[Senate Hearing 112-325]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 112-325
 
     HOUSING FINANCE REFORM: NATIONAL MORTGAGE SERVICING STANDARDS

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


                                HEARING

                               before the

                              COMMITTEE ON

                   BANKING,HOUSING,AND URBAN AFFAIRS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING NATIONAL MORTGAGE SERVICING STANDARDS AND HOUSING FINANCE 
                                 REFORM

                               __________

                             AUGUST 2, 2011

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


                 Available at: http: //www.fdsys.gov /



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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                     Laura Swanson, Policy Advisor

                 Erin Barry, Professional Staff Member

                 William Fields, Legislative Assistant

          Michael Bright, Republican Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                     Jana Steenholdt, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                        TUESDAY, AUGUST 2, 2011

                                                                   Page

Opening statement of Chairman Johnson............................     1
    Prepared statement...........................................    21

Opening statements, comments, or prepared statements of:
    Senator Corker...............................................     2
    Senator Menendez
        Prepared statement.......................................    33

                               WITNESSES

Jack Hopkins, President and Chief Executive Officer, CorTrust 
  Bank, Sioux Falls, South Dakota, on behalf of the Independent 
  Community Bankers of America...................................     3
    Prepared statement...........................................    33
Faith Schwartz, Executive Director, HOPE NOW Alliance............     4
    Prepared statement...........................................    36
Robert M. Couch, Counsel, Bradley Arant Boult Cummings, LLP......     7
    Prepared statement...........................................    74
Peter P. Swire, C. William O'Neill Professor of Law, Moritz 
  College of Law of the Ohio State University (via 
  Teleconference)................................................     9
    Prepared statement...........................................    76

                                 (iii)


     HOUSING FINANCE REFORM: NATIONAL MORTGAGE SERVICING STANDARDS

                              ----------                              


                        TUESDAY, AUGUST 2, 2011

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:03 a.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Tim Johnson, Chairman of the 
Committee, presiding.

           OPENING STATEMENT OF CHAIRMAN TIM JOHNSON

    Chairman Johnson. Good morning. I call this hearing to 
order.
    Thanks to all of our witnesses for joining us this morning. 
I would also like to recognize that, for the first time, we 
have a witness joining us by Skype. Professor Peter Swire is in 
Oregon but was kind enough to start his day early for our 
hearing.
    Today we will continue the Committee's oversight of 
problems in the mortgage servicing industry and explore the 
need for a national mortgage servicing standard.
    The housing recovery appears to have stalled--in part 
because of widespread uncertainty in mortgage servicing. 
Borrowers are not certain that servicers are accurately 
evaluating them for modifications. Servicers are not confident 
that borrowers' documents were submitted properly. And 
investors are concerned about how all these factors increase 
litigation risk for servicers. Homes that should move through 
the foreclosure process are held up because courts and 
servicers are concerned that paperwork has not been completed 
properly.
    We need rules of the road so that borrowers, investors, and 
servicers have a clear understanding of the process to follow 
both when a borrower is current on payments and also in the 
unfortunate event that a borrower becomes delinquent.
    Since our first servicing hearing in November of last year, 
the Federal banking regulators have found significant problems 
and issued consent orders to 14 large servicers; the Federal 
Housing Finance Agency amended its seller-servicer guidance to 
align Fannie Mae and Freddie Mac's standards for servicing and 
improve borrower contact; and the Treasury Department's HAMP 
program began issuing servicer report cards--which did not show 
promising improvements.
    Even more recently, Reuters and AP released investigative 
reports detailing ongoing problems in mortgage servicing. I 
would like to place those reports into the record.
    Given the variety of standards and the continuing problems 
that I have mentioned, it is important that we explore a 
national mortgage servicing standard.
    Several Members of this Committee have already introduced 
legislation to create such a standard and mitigate the 
foreclosure crisis. Senator Reed is a consistent leader on this 
issue, introducing legislation last Congress and again this 
Congress. I would also like to recognize Senator Merkley and 
Senator Brown for their legislative efforts.
    Senator Menendez has also helped in the Committee's 
oversight of this issue with a productive hearing in the 
Housing Subcommittee.
    This is an important issue, and the Committee will continue 
to exercise its oversight responsibility.
    Before I turn to Senator Corker, I would like to thank him 
and his staff for working with me and my staff on these housing 
finance reform hearings. Housing finance reform is a large 
topic that requires our attention in all aspects, and these 
hearings will help us better understand the areas that need 
reform.
    Senator Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Thank you, Mr. Chairman, and thanks for 
having this hearing. And I certainly welcome all the witnesses, 
both here and afar, and appreciate your testimony. I know we 
are going to be talking a lot about servicing today, and the 
point of view I would like to put forth is if we do that 
without paying attention to the mortgage investors, then we are 
going down the wrong track. We have got to have private capital 
back into mortgages, or rates certainly will not continue to be 
low right now, and obviously we are not going to ever get the 
private market involved unless we take that into account.
    I know we know there are two fundamentally different ways 
of going at servicing right now. One is the large, large banks, 
and the other is the community banks around the country. And as 
we look at either regulations or potentially new laws, we need 
to take that into account.
    So I welcome you here today. I look forward to your 
testimony. And, again, I hope whatever we do we continue to 
remember that getting private capital back in the mortgage 
market ultimately has to be a big part of what it is we are 
focused on. So thank you, and I look forward to your testimony.
    Chairman Johnson. Before we begin, I would like to briefly 
introduce our witnesses who are here with us today.
    Our first witness is Mr. Jack Hopkins, a long-time friend 
and a personal resource for me on many South Dakota community 
banking issues. Jack is the president and CEO of CorTrust Bank, 
a community bank that serves both South Dakota and Minnesota.
    Ms. Faith Schwartz is the executive director of the HOPE 
NOW Alliance.
    Mr. Robert Couch is a counsel at the law firm of Bradley 
Arant Boult Cummings LLP and a former General Counsel at HUD.
    And, finally, we have Professor Peter Swire, who is 
appearing before the Committee via teleconference. Professor 
Swire is a professor of law at the Ohio State University and 
also a senior fellow at the Center for American Progress.
    I welcome all of you here today and thank you for your 
time. Mr. Hopkins, you may proceed.

   STATEMENT OF JACK HOPKINS, PRESIDENT AND CHIEF EXECUTIVE 
OFFICER, CORTRUST BANK, SIOUX FALLS, SOUTH DAKOTA, ON BEHALF OF 
          THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Hopkins. Thank you. Chairman Johnson, Senator Corker, 
Members of the Committee, I am Jack Hopkins, president and CEO 
of CorTrust Bank, a $660 million asset bank headquartered in 
Mitchell, South Dakota. As a third-generation community banker, 
I am pleased to represent ICBA's nearly 5,000 members at this 
important hearing.
    As this Committee considers the development of national 
mortgage servicing standards, I have an important point to 
make. Community banks are successfully servicing their 
portfolios and do not have the widespread servicing problems 
reports in the press. I urge you to ensure any effort to create 
national standards does not add to the regulatory burden of 
community banks. We must preserve the role of community banks 
in mortgage servicing, or you will see further consolidation 
which will only harm borrowers, especially those in rural and 
underserved housing markets.
    CorTrust Bank was founded in 1930, at the outset of the 
Great Depression, and was built, tested, and proven under 
historically challenging economic conditions. We survived the 
Great Depression and numerous recessions by practicing 
conservative, commonsense lending. We have emerged from the 
crisis well capitalized and ready to lend to support the 
recovery. CorTrust Bank serves communities in 16 South Dakota 
cities, from Sioux Falls to rural communities with populations 
of less than 150.
    Residential mortgage lending has been an important 
component of CorTrust's business since its founding and has 
grown more important over the years. Today we have a $552 
million servicing portfolio consisting of approximately 5,000 
mortgage loans.
    Over the years, we have discovered that mortgage lending is 
a great way to cement long-term relations with customers and 
win the opportunity to serve their additional banking needs. To 
further bolster our customer relationships, we need to service 
these loans, whether they are subsequently in the secondary 
market or held in portfolio. Customers do care about who 
services their loans. They value and even seek out local 
servicing.
    Much of our recent business has come from refinancing 
mortgages away from large lenders whose borrowers are 
frustrated with remote servicing. Even though at its best it is 
a break-even business for us and loan for loan it would be more 
profitable to release servicing, we choose to service in-house 
because it is central to our community bank business model.
    The success of community bank servicing is based on close 
ties to customers and communities. Because CorTrust Bank's 
servicing team consists of only four people, customers always 
know who is on the other end of the telephone or across the 
desk.
    A customer who dials our 1-800 number will generally get 
one of two people on the line. A customer can walk into one of 
our 24 locations and deal with a staff person face to face.
    Smaller servicing portfolios and better control of mortgage 
documents also provide an advantage over the large servicers. 
For these reasons, community banks have generally been able to 
identify repayment problems at the first signs of distress. Our 
staff will contact a late customer on the 16th day, the first 
day of delinquency, and find out what their circumstances are 
and discuss solutions.
    Personalizing servicing combined with conservative, 
commonsense underwriting yields exceptional results. Our 
average delinquency rate of 1.7 percent is about one-third the 
national average and is consistent with other community bank 
portfolios. In the history of CorTrust Bank, only a handful of 
mortgage loans have gone into foreclosure.
    Overly prescriptive requirements should not be applied 
across the board. There are many examples of harsh new 
requirements. Many of the proposals I have seen would require 
us to establish a call center, a prohibitive and unnecessary 
expense for a community bank the size of mine. The new Fannie 
Mae standards, published in June and scheduled to go into 
effect on September 1st, are overly prescriptive and will 
reduce our flexibility in using methods that have proven 
effective in holding down delinquency rates.
    I ask this Committee to urge the Federal Housing Finance 
Agency to delay implementation of the new standards for small 
lenders with a record of strong performance.
    We are also concerned that the FHFA's new compensation 
proposal would sharply reduce servicing revenue that currently 
only covers costs. Moreover, this proposal creates a perverse 
incentive by rewarding the originators and servicers of 
nonperforming loans and punishing community banks. The most 
significant risk in applying standards that are too rigid and 
prescriptive and in reducing servicing income is that it would 
cause many community banks to exit the mortgage servicing 
business and accelerate consolidation. Any national standards 
developed by Congress or the regulators must exempt community 
banks. I urge you not to tamper with our success.
    Thank you for holding this hearing and for the opportunity 
to present the good story of community bank mortgage servicing. 
I will be happy to take your questions.
    Chairman Johnson. Thank you, Mr. Hopkins.
    Ms. Schwartz, you may proceed.

   STATEMENT OF FAITH SCHWARTZ, EXECUTIVE DIRECTOR, HOPE NOW 
                            ALLIANCE

    Ms. Schwartz. Thank you. Chairman Johnson, Senator Corker, 
and Members of the Committee, thank you for the opportunity to 
speak here today. My name is Faith Schwartz. In 2007, I joined 
the HOPE NOW Alliance as its executive director.
    The foreclosure issues we faced in 2007 were viewed as 
short-term subprime issues, and most people thought it would 
take a year or two at most to work through. I am approaching my 
fifth year at HOPE NOW. The crisis has not abated for many 
homeowners. It affects prime credit and nonprime credit 
borrowers alike. At times we have been discouraged by the scale 
and the persistence of the problems faced on the foreclosure 
front. But through perseverance and continued efforts by our 
alliance members, including servicers, counselors, and Federal 
and State offices, we are seeking more and more homeowners 
being helped. We measure some successes by the 4.6 million 
permanent modifications completed through May of 2011.
    Other efforts have been more difficult to measure. Sadly, 
there are cases where homeowners fall through the cracks, and 
the industry is persevering through the worst housing crisis 
since the Great Depression. Finding ways to help homeowners 
achieve stability, we are still here doing what it takes 
through many different channels to help homeowners find 
resolution. And the comments today are my own and not 
necessarily shared by all HOPE NOW members.
    I am here to recommend the importance of achieving national 
servicing standards. Many efforts are underway toward this 
goal, but to achieve it will require extraordinary cooperation 
and communication among industry, Government, and other 
concerned parties. We all must improve the customer experience 
for homeowners at risk of foreclosure. Uniform clear standards 
would be a strong step in that direction.
    Current economic conditions--underemployment and 
unemployment in particular--are challenging for customers who 
are trying to maintain their home. Many at-risk homeowners are 
frustrated by the inconsistent messages from some loan 
servicers when they ask for help. Servicers have made real 
improvements here, but more needs to be done to create the 
confidence in the servicing system.
    Let me be clear. National servicing standards may not 
change the final outcomes for many homeowners at risk of 
foreclosure. All mortgage customers need consistent servicing 
processes that give them timely responses and information on 
their options when they experience difficulty in staying 
current on their mortgage.
    I will address two of the most prominent issues in 
servicing: the desire to have a single point of contact and the 
dual-track processing of loans going to foreclosure versus the 
modification process.
    To a frightened homeowner, the single point of contact is 
one way to lessen the confusion and explain to homeowners what 
steps are required by servicers, investors, and State law. It 
is important to emphasize that the servicing system is facing 
completely different challenges in today's environment than it 
was designed to manage. Over the years mortgage servicing 
developed some uniformity in part because the standards for 
many loans were set by the GSEs and FHA guidelines.
    FHFA, Fannie Mae, and Freddie Mac remain the biggest 
influence on servicing practices and standards today. For many 
years that worked well, but servicing was primarily a simple 
task of processing loan payments on performing loans. 
Delinquent loans and troubled borrowers generally were handled 
by repayment plans or the sale of a property at a profit. The 
current housing crisis completely shifted the demands on the 
mortgage servicing, and servicers must now manage millions of 
delinquent loans and work with the borrowers on more complex 
solutions such as modifications and re-underwriting of loans.
    Since initiating the homeowners outreach events in 2008, 
HOPE NOW has hosted over 112 events. We have tracked 
participating homeowner satisfaction to gauge our success and 
adjust the outreach model accordingly. In the past 2 years, 
HOPE NOW and the U.S. Treasury's Making Home Affordable has 
worked together on outreach. Over half of the borrowers rate 
these workshops' experience as excellent.
    And, surprisingly, we continue to find that 35 and 40 
percent of the participating homeowners are first-time contacts 
with their loan servicers. We have seen a change in the 
circumstances of at-risk borrowers for up to 30 percent who are 
unemployed. Unemployment significantly affects the type of aid 
available and highlights the obvious challenges we face in this 
crisis.
    This offers some insight to the importance of customer 
experience regardless of the outcome, and it reinforces the 
need for multiple ways to communicate with borrowers who need 
assistance. There are multiple efforts underway to improve and 
establish servicing standards, particularly for helping at-risk 
homeowners. A single uniform standard is needed, but current 
initiatives must be evaluated, coordinated, and ultimately 
combined to set national standards.
    There are many rules and standards that have been put in 
place by the various agencies. We have the recent OCC consent 
orders for the top 14 banks. We have unique Fannie Mae, Freddie 
Mac, and FHA servicer guidelines. We have proposed risk 
retention under Dodd-Frank, which includes servicing standards. 
We have FHFA, Fannie Mae, Freddie Mac, and Ginnie Mae setting a 
new compensation servicing model that affects performing loans 
and nonperforming loans. We have the Treasury under Making Home 
Affordable offering recent directives on single point of 
contact and a 1-year forbearance plan. Note the forbearance 
plan does not apply to Fannie Mae, Freddie Mac, or VA loans.
    State Attorneys General are under confidential discussions 
with top banks to discuss practices and processes that will 
indeed lead to standards. The soon-to-be CFPB efforts and 
interagency guidelines are also being looked at to effect 
standards. All of these efforts must be evaluated before any 
decision is made on any single uniform standard.
    Just a quick note. I did visit a shop recently, and I 
wanted to see what they had implemented on the single point of 
contact. Hundreds of people were being trained to handle the 
single point of contact rule. Training lasted for 6 weeks. Once 
the training was complete, employees had several large black 
binders of which to navigate for all the different programs and 
processes they had to deliver the message on about what the 
options were for the borrower.
    The training objective for new hires was to bring 
consistency, empathy for the customers, and accuracy regarding 
the description of the options available for the borrowers as 
well as access to information that would be relevant to the 
borrower over the course of the eligibility review.
    The training task seemed daunting, but it was indeed 
impressive. And some companies are dealing with licensing 
single point of contact on the origination process if they are 
subject to the SAFE Act under several State laws.
    It was enlightening to see how the directives were being 
implemented in the real world. All changes must get adapted 
into systems, processes, and work flows to educate and train 
the full workforce, who in turn will need to communicate 
internally and externally on all these directives. And as a 
reminder, the single point of contact is not the person who 
will perform any of the underwriting, any of the modifications, 
or any of the sale processes if there is a short sale in place.
    We believe the efforts by various entities currently 
underway are moving in a positive direction to elevate 
servicing standards and improve the customer experience. 
Increased coordination by all entities is needed in order to 
make things happen in a timely fashion.
    In summary, we recommend the Administration gather all of 
the involved parties together to review the servicing standard 
initiatives to ensure that definitions and policies agreed to 
by regulators, enforcement agencies, and investors align with 
one another. That is the time to ensure a uniform set of 
standards can be identified and established. Reducing confusion 
and friction from the system is very important. As Senator 
Corker initially noted, bringing private capital back to the 
market is of utmost importance, so looking at standards must be 
done thoroughly and cautiously.
    The home mortgage is the most important investment in the 
lives of many consumers, and it is essential that we get it 
right, and the communication to the consumer of the process and 
servicing that comes with this investment. The industry 
nonprofit partners and servicer members are committed to 
working to improve mortgage servicing for consumers.
    Thanks for the opportunity for letting me speak today.
    Chairman Johnson. Mr. Couch, you may proceed.

