, some foreclosure documents indicated they 
were executed under oath when no oath was administered. 
Examiners also found that the majority of the servicers had 
improper notary practices, which failed to conform to State 
legal requirements. These determinations were based primarily 
on servicers' self assessment of their foreclosure processes 
and examiners' interviews of servicer staff involved in the 
preparation of foreclosure documents.''
    It seems to me that there is room here for investigation 
claims that borrowers are often charged exorbitant and 
unjustified forced place insurance. Can one of you tell me how 
this is being handled so as to help these individuals we are 
trying to help out?
    Ms. Williams. Congressman, I can start.
    Mr. Hinojosa. Yes.
    Ms. Williams. The issue of fees and whether borrowers were 
charged unreasonable fees, fees that were not reasonable and 
customary, or fees that were not authorized under the terms of 
the agreements that they entered into, is an element that is 
part of the look-back process pursuant to our enforcement 
orders.
    So that is one of the things that will be part of the 
review of the borrowers who are in the scope of that look-back.
    Mr. Hinojosa. Anyone else?
    Mr. Date. Congressman, I know that Title XIV of Dodd-Frank 
appropriately, to my mind, includes the request for the Bureau 
to undertake an evaluation of this forced-place insurance issue 
and includes rulemaking authority. Obviously, anything that the 
Bureau would do in this respect would be grounded in real 
analysis on what the impact would be and whether it would, in 
fact, help the market and help consumers.
    Mr. Hinojosa. We have seen an impact that the actions of 
the top 14 servicers had on our military servicemen, 
servicewomen, who put their lives at stake each and every day 
to protect us here in America. What actions can be taken to 
ensure that those troops are protected from unscrupulous 
lenders and mortgage servicers?
    Mr. Strange. Congressman, from the law enforcement 
perspective, we are seeking and extremely interested in any 
instance like that. And I am sure I can speak for all the 
attorneys general that if that type of activity comes to our 
attention, we will pursue it to the fullest extent of the law.
    Ms. Williams. Congressman, actions have already been taken 
by the Department of Justice in some respects. But I think the 
short answer to your question is 100 percent compliance with 
the Servicemembers Civil Relief Act.
    Mr. Hinojosa. That is good to know.
    With that, Madam Chairwoman, I yield back.
    Chairwoman Capito. The gentleman yields back.
    Mr. Royce, for 5 minutes.
    Mr. Royce. Thank you, Madam Chairwoman.
    I am going to ask Ms. Williams some questions.
    And Ms. Williams, I am not a fan of bifurcated regulation. 
I think it has had some very adverse consequences. But as I 
mentioned in my opening statement, the number of existing or 
proposed servicing standards is pretty daunting.
    You have HAMP, FHFA for Fannie and Freddie, individual 
State laws, bank regulator consent orders, the bank regulator 
joint interagency initiative, the legal settlement reported in 
the press. You have risk retention for qualified residential 
mortgages. You have congressional proposals.
    You have the potential activity by the CFPB. And I quoted 
from the New York Times, in terms of the overhang or the 
inability here. I think you have 60-some years worth in New 
York State in order to work through the backlog.
    So you mentioned in your prepared testimony that the OCC 
supports the development of a uniform servicing standard. And 
you are all working with the various regulatory agencies to 
come up with such a standard.
    I wanted to ask you about that. And I was going to say, 
looking at the backlog of foreclosures throughout the country, 
what impact does the lack of a clearly defined set of rules 
have on the confusion throughout the market?
    Is that adding to the delays? And does that add perhaps to 
recovery when you have that amount of confusion out there?
    Ms. Williams. To the extent that lenders and servicers are 
uncertain about what the rules of the road are in proceeding 
with their mortgage servicing and with the foreclosure process, 
that does slow down the process.
    As I said in my testimony, there are under way right now a 
number of different initiatives that deal with mortgage 
servicing, in the larger sense, mortgage servicing with respect 
to current and performing loans, loss mitigation, including 
loan modification efforts, and also the foreclosure process, 
and of mortgage servicing.
    And we do think that it is very important for the different 
players to try to bring those together to be as consistent as 
possible, so that there is a single set of standards, to the 
extent possible, so that the servicers clearly know what is 
expected of them, and so that customers know what to expect 
from their servicer.
    Mr. Royce. The committee has heard a lot about coordinated 
rulemaking efforts. I can just give you my take on this sitting 
through the hearings and then talking to people in the 
regulatory community about their feelings.
    And the truth seems to be that there is little 
communication and coordination occurring in many, many ways, 
partly due to regulatory turf battles, partly the fact that we 
just don't have this one clear set of rules.
    And I think it is in everybody's interest to see that this 
is done right. But let us say for a minute the New York Times 
is right in this story of a week-and-a-half ago. Let us say 
that New York State, that it will really take lenders 62 years 
at the current pace.
    What might that portend going forward? How are we going to 
see a return to the private market when we are building so many 
inconsistencies into the system?
    Ms. Williams. Congressman, I don't recall all of the 
details of the article that you are referring to. But it is 
premised on the current pace. One would hope that that current 
pace isn't going to be the pace going forward once we got some 
clarity in the standards that are expected going forward.
    Mr. Royce. As the story goes through also other States, New 
Jersey 49 years, Florida, Massachusetts, Illinois--it would 
take about a decade in those States. So, again, we are dealing 
here with bifurcated regulation, with 50 different States, with 
50 different sets of rules.
    And even at the Federal level, bifurcated regulations 
without the common standard yet. Until we get it, it is hard to 
figure out how we move out of this morass and sort things 
through in the marketplace with respect to the overhang.
    I yield back, Madam Chairwoman.
    Chairwoman Capito. The gentleman yields back.
    Mr. Miller, from North Carolina, for 5 minutes for 
questions.
    Mr. Miller of North Carolina. Thank you, Madam Chairwoman.
    The American people are justifiably skeptical and I am 
skeptical that anybody who has been involved in all this, who 
is supposed to be independent, has actually been independent. 
That certainly was true at the rating agencies. Everybody 
involved seems to have deep business ties with each other.
    And even when they are supposed to be looking after 
somebody else, they seem to be just looking after each other. 
It is all the same folks, whether they are called servicers or 
trustees or securitizers or whatever else.
    Ms. Williams, the consent order a couple of months ago with 
the 14 servicers required an independent review, a consultant's 
independent lay review of some of the files.
    Mr. Pearce, in his testimony, said that review should 
include all foreclosures where the homeowner had applied for 
modification or had filed a complaint against a servicer or was 
a member of the military, and that because of the importance of 
the review and the skepticism about whether they are really 
independent or not, that there will be an interagency group 
that would sample the reviews and look hard at them to see how 
they had been done.
    Do you agree with that?
    Ms. Williams. I think the approach that we are taking at 
this point is to share information. We have been sharing 
information among the agencies that have been participating in 
the reviews in other respects. But we have not gotten to the 
point of having sort of an interagency second review as part of 
that process.
    Mr. Miller of North Carolina. Are you telling me, then, you 
are taking a--whether or not you are doing it in consultation 
with others or with an interagency group, I took that to be 
that the FDIC was volunteering to be part of an interagency--
just as in Mr. Pearce's testimony, they volunteered to work 
with you in that and be part of an interagency operation.
    But you say that you are taking a hard look at a reasonable 
sample of those files?
    Ms. Williams. Oh, absolutely.
    Mr. Miller of North Carolina. And does it include all of 
those, whether it is in the foreclosure, where the homeowner 
applied for modification or filed a complaint or is in the 
military?
    Ms. Williams. What we are in the process of doing is 
identifying the level of review for different segments, 
different high-risk segments, and what the factors are that 
will trigger a 100 percent review versus the sampling approach.
    Mr. Miller of North Carolina. Okay. There is a further 
concern that contributes to the skepticism of the American 
people and me. Brandeis said that the best disinfectant was 
sunlight, and the street lamp the most efficient policeman. 
There has been no light on most of this. All of this has been 
in the dark.
    Will the result of those reviews be public? To what extent 
will it be public, so the public can look over your shoulder 
and decide whether you are really being an independent 
watchdog, as you were supposed to be?
    Ms. Williams. Congressman, what we anticipate is probably 
two public-type reports as we go through this process. One, an 
interim report to describe the structure of the look-back 
process, sort of the details of how the whole process is going 
to be conducted. And this will get to some of the questions 
that you just asked.
    And then a report at the end of the process that will be 
similar to the interagency horizontal report--
    Mr. Miller of North Carolina. Reports from the consultants, 
the independent--
    Ms. Williams. No, the reports that the agency would put out 
describing the--
    Mr. Miller of North Carolina. Their review?
    Ms. Williams. --the look-back process, describing the 
findings, describing the financial remediation that would be 
provided.
    What we would not anticipate doing is having bank-specific 
information because that is confidential bank supervisory 
information, but providing information about the scope and the 
details across-the-board.
    Mr. Miller of North Carolina. Mr. Pearce, do you have a 
response to the question about the necessary views that address 
your testimony?
    Mr. Pearce. I guess I would say that people have been 
skeptical about what has gone on in the mortgage servicing, and 
whether the servicers that have made errors in following State 
laws and other laws that have been on the books for a long 
time, whether they are going to be held accountable for that.
    And so I think the FDIC's view, in consultation with our 
fellow regulators, is that that this look-back process really 
does need to be robust. And it needs to look at the areas where 
we think there is likely to be harm.
    As Ms. Williams stated, the sampling approach can really 
identify where there might be errors and then how many errors 
you might find there. But it won't go all the way for these 
high risk segments, like borrowers who applied for a loan 
modification and then ended up through foreclosure that--excuse 
me.
    Just to finish up, having a full review of those files 
seems to be pretty fundamental, in our view.
    Mr. Grimm [presiding]. Thank you.
    Representative Hayworth, you are recognized for 5 minutes 
for questioning.
    Dr. Hayworth. Thank you, Mr. Chairman.
    Mr. Date, in particular, there have been questions about 
whether or not the CFPB should be viewed primarily as a 
banking--or substantively as a banking regulator or more as a 
consumer protection agency to the extent that it has considered 
itself, if you will, or if it is considered to be a banking 
regulator, then the Federal Financial Institution Examination 
Council's policy presumably would be applicable to the CFPB's 
actions, vis-a-vis some type of financial institutions 
obviously.