  STATEMENT OF ROBERT M. COUCH, COUNSEL, BRADLEY ARANT BOULT 
                         CUMMINGS, LLP

    Mr. Couch. Good morning, Chairman Johnson, Senator Corker, 
and other Members of the Committee. Thank you very much for 
letting me appear today to talk about this important issue.
    I am not going to spend a lot of time on my background, but 
to establish my bona fides, I was General Counsel of HUD, 
President of Ginnie Mae, president of one of the most active 
mortgage lenders in the South, chairman of the Mortgage Bankers 
Association, and president of the Mortgage Bankers Association 
of Alabama as well.
    First and foremost, I am not here to defend the industry or 
be an apologist for the industry. Mistakes have been made, and 
there have been some abuses of particular processes. But I am 
here to speak about three issues: certainty, fairness, and 
State law. I would like to cover all three of those in the 
limited amount of time I have.
    I would like to start by telling you a story about the last 
time I refinanced my own mortgage, about 10 years ago. At the 
closing table the agent handed me a document about 15 pages 
long, a mortgage. And he said, ``Rob, do you know what this is? 
Do you know what it says, what it means?'' I said, ``Well, I 
think I do, but tell me what you think it means.'' He said, 
``It is very simple. If you pay, you stay. If you don't, you 
won't.''
    Now, this may seem unduly harsh to a lot of people, but it 
is, in fact, the essence of the transaction and the essence of 
this hearing in many ways.
    It is, I think, instructive to briefly talk about how the 
process works. Someone wants to borrow money, goes to a lender, 
establishes what their likelihood of repaying that mortgage is 
or that loan is, and offers the home that they are about to buy 
or refinance as collateral, as security for the mortgage. At 
closing they get the money. In return they sign a note that 
says, ``I promise to pay this money back, and to secure that 
promise, I give you the right to take my home if I do not pay 
that money back.''
    That certainty in the process allows that loan then to be 
sold in the secondary market, many times to pension plans that 
you or I may be beneficiaries of, and the money is recirculated 
in the marketplace. That is the way the process is supposed to 
work.
    But, unfortunately, over the past several years, a lot of 
uncertainty has, as you mentioned, Chairman Johnson, crept into 
the process, and that uncertainty has been in the form of 
stretching out the period of time that it takes to foreclose on 
the loan. Today it takes, on average, about 400 days from when 
a person quits paying their mortgage to when the foreclosure 
process is completed. In some States--New Jersey, New York, 
Florida--it is a much longer process. And the uncertainty that 
has crept into the process has made the functioning of the 
market much more treacherous.
    If you look today, well over 90 percent of all mortgages, 
in order to be done, have to be guaranteed directly by the 
Federal Government for the mortgage process to take place. Or 
by way of illustration, if you look over the past 3 years, 
there have been two private label securities backed by 
mortgages done in this country, worth about $500 million. By 
comparison, if you go back to 2006, there were hundreds of 
securities totaling $723 billion done in that year alone--a 
thousandfold decrease for a 3-year period. So the process has 
dramatically been affected by this uncertainty, and you need to 
be aware of that.
    Fairness is also a very important issue, and many of the 
efforts that we have seen lately have been designed to be 
compassionate to those who cannot or will not pay their 
mortgages on time. And I certainly understand that, but that 
overlooks the need to be fair to those folks that have been 
very diligent in paying their mortgages, which is the vast 
majority of people in this country who have mortgages. The 
effect of that stretching out of the foreclosure process and 
the uncertainty I mentioned before has been to dampen real 
estate values across the board across the country for those 
folks that have been diligent in paying their mortgages, and I 
would hope that you would take those folks into consideration 
in your deliberations.
    And, finally, State law. I am not here to advocate for or 
against a uniform national standard, but I would remind the 
Committee that there are 50 States out there with procedures 
set up to protect both borrowers and lenders in the process and 
make sure the process runs smoothly. I would hope that you 
would be mindful of all of those 50--really 51, State and, in 
the case of D.C., the district laws designed to do just that.
    In sum, in conclusion, please be mindful of certainty, 
please be mindful of fairness, and please be mindful of State 
law. And please be deliberate about this process.
    Thank you very much for the opportunity to talk to you 
today, and I would be happy to answer any questions.
    Chairman Johnson. Thank you, Mr. Couch.
    Professor Swire, you may proceed.

 STATEMENT OF PETER P. SWIRE, C. WILLIAM O'NEILL PROFESSOR OF 
 LAW, MORITZ COLLEGE OF LAW OF THE OHIO STATE UNIVERSITY (VIA 
                        TELECONFERENCE)

    Mr. Swire. Thank you, Chairman Johnson and to other 
distinguished Members of the Committee. Thank you for inviting 
me to participate in this hearing on national mortgage 
servicing standards.
    As you are aware, I previously committed to speak in Oregon 
today, and I thank the Committee and its staff for the great 
flexibility of having me testify online today. I believe that 
using these online technologies can continue to open up 
Congress and our political process to participation by the 
American people.
    My testimony today draws on two previously published items 
which I have provided to the Committee. The first is a report 
on mortgage servicing that I published in January of this year. 
The second is an article in the Los Angeles Times from March 
which describes some of my personal experiences as a homeowner 
with the mortgage servicing industry.
    As you said, Mr. Chairman, I am now a law professor at the 
Ohio State University and a Senior Fellow at the Center for 
American Progress. In 2009 and 2010, I was Special Assistant to 
the President for Economic Policy, serving under Larry Summers 
on the National Economic Council. At the NEC, my biggest task 
was to coordinate the interagency process for housing and 
housing finance issues. In this role, I worked extensively on 
mortgage servicing issues and Fannie and Freddie and the FHA, 
and in that role, I met regulated mortgage servicers as well as 
many other stakeholders.
    My January report was called, ``What the Fair Credit 
Reporting Act Should Teach Us About Mortgage Servicing.'' The 
report makes a simple point. The sorts of market failures that 
led to the creation of the FCRA in 1970 also exist today for 
mortgage servicers. The single most important fact is that the 
consumers, the homeowners, are not the clients. The clients for 
the credit reporting agencies are the companies that pay for 
the credit reports, the lenders and employers. The clients for 
the mortgage servicers are the companies that pay the services, 
and those are the investors in mortgages. Mortgage servicers 
owe their legal duties and market loyalties to the investors, 
not the homeowners.
    Now, in saying this, I am talking about when mortgage 
servicing rights are sold, and that appears not to be the model 
that Mr. Hopkins's bank follows, where they keep the servicing 
in-house, close to the market. But the large majority of 
mortgage servicing rights today are sold out into the market to 
new buyers of servicing, often the biggest banks.
    So the structure of the market that we have today leads to 
problems. Consumers have no market or legal checks on the 
servicer. The homeowner does not choose the service. That 
choice is made by the company usually the one that originates 
the loan. If the homeowner has a bad experience with the 
servicer, as so many people have, the homeowner cannot even 
quit. Even if the homeowner refinances a loan to get away from 
the servicer, the servicing market is so concentrated that the 
homeowner may get the same servicer all over again the next 
time.
    Homeowners not only lack any market choice, but they 
currently lack legal remedies if the servicer performs badly. 
That is why national standards for mortgage servicing are so 
important. Where there are no market forces to protect 
consumers, then something else should fill the gap. An 
effective set of consumer rights could be embodied in national 
mortgage servicing standards and I hope that will happen.
    Now, I will turn to my dispute with Washington Mutual's 
servicing arm in 2006 and 2007. To prepare for this testimony, 
I have brought along and reviewed and provided to the Committee 
files from my 21-month dispute with Washington Mutual in 2006 
and 2007, before the crisis, about flood insurance that they 
incorrectly placed on my family's home in Bethesda, and that 
dispute was the subject of the Los Angeles Times article.
    Our family was a target of what people have called ``force 
placed insurance'' and that this Committee has heard about 
before. In early 2006, WaMu asked for proof of flood insurance 
coverage. My State Farm agent immediately faxed them the 
information. It turns out that WaMu had a really cute trick 
that I discovered after numerous phone calls. They did not even 
process the proof of coverage unless it contained WaMu's 
servicing accounting number. So WaMu received the State Farm 
certification and simply ignored it and did not tell us until I 
found it out several months later, and that was how WaMu could 
bill my family for the duplicate flood insurance.
    The next cute trick was to pile up late fees on our monthly 
mortgage payment. We had automatic payment the first week of 
every month, and even WaMu admitted we never missed a payment. 
WaMu's practice, though, was to charge for the duplicative 
flood insurance with each monthly payment. That meant they 
considered our payment too small each month by the amount of 
that insurance premium. So then they declared our entire 
monthly payment late and charged a late fee of over $170 a 
month.
    I provided the Committee staff with detailed and 
contemporaneous documentation of these and numerous other 
problems with our servicer. Eventually, after 21 months and 
over 50 calls to customer service, they finally agreed in late 
2007 to withdraw the flood insurance and cancel the fees.
    In conclusion on this, I feel fortunate that I was able to 
get my family's dispute resolved and cancel over $4,000 in 
erroneous fees that they wanted to charge me. Most homeowners, 
however, are not banking law professors. All of those hours 
sitting on hold, waiting for customer service, gave me plenty 
of time to think about the flaws in our mortgage servicing 
system.
    My experience in Government and since has taught me there 
are numerous hard-working and talented individuals in the 
mortgage servicing industry. I admire the work of Faith 
Schwartz and Hope Now and many others. The incentives, however, 
do not work for consumers.
    In response to Senator Corker's opening statement about 
getting private capital back into the market, a goal I very 
much share and the Administration has shared, fixing servicing, 
which is getting the money to flow properly from the homeowner 
to the investor is an essential part of reform. And so I agree 
that working on national mortgage standards should be seen as 
part of getting the investor part of the thing to work, as 
well.
    In short, in the absence of market discipline on servicers, 
an effective national set of mortgage standards is essential. 
There is no other way to have consumers protected.
    I thank the Committee for its attention to these matters 
and I welcome any questions you may have.
    Chairman Johnson. Thank you, Professor Swire.
    Mr. Hopkins, small servicers, like your bank, have not been 
caught up in the problems that large servicers have. Is that 
just due to your size or do you believe that there are other 
factors?
    Mr. Hopkins. I think that it starts up front. I think we 
had strict underwriting standards and we always held strict 
underwriting standards. We were not offering a lot of the 
exotic products, the Alt ARMs and some of these things that are 
creating the problems with the foreclosures now. We did not 
believe in the products. Therefore, we did not offer the 
products.
    So because servicing is a very low-margin business, we felt 
it was important to have a good quality portfolio, so we were 
always conscious about underwriting our loans very strict up 
front. I think it starts right with the underwriting. We keep 
our loans in-house. Therefore, we are concerned about what we 
put in our portfolio.
    Chairman Johnson. Mr. Hopkins, like mortgage origination, 
there has been a significant consolidation in the mortgage 
servicing industry and the largest banks now service the 
majority of the loans in the country. Have borrowers and 
communities benefited from this consolidation?
    Mr. Hopkins. Absolutely not. I think that is part of the 
problems that Professor Swire was dealing with a little 
earlier. You know, an article I saw in 2010 showed that the 
four largest servicers control 70 percent of the market. So 
they do not have the customer contact that we do. I think that 
if it was a more diverse market in the servicing side, that the 
customers would have a better experience.
    Chairman Johnson. Professor Swire, in your testimony, you 
recommend a Fair Credit Reporting Act equivalent for mortgage 
servicers. Can you expand on what that should include, and how 
could it prevent some of the problems we are currently seeing?
    Mr. Swire. Thank you, Senator. There are many people 
working on the details of what the standards should look like. 
I think the point with the FCRA is if there is a mistake being 
made about the customer, we actually can go fix it these days, 
and when we had mistakes with the servicers, we did not have 
those same kind of legal rights, and that is part of what I am 
point out. I think single point of contact is clearly a step in 
the right direction and the standards should address issues 
around dual track so that when people are getting something 
fixed, they do not suddenly have the house yanked out of them, 
that is part of it. Having disclosures and avoiding conflicts 
of interest to make sure that the servicer is doing what is 
right for the investor and the customer and not for other parts 
of his portfolio, I think those are some of the main categories 
of things you would like to see in the standards.
    Chairman Johnson. Ms. Schwartz, with a number of different 
standards being put forward, would a national mortgage 
servicing standard help provide clarity for servicers, 
homeowners, and investors?
    Ms. Schwartz. Senator, yes, we do believe there is a strong 
need for some coordination and alignment on what is going on 
today with the regulatory efforts and others on servicing 
standards. I would caution the Senator to let this fall out to 
find out what is finally happening with the standards through 
the AG discussions and the OCC consent orders as we see how it 
works through the system before there is another effort to make 
new standards without testing how these are coming through.
    Chairman Johnson. Mr. Couch, in your testimony, you argued 
that homeowners have not been harmed by the problems in 
mortgage servicing. Do you disagree with the assessments and 
subsequent required changes imposed by the Federal banking 
regulators and by FHFA?
    Mr. Couch. Senator, in my testimony, I said that in the 
event that a borrower has been damaged, he or she should be 
entitled to be made whole for those damages. In terms of harm, 
it is important to keep in mind that in the case of 
foreclosures and this foreclosure process, as I mentioned 
before, the length of time during that 400-plus days, depending 
on what State you are in, while the process is working, that 
borrower is not monetarily damaged. In fact, that borrower is 
living rent-free, so to speak, during that period of time.
    Now, there are in place in all 50 States mechanisms for 
making, if there are damages, making the borrower whole, and I 
am suggesting that in every case that should take place. But I 
think it is important for the Committee to look at who is 
actually being damaged in this process.
    Chairman Johnson. My time has expired.
    Senator Corker. Go ahead. I will use that chit later.
    Chairman Johnson. Yes. Yes.
    [Laughter.]
    Chairman Johnson. I will proceed to a second round if need 
be. Senator Corker.
    Senator Corker. There are so few of us here, I am more than 
glad for you to take all the time you need, from my 
perspective.
    But to the witnesses, again, thanks for your testimony. One 
of the folks in our office, as we were getting ready for this 
hearing, was talking about the fact that a year or so ago, they 
had a decision to make as to who they would borrow money from 
because they, obviously, being a staffer, had had experience 
with what happens with mortgage servicing. They looked at 
borrowing money from a community bank, where they would 
actually know the person on the other end of the line, and, on 
the other hand, looked at some of the larger institutions where 
the rates were actually cheaper but they knew they might be put 
through a meat grinder if something happened.
    And so I use that example to say the customers do have a 
choice. I mean, they can choose to go to a smaller institution 
and maybe pay a higher fee but have that personalized service, 
or go to one of these larger institutions where your file might 
be in a warehouse in Kansas someplace. So there is a difference 
there, and I know it was a difference that, when I used to 
borrow money for commercial loans, I paid attention to.
    And I am just wondering, Ms. Schwartz, what your response 
would be to that. I mean, people do have a choice.
    Ms. Schwartz. Sure, Senator Corker. They do have a choice, 
and I would say in the evolution of a $3 trillion market, there 
was a lot of buying and selling of mortgages, small lenders and 
large ones. Today, most of the mortgage market is controlled 
through the investor guidelines, through Fannie Mae, Freddie 
Mac, and FHA, of which most--many lenders participate, and 
those guidelines really govern how they are serviced.
    But to your point, there are choices to be local with your 
community banker and go in and see how your payment was applied 
versus online or 800 numbers to find out how it is being 
processed with larger organizations. There is always a choice. 
But they have the right to buy and sell those loans today, and 
some do.
    Senator Corker. And that is a good point, and so as we--a 
lot of the things that we do around here, I mean, we look at 
some of the regulatory practices that were put in place with 
Dodd-Frank. There is a concern that that just creates greater 
consolidation over time. So is there any concern by any of the 
witnesses that if we put in place uniform standards by law that 
there will be consolidation and maybe it gets even more 
difficult than it is?
    Ms. Schwartz. If I could follow up on that, I believe you 
can have standards and have appropriate protections in place 
for smaller servicers or banks that have too much cost and 
burden with that, but you can have standards that are fair to 
customers and protect----
    Senator Corker. Now, how would that work exactly, because 
we just went through that with debit and interchange and none 
of the community bankers felt like that worked too well. Even 
though they were protected, they know, over time, the market is 
going to migrate away from them if they are charging a higher 
fee than the large institutions. So that is a nice thing to 
say, but tell me how that would actually work, and anybody else 
that wants to chime in would be helpful.
    Mr. Swire. I would have an idea, but do you want to go----
    Senator Corker. Go ahead.
    Mr. Swire. OK. I did not want to step on Faith. So one of 
the basic distinctions for mortgage servicing rights is whether 
the bank retains the servicing, keeps them there in their 
community bank or whether they get sold to somebody else to do 
the servicing, and you can write rules to say, if it is 
retained, the customer chose that bank. It is being serviced by 
that banking organization. You could also have a dollar limit 
if you want to, so that applies up to some amount, so that the 
smaller banks that retain servicing are more likely the whole 
time you have a customer relation, but once it is sold out into 
the national market, that is where the standards apply.
    Ms. Schwartz. If I could--oh, go ahead.
    Mr. Hopkins. First, if I may step in, one, I think that you 
have already defined in here what a small, or a large investor 
is. In the Fannie Mae guidelines, I think it defines 65,000 
loans as being a small market investor or small servicer.
    As far as for the cost, what we are looking at, we do some 
servicing for some other banks, primarily for the South Dakota 
Housing Development Authority loans, because there are only six 
servicers in the State, so I caution that anything--you know, 
we do some servicing for other banks, so we do buy some 
servicing. But the vast, vast majority, 90-some percent, 
probably 98 percent, is our own originated product. So I would 
argue that if we are doing our own product, we are looking not 
to increase the standards that are so prescriptive. They are 
looking at things that would almost force us to have a call 
center implemented in order to do that, in order to track all 
our contacts with customers.
    And to your point earlier when you were talking about the 
cost of a mortgage at a community bank versus a large bank, I 
do not think, with the markets the way they operate today, 
there is a difference in cost, particularly with the new 
incentive rules. So I think that the pricing is virtually 
identical between a large and a small servicer. We advertise 
that we service locally. That is one of our key advertising 
points and we are proud of that. And that brings us in 
business.
    Senator Corker. But I assume you still do not want national 
standards that are the same for you as they might be for 
JPMorgan or somebody like that, is that----
    Mr. Hopkins. No, we do not. I mean, we do not want the 
standards that are very prescriptive. We have been successful. 
Our delinquency rate shows that. We have been very successful 
in servicing, so I am cautious that we have standards that are 
requiring us to contact people on nights and weekends when we 
do not have those type of issues. Our biggest issues is whether 
they pick up the phone. We have gone to the point of using cell 
phones so they do not identify the number when they are 
collecting, and we change the number monthly.
    Senator Corker. Thank you. I noticed I am over my time, Mr. 
Chairman.
    Chairman Johnson. Ms. Schwartz has a comment to make.
    Senator Corker. OK.
    Ms. Schwartz. Oh, I would just say, I think there are ways 
to create standards where the regulatory oversight body can 
work with the smaller community banks or others to say, are you 
satisfying single point of contact? Do you have a customer 
service or abandonment rate that is very low that you are 
really taking care of your customers? And of course, they just 
testified they do. But larger companies may have different 
processes in place because they are a higher volume shop and, 
therefore, they need some different structural concepts. In all 
cases, though, there are ways to be flexible with standards to 
accommodate customer protections as well as the banks' and 
investors' needs.
    Senator Corker. Thank you.
    Chairman Johnson. Senator Menendez.
    Senator Menendez. Well, thank you, Mr. Chairman. Mr. 
Chairman, I ask unanimous consent that my statement be included 
in the record at the beginning.
    Chairman Johnson. It will be.
    Senator Menendez. Thank you.
    Mr. Chairman, thank you for holding the hearing and I 
appreciate the testimony that I have read of the witnesses. I 
have a few questions and I am hoping that you can all help me 
here.
    So let me start off with, I know some of you talk about 
single point of contact and dual track, but if you had to name 
a few specific national mortgaging service standards that you 
believe would be helpful, what would those be and how would 
they be helpful? This is for anyone on the panel.
    Ms. Schwartz. I am happy to offer a few. Clearly, the 
single point of contact has become a dominant discussion in the 
regulatory environment, the legislative environment, the 
advocacy environment, because customers are unhappy. And to 
turn that into something where they understand what is 
happening around them and to them and through the options that 
are made available, a single point of contact is something that 
makes them get through the process in an easier way. I 
testified earlier to say it does not mean the outcome will 
differ if they are not able to make an affordable payment or if 
they are unemployed and there are very tools that will help 
them get through a loan process. So single point of contact.
    Dual track processing is the other very significant issue 
out there. It is confusing to homeowners to get help on the 
left side of the house to get a modification, of which I have 
spent 4 years working with the industry and nonprofits to do. 
At the same time, the laws create process and standards for 
foreclosure to occur, and so to explain that very complicated 
process has to be done in a much better way for the consumer.
    Senator Menendez. Now, Mr. Hopkins, in your testimony, you 
suggest that community banks should not be subject to national 
servicing standards, and I realize your arguments about 
consolidation in the industry are a concern. But to what extent 
does that depend on what servicing standards are we talking 
about?
    Mr. Hopkins. Well, we are already subject to some 
standards, and I think we have been able to follow those 
standards very carefully. You know, if we are dealing with 
Fannie Mae, Freddie Mac, or South Dakota Housing, in our case, 
they all have their standards of when they expect us to make 
contact with customers, et cetera. What we are concerned about 
is the cost that they are looking at to document that we are 
doing what we are doing, that we are having the contact with 
the customer. But I think, again, our results show that we are 
there. So what we are looking for is that anything you are 
doing does not add cost and burden to us and that we have a 
carve-out if we are meeting certain standards. I mean, our 
delinquency rate----
    Senator Menendez. So if your--go ahead. Finish that.
    Mr. Hopkins. I said, our delinquency rate would prove, at 
1.7 percent, where we are one-third the national average, that 
we are doing the job that we are supposed to be doing. We have 
only had a handful of foreclosures over the last few years. And 
by handful, I am talking 23 last year. I mean, that is not--out 
of 5,000 loans, that is not an excessive number of 
foreclosures. Those are typically life-event type things, a 
divorce, loss of job, et cetera, that are causing those issues.
    Senator Menendez. All right. Let me ask for anyone, maybe 
some of the counsel here, does the panel acknowledge that it is 
a conflict of interest for mortgage servicers to have an 
ownership interest in a company that performs services 
associated with that owned mortgage services foreclosures--
property maintenance, inspection, force placed insurance? Does 
that not give the servicers an incentive to force homeowners to 
use expensive add-on services for their own property, even when 
that is more likely to drive the homeowner into foreclosure?
    Mr. Swire. Senator, that--OK.
    Mr. Couch. Senator, I think that certainly you raise a good 
point, that there are all sorts of interests in place that have 
to be balanced. I would maintain that there is not necessarily 
a conflict of interest for--in fact, it may make it easier for 
the consumer to have services that are provided in-house versus 
going outside the house.
    Now, I think that most of the standards that are proposed 
would require those services to be offered at fair market rates 
and not be marked up, and we have had extensive debate 
throughout about RESPA and what is required under RESPA in that 
regard. So, I mean, you raise a very good point, but I think it 
is a case-by-case----
    Senator Menendez. How about force placed insurance?
    Mr. Couch. And----
    Senator Menendez. The effect on borrowers----
    Mr. Couch. Well, keep in mind what force placed insurance 
is designed to do. If you lend me money and I give you a 
security interest in my house to secure that money, part of the 
deal is that I keep insurance in place so that your security 
interest in my house is protected. And if I do not go out and 
get property and casualty insurance to keep your security 
interest secured, I think you as an investor would like there 
to be a provision, a contractual provision, that allows that 
coverage to be put in place so that your security interest is 
secured.
    Senator Menendez. But we have found many cases in which 
that force placed insurance has been well overpriced. And so, 
again, how do you maintain these bounds? The same issue, and I 
see, Professor, you are trying to get in here, so I will, after 
I ask this next question, have you maybe answer both of them.
    The second thing was--and, Mr. Chairman, thank you for your 
patience--second lien conflict of interest at mortgage 
insurers. You know, so suppose it is a conflict of interest for 
the company servicing the primary lien to also own the second 
lien, and that industry alone is not willing to do anything to 
stop the conflict since it might be in the financial self-
interest of at least some private sector parties for that 
conflict to continue. Is that not the kind of situation where 
there is a legitimate role for the Government to step in?
    Mr. Couch. Are you directing that to me, Senator?
    Senator Menendez. Yes.
    Mr. Couch. Well, again, keep in mind that in most of the 
cases that we are talking about, I mean, we can go back and 
talk about where the piggyback loan, which is where many times 
this has come about, is through the piggyback loans, why those 
evolved the way they did. But keep in mind that the 
relationship between the first and the second is established by 
State law. Well, it is established by, I think, investors that 
bought the first, or the lender that has the first and the 
lender who has the second, and any competing interests there 
are governed by State law and also by the contracts that govern 
the servicing----
    Senator Menendez. Oh, I understand the right, the privilege 
rights of whatever the first lender is and whatever the second 
lender is in terms of their status and how they will be 
compensated if there is foreclosure. My concern is the second, 
you know, the second lien being also the servicing entity, and 
in that context are they working in a way to satisfy their 
interests as a second lien holder or are they working in the 
interest of the homeowner and a resolution of the process in a 
way that best ensures that they can keep the person in their 
home.
    Mr. Couch. Well, the primary party affected by that is the 
owner of the first lien, and the first lien holder, if he has 
concern about the way the second lien is going to be serviced, 
would have to raise that concern at the point that he purchased 
the loan, because those are the rights that are most directly 
affected.
    Now, I recognize that there have been suggestions that that 
second that the servicer of the second lien may put the 
interests of the second lien in front of the first, 
particularly if there is a loan modification that has been 
proposed, and I can easily envision the conflict that could 
arise. But the beef, if you will, is with the investor in that 
first mortgage.
    Senator Menendez. Professor, Swire, and then I will stop 
there.
    Mr. Swire. Yes. Thank you, Senator. Just a couple of quick 
points. First is on force placed insurance, the logic of having 
the insurance to protect the investor is strong. What my 
experience found out was a national servicer had a practice of 
ignoring proof of insurance that came in from my State Farm 
agent or other agents like that and buying insurance anyway. So 
the fact that there is a reason for something does not mean it 
is being implemented correctly.
    On the conflicts of interest, often, a first step is 
disclosure of the conflict so that people can see it, and I 
think with force placed insurance, with fees of various sorts, 
disclosures about that are one way to start to address the 
problem.
    And the last point is on second liens, I know from my time 
in the Administration, there was very great concern that the 
decisions about seconds by major banks were driving how firsts 
got handled, and that a lot of times, seconds seemed to come 
first, that we had a lot of conflicts of interest. It made it 
much harder to make modifications that worked for the 
homeowners and for the first lien holders, and that was a big 
problem.
    Senator Menendez. Thank you. I appreciate it.
    Thank you, Mr. Chairman.
    Chairman Johnson. Senator Hagan.
    Senator Hagan. Thank you, Mr. Chairman, and I thank all of 
you for being here today and on Skype.
    When I am in North Carolina, I travel across the State, and 
I hold ``Conversations with Kay,'' and it is an opportunity for 
constituents throughout North Carolina to come to these events 
and actually bring their--we talk about the issues of the day, 
but also to bring their concerns to me, and we have constituent 
staffers there that can help immediately start working on 
issues. And without a doubt, there are always concerns about 
foreclosures, always concerns about mortgages that have 
questions. And in just about every situation, they discuss how 
documents have been requested, they send them in, they get 
lost; they send them in again, they get lost; they send them in 
again. It is a repetitive comment that I hear each and every 
time.
    So my question is--and, Ms. Schwartz, I think you mentioned 
this in your opening talk about how a single point of contact 
might help solve problems like this, and any of you if would 
care to comment.
    Ms. Schwartz. Yes, Senator, good morning. You know, 
earlier, I also referenced, we created a Web portal called HOPE 
LoanPort for just that reason, so that consumers, counselors, 
and servicers would no longer have that anecdotal back-and-
forth but a rigorous way to track documentation and process and 
time and date stamp every communication so that there no longer 
would be an issue, and that exists today through HOPE LoanPort, 
and we created a neutral nonprofit entity for just that reason.
    Second, that is a fair concern. There is nothing more 
frustrating than losing documents and having 20 phone calls 
with someone who says--and then someone on the receiving end 
does not have it because of a fax or a FedEx.
    So at the end of the day, this is not complex. There are 
ways to address it through documenting and making sure there is 
a safe and secure system of communicating among all the 
stakeholders so that does not happen anymore. It already exists 
today. We need to as an industry and Government keep working 
toward those solutions.
    Senator Hagan. Thank you.
    Mr. Swire. Senator, from my experience this problem--first 
of all, the portal that Faith Schwartz just described is 
something that I have supported, and I think it is getting 
better. But what I saw in my own experience because I kept date 
and time stamps with a lot of documents was that at that point 
they would receive the documents, and then it did not fit their 
system, it did not have their loan number on it, and so they 
ignored the document even though they had my insurance agent's 
phone number and fax, my phone number and fax. They had a proof 
of insurance. They ignored it because it did not sort of check 
a box that they had in their system, and then they went ahead 
and bought the industry in a force placed way. And so that is 
in the file that I provided to staff, and it was a practice by 
one of the major servicers in this country in 2007.
    Senator Hagan. Thank you.
    Some have suggested that one way to improve servicing is to 
create performance thresholds that servicers must meet at the 
MBS level, and if servicers failed to achieve delinquency rate 
targets, time lines, or modification success rates, the 
servicing rights would be sold and the servicer replaced.
    Mr. Couch and Ms. Schwartz, can you discuss whether you 
believe such an approach would be effective? And then, Mr. 
Hopkins, could performance thresholds get servicers to perform 
better on behalf of investors and borrowers and at the same 
time avoid placing undue loan-by-loan regulatory burden on 
community banks that service loans?
    Ms. Schwartz. Sure. So there are already in a sense 
performance thresholds. Fannie Mae and Freddie Mac today have 
time lines required of foreclosure processes. They measure them 
against State law and other efforts, how long it takes to 
foreclose on a loan, and there are incentives in place for 
servicers to perform under their guidelines.
    Certainly there are really great things being done by the 
small and special servicers out there, many who are members of 
HOPE NOW, who all they do is high-touch and feel and help the 
borrower who is in distress, and that is their main business. 
The larger shops have both performing and nonperforming aspects 
to their departments and have a lot of performing loans they 
deal with versus just a focused efforts.
    Thresholds and ability to move servicing you investors is 
probably something to be considered because we have been locked 
up in the system with the inability to move loans in and out of 
pools and buckets, and it has caused some stress in the system.
    Senator Hagan. Mr. Couch.
    Mr. Couch. She did a good job.
    Mr. Hopkins. I guess from our standpoint, you know, 
particularly when we are talking about performance standards, 
we in the South Dakota housing market do have some penalties if 
we do not hit certain delinquency rates. Our fees are actually 
reduced as the delinquency rate goes up. So we are incented to 
have early and often contact with our customer, and it works.
    You know, under some of the new proposals they are looking 
at, it is taking and cutting the servicing fees for your 
performing loans because they say you do not need to deal with 
them. Well, that will drive me out of the business because it 
is a break-even at best business as it is. And they are looking 
at, in my opinion, rewarding the bad players by paying them 
more to service and to modify those loans. Well, I think that 
is kind of a perverse relationship, and it will drive bad 
behavior. In my opinion, you should not be rewarded for making 
bad loans and paying people more to service bad loans. So we 
would be in favor of some servicing standards that would drive 
that.
    Senator Hagan. Thank you.
    Thank you, Mr. Chairman.
    Chairman Johnson. Mr. Hopkins and Ms. Schwartz, as we have 
heard from Professor Swire's testimony, resolving a servicer's 
mistakes takes time and diligence. To help correct mistakes 
sooner, can borrowers access their servicing records and 
mortgage files to ensure that payments and fees are being 
applied appropriately? Mr. Hopkins.
    Mr. Hopkins. Yes, if they call into our servicing 
department, we will happily supply them with their payment 
record and any other record that they would like on their 
mortgage. We will email it, fax it to them, whatever they would 
like, or if they come in and talk to us. If they find a 
discrepancy, we are happy to work with them to try to resolve 
the discrepancy because obviously we are what we call a high-
touch, high-feel type bank, and we rely on our servicing and 
our expertise in servicing and our reputation as a high-touch 
supervisor.
    Chairman Johnson. Ms. Schwartz.
    Ms. Schwartz. Yes, sir. Well, what I have seen from some of 
the largest shops is that they have very impressive Web-based 
access systems where they indeed can go in and look and have a 
read-only review in a private, secure setting to see where they 
are. And I think the industry has made great strides in that 
area.
    I am not familiar enough to know across the industry the 
consistency of that opportunity.
    Chairman Johnson. Professor Swire, what do you have to say 
to that?
    Mr. Swire. Two observations. One is that Washington Mutual 
did, in fact, provide me detailed records eventually on that 
issue. They showed a lot of fees that I did not think I owed, 
but they showed them accurately.
    A second thing is this issue of access to records was an 
issue in the Gramm-Leach-Bliley area, an area I used to work 
in, where there is no right of access in general like you have 
a right of access now to your medical records, and that is 
something that I think in practice usually the banks comply 
with, but there is not the same legal right that we have to our 
financial records that we have to our medical records.
    Chairman Johnson. Yes. Thanks again to all our witnesses 
for being here with us today. As more developments within the 
servicing industry continue to surface, the Committee will 
continue to exercise oversight of this important issue.
    The hearing record will remain open for 7 days for 
additional statements and questions.
    This hearing is adjourned.
    [Whereupon, at 11:06 a.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
               PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
    Good morning. I call this hearing to order.
    Thanks to all of our witnesses for joining us this morning. I would 
also like to recognize that, for the first time, we have a witness 
joining us by Skype. Professor Peter Swire is in Oregon, but was kind 
enough to start his day early for our hearing.
    Today, we will continue the Committee's oversight of problems in 
the mortgage servicing industry and explore the need for a national 
mortgage servicing standard.
    The housing recovery appears to have stalled--in part because of 
widespread uncertainty in mortgage servicing. Borrowers aren't certain 
that servicers are accurately evaluating them for modifications. 
Servicers aren't confident that borrowers' documents were submitted 
properly. And investors are concerned about how all these factors 
increase litigation risk for servicers. Homes that should move through 
the foreclosure process are held up because courts and servicers are 
concerned that paperwork has not been completed properly.
    We need rules of the road so that borrowers, investors and 
servicers have a clear understanding of the process to follow both when 
a borrower is current on payments and also in the unfortunate event 
that a borrower becomes delinquent.
    Since our first servicing hearing in November of last year, the 
Federal banking regulators have found significant problems and issued 
consent orders to 14 large servicers; the Federal Housing Finance 
Agency amended its seller-servicer guidance to align Fannie Mae and 
Freddie Mac's standards for servicing and improve borrower contact; and 
the Treasury Department's HAMP program began issuing servicer report 
cards--which did not show promising improvements.
    Even more recently, Reuters and AP released investigative reports 
detailing ongoing problems in mortgage servicing. I would like to place 
those reports into the record.
    Given the variety of standards and the continuing problems that 
I've mentioned, it is important that we explore a national mortgage 
servicing standard.
    Several Members of this Committee have already introduced 
legislation to create such a standard and mitigate the foreclosure 
crisis. Senator Reed is a consistent leader on this issue introducing 
legislation last Congress and again this Congress. I would also like to 
recognize Senator Merkley and Senator Brown for their legislative 
efforts.
    Senator Menendez has also helped in the Committee's oversight of 
this issue with a productive hearing in the Housing Subcommittee.
    This is an important issue, and the Committee will continue to 
exercise its oversight responsibility.
    Before I turn to Senator Shelby, I would like to thank him and his 
staff for working with me and my staff on these housing finance reform 
hearings. Housing finance reform is a large topic that requires our 
attention in all aspects and these hearings will help us better 
understand the areas that need reform.