    And in the assessment of penalties and in this prospective 
document that we have all been talking about, there was 
reference to penalties in particular regarding deficits in 
mortgage servicing.
    There are mitigating factors that have to be considered in 
terms of FFIEC policy. There is the whole list of mitigating 
factors, including the size of the institution, evidence of 
past violations, evidence of concealment, etc., that themselves 
flow from certain statutory requirements regarding banking 
regulations.
    So how is the CFPB considering its activities in terms of 
those FFIEC guidelines?
    Mr. Date. Thank you, Congressman.
    With respect to specifically the FFIEC guidelines, broadly 
speaking, the Bureau will, as my understanding, participate in 
the FFIEC. The Bureau's Director will be a member of the 
Financial Stability Oversight Council.
    I spent most of my career as a banker. I can assure you 
that in that capacity, someone with supervisory authority over, 
for example, the Truth in Lending Act and RESPA, etc., I would 
view it as a bank regulator. And that is certainly how it is 
that we are thinking about what we are setting up.
    With respect to the mitigating circumstances associated 
with any putative settlement, I am confident that the people at 
the table, in terms of the Department of Justice and the State 
attorneys general, as well as presumably the legal 
representatives of whatever servicers might be involved, are 
considering and making arguments about mitigants in the 
industry.
    Dr. Hayworth. So, in other words, you are not necessarily 
subscribing specifically to FFIEC policy. That hasn't been 
internally determined, yet it is still all under consideration?
    Mr. Date. For context, I will explain my role at the 
Bureau, but then also point towards what might be a productive 
answer to your question. I think examination practices in the 
main.
    My role at the Bureau is really running the division called 
Research, Markets and Regulations. There is an Assistant 
Director for Depository Supervision who, among other things, 
has been recruiting a team that is ready to take over 
supervisory authority with respect to the specifically 
enumerated Federal consumer financial protection laws, as of 
July 21st.
    And they have been hard at work to make sure we are ready 
to use guidelines, policies, and procedures to that end. Again, 
my understanding is that would be in light of existing 
protocols, and to the extent possible coordinated.
    Dr. Hayworth. The importance being obviously that since we 
are talking about penalties being assessed against banks in 
regard to their relationship to the mortgage servicers--
obviously, you are getting in that issue through the banks 
here. And we are talking about the broader issue of bringing 
private capital into the mortgage marketplace, encouraging 
that.
    If penalties are assessed without due consideration for 
what banks, as you know very well, consider to be a policy that 
they understand and are familiar with, then it increases the 
uncertainty. It might deter further or enlarge participation by 
private capital in the marketplace.
    Any comments by any of our other panelist would be welcome 
in that regard.
    Mr. Pearce. I guess that from the FDIC's point of view, I 
think we are concerned that the servicing errors have really 
created an environment where there may be lots of different 
litigation and claims at either the State level or Federal 
level, not only bank regulators or the Department of Justice, 
but there may be other Federal agencies or other State 
regulatory authorities that have issues.
    So the range of government parties out there that may have 
some claim related to servicer errors. There is private 
litigation going on relating to loan modification programs, 
enhanced and non-enhanced, whether a chain of title is secure 
in that.
    And so I think the point there is that resolving these 
issues is really important to get private capital back in the 
marketplace, and so a comprehensive resolution, we would like 
to see that if we can.
    Mr. Grimm. The gentlelady's time has expired.
    The gentleman from Georgia is recognized for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman. I appreciate 
that.
    As I mentioned in my opening remarks, we had extraordinary 
success in Atlanta, Georgia, with our home foreclosure event. 
And Mr. Raj Date--I hope I didn't do too much injustice to your 
name there. But you are with Treasury, although you are with 
the CFPB--is that correct?
    Mr. Date. During the stand-up period for the CFPB, the 
Bureau of which I am an employee is under the governance of the 
Secretary of the Treasury, during that--
    Mr. Scott. Excellent. The only reason is I want you to get 
a message to the Treasury for me, especially Ms. Alvina McHale, 
Assistant Secretary Kim Wallace, and the acting Secretary for 
the U.S. Treasury Office of Financial Stability, Tim Massad. 
They really worked tremendously in making such a success that 
we got over 2,000 homes prevented from foreclosure in this 
event.
    It opened my eyes to a world of which I was only dimly 
aware. And I feel so much stronger now about how we can attack 
and solve this problem.
    This is a war that we have going out here. And so many of 
our American people and the struggling homeowners are just 
victims because of a lack of information, or a lack of access 
for that information. For it is there. We have a plethora of 
programs.
    And the reason we were able to solve this--and people came 
out. As I have said before, thousands and thousands. I walked 
the lines. I talked with thousands of people, so I learned 
exactly what was on their minds. The complaints about the loan 
servicers not returning calls, multiple people, people 
foreclosing without the proper knowledge of the loan, etc.
    People were very, very frustrated. But when we were able to 
get in there, we were able to solve those problems.
    But there are two points I want to address here. One is the 
HAMP program, which has come under a lot of criticism--but let 
me tell you that we were able to effectively use HAMP in over 
200 of those cases right there on the spot.
    And the reason for that was because there are some banks, 
like Bank of America was there, who made the decision to bring 
their--what do you call--loan underwriters. Excuse me. When 
they brought their underwriters there, they could do the deal 
right there.
    This was a major move. And it should be encouraged.
    So, I really believe that if your Department continues that 
kind of work and outreach--if it worked in Atlanta, Georgia, 
that way, just imagine what that would be if it was done over 
and over. Like I said, it is a war. We have to get this 
information out to the people and make sure that happens.
    I do want to get your comments, especially the Office of 
the Comptroller of the Currency and the FDIC, on the move that 
you are making to deal with the loan servicers' issues and 
deficiencies which is this consent agreement.
    Could you tell me exactly, and the American people, what 
that is and why we are having the consent agreement? And then 
explain which types of servicers are not subject to the consent 
agreement? This I understand is a major tool that we are using 
now to address some of these deficiencies of the loan 
servicers.
    Ms. Williams, could you start?
    Ms. Williams. The reason why we have these consent 
agreements is because there were serious deficiencies in the 
foreclosure processes of the large mortgage servicers.
    And the consent agreements are extensive. They require 
major changes in significant areas of the servicers' 
compliance, governance, mortgage servicing oversight, loss 
mitigation, including loan modifications, foreclosure 
processes, MIS.
    They are very comprehensive.
    Mr. Scott. Why are certain loan servicers not subject to 
the consent agreement and others are? Why is that? And who are 
they?
    Ms. Williams. When we embarked on the interagency 
horizontal exam, the 14 largest federally-supervised mortgage 
servicers were identified, just in looking at the volume of 
mortgages that they handle. And so those were the entities that 
were subject to the interagency exam process.
    None of those entities came out of it with a good grade. 
And so, therefore, all of them are subject to the orders.
    Mr. Scott. Okay.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Scott. Thank you, Madam Chairwoman.
    Chairwoman Capito. Mr. Canseco, for 5 minutes.
    Mr. Canseco. Thank you, Madam Chairwoman.
    Ms. Williams, I am curious about the overall goal of the 
consent orders that the OCC and other agencies have provided 
the banks. And as a follow up to my colleague, Mr. Scott here, 
let me ask you this, please expand on what exactly the OCC is 
trying to do with the guidelines they are requiring banks to 
follow?
    Ms. Williams. What we are trying to do with the guidelines 
with respect to servicing practices or all of the guidelines--
    Mr. Canseco. Servicers' practices.
    Ms. Williams. --in the consent?
    What we are trying to accomplish with the--I will call them 
the action plans is what they are referred to in the consent 
for mortgage servicing procedures, loss mitigation activities, 
foreclosure processing, is to make sure that there is a 
rigorous process with integrity in handling the way that those 
operations are conducted by the servicers, that customers are 
dealt with properly, that the servicers are making decisions 
based on accurate and complete information, and that they are 
conducting themselves in accordance with all of the applicable 
State and Federal laws in how they operate.
    Mr. Canseco. These consent orders or consent decrees, will 
they do anything to reduce foreclosures?
    Ms. Williams. They could to the extent that there are 
foreclosures that have been based on incorrect information, 
that have been based on, for example, incorrect information 
about amounts owed or fees that have been charged.
    Mr. Canseco. But not to the extent that it is going to 
prevent somebody who has not been paying his mortgage, prevent 
them from being foreclosed on.
    Ms. Williams. No, sir.
    Mr. Canseco. Okay. There has allegedly been some discussion 
among the regulators about changing the way in which mortgage 
servicers are compensated. And one idea apparently being 
floated would pay servicers less for performing loans and more 
for non-performing loans.
    And my concern is that this conversation among regulators 
is focusing only on the larger servicers, and little attention 
is being paid to community-based servicers that have close 
relationships with borrowers.
    So since the loans at these banks tend to perform much 
better, simply because of the personal relationship that they 
have with their community, any cut in service compensation for 
performing loans would cause smaller servicers to get out of 
business.
    And these servicers might not be the most efficient in the 
industry, but their business model is exactly what some 
customers are looking for. Has your agency, the OCC, considered 
the impact on community lenders of these proposed changes that 
would change the way servicers are compensated?
    Ms. Williams. Congressman, the initiatives that you are 
describing are actually not initiatives that my agency or the 
other Federal bank regulatory agencies have commenced. The FHFA 
and I believe HUD, together with the GSEs have embarked on a 
significant initiative to revisit the compensation structure 
for the GSE-held mortgages and the servicing of those 
mortgages.
    So, the driver of the standards or the potential changes 
that you are describing are the GSEs, the FHFA and, I believe, 
HUD. I completely agree with the point that you are making 
about the implications for community institutions.
    Mr. Canseco. Thank you.
    Mr. Pearce, would your answer be the same?
    Mr. Pearce. Yes. I would agree that it is a process that 
HUD and FHFA have taken on to look at servicing initiatives. 
And I do think we want to be careful here that problems we have 
identified really are in the larger institutions that have sort 
of the economies of scale and different foreclosure and loss 
mitigation and collections departments.
    And so the problems we have seen really been, the right 
hand doesn't know what the left hand is doing, and the borrower 
falls through the crack.
    Mr. Canseco. Right.