ADDENDUM I
 AP Exclusive: Mortgage ``Robo-Signing'' Goes On

By Michelle Conlin and Pallavi Gogoi, AP Business Writers

Tuesday, July 19, 2011
(07-19) 06:05 PDT (AP)----

    Mortgage industry employees are still signing documents they 
haven't read and using fake signatures more than 8 months after big 
banks and mortgage companies promised to stop the illegal practices 
that led to a nationwide halt of home foreclosures.
    County officials in at least three States say they have received 
thousands of mortgage documents with questionable signatures since last 
fall, suggesting that the practices, known collectively as ``robo-
signing,'' remain widespread in the industry.
    The documents have come from several companies that process 
mortgage paperwork, and have been filed on behalf of several major 
banks. One name, ``Linda Green,'' was signed almost two dozen different 
ways.
    Lenders say they are working with regulators to fix the problem but 
cannot explain why it has persisted.
    Last fall, the Nation's largest banks and mortgage lenders, 
including JPMorgan Chase, Wells Fargo, Bank of America, and an arm of 
Goldman Sachs, suspended foreclosures while they investigated how 
corners were cut to keep pace with the crush of foreclosure paperwork.
    Since then, suspect paperwork has been filed not only with 
foreclosures, but also with new purchases and refinancings. Critics say 
the new findings point to a systemic problem with the paperwork 
involved in home mortgages and titles. And they say it shows that banks 
and mortgage processors haven't acted aggressively enough to put an end 
to widespread document fraud in the mortgage industry.
    ``Robo-signing is not even close to over,'' says Curtis Hertel, the 
recorder of deeds in Ingham County, Mich., which includes Lansing. 
``It's still an epidemic.''
    In Essex County, Mass., the office that handles property deeds has 
received almost 1,300 documents since October with the signature of 
``Linda Green,'' but in 22 different handwriting styles and with many 
different titles.
    Linda Green worked for a company called DocX that processed 
mortgage paperwork and was shut down in the spring of 2010. County 
officials say they believe Green hasn't worked in the industry since. 
Why her signature remains in use is not clear.
    ``My office is a crime scene,'' says John O'Brien, the registrar of 
deeds in Essex County, which is north of Boston and includes the city 
of Salem.
    In Guilford County, NC, the office that records deeds says it 
received 456 documents with suspect signatures from Oct. 1, 2010, 
through June 30. The documents, mortgage assignments and certificates 
of satisfaction, transfer loans from one bank to another or certify a 
loan has been paid off.
    Suspect signatures on the paperwork include 290 signed by Bryan Bly 
and 155 by Crystal Moore. In the mortgage investigations last fall, 
both admitted signing their names to mortgage documents without having 
read them. Neither was charged with a crime.
    And in Michigan, a fraud investigator who works on behalf of 
homeowners says he has uncovered documents filed this year bearing the 
purported signature of Marshall Isaacs, an attorney with foreclosure 
law firm Orlans Associates. Isaacs' name did not come up in last year's 
investigations, but county officials across Michigan believe his name 
is being robo-signed.
    O'Brien caused a stir in June at a national convention of county 
clerks by presenting his findings and encouraging his counterparts to 
investigate continued robo-signing.
    The Nation's foreclosure machine almost came to a standstill when 
the Nation's largest banks suspended foreclosures last fall. Part of 
the problem, banks contended, was that foreclosures became so rampant 
in 2009 and 2010 that they were overwhelmed with paperwork.
    The banks reviewed thousands of foreclosure filings, and where they 
found problems, they submitted new paperwork to courts handling the 
cases, with signatures they said were valid. The banks slowly started 
to resume foreclosures this winter and spring.
    The 14 biggest U.S. banks reached a settlement with Federal 
regulators in April in which they promised to clean up their mistakes 
and pay restitution to homeowners who had been wrongly foreclosed upon. 
The full amount of the settlement has not been determined. But it will 
not involve independent mortgage processing firms, the companies that 
some banks use to handle and file paperwork for mortgages.
    So far, no individuals, lenders or paperwork processors have been 
charged with a crime over the robo-signed signatures found on documents 
last year. Critics such as April Charney, a Florida homeowner and 
defense lawyer, called the settlement a farce because no real 
punishment was meted out, making it easy for lenders and mortgage 
processors to continue the practice of robo-signing.
    Robo-signing refers to a variety of practices. It can mean a 
qualified executive in the mortgage industry signs a mortgage affidavit 
document without verifying the information. It can mean someone forges 
an executive's signature, or a lower-level employee signs his or her 
own name with a fake title. It can mean failing to comply with notary 
procedures. In all of these cases, robo-signing involves people signing 
documents and swearing to their accuracy without verifying any of the 
information.
    Most of the tainted mortgage documents in question last fall were 
related to homes in foreclosure. But much of the suspect paperwork that 
has been filed since then is for refinancing or for new purchases by 
people who are in good standing in the eyes of the bank. In addition, 
foreclosures are down 30 percent this year from last. Home sales have 
also fallen. So the new suspect documents come at a time when much less 
paperwork is streaming through the Nation's mortgage machinery.
    None of the almost 1,300 suspect Linda Green-signed documents from 
O'Brien's office, for example, involve foreclosures. And Jeff Thigpen, 
the register of deeds in North Carolina's Guilford County, says fewer 
than 40 of the 456 suspect documents filed to his office since October 
involved foreclosures.
    Banks and their partner firms file mortgage documents with county 
deeds offices to prove that there are no liens on a property, that the 
bank owns a mortgage or that a bank filing for foreclosure has the 
authority to do so.
    The signature of a qualified bank or mortgage official on these 
legal documents is supposed to guarantee that this information is 
accurate. The paper trail ensures a legal chain of title on a property 
and has been the backbone of U.S. property ownership for more than 300 
years.
    The county officials say the problem could be even worse than what 
they're reporting. That's because they are working off lists of known 
robo-signed names, such as Linda Green and Crystal Moore, that were 
identified during the investigation that began last fall. Officials 
suspect that other names on documents they have received since then are 
also robo-signed.
    It is a Federal crime to sign someone else's name to a legal 
document. It is also illegal to sign your name to an affidavit if you 
have not verified the information you're swearing to. Both are 
punishable by prison.
    In Michigan, the attorney general took the rare step in June of 
filing criminal subpoenas to out-of-State mortgage processing companies 
after 23 county registers of deeds filed a criminal complaint with his 
office over robo-signed documents they say they have received. New York 
Attorney General Eric Schneiderman's office has said it is conducting a 
banking probe that could lead to criminal charges against financial 
executives. The attorneys general of Delaware, California, and Illinois 
are conducting their own probes.
    The legal issues are grave, deeds officials across the country say. 
At worst, legal experts say, the document debacle has opened the 
property system to legal liability well beyond the Nation's foreclosure 
crisis. So someone buying a home and trying to obtain title insurance 
might be delayed or denied if robo-signed documents turn up in the 
property's history. That's because forged signatures call into question 
who owns mortgages and the properties they are attached to.
    ``The banks have completely screwed up property records,'' says L. 
Randall Wray, an economics professor and senior scholar at the 
University of Missouri-Kansas City.
    In the Massachusetts case, The Associated Press tried to reach 
Linda Green, whose name was purportedly signed 1,300 times since 
October. The AP, using a phone number provided by lawyers who have been 
investigating the documents since last year, reached a person who said 
she was Linda Green, but not the Linda Green involved in the mortgage 
investigation.
    In the Michigan case, a lawyer for the Orlans Associates law firm, 
where Isaacs works, denies that Isaacs or the firm has done anything 
wrong. ``People have signatures that change,'' says Terry Cramer, 
general counsel for the firm. ``We do not engage in `robo-signing' at 
Orlans.''
    To combat the stream of suspect filings, O'Brien and Jeff Thigpen, 
the register of deeds in North Carolina's Guilford County, stopped 
accepting questionable paperwork June 7. They say they had no choice 
after complaining to Federal and State authorities for months without 
getting anywhere.
    Since then, O'Brien has received nine documents from Bank of 
America purportedly signed by Linda Burton, another name on 
authorities' list of known robo-signers. For years, his office has 
regularly received documents signed with Burton's name but written in 
such vastly different handwriting that two forensic investigators say 
it's highly unlikely it all came from the same person.
    O'Brien returned the nine Burton documents to Bank of America in 
mid-June. He told the bank he would not file them unless the bank 
signed an affidavit certifying the signature and accepting 
responsibility if the title was called into question down the road. 
Instead, Bank of America sent new documents with new signatures and new 
notaries.
    A Bank of America spokesman says Burton is an assistant vice 
president with a subsidiary, ReconTrust. That company handles mortgage 
paperwork processing for Bank of America.
    ``She signed the documents on behalf of the bank,'' spokesman 
Richard Simon says. The bank says providing the affidavit O'Brien asked 
for would have been costly and time-consuming. Instead, Simon says Bank 
of America sent a new set of documents ``signed by an authorized 
associate who Mr. O'Brien wasn't challenging.''
    The bank didn't respond to questions about why Burton's name has 
been signed in different ways or why her signature appeared on 
documents that investigators in at least two States have deemed 
invalid.
    Several attempts by the AP to reach Burton at ReconTrust were 
unsuccessful.
    O'Brien says the bank's actions show ``consciousness of guilt.'' 
Earlier this year, he hired Marie McDonnell, a mortgage fraud 
investigator and forensic document analyst, to verify his suspicions 
about Burton's and other names on suspect paperwork.
    She compared valid copies of Burton's signature with the documents 
O'Brien had received in 2008, 2009, and 2010 and found that Burton's 
name was fraudulently signed on hundreds of documents.
    Most of the documents reviewed by McDonnell were mortgage 
discharges, which are issued when a home changes hands or is refinanced 
by a new lender and are supposed to confirm that the previous mortgage 
has been paid off. Bank of America declined comment on McDonnell's 
findings.
    In Michigan, recorder of deeds Hertel and his counterparts in 23 
other counties found numerous suspect signatures on documents filed 
since the beginning of the year.
    In June, their findings led the Michigan attorney general to issue 
criminal subpoenas to several firms that process mortgages for banks, 
including Lender Processing Services, the parent company of DocX, where 
Linda Green worked. On July 6, the CEO of that company, which is also 
under investigation by the Florida Attorney General's office, resigned, 
citing health reasons.