    Mr. Pearce. But that has not been the problem in community 
banks.
    Mr. Canseco. Okay. Great. I appreciate your answer. And I 
don't mean to be rude by cutting you off, but I am running out 
of time here.
    I want to know from both of you, have you considered any 
measures that would help to keep high-quality community-based 
servicers in their business, especially those involving 
community banks and other smaller servicers?
    Mr. Pearce. I am sorry. I didn't hear that.
    Mr. Canseco. If you have considered any measures that would 
help to keep high-quality community-based servicers in 
business, in your rules and regulations and orders?
    Mr. Pearce. Certainly, as the primary Federal regulator for 
most of the community banks, we didn't find those problems in 
those institutions. And we are very concerned about new 
initiatives and are paying attention to that.
    Mr. Canseco. Thank you, sir.
    And Ms. Williams?
    Ms. Williams. I think that is something that we should 
certainly be sensitive to in doing interagency mortgage 
servicing standards.
    Mr. Canseco. Thank you both very much. And I yield back my 
time.
    Chairwoman Capito. Mr. Perlmutter for 5 minutes.
    Mr. Perlmutter. Thanks, Madam Chairwoman.
    I want to follow up on Mr. Canseco's line of questioning 
and just come at it a little differently.
    My law firm, for many years, had a general practice. We 
represented a lot of lenders, a lot of financial institutions. 
And so, from time to time, when the economy went south, we did 
a lot of foreclosure work.
    Sometimes, we were swamped, and we couldn't process as fast 
as our client wanted us to. And, ultimately, I am going to get 
to you, Mr. Attorney General.
    But, in this instance, we have a huge number of 
foreclosures into the system. So we got all sorts of competing 
pressures. But there is this need for speed, so to speak.
    But where I have seen the excesses and where I am concerned 
about--before I get there, just a public comment. The new form 
that CFPB has done on disclosures when you take out a loan, 
good work. I just want to applaud you for that.
    But getting back to the default side of all this--not the 
lending side, but the default side--we have the biggest banks, 
and we have Fannie Mae and Freddie Mac. And, generally, they 
pay a certain amount to process a foreclosure. Isn't that 
right? Like $650 for the foreclosure and ``X'' number of 
dollars for the bankruptcy. Correct? Mr. Attorney General, I 
don't mean to ask leading questions, but am I off base on that? 
There is a standard--
    Mr. Strange. I am sure there is.
    Mr. Perlmutter. There is a standard payment for the bulk of 
the foreclosures that are processed, unless they are a private 
kind of a loan that has been made?
    So, within that amount that mostly Fannie Mae and Freddie 
Mac pay to have a foreclosure process, now we have this 
tremendous number of foreclosures coming through. And now we 
have, as opposed to what I used to deal with, there is sort of 
a middle man who is taking charge of the default process, the 
loan process servicer, LPS, or whatever they are called.
    And from my review of the cases and the consent decrees, 
that seems to be where we have a lot of problems.
    Mr. Attorney General, can you sort of expand on that? Am I 
off base or--
    Mr. Strange. I think you are describing the situation and 
the problem. I think that is a new twist to the whole 
experience. It sounds like yor experience with this issue is 
similar to mine.
    As the individual cases state law process--that is still 
really typically the situation in Alabama, in my State.
    Mr. Perlmutter. So, we have this massive number of 
foreclosures that have to be processed. And the client who is 
up here could be a big bank one or could be a Fannie Mae number 
one.
    You have a loan processing servicer company here, and then 
you have lawyers and title companies down here. How in 
regulating all of this--Ms. Williams you were talking about 
some standardized processing, because we have State-by-State 
laws.
    But how would you approach this? Because I think in your 
testimony, you talked about trying to standardize this stuff.
    Ms. Williams. What we found in our examinations--and it is 
part of the areas where additional corrective action is 
required in our orders--is that the oversight of these, I will 
call them third-party vendors, and they include law firms, but 
they also include the paper processor, packagers.
    The large servicers relied significantly on third-party 
vendors of different types to do important components in the 
foreclosure process. And they did not oversee them properly.
    We have guidance that we have issued, supervisor guidance 
that deals with oversight of third-party vendors that banks 
use, regardless of what particular service is being provided. 
That guidance was pretty well ignored in the oversight of the 
law firms and wasn't adequately applied elsewhere.
    Mr. Perlmutter. And so that sort of reminds me of what used 
to be doctor-patient, then it became doctor-insurance company-
patient. Here it is client-servicer-lawyer. And hearing from 
the lawyers, they were getting nicked like crazy by the 
servicer, almost a RESPA in reverse, that they would have to 
payback kickback, if you will, moneys to the servicing company.
    Then, there was this piecemeal or piece process, where they 
just had to speed these things through. And you lost the 
lawyer-client relationship.
    And I don't know if in Alabama, there are ethics issues 
that are going on. I want to be here on behalf of the lawyers 
to say, let them do their job.
    Mr. Strange. I agree with your comment. And some of the 
things I pointed out in my testimony that I think are good, as 
far as this overall negotiation process, the single-point 
contact, the dual-track negotiations, eliminating this robo-
signing problem, verifying accounting information, a lot of 
things that consumers deserve and should have in a simple forum 
are very good parts of this whole discussion.
    Chairwoman Capito. The gentleman's time has expired. Thank 
you.
    Mr. Luetkemeyer for 5 minutes for questions.
    Mr. Luetkemeyer. Thank you, Madam Chairwoman.
    Mr. Strange, just very quickly, I am curious, how many 
cases have you filed so far in your investigatory work against 
servicers?
    Mr. Strange. In our State?
    Mr. Luetkemeyer. Yes.
    Mr. Strange. I don't know of any at this point.
    Mr. Luetkemeyer. Okay. How long have you been investigating 
them?
    Mr. Strange. I have been in office for 5 months.
    Mr. Luetkemeyer. Okay. You are following a predecessor. Are 
you initiating--
    Mr. Strange. We have had a lot of organizing to do. But we 
have a very robust consumer protection division. We have 
received lots of information, complaints that we are pursuing.
    But I couldn't comment on specific investigations right 
now.
    Mr. Luetkemeyer. Can you give me a number of complaints? I 
know you can't get specific.
    Mr. Strange. In the hundreds.
    Mr. Luetkemeyer. In the hundreds. What would be the fine 
for someone who is deemed to have committed fraud here or 
committed an offense? What would be the fine?
    Mr. Strange. I think it depends on what the offense is, 
obviously. And I would have to get back to you on that. I am 
not exactly sure. It depends on where they fall.
    Mr. Luetkemeyer. Okay.
    Mr. Strange. I would be happy to get that information for 
you, though, for our State.
    Mr. Luetkemeyer. Thank you. What do you see, so far as--I 
think we have had a pretty good discussion this morning--
afternoon now, I guess--with regards to the events that all 
transpired, and how it has all come about with regards to some 
of the servicing, obviously, has fallen short here.
    And now in the default process, there is, obviously, some 
lack of communication, probably some other shortfalls. Is that 
what you see so far? Are there some other players along the 
line here that did some inappropriate things as well?
    Mr. Strange. Most of the complaints that we receive are 
lack of communication or a lack of understanding of the 
process. And it can be from lots of different sources or 
reasons. We try and do everything we can to inform the consumer 
and then try and adopt the approach that I think Congressman 
Scott mentioned, get people together so that they can get the 
information. And oftentimes, that will solve the problem.
    Mr. Luetkemeyer. Okay.
    Mr. Date, I am just kind of curious. A while ago, you were 
talking about, basically, the 14 mortgage servicers have 50 
percent of the market, roughly. And then, you were talking 
about working with all the stakeholders. And you included 
academics in that.
    Can you explain how the academics are part of the 
stakeholders in mortgage servicing?
    Mr. Date. What we have tried to do within the Bureau 
broadly, and certainly within our work in our research and 
markets team, is to make sure that we are plugged in to both 
the actual pragmatic market reality of how these financial 
markets work, operationally how do they work, how do the 
financial incentives work, what is the structure and 
concentration in the markets, and then, simultaneously, be 
aware of and be on top of advances in the conceptual 
understanding from a research point of view.
    There are lots of great economists, for example, who are in 
the employ of the bank regulatory agencies. But we really know 
that we don't have the monopoly on good ideas or different 
perspectives. So we want to make sure that we are talking and 
getting the insights and the perspectives of a wide range of 
people.
    Mr. Luetkemeyer. Even those people who are not on the 
ground dealing with it everyday? That is just kind of curious. 
It is kind of interesting to me, how they can impact it, since 
they don't have a working knowledge of it, because they are not 
there everyday? They are just conceptualizing.
    Mr. Date. Congressman, I appreciate your point, certainly. 
But I will say that when I was in the business, I would 
occasionally talk to academic researchers. It is a different 
perspective and, therefore, valuable.
    Mr. Luetkemeyer. Okay. That is fine.
    In April, a letter from the Center for Responsible Lending 
was sent to Federal bank regulators stating the preference for 
State solutions to addressing deficiencies in the mortgage 
servicing as opposed to solutions crafted by the Federal 
Government. Does the CFPB concur with this position?
    Mr. Date. I am sorry. Would you mind? I couldn't quite--
    Mr. Luetkemeyer. In April, there was a letter sent from the 
Center for Responsible Lending to the Federal bank regulators 
stating the preference for State solutions to address the 
deficiencies in the mortgage servicing, as opposed to solutions 
crafted by the Federal Government. I just asked if CFPB concurs 
in this position.
    Mr. Date. The CFPB has the advantage structurally of being 
able to have supervision authority with respect to Federal 
consumer protection laws, irrespective, when we have our full 
authority, of a particular charter or locale that the servicer 
is in.
    So it does allow us, over time, to be able to be a 
meaningfully additive voice to creating a baseline that is 
consistent across-the-board.
    That said, much of the constraints on the mortgage market, 
because of the size of the real estate market, are matters of 
State law, which is why I assumed that the State attorneys 
general figure so prominently in this debate.
    Mr. Luetkemeyer. So, is that a yes or a no?
    Mr. Date. State law issues and solutions ought to, I 
suspect, be an important part of the solution. But I don't 
think that somehow excuses the Bureau or other Federal 
regulators from trying to improve what today appears to be a 
broken market.
    Mr. Luetkemeyer. Okay. Thank you very much.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. Thank you. Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you, Chairwoman Capito.
    Mr. Date, in connection with this loan servicing issue, has 
CFPB proactively reached out to the State attorneys general?
    Mr. Date. With respect to the mortgage servicing settlement 
conversations, I assume, Congressman? At the invitation of the 
Treasury and the Secretary, we have been asked to participate 
in the interagency Federal and State dialogue in that way.
    There are 50 State attorneys general. Although I don't 
personally know, I would expect that some reached out to us and 
that members of the team reached out to some of them.
    Mr. McHenry. Okay. And in connection with this loan 
servicing issue as well, has the agency proactively reached out 
to loan servicers?
    Mr. Date. Just to clarify, with respect to the attorneys 
general, the CFPB will have an enforcement division. And in an 
effort to make sure that we are at some level coordinated with 
State attorneys general, I know that we have, at least, been 
trying to connect with State attorneys general over time, in 
respect with their significant authority over these areas.
    But that is a more broad-based comment than mortgage 
servicing.
    Your comment with respect to reaching out to mortgage 
servicers, my job, just a component of it, is to make sure that 
we are very plugged in to how it is that these businesses, as a 
practical matter, actually work in the moment.
    And what that means is that it is incumbent on me and it is 
incumbent on my team to make sure that we are connecting, I 
would hope on a regular basis, with those who can provide 
market color and market insight.
    As the gentleman pointed out a moment ago, the mortgage 
servicing market has come to be quite concentrated. And so my 
expectation is that members of my team, if not me personally, 
have talked with the institutions that have mortgage servicing 
platforms of some sort.
    Mr. McHenry. Okay. In light of that, is it part of your 
practice, in terms of your engagement in this mortgage 
servicing settlement issue, to float ideas with the industry to 
see if it is workable?
    Mr. Date. In general, that has not been the approach. What 
we have tried to do is to provide advice to Federal and State 
agencies that are at the table.
    I would argue that it would become confusing and slightly 
entropic to be making some parallel set of negotiating rounds 
with servicers. And so, that is not something we have done.
    To be clear, I have tried--I have personally tried to 
provide ideas to our sister agencies and to State attorneys 
general, to put those ideas in perspective, those perspectives 
in some grounded analysis, to communicate that analysis and to 
listen and receive feedback with respect to--and provide 
feedback about ideas. All of that is certainly true.
    Mr. McHenry. Okay. So, that is in light of the PowerPoint 
presentation that has been going around for a few months now, 
that some proactive solutions that the CFPB is proposing as a 
part of this agreement.
    Do you have an email from Richard Davis at U.S. Bank to you 
and Ms. Warren, from back in March, where it appears that it is 
a follow-up from a conversation? You are asking about details 
of a needs test.
    And so, I just want to be clear, sometimes you are 
soliciting opinions from the mortgage servicer on what would be 
workable? I just want to make sure that I give you another 
opportunity to answer that question. Perhaps I didn't word it 
correctly.
    But it appears, in light of the email that we have--we are 
not privy to your conversation you had with U.S. Bank. But in 
response to that meeting, they go through a detailed analysis 
of what a needs test would look like and how operationally it 
worked.
    Is that something that you solicited?
    Mr. Date. Congressman, I can't recall this specific 
conversation with Mr. Davis around the--I remember the meeting, 
of course. But I want to make sure that I understand your 
question.
    A needs test is one of, frankly, many structural mechanisms 
that a variety of mortgage servicers use in order to prevent 
what otherwise can be an arguably pernicious impact of moral 
hazard when loss mitigation techniques are used.
    And as a large mortgage servicer, I would expect that 
particular institution would have some experience in that, 
particularly in light of delinquencies in the marketplace. And 
I naturally, by virtue of my role, would be very interested in 
their perspective and--
    Mr. McHenry. So you did solicit their opinion on that?
    Mr. Date. I have solicited. I don't remember that in 
particular, but it would not surprise me. I have solicited 
opinions about a great many things with respect to the mortgage 
market and otherwise.
    Mr. McHenry. Okay. Thank you for your testimony.
    Chairwoman Capito. The gentleman's time is expired.
    Mr. Duffy, for 5 minutes?
    Mr. Duffy. Thank you, Madam Chairwoman.
    Just to revisit an issue that came up earlier, there was 
quite a bit of conversation earlier in this hearing about Ms. 
Warren. And, I think one of our concerns is that she has come 
into this committee and told us very specifically that she was 
here just providing advice for certain folks as her role with 
the formation of CFPB.
    But as we have come to learn, I think she has been less 
than forthright, that she has been actively engaged in the 
negotiations, actively making proposals for these settlements.
    As one of my Democrat colleagues mentioned earlier, 
sunlight is the best disinfectant. And when we feel like there 
has been a cloud around what she has been doing, that will 
raise our need to question further. And I think that is what 
has been happening here.
    But with that clarification, Mr. Date, is it fair to say 
that the CFPB is making recommendations that we should have 
some form of principal write-down as a settlement proposal?
    Mr. Date. We have provided ideas and perspectives on 
mortgage servicing broadly. I personally had--
    Mr. Duffy. That is not my question. Have you guys provided 
ideas that a principal write-down should be part of the 
settlement?
    Mr. Date. That is an idea that we have presented in the 
past.
    Mr. Duffy. So you have set out the idea that principal 
write-down could be part of the settlement?
    Mr. Date. As part of a broader settlement.
    Mr. Duffy. Are you aware that the Senate and the House last 
year considered the concepts of principal write-down? And they 
soundly rejected those ideas?
    Mr. Date. Congressman, I wouldn't be able to point to 
specific provisions that were considered or not. But obviously, 
that was not in the context of a voluntary settlement by 
parties.
    Mr. Duffy. Sure. But you are aware that it was considered 
last year in the Senate when we talked about bankruptcy judges 
being able to do a principal write-down as part of a 
bankruptcy?
    And then in the House, there was a measure to allow 
mortgage cram-down that was rejected. Are you aware of that?
    Mr. Date. I am not specifically aware of the specific 
contours. But I do know that the Congress appropriately is 
thinking about and considering different ways in which to help 
American households through what is a grotesquely difficult 
period.
    Mr. Duffy. That is right. And so, the Congress has rejected 
these ideas. But here at the CFPB, even though we, the elected 
Representatives of the people of the United States, have 
rejected it, you all come in and said, as a form of a 
settlement, as per the documentation that was provided to you 
earlier by Mr. Bachus.
    You say, no, no, no. This is an appropriate form of 
settlement, even though we have all rejected it, and we are the 
ones who are the elected officials. I take some offense to that 
because I think, in the end, what it does is it is going to 
drive up interest rates. It is going to drive capital out of 
the private marketplace.
    And in the end, it is not going to serve consumers in my 
district. I think it is going to make it more difficult for 
them to obtain a mortgage for a new home.
    Ms. Williams, as you have been dealing with this issue, is 
it fair to say that the Federal Reserve and the OCC have been 
discussing the deficiencies in the servicing process over the 
last couple of years?
    Ms. Williams. The OCC, the Fed, the FDIC, and the OTS--this 
has been a subject of interagency discussion.
    Mr. Duffy. And is it fair to say that you guys have entered 
into consent orders with the Nation's largest mortgaging 
services?
    Ms. Williams. Yes, sir.
    Mr. Duffy. Yes. And part of that consent order is that 
there would be significant remedial steps taken to make sure 
this doesn't happen again?
    Ms. Williams. Absolutely.
    Mr. Duffy. And so, you have stepped in. And I hope that you 
would have taken appropriate caution to make sure this doesn't 
happen again. Do you then see the need to have the CFPB and the 
State attorneys general stepping in to supplement the remedies 
that you have implemented?
    Ms. Williams. The settlements that the State AGs and the 
DOJ are involved in deal with areas that are separate and 
distinct from the areas that we addressed in our orders. They 
deal with matters of State law. They deal with other Federal 
agencies' issues.
    So, we have moved on parallel and coordinated tracks, but 
it is a separate track.
    Mr. Duffy. But the concern for everyone here is that there 
have been some deficiencies in the servicing process, right?
    Ms. Williams. Yes, sir.
    Mr. Duffy. And you wanted to make sure this doesn't happen 
again, right, moving forward?
    Ms. Williams. That is correct.
    Mr. Duffy. And you have implemented procedures to make sure 
that doesn't happen again
    Ms. Williams. We are in the process of doing that. Yes.
    Mr. Duffy. Okay, fine.
    I am out of time. I yield back.
    Chairwoman Capito. The gentleman's time has expired.
    The first panel--I believe we have had all the questions--
is dismissed.
    I would like to thank the first panel very much. You had 
great testimony and great responses to questions.
    Thank you very much.
    At this time, I would like to call up our second panel of 
witnesses. I ask everyone to take their seats.
    Hello. Welcome to the second panel. I will introduce them 
individually for the purpose of giving a 5-minute statement.
    Mr. David Stevens is no stranger to the Financial Services 
Committee room. And I welcome him back in a different capacity, 
as president of the Mortgage Bankers Association.
    Welcome.

  STATEMENT OF DAVID H. STEVENS, PRESIDENT AND CEO, MORTGAGE 
                   BANKERS ASSOCIATION (MBA)

    Mr. Stevens. Thank you, Chairwoman Capito, Ranking Member 
Maloney, Chairman Neugebauer, and Ranking Member Capuano for 
the opportunity to testify today on mortgage servicing and 
national servicing standards.
    We at MBA believe that a consolidated national servicing 
standard, if developed in a cooperative manner, could stimulate 
much needed reform of a residential mortgage loan servicing 
system that has admittedly failed a great number of consumers 
during the recent foreclosure crisis.
    In 2008, we faced a ``perfect storm.'' As the global 
economy collapsed, the subprime market imploded. Many Americans 
lost their jobs and millions of Americans defaulted on their 
mortgages, putting extraordinary strains on the existing 
servicing system.
    When the crisis hit, I was in the private sector running a 
large real estate firm. I saw firsthand the buy and sell sides 
of the business grind to a halt. All the members of these two 
subcommittees know from your own experiences the devastating 
impact that ensued.
    It is clear that the real estate finance industry as a 
whole was unprepared to handle these unprecedented events, and 
that mistakes were made. What brings us here today, and what is 
grossly lacking at every level within the industry, is trust.