http://sfgate.com/cgi-bin/article.cgi?f=/n/a/2011/07/18/national/
a135435D60.DTL
ADDENDUM II
















             PREPARED STATEMENT OF SENATOR ROBERT MENENDEZ
    Thank you all for being here today. This hearing of the Banking 
Committee is on a very important topic to our Nation's homeowners. I 
explored a similar topic in a hearing that I chaired in the 
Subcommittee on Housing, Transportation, and Community Development in 
May. It is of particular concern to the countless New Jersey homeowners 
who have contacted my office, almost all with terrible stories about 
their experiences going through foreclosure, and many with stories of 
being either mistreated or neglected by mortgage servicers. The typical 
problems they encounter are servicers losing their paperwork, not 
understanding what already happened the last time they called since 
they get a different person each time they call, lack of transparency 
as to whether their modification requests are being calculated 
properly, ineffective appeals, excessive delays in coming to decisions, 
and a general reluctance by servicers to modify loans in ways that 
would be sustainable in the long run. Overall the current process is 
both emotionally draining and ineffective in keeping people in their 
homes. Closely related to homeowner concerns are mortgage investor 
concerns about the conflicts of interest that many mortgage servicers 
face when deciding whether to foreclose or modify a loan.
    In response to all of these concerns, numerous commentators have 
suggested national mortgage servicing standards as a way to provide 
consistency, accountability, and better homeowner and mortgage investor 
protections. There seems to be increasing consensus that at least some 
kind of national mortgage servicing standards are warranted, and I 
believe if they are done in the right way, they can actually make 
mortgage servicers' jobs easier too.
    This is also a timely topic because Federal banking regulators 
including the OCC, Federal Reserve, FDIC, and OTS recently issued 
Consent Orders as enforcement actions against some of the largest banks 
to require changes in their mortgage servicing practices. These actions 
take a step in the direction of developing national mortgage servicing 
standards, but they're also too little and too late to help many 
homeowners. Fortunately the State Attorneys General settlement 
framework is providing some basis for discussion of these important 
issues as well. I look forward to hearing the testimony on this.
                                 ______
                                 
                   PREPARED STATEMENT OF JACK HOPKINS
  President and Chief Executive Officer, CorTrust Bank, Sioux Falls, 
South Dakota, on behalf of the Independent Community Bankers of America
                             August 2, 2011
    Chairman Johnson, Ranking Member Shelby, Members of the Committee, 
I am Jack Hopkins, President and CEO of CorTrust Bank, a $660 million 
asset, nationally chartered bank headquartered in Mitchell, South 
Dakota. As a third generation community banker, I am pleased to 
represent ICBA's nearly 5,000 members at this important hearing on 
``National Mortgage Servicing Standards.''
    As this Committee considers the development of national mortgage 
servicing standards, I urge you to ensure that they do not add to the 
regulatory burden of community banks, which are servicing their 
portfolios successfully and have not contributed to widely reported 
problems. We must preserve the role of community banks in mortgage 
servicing because the alternative is further consolidation in the 
servicing industry, which will only harm borrowers, especially those in 
rural and underserved housing markets.
    CorTrust Bank was founded in 1930, at the outset of the Great 
Depression, and was built, tested, and proven under historically 
challenging economic conditions. We survived the Great Depression and 
numerous recessions since that time, including the most recent 
financial crisis, by practicing conservative, commonsense lending. We 
have emerged from the crisis well-capitalized and ready to lend to 
support the recovery. CorTrust Bank serves 16 communities in South 
Dakota, from Sioux Falls to rural communities with populations of less 
than 150, such as Artesian, where we were first chartered under the 
name Live Stock State Bank. We recently expanded into Minnesota.
    Many ICBA member banks with similar stories--some have been in 
business for more than 100 years--have also emerged from the crisis 
well-capitalized. Despite the recent wave of bank failures and 
consolidations, I fully expect the community bank business model will 
thrive in the future, to the benefit of consumers, communities, and the 
economy.
Servicing Is Key to Relationship Banking and Helps Community Banks 
        Remain Competitive
    Residential mortgage lending has been an important component of 
CorTrust's business since its founding and has grown more important 
over the years. In 1988, we first began to sell mortgages into the 
secondary market in order to access additional funding. Today, we have 
a $552 million servicing portfolio consisting of approximately 5,000 
loans.
    About two thirds are held by Fannie Mae, and a smaller number are 
held by Freddie Mac and by the South Dakota Housing Authority.
    Over the years, we have discovered that mortgage lending is a great 
way to cement long-term relations with customers and win the 
opportunity to serve their additional banking needs. But in order to 
sustain customer relations we need to service these loans, whether they 
are subsequently sold or held in portfolio. We also discovered that 
customers do care about who services their loans. They value, and even 
seek out, local servicing. If they have a question, they want to be 
able to pick up the phone or visit a branch and sit down with a banker 
in their community. We built a successful ad campaign--print, TV, 
online--around the advantage of local servicing. The campaign has 
resonated with consumers and boosted our mortgage sales. Notably, much 
of our recent business has come in the form of refinancing mortgages 
away from large lenders whose borrowers are frustrated with remote, 
faceless servicing performed outside the community.
    Servicing is key to the marketing of mortgage originations, and 
together, origination and servicing are integral to our relationship-
banking business model. Mortgage lending represents approximately 20 
percent of our business, but its significance is greater than its 
percentage would suggest. Viewed narrowly, loan-for-loan, it would be 
more profitable for us to release servicing when we sell a loan. But we 
chose to keep servicing in-house, even though it's at best a break-even 
business, because it is central to our community bank business model.
    CorTrust Bank's experience is typical of community banks. Servicing 
helps community banks remain competitive in the mortgage origination 
business. Today, community banks represent approximately 20 percent of 
the mortgage market, but more importantly, community bank mortgage 
lending is often concentrated in the rural areas and small towns of 
this country, which are not effectively served by large banks. For many 
rural and small town borrowers, a community bank loan is the only 
mortgage option. Any broad based recovery of the housing market must 
involve community bank mortgage lending.
    Community bank servicing is based on close ties to customers and 
communities. Because CorTrust Bank's servicing team consists of only 
four people, customers always know who is on the other end of a 
telephone or across the desk. A customer who dials our 1-800 number 
will generally get one of two people on the line. Alternatively, a 
customer can walk into one of our 24 locations and deal with a staff 
person face-to-face.
    Most importantly, we intervene early to keep mortgages out of 
default. We know, for example, when an employer closes in our community 
and how that closure impacts the income of our borrowers. A servicer 
based 1,000 miles away won't have such knowledge. Smaller servicing 
portfolios and better control of mortgage documents also provide an 
advantage over the large servicers. For these reasons, community banks 
have generally been able to identify repayment problems at the first 
signs of distress. Our staff will contact a late customer on the 16th 
day--the first day of delinquency--to find out what their circumstances 
are and discuss solutions.
Community Bank Servicing Improves Loan Performance
    This personalized approach to servicing is a natural complement to 
conservative, commonsense underwriting. We make sure loans are 
affordable for our customers and they have the ability to repay. Loans 
are underwritten based on personal knowledge of the borrower and their 
circumstances--not based on statistical modeling done in another part 
of the country. We don't underwrite option adjustable rate mortgage 
(ARM) loans or other exotic credit products. This combination of 
quality, personalized underwriting and servicing yields results. 
CorTrust Bank's delinquency rate on loans transferred to Fannie Mae is 
0.83 percent. Our delinquency rate on loans transferred to other 
programs is a bit higher, yielding an average delinquency rate of 1.7, 
which is consistent with the general pool of community bank originated 
loans and about one-third of the national average. In the most 
frenzied, exuberant years of mortgage lending, 2005 through 2007, the 
general pool of GSE loans was seriously delinquent at a rate four or 
five times higher than loans originated by community banks and sold to 
GSEs. In the history of CorTrust Bank mortgage lending, we've had very 
few mortgage loans go into foreclosure. Community bank originated and 
serviced mortgages perform better in all market conditions.
National Servicing Standards Should Exempt Community Banks
    As a result of widely reported, abusive servicing at some large 
banks, ``robo-signing,'' wrongful foreclosures, and other high profile 
scandals, Congress, the regulators, State officials, and the media have 
focused on servicing. In June, Fannie Mae published Announcement SVC-
2011-08, ``Delinquency Management and Default Prevention.'' These new 
servicing standards are very prescriptive with regard to the method and 
frequency of delinquent borrower contacts. They are a challenge to 
implement and have reduced our flexibility to use methods that have 
proved successful in holding down delinquency rates.
    As Congress and the agencies consider how to address the deficient 
servicing standards of some large lenders, they must recognize 
community banks have fundamentally different standards, practices, and 
risks. Overly prescriptive servicing requirements should not be applied 
across the board. Examples of difficult and unnecessary requirements 
include rigid time lines for making contacts that leave no discretion 
to the servicer; mandatory property inspections; establishing a single 
point of contact for the borrower; the creation of a special servicing 
group for delinquent loans; requiring significant oversight of third-
party providers; developing burdensome compliance programs; and annual 
independent audits of controls and processes. Many of the proposals 
I've seen would require us to establish a call center to comply, a 
prohibitive and unnecessary expense for a community bank such as mine. 
Our small size and our local presence in the communities we serve make 
many of these requirements unnecessary. For example, borrowers are able 
to quickly find the right person in the bank to address their issues.
    In practice, community bank servicing is consistent with the goals 
and the spirit of national standards proposals I have seen, which 
promote more personalized service, improved accountability and control 
of documents. But, in the proposals I've seen, the means of achieving 
those goals are overly prescriptive. CorTrust Bank services loans with 
care, diligence, and accountability because quality servicing 
contributes to the reputation we enjoy in our communities. We don't 
need threat of enforcement to incentivize quality servicing.
    The most significant risk in applying standards that are too rigid 
and prescriptive to all banks, regardless of size, is that the 
additional expense would cause many community banks to exit the 
mortgage servicing business and accelerate consolidation of the 
servicing industry, leaving it to the largest lenders. Loss of 
servicing would make it harder for community banks to compete for 
origination business and would thereby accelerate consolidation in that 
business as well. Were this to happen, rural and small town customers 
in particular would be left with fewer mortgage choices, interest rates 
and fees would be less competitive, and customer service and product 
choice would suffer. The secondary markets, without well-performing, 
community bank-originated loans to shore them, would be less stable. We 
all witnessed the danger and devastating fallout that resulted from the 
concentration of mortgage lending in a few major market players. We 
must promote beneficial competition and avoid further consolidation and 
concentration of the mortgage lending industry.
    Any national standards developed by Congress or the regulators must 
exempt community bank lenders. There are a number of ways of 
accomplishing this. One possibility is to exempt lenders that are both 
below a threshold number of loans (or aggregate dollar value of loans) 
and whose delinquency rate is below its regional average. As a lender 
exceeds its regional average, servicing standards could be applied on 
an incremental basis, so that one delinquent loan does not bring on the 
full array of standards that apply to a large bank. However you choose 
to structure the exemption, I urge you not to tamper with our success 
in a service that is so important to our business and that of other 
community banks.
Servicing Compensation Must Cover Costs and Incentivize Diligent 
        Servicing
    A separate but related issue is compensation for servicing. Because 
the income provided by servicing is only enough to cover costs, ICBA is 
very concerned about a recent Federal Housing Finance Agency (FHFA) 
proposal to change both the method and the amount of compensation paid 
for servicing mortgage loans for Fannie Mae or Freddie Mac. The 
proposal would significantly reduce or eliminate all together the 
minimum servicing fee of 25 basis points earned for performing 
mortgages and would implement a specific fee paid for nonperforming 
loans. This proposal would result in a sharp reduction in mortgage 
servicing fee income for community banks, who predominantly service 
performing loans, and does nothing to improve the financial condition 
of Fannie Mae or Freddie Mac. Further, changing the servicing fee 
structure could cause significant change to the value of existing 
mortgage servicing rights held by community banks which may impact 
their capital position and likely increase consolidation of the 
servicing business. Moreover, by rewarding the servicers of 
nonperforming loans--and the originators who typically retain servicing 
rights--the proposal would create a perverse incentive. Loan servicing 
fees should be structured to incentivize diligent servicing, which can 
make the difference between keeping a loan current and a lapse into 
nonperformance.
Closing
    Thank you for holding this hearing and for the opportunity to 
testify and present the good story of community bank mortgage 
servicing. For many community banks, servicing is integral to 
competitive mortgage origination and is a crucial aspect of 
relationship business lending. While I appreciate your concern with 
servicing practices that have harmed consumers and impeded the housing 
market recovery, I urge you not to tamper with the success of community 
banks in serving their customers and keeping loans out of delinquency.
                                 ______
                                 