    There is a lack of trust between borrowers and servicers. 
There is a lack of trust between servicers, regulators, the 
State attorneys general, and the courts to find a joint 
solution as to how to equitably handle borrowers facing 
foreclosure. And there is a lack of trust between investors, 
underwriters, and credit rating agencies to restore private 
capital to the mortgage market in a meaningful way.
    Without the trust, the housing industry goes nowhere. And 
by trust, I mean the ability of policymakers, borrowers, and 
the industry at large to have faith in the products and 
services we provide, and how those loans will be serviced. It 
must do better moving forward.
    I am here today representing an important segment of the 
mortgage finance market. In my prior job as FHA Commissioner, 
you may recall that my staff and I worked hard to get 
bipartisan support for FHA reform last year. That proposal 
passed overwhelmingly in this House.
    Now here today, I believe the environment exists to reach 
similar consensus amongst regulators and stakeholders regarding 
national mortgage servicing standards. Certainly, the MBA will 
support such an effort.
    I can assure you that the mortgage finance industry and 
servicers have not stood still and we are constantly in the 
process of addressing our shortfalls in implementing new 
program upgrades.
    Creating a truly national servicing standard would 
streamline and eliminate many overlapping requirements, 
providing clarity and certainty for servicers, borrowers, 
lenders, and investors alike.
    It is critical that all of the Federal regulators involved 
act in a coordinated manner to establish one national 
consolidated servicing standard that applies to the entire 
industry, rather than each piling on requirement after 
requirement.
    A national standard should start with a complete analysis 
of existing servicer requirements and State laws governing 
foreclosures. Development should include an open dialogue with 
stakeholders in the servicing arena, all of whom must 
ultimately work together to ensure the standard achieves the 
dual goal of better serving borrowers while allowing for a 
sustainable mortgage servicing business model.
    MBA actually initiated the process in January by convening 
a blue-ribbon council on Residential Mortgage Servicing. That 
council examined the entire servicing model and is the basis 
for work that is currently under way to identify 
recommendations to improve the system for all stakeholders.
    In May, the council released its preliminary White Paper. 
In it, the council examined the current servicing model, 
educated the public on the role and compensation of servicers, 
and addressed popular misconceptions relating to servicing 
practices and incentives.
    I believe this White Paper has provided useful information 
to you and other policymakers that are currently engaged in the 
debate, and I encourage your two subcommittees and Congress to 
use MBA and its counsel as a resource going forward.
    In conclusion, as we develop servicing standards, I urge 
you to pay careful attention to the interdependence of 
servicing and the impact that changes to the system will have 
on the economics of mortgage servicing, tax and accounting 
rules and regulations, and the effect of the new requirements 
on Basel capital requirements and the TBA market.
    Servicing does not exist in a vacuum. Instead, it is part 
of a broader interdependent and interconnected ecosystem that 
involves all the varied elements of the mortgage industry. The 
housing market remains fragile. Therefore, when considering 
changes to the current model, policymakers must be mindful of 
unforeseen and unintended consequences that could ultimately 
result in higher housing costs for consumers and reduced access 
to credit.
    I have spent more than 30 years in this industry. Despite 
what we have just lived through, and the challenges we continue 
to face, I am optimistic that we can successfully address the 
challenges in the mortgage servicing system.
    To both subcommittees and the full Congress, I would 
reiterate that MBA supports reasonable national servicing 
standards that apply best practices to the process to better 
serve the needs of borrowers, servicers, and investors alike.
    Again, we want to be part of the solution and we look 
forward to working with you and other policymakers towards that 
end.
    I look forward to any questions. Thank you
    [The prepared statement of Mr. Stevens can be found on page 
106 of the appendix.]
    Chairwoman Capito. Thank you.
    I would like to introduce Mr. Michael Calhoun, the 
president of the Center for Responsible Lending.
    Welcome.

STATEMENT OF MICHAEL CALHOUN, PRESIDENT, CENTER FOR RESPONSIBLE 
                         LENDING (CRL)

    Mr. Calhoun. Thank you, Madam Chairwoman, ranking members, 
and members of the subcommittee, for this opportunity to 
testify today.
    It has been noted what a critical time this is for the 
housing market. And the housing market is increasingly probably 
the most important drag on our recovering economy. For the 
point on that, housing starts today are at the lowest point 
that they have been at since World War II.
    We have an overhang of housing in the real estate market 
that will take far more than a year to clear--that is, existing 
houses for sale--without the addition of the many other houses 
that face foreclosure now.
    CRL comes to this and other consumer financial issues from 
a dual viewpoint. We work to help families achieve and maintain 
financial security in two ways.
    First, we fight for consumer protection that helps families 
have access to sustainable lending. And second, through our 
affiliates, we provide, through this affiliate, substantial 
financing, over $6 billion to date, primarily for 
homeownership.
    We currently, today, have a large portfolio of loans for 
which we have 100 percent of the credit risk, that we are 
wrestling ourselves with these very issues of how do you sort 
out which families can be helped, and which ones need to 
transition to the next stage.
    And so, we deal with this in a very real way on an every 
day basis.
    I appreciate the opportunity to testify today with David 
Stevens and the work we do with the MBA.
    There are three main points. The first is documented by the 
regulator's repeated studies. There are serious servicing 
deficiencies and they continue. Importantly, these harmed not 
only borrowers, but also investors, surrounding property 
owners, local government, and the overall economy.
    Second, there are deep structural barriers to a properly 
functionally servicing market. As noted, borrowers do not 
select or control the servicer. Investors, likewise, have very 
little control over selecting or controlling the servicers.
    And perhaps most important, typically, the servicer does 
not own the loan that they are servicing. They are doing it for 
another party. That changes the incentives.
    And indeed, often, the servicers have conflicts of 
interest, in that they own second loans and unsecured loans 
that are subordinate to the very loans that they are servicing, 
and can be adversely affected depending how they service those 
loans.
    There have been questions about what has been the impact of 
the servicing deficiencies. And I think it is critical to 
remember the same company, the same personnel who have been 
charged with the robo-signing, cutting corners, and inadequate 
staffing foreclosure, are the very same companies, the same 
personnel who have been responsible for implementing loss 
mitigation efforts, have been where the rubbers meets the road 
of processing which families can be saved and which should be 
moved forward.
    And I think it is noteworthy that the largest legal action 
to date regarding servicing deficiencies was brought by 
investors who felt their investments were being damaged by the 
inadequacy of the servicing, and that too many families were 
being pushed into foreclosure rather than through loan 
modification.
    And indeed, the remedy in that proposed settlement is that 
the servicing for troubled loans be transferred to another 
servicer. In effect, we are trying to figure out how you make 
servicers treat other people's loans like they do their own.
    The solution, as we outlined in our testimony, is better 
baseline servicing standards and coordinated oversight. Key 
among the particular individual protections, there needs to be 
required loss mitigation evaluation before foreclosure can be 
either initiated or continued.
    As noted by many, we need to get in place promptly a single 
point of contact, so people don't get lost in the maze of these 
servicing companies.
    There needs to be third-party review of loan modification 
denials. Audits continue to show very high failure rates and 
error rates by the servicers. And again, this provides the 
safeguards and improves the quality of the modifications.
    And there need to be standards for imposition of fees. 
Often, borrowers start with a small delinquency and are buried 
under an avalanche of pyramided fees that push them into an 
unrecoverable delinquency.
    Again, in summary, everyone who is affected by this housing 
crisis and the key role of servicing in it, we need to move 
forward with coordinated common sense ground rules and careful 
oversight, to restore the health of the housing market and our 
economy.
    Thank you.
    [The prepared statement of Mr. Calhoun can be found on page 
72 of the appendix.]
    Chairwoman Capito. Thank you. I would like to thank you 
both. I would like to recognize myself for questioning.
    Mr. Stevens, I would like to ask you about something that 
the first panel got into quite a bit, and that is the mandatory 
principal modification write down.
    How do you feel about that? Do you think that will help 
solve the problem? Is there a fairness quotient? How do you 
decide how much, in which direction, and what harm?
    I would just like to hear your comments on that.
    Mr. Stevens. So, as briefly as I can, when I was FHA 
Commissioner, we introduced the FHA Short Refinance Program, 
which was a program created to provide principal write-down, 
but it was optional.
    I believe mandatory principal write-down is extraordinarily 
problematic for a variety of reasons. One, it will have a 
direct impact on future liquidity being provided from this 
mortgage finance system which desperately needs private capital 
to reengage. If there are concerns that, down the road, 
agreements made in pooling and servicing agreements could 
suddenly be changed at some point, with principal write-down 
being thrown in as a mandatory provision at awkward moments in 
economic cycles, the willingness for private capital to 
reengage will be problematic.
    The second reason why I am not in favor of mandatory 
principal write-down, but do favor, again, optional principal 
write-down, is that the critical component during this crisis 
was people's ability to afford their home. In some cases, they 
may not be able to afford the home without principal write-
down. And the servicer and investor combined should take a look 
at that particular borrower's need, and use that if that is the 
best solution, based on their determination.
    But if forced principal write-down were to occur, it could 
encourage strategic defaults of people who can make their 
payments, took a prime mortgage, knew what they were getting 
into when they bought the home, and simply because of property 
value loss, they want the investor to take that loss.
    And so in each case, I think we need to look at the broad 
spectrum of loss mitigation options and work primarily towards 
finding the best resolution, whether it be forbearance, 
principal write-down, payment reductions or payment 
modification programs that are provided for in HAMP, 
proprietary modifications, all of those components.
    And that is just the tip of the iceberg, not going into the 
GSE solutions, the FHA solutions, or the private market 
solutions.
    Chairwoman Capito. Thank you. Mr. Calhoun, you wrote a 
letter, I believe, asking the regulators to withdraw their 
consent orders, and saying that you think the States were 
better positioned to make these decisions. Could you give me 
some background on that or clarification, please?
    Mr. Calhoun. Certainly. As set out in our testimony, and I 
think this follows the comments of Ms. Williams, we believe 
that you need a coordinated approach from the Federal banking 
regulators, the State attorneys general and State banking 
regulators, as well as the CFPB.