                  PREPARED STATEMENT OF FAITH SCHWARTZ
                 Executive Director, HOPE NOW Alliance
                             August 2, 2011
Introduction
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee, thank you for the opportunity to testify today. My name is 
Faith Schwartz. I am the Executive Director of the HOPE NOW Alliance 
and a cofounder of HOPE LoanPort'. \1\ I have served in a 
leadership capacity at HOPE NOW since 2007, during which time I worked 
closely with members and partners of the Alliance, including mortgage 
servicers, investors, nonprofit housing counseling partners, Government 
agencies and regulators to help homeowners avoid foreclosure. Before my 
time with HOPE NOW, I served in various capacities in the housing 
finance industry for 28 years.
---------------------------------------------------------------------------
     \1\ HOPE NOW is an alliance of counselors, mortgage lenders/
servicers, investors, and other mortgage market participants to prevent 
foreclosures through outreach to delinquent borrowers, counseling, and 
loan workouts based on the borrower's ability to repay. The goal is to 
prevent foreclosures by connecting troubled borrowers with counselors 
and/or their mortgage servicer. HOPE LoanPort' is a Web-
based tool that streamlines home retention applications on behalf of 
homeowners at-risk of foreclosure, allowing housing counselors to 
efficiently transmit completed applications to mortgage companies.
---------------------------------------------------------------------------
    The comments I make today are my own and reflect my experience in 
the mortgage business and in particular, in working with servicers and 
counselors attempting to help at-risk homeowners. These comments do not 
necessarily represent the views of all HOPE NOW members. Attached to my 
testimony is an addendum on HOPE NOW data and supplemental facts from 
the HOPE NOW Alliance.
The Goal of National Servicing Standards
    I am here today to speak to you about the goal of achieving strong 
National Servicing Standards which will require extraordinary 
cooperation and communication between the industry, the Government, and 
other concerned parties to evaluate the servicing standard initiatives 
now underway. We all want to improve the customer experience and the 
establishment of uniform, clear standards would be a strong step in 
that direction.
    The members of HOPE NOW have been focused on assisting homeowners 
in need for the past 4 years. The joint efforts of servicers, 
nonprofits and other partners have helped millions avoid foreclosure, 
but unfortunately there are millions of homeowners who still remain at 
risk of losing their home. In addition to the estimated 4 plus million 
homeowners 60 days past due or in foreclosure, there are many customers 
current with their mortgage, but who struggle to make that payment 
every month letting other bills slip.
    We are all aware that the current economic conditions--unemployment 
and underemployment in particular--are challenging for customers who 
are trying to maintain their home. Additionally, homeowners are 
frustrated by mixed messages from some loan servicers when they ask for 
help. Improvements have been made, but more needs to be done. These 
issues are part of the motivation for more uniform servicing standards. 
At the same time, it is important to recognize that national servicing 
standards may not change the final outcome for many homeowners at risk 
of foreclosure because of their economic situation, but customers need 
a servicing process that gives them timely responses and consistent 
answers regarding their loans.
Improving the Customer Experience in Mortgage Servicing
    Our alliance members recognize the importance of improving the 
customer experience in mortgage servicing and they have been working 
hard to achieve that goal. An ongoing demonstration of the effort on 
reaching customers directly is the large number of outreach events that 
HOPE NOW has helped organize around the country since the crisis hit. 
Loan servicers and nonprofit counselors have worked with HOPE NOW staff 
to set up events in different cities and around the country, spending 
2, sometimes 3 days on the ground in distressed markets providing in 
person help to at-risk homeowners. HOPE NOW initiated the events in 
2008 and when the Making Home Affordable program began, we partnered 
with Treasury to combine industry and Government efforts in joint 
events to reach more borrowers at risk and offer solutions in a timely 
manner.
    Part of the focus at these events is to make sure that the customer 
walks away feeling that they have been helped or at the very least put 
on the right path to get help. Providing access to HUD approved housing 
counselors at the events has been a very important component of the 
free services offered to a borrower. If a borrower comes prepared with 
all the necessary documents and information, they may have the option 
to be underwritten on site and approved for a loan modification or 
other workout by their loan servicer, subject to various validations.
    Together, we have held 112 outreach events. Just 3 weeks ago, HOPE 
NOW members and Making Home Affordable partners were in two cities in 
Florida and met with more than 2,000 homeowners. The latest totals for 
all outreach events reached 89,207 borrowers. Our follow up from those 
events indicates that 43.5 percent have been assisted by resolving 
their delinquencies without foreclosure sales. As an addendum to this 
testimony, there is a list of the communities in which HOPE NOW, 
partnering with our industry members, the Government Sponsored 
Enterprises (GSE), the United States Treasury, and nonprofit counselors 
have been to since we started holding outreach events in early 2008. It 
is also important to note that several of the larger servicers are 
holding their own company-sponsored events all over the country which 
directly reach their borrowers at risk in key markets.
    Without question, the outreach events have improved the experience 
of many customers trying to resolve their mortgage difficulties through 
a face to face meeting with their loan servicer or counseling through a 
nonprofit agency. Our exit surveys reflect over 88 percent strong 
borrower satisfaction after they have a chance to meet face to face 
with their loan servicers. As many as 30-40 percent of those attending 
had never had contact with their servicer before the meeting. These 
numbers will vary slightly from market to market, but in every case the 
majority of homeowners who come to the events are delinquent on their 
loans and more than satisfied with the service they receive at the 
outreach event. We truly believe that nothing gives a distressed 
homeowner more peace of mind and satisfaction than sitting down face to 
face with someone and being able to discuss the options that are 
available to them. I have included as part of my addendum exit surveys 
from recent outreach events to give you a taste of how borrowers feel 
after coming to an event.
    Another ongoing effort that was begun in 2006 is the Homeowner's 
HOPE hotline, the national 1-888-995-HOPE number that servicers and 
investors support financially, for homeowners to call to speak to a HUD 
certified counselor. The Homeowner's HOPE Hotline, operated by the 
Homeownership Preservation Foundation, has become the leading national 
hotline and has received over 5.2 million calls from borrowers seeking 
help with their mortgage.
Servicing Has Changed Dramatically
    It is important to understand some of the history of mortgage 
servicing and how the tremendous challenges of the current crisis have 
impacted the mortgage servicing system.
    In the decades before the current crisis, mortgage servicing 
developed some uniformity in part because of the requirements of GSEs 
and the Federal Housing Agency (FHA) for servicers on loans purchased 
by the GSEs or insured by FHA. In both cases these entities established 
requirements for mortgage servicing as well as requirements for other 
features of mortgage finance. In particular, the GSEs became the 
dominant force in setting standards in the industry and could dictate 
servicing rules and standards because they were the primary investor 
for the majority of the residential mortgage loans originated and 
serviced.
    When the private label mortgage securities market grew in size in 
the late 1990s those private label securitization agreements dictated 
specific servicing terms that had to be followed by the servicers, and 
when details were missing, the practice was to default to the GSE rules 
as the industry standards. While the market functioned smoothly and 
delinquencies were generally low, these differences in servicing 
requirements were not meaningful.
    However, once the dramatic downturn in the market occurred in the 
mid 2000s, the challenges facing servicers grew tremendously and 
differences in servicing requirements became more important. Prior to 
the crisis, servicing had been a fairly simple process of processing 
payments from current borrowers and forwarding those payments to 
investors. Servicers were paid a set fee for processing performing 
loans. Delinquent loans and troubled borrowers were a small segment 
generally handled by relatively small loss mitigation staffs and 
solutions often involved repayment plans to get borrowers back on 
track. The housing crisis completely changed the demands on major 
mortgage servicers. Servicers are now managing millions of delinquent 
loans and have had to hire thousands of new employees to work with 
borrowers to find solutions such as loan modifications which require a 
re-underwriting and contractual change in the terms of the original 
loan. This is a much more complicated servicing process that requires 
many more staff and additional training.
    HOPE NOW was formed in great part to assist the industry in its 
attempts to deal with the new demands on servicing resulting from the 
housing crisis. It was also created to reach a growing number of 
borrowers who were going into default and were not contacting their 
servicer. The Alliance helped industry members to work together to find 
a process for offering loan modifications and other assistance to 
borrowers that were consistent with the requirements of investors. The 
alliance helped build a good working relationship with the nonprofit 
community and Government agencies to work together to stem the tide of 
foreclosures.
Today's Servicing Issues
    The industry strongly supports a uniform approach to servicing 
standards. Progress is being made in providing better service to 
troubled homeowners, but there are a variety of initiatives and 
requirements from Federal regulators, the GSEs and others to set 
standards. These initiatives need to be evaluated and coordinated to 
determine the best overall standards. For example, let me address two 
of the main issues that are regularly discussed by industry, 
Government, and nonprofit groups: single point of contact and dual 
track processing. \2\
---------------------------------------------------------------------------
     \2\ Single point of contact has many definitions, but for this 
discussion it describes an individual or small team of individuals in a 
servicer that can communicate directly with a customer and have real 
time access to all the data in the customer's file in order to discuss 
the issues with the customer, direct the customer to the specialist in 
the organization for specific loss mitigation practices (i.e., short 
sales, modifications, forbearance, etc.). Dual track processing is the 
practice of both proceeding to move a delinquent borrower toward 
foreclosure while at the same time trying to resolve with that borrower 
an alternative to foreclosure.
---------------------------------------------------------------------------
Single Point of Contact
    In order to best help a homeowner in difficulty, a homeowner needs 
to be able to talk with a servicer representative who has the 
information on the customer's mortgage and the options that are 
available to assist them. A clear, consistent communication channel 
with someone in the servicing department will help the homeowner 
understand their options which may range from a loan modification, a 
short sale, to the need for unemployment forbearance. It is equally 
important that customers not be required to repeat the same request to 
various customer service representatives and that the information they 
provide about their income and payment situation be consistently 
available to all decision makers across the company. Finally, the 
customer needs to know that they have been informed of all options 
available and that their single point of contact or relationship 
manager at the company is able to confirm needed information and the 
status of their case.
    All of our members are working to develop a single point of contact 
or relationship manager program that will meet those goals. Most of 
them have established or committed to establishing such a program. 
While different companies may have slightly different definitions of 
what a single point of contact is and what programs should be used to 
implement it, most programs include these key features:

  1.  The creation and training of servicing specialists who can serve 
        as a relationship manager.

  2.  The designation of a group of employees to serve in that 
        capacity, and in some cases the establishment of small teams 
        that work together;

  3.  The ability to respond promptly to inquiries from borrowers and 
        to immediately record the discussions with the borrower in the 
        company's data files for that customer;

  4.  A knowledge of all of the mitigation programs that are available 
        to the borrower and the ability to know when to refer that 
        borrower to a specialist with in-depth knowledge of one or more 
        of those programs that might be suitable for that borrower;

  5.  The ability to connect that borrower with the specialist and then 
        to follow that process through to the time that all alternative 
        options have been considered and the borrower is either 
        provided an alternative or the foreclosure sale occurs;

  6.  The ability for the contact person to reach out personally, as 
        needed, to fully explain why an option might have been denied; 
        and

  7.  In all instances to utilize a single point of contact to ensure 
        consistent and appropriate feedback to the homeowner about 
        their status in foreclosure.

    Last month I visited a major servicer's shop to get a first-hand 
view of their effort to develop a single point of contact system. It 
was an excellent opportunity to actually see how a company is dealing 
with the growing number of servicing standard requirements. This 
company was hiring hundreds of people to become single point of contact 
managers. (Other servicers have reported they may hire up to thousands 
of additional staff for the single point of contact role.) The 
company's training programs lasted up to 6 weeks for these new hires. 
The long training was for two reasons--they want to make sure they get 
it right, but they also need time to educate this relationship manager 
of all the options that are available to at risk homeowners and the 
program requirements by the Government and GSEs. For a servicer 
representative to talk to a homeowner whose loan may be eligible for a 
Home Affordable Modification Program (HAMP), they had to refer to an 
eight inch thick black binder filled to the brim with the HAMP 
requirements for each loan evaluation. There was a large binder for 
each program and for each investor, to show what would be allowable for 
a specific loan.
    Obviously, the ability to understand and explain the numerous 
Government, GSE, and other loss mitigation programs is daunting. In the 
Web-based world we live in, it is hard to believe that these binders 
were not online. The answer was that the consistent training, access to 
internal systems, and an additional system to navigate the numerous 
programs not housed in any one system remained a challenge.
    That said, an impressive manager was charged with training for the 
new hires. The training emphasized consistent and empathetic ways to 
work closely with the borrower, and training on how to work with the 
several departments across the large organization. With this drive to 
make the system work more effectively for customers, I am confident 
they will establish a process that improves service to all their 
customers needing mortgage assistance. Seeing an organization at work 
in person was a good experience to understand the many factors in play 
for strengthening servicing performance in assisting borrowers.
Dual Track Processing
    The dual track process is a confusing concept to many customers, 
and also confusing for our members to attempt to explain what it means 
and why it is happening to the homeowner. But the dual track process is 
driven in large part by investor requirements and State laws on 
foreclosures. For example, in many States once a servicer commences the 
foreclosure process by sending notice to the borrower, the steps that 
must be taken and the time frames in which they must be taken are 
directed in great part through State laws and regulations. Similarly, 
investors such as Fannie Mae and Freddie Mac have certain guidelines 
and time lines that require processing foreclosures while the efforts 
to modify loans continue simultaneously. There are rules that cover and 
protect homeowners from going to foreclosure if they are eligible for a 
modification and adhere to time lines for submitting documentation, 
validating income, and finalizing the modification or alternative 
solution prior to the foreclosure sale. In any event, the foreclosure 
process (which now exceeds 600 days in some areas of the country) 
continues with the exception of a 30 day process for review of 
eligibility for modifications. If a loan is in the midst of a 
modification review, the foreclosure sale process will not commence. 
Once referred to foreclosure, there are various pauses that will occur, 
and in no case should a foreclosure sale occur while under a review for 
a modification that falls within the HAMP or investor guidelines. Rules 
differ among investors as to what time lines are required. The GSEs are 
the most important investors setting requirements in the dual track 
process.
    It is important to keep in mind that the investors' contracts 
continue to govern much of the latitude for servicers around 
foreclosures versus short sales and modifications. The investors and 
rules include HAMP, Fannie Mae, Freddie Mac, FHA, Veterans 
Administration (VA) and private securitization trusts. Often the most 
flexibility exists when a bank/servicer owns the loan in full on their 
balance sheet. These differences help explain the confusion in 
understanding the dual track issue.
    Our servicer members generally follow a few clear practices on the 
dual track process:

  1.  They notify the borrower that a dual track process exists and how 
        it works with the continuation of the foreclosure proceedings, 
        including the continued delivery of statutorily required 
        notices, but that no foreclosure sale will occur if the 
        borrower is still being considered for a modification or is 
        making payments under a trial modification;

  2.  The servicer attempts to come to an agreement with the borrower 
        on a loan modification or other alternative to foreclosure for 
        which the borrower might be eligible while the processes 
        necessary to continue to the foreclosure sale continue;

  3.  If a modification is agreed upon and payments have been made to 
        convert the trial modification to a permanent modification no 
        further foreclosure notices will be sent; and

  4.  If no agreement for a modification can be reached, and trigger 
        dates arise after which time the foreclosure sale must proceed, 
        the servicer pauses and ensures by a separate review of the 
        loan file that all viable options to foreclosure have been 
        explored before notifying the foreclosure attorney to continue 
        with the sale.
Multiple Efforts on Servicing Standards
    In evaluating the need for uniform national servicing standards, it 
is important to understand the wide variety of rules and initiatives 
already in progress that servicers are attempting to understand and 
implement as they develop and utilize a single point of contact and 
address dual track processing issues. These are some of the current 
initiatives by Federal and State governments and the GSEs to set 
servicing standards, many of which have or will set single point of 
contact and dual track processing rules:

    The OCC consent orders of April, 2011, differ from 
        institution to institution but all require specific practices 
        relative to establishing and maintaining a single point of 
        contact and safeguards and disclosure requirements when 
        engaging in a dual track process with a delinquent homeowner.

    The Fannie Mae Servicer Guidelines describe a single point 
        of contact as a Quality Right Party Contact (QRPC). The 
        guidelines say that Fannie Mae will establish benchmarks to 
        measure and monitor effective QRPC, and that it promotes single 
        point of contact which supports those servicers who have or 
        will implement single point of contact processes for the 
        purpose of achieving contact continuity throughout the 
        delinquency process.

    The Fannie Mae Guidelines also cover elements of dual track 
        processing in a number of ways but do not specifically use that 
        term. The guidelines establish uniform disclosure requirements 
        for borrowers, including notices about the evaluation process 
        and time line, explanation of the foreclosure process, and 
        instances where foreclosure shall not be halted, as well as 
        uniform content and timing requirements for solicitation during 
        the foreclosure process.

    The Freddie Mac Servicer Guidelines also use the term QRPC, 
        and is defined by a contact that occurs when a servicer 
        identifies and discusses with a borrower, coborrower, or 
        trusted advisor such as a housing counselor, the most 
        appropriate options for delinquency resolution, and makes every 
        attempt to achieve quality right party contact by establishing 
        rapport with the borrower, expressing empathy with the borrower 
        and a desire to help, determining the reason for the 
        delinquency and whether it is temporary or permanent, 
        determining whether the borrower has vacated the property or 
        plans to do so, setting payment expectations and educating the 
        borrower on the availability of foreclosure alternative 
        solutions, and obtaining a commitment from the borrower to 
        either resolve the delinquency through traditional methods 
        (paying the total delinquent amount) or engage in a foreclosure 
        alternative solution. It has similar, but not the same, 
        guidance to that of Fannie Mae with respect to benchmarks for 
        measuring effective QRPC and contact continuity.

    Freddie Mac language with respect to dual track is again 
        similar but not identical to that of Fannie Mae.

    Treasury's Home Affordable Modification Program (HAMP) 
        requires that each servicer must develop and implement a policy 
        that identifies experience and training requirements for the 
        relationship manager position and the appropriate caseload 
        levels to ensure that relationship managers can successfully 
        fulfill all specified requirements.

    Various States have servicing requirements which vary 
        considerably from State to State. In the area of mediation, for 
        example, some States may include opt in for mediation, and 
        others may require opt out for mediation and the variations may 
        not be clear on how many meetings are required for servicers 
        send borrowers to meet face to face. Some States are silent on 
        mediation.

    States' Attorneys Generals are in discussions with the top 
        five servicers and while the content of their discussions 
        remains confidential, it is very possible that they will have a 
        broad list of required servicing requirements, including those 
        relating to single point of contact and parallel tracks.

    Individual private investors require different servicing 
        rules for various pools of securities. For servicers signed up 
        with Making Home Affordable, some of that is mitigated but not 
        all.

    The Board of Governors of the Federal Reserve System and 
        other Federal banking regulators have called for uniform 
        national servicing standards and many of those regulators are 
        now in discussions to create new standards.

    The Consumer Financial Protection Agency (CFPB) has 
        indicated they will work on servicing standards early on as 
        they begin to stand up the agency.

    The proposed risk retention rule under Dodd Frank Act--
        specifically the Qualified Residential Mortgage (QRM) 
        definition--includes servicing requirements. While these do not 
        specifically refer to single point of contact, they do require 
        rules in place in the contracts themselves which mandate 
        default mitigation policies without regard to whether 
        foreclosure proceedings are underway, therefore raising 
        questions about dual track processing.

    The Federal Housing Finance Agency (FHFA), Fannie Mae and 
        HUD unveiled an initiative on compensation of servicers, which 
        will address a wide variety of servicing requirements, 
        including different payments for noncurrent borrowers than the 
        payments for current borrowers, and could conceivably address 
        both dual track processing and single point of contact. This 
        effort is in progress and adds to the changing landscape.

    There are other servicing features that also differ from program to 
program. For example, as recently as July 25th, 2011, Treasury issued a 
Supplemental Directive 11-07 that expanded the minimum period of 
forbearance for unemployed borrowers under HAMP to 12 months from 3 
months. That is consistent with the new policy issued by FHA, but is 
inconsistent with the policy followed by Fannie Mae and Freddie Mac and 
the VA.
    Servicers faced with this daunting list find that they must 
frequently change the way they do business. That includes, not only 
changes in systems, but changes in training and educating staff 
throughout the organization. One solution, to which many servicers are 
attracted, is the establishment of a single uniform set of servicing 
standards which all State and Federal entities must accept, and which 
would establish the parameters for the GSEs, FHA and private investors.
    We believe that the efforts by various entities currently underway 
are already moving in the direction of national standards for 
servicing. We recommend that there be coordination to ensure the 
definitions and policies set by different regulators, enforcement 
agencies and investors align with one another. If these efforts are 
given a certain amount of time to be put in place and reviewed, then 
major progress toward national standards will be achieved. To ensure 
that all these initiatives on servicing standards achieve their 
intended goal, we would suggest that the Administration convene a 
summit with all necessary partners from the industry, the Government, 
nonprofit agencies, and other concerned entities to review the new 
standards underway, evaluate them, and determine what should be 
included in a uniform national standard.
    Uniform national servicing standards can help improve the customer 
experience as well as give servicers clarity on a single definition of 
the standards expected. We appreciate the difficulties in reaching 
agreement on servicing standards because the servicing process for 
delinquent loans is complex; there are multiple initiatives at the 
Federal and State levels on standards, and servicers are have programs 
already underway to improve assistance to customers.
    Now is the time to coordinate and align the servicing standard 
initiative and make them work for all parties. This will help rebuild 
confidence in our housing finance system and assist in the recovery of 
the market. The home mortgage is the most important investment in the 
lives of most consumers, and it is essential that we ``get right'' the 
process for communicating to the customer whenever there is a change 
affecting their ability to meet their loan payment.
What Has Changed From 2007 to 2011?
    Since the housing crisis began in 2007, there have been tremendous 
changes in the challenges facing homeowners; programs created to 
address the crisis; and the process for servicing loans. It is 
important to keep all of these events and factors in mind as we 
evaluate how to implement uniform servicing standards.
    Subprime Crisis: When the crisis began in 2007, most of the early 
foreclosure prevention efforts focused on repayment plans, and some 
modifications, which entailed capitalizing missed payments (arrearages) 
and re-setting the mortgage. The HOPE NOW data indicates that in July 
2007, there were 17,000 modifications completed. The primary focus was 
in the subprime products; the hybrid ARMs and option ARMs which were 
defaulting in record numbers, many prior to the ARM reset. In 2007, The 
Treasury Department and the Department of Housing (HUD) reached out to 
industry and asked them to increase and expand collaboration with 
nonprofits to reach more borrowers and help them avoid foreclosures 
wherever possible.
    Through HOPE NOW, more servicers set up toll-free numbers for 
housing counselors. HOPE NOW servicers produced servicing guidelines to 
improve the loss mitigation process, and worked with third parties to 
reach homeowners who were not responding to contact from servicers. The 
housing crisis deepened with the recession and we saw more widespread 
defaults happening across loan portfolios--economic problems spread 
defaults to borrowers with prime, fixed-rate loans. Servicers continued 
to be proactive working with housing counselors and third parties, 
while hiring and expanding activity around foreclosure prevention 
efforts.
    In 2007, there was few Government resources focused directly on 
foreclosure prevention. Mortgage servicers and others worked 
individually and then pulled together through HOPE NOW to meet the 
challenge, progress was made but the growth of the housing crisis 
outweighed the response.
    Additionally, since 2008, the Government has taken on a broader 
role to address the crisis. The Government created programs to deal 
with several problem areas: refinances, unemployment assistance, 
modification, short sale and deed in lieu, and mediation (at the State 
level). Some of these programs are more successful than others and it 
is difficult to measure the full impact of the programs. However, a 
combination of factors has led to record longer foreclosure time lines 
as measured in 2010. The average loan in delinquency that went to 
foreclosure in 2010 exceeded 500 plus days, up from 300 days in 2008, 
according to a Lender Processing Services (LPS) report in early 2011. 
The following programs have been implemented by the Government to deal 
with the housing crisis:

1. FHA HOPE for Homeowners was an attempt to assist homeowners who 
might qualify to refinance to an FHA-insured loan with the 
participation of servicers and investors willing to write-down the 
existing loan. It also required the homeowner to share possible future 
appreciation of the property with the Government. There were few loans 
produced through the program in part because of its complexity. 
Originators and servicers have not been easy to match up with regard to 
refinancing higher risk loans and expanding short payoffs.

2. Home Affordable Refinance Program (HARP) is the refinance portion of 
the MHA program offered by the Fannie Mae and Freddie Mac. It is a 
first lien refinance program targeted to loans at 80 percent LTV up to 
125 percent LTV. Essentially, it targeted borrowers who were current on 
their loan, but at-risk to become delinquent. From April 2009 through 
November 2010, FHFA reports 623,000 homeowners refinanced into this 
program. This is creative and an opportunity to continue reaching 
borrowers who could not otherwise refinance and may become future 
foreclosure candidates.

3. Making Home Affordable: HAFA--A short sale and deed in lieu program 
that focuses on a detailed process for the complicated nature of a 
``short sale'' and deed in lieu product. The effort has key time lines, 
document and process requirements that need to be followed and extends 
the time line for loans for up to 120 days. It includes forgiveness of 
the deficiency when a borrower sells a property short of value and it 
offers clarity, accountability and clear expectations of what is 
required for realtors, servicers, and other stakeholders. Junior lien 
holders often require more dollars than HAFA supports. Recent 
adjustments to the program offered by Treasury suggest that this 
program may be used more in the future because of adjustments made to 
the requirements to prove hardship or stick to 31 percent DTI 
thresholds.

4. Making Home Affordable: HAMP--This is the loan modification program 
that was rolled out in response to the growing stress in the housing 
market. The crisis was deepening. By intervening with a loan 
modification that was subsidized by the Government, it was a change 
from the previous attempts to modify loans, and was an important step 
toward creating market standards.

    Standards: Despite criticism for falling short of projected 
        numbers for permanent modifications, HAMP helped create 
        standards that improved methods and transparency on how to 
        achieve affordable and sustainable loan modifications.

    Increasing Homeowner Awareness: When the United States 
        Government offers a potential solution to the loan modification 
        process, the public listens. The awareness created by the HAMP 
        program helped engage millions of at-risk homeowners in efforts 
        to preserve their home and avoid foreclosure. The existence of 
        the HAMP program helps attract borrowers to seek help. It is 
        still a very valuable way for borrowers to get in the system, 
        even if they do not qualify for a HAMP modification.

    First line of defense for homeowners: The HAMP program 
        structure requires participating servicers to first review the 
        borrower for HAMP eligibility prior to placing them into 
        alternative modifications. Even if they do not ultimately 
        qualify, borrowers are first assessed for eligibility for HAMP 
        and then must be considered for other loan modifications or 
        other workouts.

    Safe Harbor: HAMP created an industry ``safe harbor'' for 
        modifying loans. Due to conflicting investor contracts, prior 
        to HAMP it was difficult to identify a consistent ``industry 
        standard.'' HAMP helped create these standards and common 
        practices The creation of tools to use in an evaluation 
        ''waterfall'' and use of a Net Present Value test has 
        transcended HAMP and is a model for servicers to use for 
        proprietary modifications. This may transcend HAMP for other 
        modifications as the process and a net present value test 
        provide an ``industry standard.''