    As also as Ms. Williams--I was on the panel with her some 
time ago when she made the point even more explicitly. The 
State attorneys general are investigating State law violations. 
They are not Federal statutes that they are acting under.
    And we believe, first, in general, in the preservation of 
State rights and the preservation of enforcement of those State 
responsibilities by the State AGs.
    We certainly have been supportive, in our testimony today 
and other times, of the need for the Federal regulators to also 
have a baseline of servicing standards. But in terms of 
resolving those State claims, we believe it is appropriate for 
the State attorneys general to take the lead on that.
    Chairwoman Capito. Okay. Thank you.
    One of the points I think that has been made and the 
servicing standard suggestions have been the singular point of 
contact, individual point of contact. Boy, that sounds great.
    But can you really get it done when you are talking about 
servicer moves to servicer? Who is in charge? Who is on first? 
Who is on second? We all like to have the day where you really 
just had to walk down the street and talk to your local 
mortgage guy and say, ``I am going to be a little late this 
month. Can you help me out here?''
    I talked to Ms. Williams about this previously. Is that 
achievable? As much as I think it is great and we should do it, 
is this workable? And what kind of suggestions would you make 
to make it workable, so that when somebody has a problem, they 
actually have somebody that they can impact. and they are not 
stuck with, ``push one for this, push two for that, and call 
back in 24 days.''
    Do you have any suggestions? I don't have much time, but 
how might that work?
    Mr. Calhoun. I think, as you know, it can make a lot of 
progress where we are now. There are some debates. Some of the 
servicers are already going to a goal of a point a contact, to 
make sure that if you have a problem, you can call and get a 
live person who has access to all your information, not 
somebody who is just writing down a note to pass on to someone 
else.
    And that, at least as the minimum, should be there. And 
hopefully, the goal is actually there is a case manager.
    The loan modifications are very akin to re-underwriting a 
loan. And in that process, I think it is noteworthy that the 
servicers typically do have a single underwriter assigned to 
underwrite the loans for the original making of the loan.
    And so, I think that suggests that there is a lot of wisdom 
in having that same process when you, in fact, are re-
underwriting the loan for purposes of the loan modification.
    Chairwoman Capito. Yes. I would agree with that. And I 
think that what we have found here is that the servicers did 
not have the staff available, didn't anticipate, I don't think, 
the numbers and the complexities of where we were going to be. 
Hindsight is always better.
    So, hopefully, this will help with that, because I think 
that is a very valuable point of a national servicing standard, 
if that is the direction that we end up going, which it looks 
like it is.
    So I will recognize Ranking Member Maloney for 5 minutes.
    Mrs. Maloney. My main question is, how do we prevent this 
from happening in the future? And is the consent agreement that 
has come forward from the regulators--is that strong enough? Or 
what changes need to take place so that we prevent this 
disaster to individuals and our overall economy from happening 
again?
    I would like to start with Mr. Calhoun, then Mr. Stevens. 
In what way does the consent agreement fail to provide 
sufficient accountability for servicers, either in their 
foreclosure procedures generally or in their loan modification 
or loss mitigation efforts?
    And I would also like you to comment on the point that my 
colleague, Mr. Perlmutter, raised, where the servicers come in 
and they say to the bank, ``Oh, we are not going to charge you 
anything. We will handle it for you.''
    Meanwhile, they contract with the lawyers who are paying 
them, that they have obstructed the lawyer-client 
responsibility, where the lawyer must look out for the best 
interest of their client. And maybe that has cost this country 
more, in terms of what it is costing us individually and as an 
overall economy and government to respond to this.
    If an attorney-client relationship was there, where they 
were really forced to look at every option and work with that 
individual, but it is cut off. And if I understood him 
correctly, the attorneys then are pressured, don't ask 
questions; just pay us and get it done.
    And maybe it would have been better if there were able to 
have that communication and that responsibility, and to ask 
those questions on the individual basis of how to best work 
through it, both for the individual and the country.
    Starting with you, Mr. Calhoun, and then Mr. Stevens.
    Mr. Calhoun. I think the first point is that the best way 
to avoid this, again, is--and I think we are making great 
progress on this--strong but workable mortgage origination 
standards, so that we are not flooded with portfolios where you 
have 50 or 50-plus percent of the loans going to foreclosure. 
It can be very difficult to design a system that can absorb 
that.
    We have worked with the MBA, for example, on concerns with 
the qualified residential mortgage standards. We are very 
concerned at CRL about access to credit. We think that is a 
huge thing. But specifically, you need some bright line ground 
rules because of the structure of this market in good times.
    These structural problems have been there. They were masked 
by the bubble housing economy of 2000 to 2006, when the 
securitization and a lot of the structure grew up. Default 
rates were so low and they were illusory low, because people, 
in point of fact, were defaulting, but instead they could get 
an easy refinance. And there really was a buildup of the 
foreclosures.
    But you need more specificity, so that there are basic 
ground rules that then the system can operate competitively 
with.
    Mr. Stevens. I would completely agree with the statement 
about strong, well-founded, secure origination practices being 
the first bellwether to protect this environment from ever 
occurring again.
    If we all reflect back, we had an industry that was 
designed for efficiency over the last decade. It became fully 
automated only in the late 1990s. So we didn't even have 
automated underwriting systems until the 2000s that were 
actually been using in this country.
    All the processes of servicing became based on efficient, 
low-cost, low-touch, highly technologically-oriented servicing 
systems that could work efficiently for performing loans.
    When the bubble collapsed, the models had never been 
tested. The automated systems had never been through this, a 
testing of a market correction. When the house of cards 
completely collapsed, these low- cost, low-touch, efficient 
servicing models found themselves completely incapable of 
dealing in what was now needed to be a high touch, a highly 
trained, extraordinary set of underwriting skills, a personnel 
base that just absolutely did not exist.
    The servicers were not prepared for this. The capital had 
already been expended. The market was not prepared for the 
extraordinary collapse of these models that proved to not be 
able to withstand the pressures of an economic downturn, no 
matter how they were viewed when the loans originated.
    And that subsequent collapse has created all of this 
backlog, the extraordinary pressure on all of our systems in 
our economy, that could be avoided going forward if we had 
strong rules about performing loans.
    This is the last point I would make. If you look at prime 
owner-occupied residential loans originated by the GSE's fully 
documented, the default rate is only about 5 percent. It is 
high, but it is extraordinarily low. And had we stuck to those 
kinds of underwriting characteristics, we wouldn't have found 
ourselves anywhere near the predicament we are in today.
    Mrs. Maloney. Thank you.
    Chairwoman Capito. The gentlelady's time has expired.
    Mr. Renacci, for 5 minutes for questions.
    Mr. Renacci. Thank you, Madam Chairwoman.
    It is interesting, because I am still hearing you say that 
if we had all the procedures and all of the things in place in 
advance, this would not have happened. Even going into the 
future, I think I heard you just say that, Mr. Stevens.
    And my concern is even if they are in place, you are always 
going to have issues going forward. But I also heard you talk 
about personnel. Do we have the personnel? Are we going to have 
the servicing agencies? Are they going to be available with the 
personnel and the opportunities for another major downturn?
    I am not talking about one that happened in 2007, 2008. 
But, what are we going to do to make sure those things don't 
occur in the future?
    Mr. Stevens. I really believe that is the discussion that 
we are all actively engaged in, and my worry in the process 
today is that we are so concerned about coming up with a 
perfect answer in the current moment, that we see, again, 
multiple sets of rules and regulations coming out of the 
various regulators, some untested ideas--even single point of 
contact, for example, is not really tested.
    It is now being required in HAMP, but we don't ultimately 
know if that is the right solution.
    Independent servicers has been a proposal. We don't know if 
independent servicers can ultimately handle the volume.
    My contention is that if we go back decades in the 
industry--and I started in this industry in Colorado--yes. And 
we all know Mayor McNichols lost his job because he didn't have 
enough snow plows for the big snow storm, yet he had enough 
plows for normal sets of snow storms.
    We will go through market corrections. In Colorado, they 
also experienced the oil patch crisis. And during the oil patch 
crisis, we saw market corrections. And there were home value 
declines. And there were large numbers of foreclosures.
    I was personally in the industry at that time. We were able 
to manage it because we hadn't built on top of that this 
extraordinary bubble of unsustainable mortgage products, given 
to people who never should have qualified for that product in 
the first place, created this frenzy around using their home as 
an ATM machine.
    And I do believe when we come back to it--and we will go 
through market corrections again, there is no question about 
it.
    If we can create safe and sustainable guidelines for 
mortgage products, and we can create a standardized set of 
servicing requirements that protect the consumer, but also 
provide for an industry that can actually deal with these 
crises, I think we will come a long way to creating an 
environment that will allow us to withstand the storms of the 
future.
    And I think that is the most important thing we need to be 
prepared for.
    Mr. Renacci. Mr. Calhoun, do you have any comments?
    Mr. Calhoun. I think your point is well taken, that there 
need to be basic protections and quite frankly, some basic 
rights for consumers. I am sure you had constituents who called 
their servicer and they were basically at the mercy of what the 
servicer decided to do, for example, with imposing fees, with 
how they treat their payments, etc.
    In the absence of the rules, we should expect that. So what 
happened was servicing companies pay the originator of loans to 
get the right to service the loans. And then again, they get 
paid a monthly fee, typically 25 basis points for a GSE-type 
loan.
    And they are supposed to make the money back through that 
fee and through the additional fees that are charged, because 
they get to keep the late fees, the property inspection fees, 
the third-party vendor fees.
    Without standards there, companies who can charge a lot of 
those fees are going to bid up the price of the value of 
servicing. And so, if you want to be in that market, you have 
to match what they are doing. If you are allowed to charge 
those fees and everyone allows it, that is the only way you can 
stay in the market.
    So we need that baseline of--and I think we are close. 
There can be areas of disagreement. But there is evolving 
consensus of what the contours of that baseline of protection 
should be.
    We need to get those in place. And then at the other side, 
investors are now much more attuned to making sure that they 
have more protection about servicing and start to insist on 
protection in the securitization field, when up to now, no one 
even thought about that when they were doing due diligence on a 
security.
    Mr. Renacci. Mr. Calhoun, how would you protect consumers 
from illegal mortgage servicing in the future, the illegal 
things that have occurred, some of the ones that have occurred?
    Mr. Calhoun. I think the CFPB will play an important role 
in this, because you need the flexibility to respond to the 
changes in the market. The CFPB needs to be careful to not 
throttle innovation, to not adversely impact credit, which I 
think for the next probably--
    Mr. Renacci. Excuse me, not to interrupt, but how is the 
CFPB going to do that?
    Mr. Calhoun. Under Dodd-Frank, it transferred those 
specific statutory responsibilities for servicing under RESPA. 
It also is given a general mandate to oversee the servicing 
companies, along with the Federal banking regulators, and to 
police and prohibit any unfair deceptive practices by the 
servicers.
    Mr. Renacci. I know I ran out of time, but I was really 
trying to get to the specifics.
    Mr. Calhoun. Forced-place insurance is a big thing, where 
the servicers will place insurance with a company that the 
owner has interest in, and charge the borrower 3 or 4 times 
what the regular insurance rate is.
    Chairwoman Capito. The gentleman's time has expired.
    Mr. Perlmutter?
    Mr. Perlmutter. Okay. And again to follow up on my 
colleagues' questions--and first of all, thank you two for 
being here. The wisdom you are bringing to the table is really 
important.
    In Colorado, I would say, though, having done the 
foreclosures during that period when our economy fell apart, 
we, as the lawyers, did say 10 foreclosures a month, boom, 
boom, boom. All of a sudden, we were doing 100.
    And we weren't ready for it. Okay.
    This time around, some guys have been doing 100 
foreclosures a month. All of a sudden, they have 5,000 a month. 
And they can't do it.
    So the system has just been swamped, from beginning to end. 
And it started with some lousy loans being made in the first 
place.
    So you two are right on the money. That is where it starts. 
But I don't know that any system is going to be foolproof when, 
all of a sudden, you have this giant lurch in the numbers that 
are being processed. Because we are going to go back to some 
normal at some point here. And then we will deal with it.
    And then there will be another downturn. And for a while, 
there is going to be a backlog.
    But what I don't want--and I want the servicers or whoever 
is processing these things to do them, to do them in a speedy 
fashion. But the real problem here is that the borrower is 
entitled to some due process. And that is what has been missed 
in so many of these cases. That is why that robo-signing isn't 
right.
    That is why pushing these out the door so fast, in some 
instances, because that borrower has rights. The investors have 
rights. Everybody has rights in this deal. But the borrower's 
rights were getting hurt in the name of speed.
    So, let us go back to some of those things that need to be 
corrected, whether it is robo-signing or, in my opinion, I 
think the lawyers are being asked--as they process these 
things, they have to kick back in effect.
    They are paying certain fees back to the servicers that 
really weren't ever in the deal in the first place. But to get 
the foreclosure, they have to do it.
    So I will let you follow up on Mr. Renacci's question. And 
if you can answer that and my questions, I would appreciate it.
    Mr. Stevens. Let me just try just a couple, the robo-
signing, where, in fact, the laws were violated--robo-signing 
became a big catch-all phrase. But where, in fact, affidavits 
were signed by people who are not the individual who was 
actually supposed to sign, or could not support the 
attestations being made in that affidavit, because they hadn't 
reviewed the subsequent documentation, those are legal 
violations.
    And those are fully enforceable. So, to some degree, I 
think what we found during this process of this collapse is in 
the effort to respond to this massive pile of foreclosures, 
people were setting up the proverbial, as the stories would 
call it, card tables with Burger King kids, which was the story 
in Florida, of just untrained, inexperienced people signing off 
on documents.
    All of that is illegal. That is fully enforceable. And that 
clearly has to change. I still come back to the--
    Mr. Perlmutter. If I could--
    Mr. Stevens. Yes.
    Mr. Perlmutter. I guess that is what I am trying to say. 
Here you have these massive numbers of foreclosures coming 
through. Everybody is trying to deal with it. There are plenty 
of laws in place to go after a lot of these practices.
    I would caution the regulators as they get involved in this 
to not go overboard.
    Mr. Stevens. Right.
    Mr. Perlmutter. We had something--there is a huge swamp of 
the system. So, go ahead and finish. But I agree with that 
point.
    Mr. Stevens. So if you take that at its premise, there were 
laws broken by not all institutions but some. Those cases are 
being fought either through State attorneys or through class 
action lawsuits or other measures where people are paying 
fines. Some are going to jail. Many institutions have failed in 
this process, because they were not legitimate.
    So that is one core measure that exists anytime crimes are 
committed. There are other provisions that exist today. And I 
think FHA is actually a good example. FHA has had in state, in 
their processes as a requirement, by rule and by statute, a set 
of servicing standards that must be complied with. Even the OTC 
consent decree references the FHA as a model for how you set up 
servicing centers.
    What we found through this last cycle was that not all 
guarantors of risk, not all institutions that paid out 
servicing fees to companies that service their loans had the 
same set of standards. They vary significantly. Even Freddie 
and Fannie had different sets of standards that weren't 
completely in sync.
    But the FHA sets of standards also came with explicit 
penalties for noncompliance, which could, at bare minimum, 
include nonpayment of claim, meaning your loan is not insured 
and you take the full loss on that loan if you don't service it 
appropriately.
    Mr. Calhoun. Dave, could I add--
    Mr. Stevens. Yes, go ahead.
    Mr. Calhoun. --a couple of specifics there. The first is 
how your payments are treated.
    One of the real scams that goes on is say, you make a 
payment that there is a late fee taken out, or your payment is 
$50 short. Many servicers now, instead of crediting you--should 
have paid $1,050, you paid $1,000; instead of crediting the 
$1,000, they put it in something called the suspense account, 
meaning you get no credit for it.
    The account is treated is if you made no payment. And so 
interest accrues as if you had made no payment. Penalty accrues 
as if you paid no payment.
    That should not be allowed. There should be prompt and full 
crediting of all your payments.
    All the junk fees that get piled on, that has been the 
business model, if you are a servicer, of how you make this 
possible, is you just pile on the jump fees. If people are 
late, they ought to pay a reasonable fee.
    I think much like what was done with the Card Act, where 
for credit cards we had no basic ground rules and we saw all 
these abuses and games come up. Put in a set of basic ground 
rules and then let the market compete.
    You didn't set credit card interest rates, appropriately 
so, as the focus of that bill was on the basic ground rules. So 
let the companies compete on service, benefits, and the fee, 
and their interest rate, but don't let them have all these 
under the table, things that people can't shop on and make the 
market not work.
    Chairwoman Capito. The gentleman's time has expired.
    I am going to go to our last question, because we are going 
to be having a vote and, if we can, we will come back.
    Mr. Manzullo, for 5 minutes.
    Mr. Manzullo. Thank you very much. I am going to date 
myself, because I was practicing law when RESPA came into 
effect, and we had to back-date the documents 3 days in order 
for the homeowner to buy the house. I used to be able to close 
a real estate loan as an attorney in 20 minutes, with a stack 
of papers maybe the size of my thumb. And now it is 2 hours and 
there are so many disclosures, there are so many protections 
out there, no one knows what goes on.
    If they think it is bad in housing, any of you who are 
making payments on a student loan, look at the national 
organization that really screws that one up. They hang up on 
you. They put things in a suspension account. They scream at 
you. You can't pay in advance. There are a lot of problems 
there.
    But what I wanted to return to is the fact that when I was 
first elected back in 1992, shortly thereafter, somebody came 
up with the brilliant idea to bypass recording home mortgages 
with a local recorder, something called MERS. That is the 
reason now where we have a lot of people who don't know who 
owns the notes. They don't know who owns the mortgage.
    And so, in all those great automations to make things 
easier, to standardize things, things got worse. It is almost 
to the point where there is no longer, with the exception of 
many community banks, any type of face-to-face contact.
    And oftentimes, the only real people that the homeowner 
will see is the community bank that originated the loan, sold 
under secondary markets and maintains the relationship of 
collecting the payments. And it is obvious that relationship 
must exist. Otherwise, local homeowners absolutely have no idea 
as to whom to contact in the event that there has to be 
something taken care of.
    The second thing is in the FHFA extended the timeframe 
within which a mortgage has to be foreclosed. But the problem 
that we see is every State has its own mortgage foreclosure. In 
some States, it is an administrative function that doesn't even 
go through the courts. In the State of Illinois, it is a formal 
legal proceeding with the equity of redemption and everything 
rolled into it.
    I know what you are trying to do. And I know what you are 
advocating. The problem is that that you are advocating common 
sense. And that is never going to find its way into anything 
that makes sense coming out of this City.
    Isn't there a way, for example, of coming out when a loan 
is originated, that there are 10 principles that can be 
followed that would add to the stack of papers I guess that the 
homeowner would get, that would talk about exactly what is 
expected of when the person makes the payment?
    Could that be adopted as a standard of the industry as 
opposed to, in fact, allowing the Consumer Financial Protection 
Bureau to come up with some more standards?
    On page five of your testimony, Mr. Stevens, you say, 
``Unfortunately, each of the parties mentioned has a different 
opinion on what the servicing standards should be, making it 
very difficult for a servicer to implement what has already 
been issued.''
    Mr. Stevens. I think you are highlighting the extraordinary 
complexity to this process and the concerns that we have about 
creating more confusion, rather than finding a solution to 
protect consumers.
    We are moving in that direction, to come out with what we 
believe could be an industry response. And we are moving as 
rapidly as possible, so as to hopefully contribute to what 
ultimately we could get others to join in with us to get to 
that solution.
    The point that I would continually emphasize is that our 
industry desperately believes that we need a solution to create 
servicing standards, but that we need to change the perspective 
that there is some value creation in doing it badly. Servicers 
have paid an extraordinary price for the mistakes of this broad 
industry and the crisis that we have just been through.
    Even these partial payment applications, the servicer must 
redeem a full payment to the investor every month, whether the 
consumer makes no payment or a partial payment. And a consumer 
who decides to be constantly late by choice and continues to 
make partial payments, I think the question ends up being 
asked, should the servicer have to pay the brunt of that 
continuous delinquency in the process.
    All of these are very complex questions, which is why what 
I said in my testimony and we continue to advocate for, we need 
to work collectively and aggressively to try to conclude with a 
national set of servicing standards that can be adopted to 
protect consumers, to reach our objective, but not to overreach 
and create a system that is just nonfunctional for either the 
industry or the consumer, or for capital to engage back in the 
system.
    And I will pledge to you that the mortgage bankers are 
moving on that path. We already have started down that path and 
we hope to have something--
    Chairwoman Capito. The gentleman's time has expired
    Mr. Stevens. --to talk about here at the short-term.
    Chairwoman Capito. Mr. Neugebauer for 5 minutes.
    Chairman Neugebauer. Thank you, Madam Chairwoman. The first 
thing I would like to do is ask unanimous consent to offer 
material that I used during my questioning this morning for the 
record.
    Chairwoman Capito. Without objection, it is so ordered.
    Chairman Neugebauer. Thank you.
    I apologize, I am kind of bouncing back and forth.
    But, Mr. Stevens, one of the things that my friend, Mr. 
Hensarling from Texas brought up earlier, and maybe others 
have, is that we need to get the mortgage market back 
functioning again. And particularly, we need to get private 
capital back into play here.
    I know a number of my colleagues have been sitting down 
with people who have been in the past participants in the 
private mortgage market. There is a lot of reluctance, quite 
honestly, right now for those participants to come back into 
the market. And particularly, they point to just a lot of 
uncertainty.
    And I think the latest round of uncertainty is now there is 
this huge proposed settlement that we haven't seen yet. But 
also that the implications of that in the chain of title and 
the rule of contract, where servicers are going to be mandated 
to basically enter into modifications and principal reductions.
    Without really a lot of input from I think really the 
ultimate holders of those mortgages, the investors are buying 
those mortgage-backed securities. And while obviously having 
some certainty of what the world is going to look like moving 
forward, I think the troubling part is that we may have created 
so much what I call regulatory risk in the mortgage market that 
is going to cause an increased pricing premium for new risk 
that is out there that subsequently wasn't there in the past.
    Is that a sentiment that you share?
    Mr. Stevens. Congressman, if I could, I would like to 
separate the settlement discussions going on with the broader 
question about the regulatory environment and the mortgage 
capital and I need to do that because of my previous role as 
FHA Commissioner and that I was with the ethics council prior 
to leaving, and the servicing settlement discussion is a 
subject that I cannot discuss and have not been involved in 
since I became FHA Commissioner at all.
    On the broader question, when we created the FHA short 
refinance program, which has received mixed reviews, those 
kinds of programs were created with the intention of it being 
an optional opportunity to write down principal refinancing to 
a new mortgage.
    The uncertainty premium that exists right now in the market 
is clearly impacting the desire, the inclination of private 
capital, private market players to come up with private 
capital, there is no question about it.
    There are other things, home prices being flat or 
declining, that uncertainty as well makes the investors 
concerned about the collateral they are investing in.
    But there is no question that many of the actions that are 
being discussed or to take place in the future from a 
regulatory standpoint are going to have extraordinary impact on 
who invests in the U.S. mortgage market.
    One fact we all know is to finance $1.5 trillion of annual 
mortgage production, sort of a normalized market, we cannot 
depend solely on the banking system to provide that financial 
capital and so that will have to come in from external parties.
    To do so, we need confidence in the servicing environment. 
We need confidence in that terms that are agreed to in investor 
documents will be upheld and that there won't be changes to 
those documents down the road.
    And the more uncertainty we create to this discussion while 
trying to reach a conclusion to help protect consumers and 
create a safe market, that has to be in balance to the notion 
that we need to have a functioning housing finance system going 
forward or there will be no really functional recovery for a 
much longer period.
    So I do appreciate your concern, and I think it is one that 
why we are so concerned about making sure that we are all 
actively engaged in this discussion, regulators as well as 
private sector participants and the other stakeholders before 
decisions are made because these all have extraordinary impacts 
on this ecosystem which we depend on to make the housing market 
function.
    Chairman Neugebauer. Mr. Calhoun?
    Mr. Calhoun. First, I think there is very broad evidence 
that there are not enough loan modification efforts taking 
place and that they are not being done well.
    As I have made the point earlier, the servicers who messed 
up the foreclosures are the same ones doing the loan 
modifications. And indeed, it is the investors who are coming 
in and demanding, including a legal action, so that there will 
be more modifications because they ultimately are paying a 
heavy price.
    Second, the touchstone still needs to be net present value, 
that the modification results in a higher return for the holder 
of the mortgage or the investor who holds the security. But I 
do think we can move to a better place and there is broad 
consensus of the contours of how we do that to get some 
baseline standards in place and that will help both consumers 
and the investors which also indirectly helps the consumers.
    Chairwoman Capito. Thank you.
    Mr. Carney, for 5 minutes, will be our final questioner, as 
we have votes, so proceed.
    Mr. Carney. Thank you, Madam Chairwoman. I appreciate it. 
And I apologize to the panel for just coming in a minute ago. I 
am probably going to ask questions that you may have addressed 
in your testimony.
    But I would like to follow up on really the conversation 
you were just having about what we need to be doing or what 
ought to be done to address the problem at large, and in 
particular, to address the problems that folks in delinquency 
and foreclosure experiencing.
    In my State, the State of Delaware, we put together a group 
of people that included the banks and servicing agency, the 
community service organizations that have housing counselors 
and working with homeowners, the government agencies.
    And in my view, it has always been that it requires a whole 
series of talks. We have had debates in this committee with the 
other members here about anything else, the government has been 
the problem, one side argues and, today, we have heard about 
the problem that the servicers have had.
    And it seems like I was frankly appalled to hear about the 
practices that were not being done. Could you elaborate again 
on what you were just addressing what we need to really address 
these problems?
    Getting people processed through in my State, we ran into 
consumers who can't get one single point of contact that is 
going to get it fixed. The documents get lost. They can't move 
through the process. Nobody is willing to make a decision.
    The HAMP program in Delaware has been very successful. It 
hasn't been as successful in other States. Could you offer your 
thoughts on what we should be doing? Both of you, if you would, 
please?
    Mr. Stevens. I will start. This is the billion dollar 
question that we really need to be thinking about.
    I will cover a couple of points. The HAMP program works 
particularly effectively obviously with Freddie Mac and Fannie 
Mae loans. But Freddie Mac and Fannie Mae can't do principal 
write-down using the FHA's short refinance program.
    Private label investors, because of concerns about Safe 
Harbor provisions, etc., working through trustees, it makes it 
difficult for a servicer to take action on a certain 
modification initiative because they could expose themselves to 
litigation for violating the pooling servicing agreement.
    We are in a very complex financial environment, on top of 
which, as I said earlier in my testimony, I would never want to 
back away from that, the entire servicing industry has been 
working frantically to hire tens of thousands of people across 
this country and train them to be underwriters--the skill that 
they didn't typically have to have in the servicing world to be 
able to respond to the enormous need of families across 
America.
    I would be glad to do this as a follow-up. Let me just 
start at a high level. And this is going to sound 
extraordinarily limited. But I view the market issues right now 
as both a supply and a demand struggle.
    On the supply side, we have excessive inventory as it were 
of foreclosures and borrowers at risk, either do the 
unemployment, causing them to not be able to pay their 
mortgages or having them put into mortgages that were not 
sustainable, or strategic default due to the overhang of 
negative equity. Each of those has a set of solutions we need 
to work with and systems need to be created.
    And then on the demand--
    Mr. Carney. Do we have those systems?
    Mr. Stevens. I think the system is--there is a lot of--
    Mr. Carney. And tools?
    Mr. Stevens. Let us talk--
    Mr. Carney. Every situation is different.
    Mr. Stevens. Let us talk about--let us finish this up and I 
will turn it over, because it is a long answer.
    Mr. Carney. My time is running out.
    Mr. Stevens. Look at modification today, about 4.7 million 
modifications have been proprietary modifications done by 
financial institutions, the same servicers that we have talked 
about in this hearing today.
    HAMP modifications have been about 700,000 because the 
proprietary modifications have actually been far more effective 
as a solution than--
    Mr. Carney. And that is a good thing.
    Mr. Stevens. It is a good thing.
    Mr. Carney. It is a good thing.
    Mr. Stevens. But it tells you that it is impossible to come 
up with a one-size-fits-all solution.
    Mr. Carney. Exactly.
    Mr. Stevens. And it takes the private sector and these 
regulators working together to come up with a broad set of 
solutions and then training expertise--
    Chairwoman Capito. Will the gentleman yield for 2 seconds?
    Mr. Carney. Sure.
    Chairwoman Capito. Following up on your comment that Fannie 
and Freddie cannot write down loans, do you think they should 
be able to write down loans?
    And I yield back to the gentleman.
    Mr. Calhoun. If I can respond to that?
    Mr. Carney. Please do.
    Mr. Calhoun. In the broader question, the baseline that 
needs to be there is you should not be allowed to start or 
complete a foreclosure unless the servicer can demonstrate that 
they have gone through a good faith evaluation of whether an 
alternative loan modification is possible.
    Obviously, if the borrower doesn't respond, or the borrower 
doesn't have the income to make it work, they don't have to 
modify. But, as you have said, when you get people into the 
room and you force them to commit those resources, and as we 
heard from Congressman Scott, it works.
    Second, on principal reduction, industry analysts and 
investors are calling for principal reduction because it 
generates a higher return than foreclosure, which right now is 
producing horrific losses. And there are repeated studies, 
Amherst Securities, for example, shows that currently 
performing loans, if they are deeply underwater, are rapidly 
falling into default and foreclosure.
    And that is why some servicers have recently published 
these--added some banks on their portfolio loans are offering 
principal reduction in carefully controlled ways because it 
makes sense. Again, we need to force the servicers to treat 
other people's loans as they are treating their own portfolio 
loans.
    Mr. Carney. Thank you very much.
    Thank you, Madam Chairwoman.
    Chairwoman Capito. The time has expired. The Chair notes 
that some members may have additional questions for this panel, 
or both panels, which they may wish to submit in writing. 
Without objection, the hearing record will remain open for 30 
days for the members to submit written questions to these 
witnesses and to place their responses in the record.
    I would like to thank all of the witnesses, and I 
understand some have come from far away, so I appreciate that.
    And with that, this hearing is adjourned.
    [Whereupon, at 1:37 p.m., the hearing was adjourned.
                            A P P E N D I X



                              July 7, 2011


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