    Structure created: Through Making Home Affordable, 
        Government HAMP modifications introduced clear guidance for the 
        HAMP waterfall, including guidance for working with unemployed 
        or underemployed borrowers--one of the most difficult 
        situations. The protocols on structuring an affordable payment 
        for borrowers include:

      Forbearance (3-6 months, recently updated for HAMP and 
        FHA loans to 12 months) for unemployed borrowers;

      31 percent housing DTI split by investors and Government 
        dollars from 38 percent;

      Use of lower interest rate to 2 percent, extended terms 
        to 40 years, and principal deferral and/or principal write-
        down;

      If ineligible, servicers must review for proprietary 
        solutions (GSE, other), and if ineligible for that option;

      Servicers must consider HAFA (Home Affordable Foreclosure 
        Alternatives short sale and deed in lieu) or proprietary 
        programs;

      In many instances, foreclosure prevention will then state 
        mediation requirement to review all solutions outside of 
        foreclosure; and

      Foreclosure sale as the final option.

    Confusion and expanded time lines were the result of this 
        early execution: Average foreclosure time lines since in 2008, 
        2009, and 2010 are as follows (according to data from LPS):

      January 2008--300 days

      January 2009--350 days

      January 2010--450 days

      September 2010--500 days

      May 2011--590 days

5. Treasury: Hardest Hit Funds: Treasury has also expanded foreclosure 
prevention programs by creating a Hardest Hit Fund. The Hardest Hit 
Fund distributed $7.5 billion dollars to 18 States and the District of 
Columbia and directed them to set up their own programs to assist 
unemployed and other at-risk homeowners in the hardest-hit housing 
markets. When a borrower is unemployed, it is difficult to qualify for 
a loan modification due to lack of income. State housing finance 
agencies develop the waterfall for approving borrowers for various 
means of assistance, including unemployment assistance, principle write 
down, and combined funds that may compliment a HAMP modification.

This deployment of dollars should be helpful to assist some homeowners 
in particularly distressed States where there are few other solutions. 
However, the States, Treasury, counselors, and State housing finance 
agencies must continue to work with industry to achieve some uniformity 
to ensure servicers can implement the many variations of programs in 
the different States. To help share information and increase the 
ability to execute on these programs, HOPE NOW has played a role in 
convening the stakeholders to discuss implementation issues. As a 
reminder, loan servicers need uniform standards and guidelines wherever 
possible for efficient execution. Each time a program is introduced, 
the more aligned it is with similar programs in various States with 
uniform automation, the more successful that new program will be.

6. State Mediation Programs: HOPE NOW has focused on the mediation 
issue as a high priority issue and convened States and the Federal 
Government to find common ground on what constitutes success. Mediation 
is a powerful tool that may be even more effective with a common 
definition of success with rules to get there (including early 
engagement with the borrower). There are now approximately 26 States 
that offer some kind of opt-in or opt-out mediation for homeowners. The 
physical presence of a third party is valuable for this final attempt 
to bring parties together to prevent a foreclosure. When appropriate 
mediation is a viable option, however, there is not enough data on 
mediation programs to make a clear judgment around the best mediation 
process. For instance, an author for the Sun Sentinel newspaper 
recently reported that Broward County, Florida examined 326 cases via 
mediation in December 2010 and 17 percent resulted in written 
settlements that avoided foreclosure. It is important we study 
mediation efforts going forward and wisely use our limited funds and 
human capital to make these most effective nationwide, and maximize 
assistance to qualified homeowners.

There is a movement among the other 24 States to incorporate mediation 
as another means to prevent foreclosures. In doing so, we believe 
certain risk parameters must first be addressed. By nature, mediation 
hearings delay the foreclosure process. And the intent is to ensure the 
borrower understands the options available to prevent foreclosure. We 
know from experience, sometimes borrowers in financial distress do not 
answer phones, open mail, and respond to more formal meeting requests 
such as State mandated mediation. Our goal over the coming months is to 
work with the stakeholders on mediation to come up with a set of 
recommendations that make sense for all parties, most importantly the 
homeowner at risk of foreclosure.

HOPE NOW stands ready to support all efforts to bring homeowners into 
the system to review options to avoid foreclosure. However, we believe 
that mediation can be streamlined with more effective processes so that 
all parties participating have aligned expectations.
Conclusion
    HOPE NOW member companies and organizations support the improvement 
of the customer experience in mortgage servicing, and have been 
actively attempting to make the system work better for customers as 
they wrestle with an unprecedented number of delinquent loans. To 
evaluate the multiple servicing initiatives and rules now under way, 
the Administration should consider gathering all interested parties 
together to review the current servicing standard initiatives to ensure 
the definitions and policies agreed to by regulators, enforcement 
agencies and investors are consistent and to determine if a single 
uniform set of standards can be identified and established.
    Improving customer communication; reducing confusion and 
conflicting directives for servicers will improve the mortgage 
servicing system. The home mortgage is the most important investment in 
the lives of most consumers, and it is essential that we have a sound 
servicing system in place to get through the current crisis and set the 
appropriate course for the future. The industry nonprofit partners and 
servicer members are committed to working to improve mortgage servicing 
for consumers.


































































                 PREPARED STATEMENT OF ROBERT M. COUCH
               Counsel, Bradley Arant Boult Cummings, LLP
                             August 2, 2011
    Chairman Johnson, Ranking Member Shelby, and Members of the 
Committee: My name is Rob Couch, and I am attorney with Bradley Arant 
Boult Cummings, a law firm based in Birmingham, Alabama. Prior to 
joining the firm, I served as General Counsel of the United States 
Department of Housing and Urban Development from June 2007 to November 
2008 and Acting General Counsel from December 2006 to June 2007. Before 
joining HUD, I served as president of the Government National Mortgage 
Association (Ginnie Mae). Prior to my Government service, I was the CEO 
of New South Federal Savings Bank, then the largest thrift in Alabama 
and one of the most active residential mortgage lenders in the South. I 
have also served as Chairman of the Mortgage Bankers Association of 
America and as President of the Alabama Mortgage Bankers Association. 
Thank you for inviting me to testify today about the ongoing debate 
regarding national mortgage servicing standards.
    Despite my years of involvement within the mortgage and financial 
services industries, perhaps the most profound lesson about mortgage 
banking that I ever learned occurred when I signed a mortgage of my own 
several years ago. It was about 15 pages long. Right before I signed 
it, the closing agent looked at me and said, ``Do you know what this 
document means, Rob?'' ``I think so,'' I replied. His response will 
remain with me forever: ``If you pay, you stay. If you don't, you 
won't.'' While this summation may seem unduly harsh to some, it 
provides the essence of the subject of this hearing.
    We are all painfully aware of the deficiencies in the mortgage 
process that came to light in the throes of the recent financial 
crisis. I believe that we are all in agreement about the need to go 
forward addressing these issues and focusing on the actual harm that 
they caused. We, of course, must also balance everything against the 
long-term impact that the unintended consequences of our actions will 
have on homeowners and the housing market. It is my hope that my 
testimony will illuminate the important issues of market certainty and 
fundamental fairness in a way that will encourage this Committee and 
the Congress to consider these principles and take a balanced approach 
as it proceeds with its important efforts.
    Although there are multiple proposals to make changes to mortgage 
servicing standards, I think that it is important to recognize that 
historically, the process has worked just as it was supposed to. In the 
debate over how to prevent mistakes in the future, there is a tendency 
to overlook the basics. At the risk of oversimplifying, it is worth a 
couple of minutes to review how the system is supposed to work.
    When an individual decides to borrow money to buy or refinance a 
home, she provides information to the bank that has the money and the 
bank makes the decision to lend based on the likelihood that the 
borrower will repay the money along with a fair market interest rate. 
At closing, the borrower receives the money and signs a note promising 
to pay the money back along with interest. She also signs a mortgage 
stating that, as collateral for the loan, the home itself is subject to 
being foreclosed upon if the borrower goes into default. This process 
provides certainty to both the borrower and the lender, which is vital 
to the markets. The borrower's promise to pay and the document that 
lays out the security is then saleable to investors. These investments 
have historically been attractive to pension plan managers and other 
long-term investors because pension plan participants and other 
beneficiaries of investments in mortgages have long-term horizons and 
30-year mortgages provide just that.
    While the intention behind setting national mortgage servicing 
standards is certainly laudable, such standards create unintended 
consequences that Congress should consider through the lens of 
certainty and fairness.
I. Certainity
    Much of the recent criticism of the mortgage industry is warranted. 
Recently, we have witnessed sloppiness and abuse of process by some 
lenders and servicers. Borrowers who have actually been harmed by any 
malfeasance should unquestionably be fully compensated as required by 
law. While national mortgage servicing standards may well address these 
mistakes, they can also potentially cause uncertainty to creep into the 
markets and devastate investment, which will ultimately be felt by 
homeowners. Efforts to slow down foreclosures have created a huge 
backlog that has become known as the ``foreclosure overhang.'' This 
backlog has further depressed real estate markets that are still 
reeling from the recent recession.
    Today, over 90 percent of all new mortgages have direct guarantees 
from the Federal Government. Such direct involvement is necessary to 
overcome the markets' uncertainty of investment in mortgages. Ongoing, 
heavy Government involvement, however, is not sustainable over the long 
run. For private capital to return, certainty must exist.
    To illustrate my point, over the past 3 years, only two private 
label securities, backed by mortgages, have come to market. They were 
worth approximately $500 million. \1\ In 2006, by comparison, multiple 
private label securities worth over $700 billion were issued backed by 
mortgages. \2\ The lack of private money in the marketplace is in a 
large part due to uncertainty and any national mortgage servicing 
standards must take that uncertainty into consideration and 
sufficiently address it.
---------------------------------------------------------------------------
     \1\ Mark Fogarty, ``Trouble Ahead'', National Mortgage News, Mar. 
10, 2011.
     \2\ The Board of Governors of the Federal Reserve System, Report 
to Congress on Risk Retention, Oct. 2010.
---------------------------------------------------------------------------
    Much of this uncertainty in the market is attributable to 
uncertainty in the foreclosure arena, the execution of the second half 
of my closing agent's simple principle: ``if you don't, you won't.'' 
Investors, many of whom are retirees, watch the value of their 
mortgage-backed investments fall as well-intended efforts to be 
compassionate to struggling borrowers proliferate. These efforts take 
many forms, including loan modifications extending or reducing interest 
rates on loans, reduction of the principal amount owed, or indefinite 
postponement of foreclosure rights. All of these proposals may change 
the terms of the contract the investor purchased and contribute to the 
uncertainty surrounding the mortgage marketplace.
II. Fairness
    The national average of the amount of time between delinquency and 
foreclosure is 400 days. \3\ Put another way, on average, a person who 
cannot or will not pay their home mortgage stays in his or her home 
rent-free for an average of 400 days before possession of the home is 
transferred to the owner of the debt. In some States, this figure is 
much higher. In New York and New Jersey, it is taking an average of 900 
days--almost two-and-a-half years--to move a loan from default to 
foreclosure. In Florida, the average foreclosure time line is about 680 
days. \4\ Many of the provisions under debate in negotiations on 
nationwide standards, such as principal write-downs, are well-intended 
efforts to provide relief to borrowers who do not pay. Any national 
mortgage servicing standards, however, must also address the 
marketplace and equally important, the people who do pay.
---------------------------------------------------------------------------
     \3\ Jon Prior, ``Delays Push Foreclosures to 40-Month Low in 
April'', Housing Wire, May 11, 2011.
     \4\ Id.
---------------------------------------------------------------------------
    The vast majority of people being foreclosed upon are not legally 
damaged or suffering demonstrated harm. As an aside, this fact 
demonstrates one of the major flaws with the proposed settlement by 
State attorneys general as reported in the press because they propose 
to collect money from servicers without basing the collection on 
demonstrated harm. \5\ Individuals who have been harmed during the 
foreclosure process already have avenues to pursue their legal rights 
and obtain damages due to them. Fact-based determinations in a court of 
law, however, are far better and ultimately provide more protection 
than simply requiring servicers to contribute money to a fund.
---------------------------------------------------------------------------
     \5\ Kerri Panchuk, ``Congress Wants CFPB To Come Clean on Mortgage 
Servicing Settlement'', Housing Wire, Jul. 14, 2011.
---------------------------------------------------------------------------
    Most of the servicing standard proposals, however, do not consider 
the majority of hardworking Americans who do pay their mortgages every 
month. National servicing standards that do not address the marketplace 
or the people who are not in default subject those people to the 
``foreclosure overhang.'' Requiring lenders to reduce mortgage balances 
increases costs that will ultimately be borne by all borrowers. 
Mortgage write-downs also remove incentives for banks to lend money and 
for investors to purchase mortgages, denying people access to credit 
needed to purchase or refinance homes and negatively impacting an 
already devastated housing market. In sum, an efficient foreclosure 
process is necessary to clear local markets, facilitate economic 
recovery, and protect the borrowers who are not in default.
III. Adequacy of State Law
    Finally, Congress should be mindful that policies and procedures 
relating to the foreclosure process historically have resided within 
the province of State laws dealing with foreclosure processes and 
consumer protection. Each State has adopted procedures spelling out how 
the foreclosure process should be conducted and what protections should 
be afforded to borrowers. These procedures have worked very well for 
many years. Federal and State regulators should be slow to override 
State law sovereignty by effectively making mortgage servicers subject 
to new rules without a legislative mandate. Moreover, in most cases, 
remedies under State laws, regulations and requirements already exist 
for a majority of the perceived problems within the mortgage industry 
and any national servicing standard should consider the existence and 
adequacy of existing rules so that borrowers who suffer actual harm may 
avail themselves of compensation already afforded by State law.
    Thank you again for holding this important hearing and for sharing 
everyone's commitment to certainty and fairness as we continue to pave 
the road to our Nation's economic recovery together. I urge you to be 
deliberate and balanced in your approach to these important issues and 
be mindful of the unintended consequences of your actions. I look 
forward to answering your questions.
                                 ______
                                 
                  PREPARED STATEMENT OF PETER P. SWIRE
C. William O'Neill Professor of Law, Moritz College of Law of the Ohio 
                            State University
                             August 2, 2011
    Chairman Johnson, Ranking Member Shelby, and other distinguished 
Members of the Committee, thank you for inviting me to participate in 
this hearing on national mortgage servicing standards. As staff is 
aware, I had previously committed to speak at an event in Oregon today, 
and I thank the Committee and its staff for the extraordinary 
flexibility of having me testify online today, over Skype. In addition 
to my work on housing and finance issues, my other main area of 
research is in technology and the Internet. I believe that using online 
technologies in this way can help open up Congress and our political 
process to effective participation by an ever-greater portion of the 
American people.
    My testimony today will draw on two previously published items, 
which are attached to the testimony. The first is a report called 
``What the Fair Credit Reporting Act Should Teach Us About Mortgage 
Servicing,'' which was published by the Center for American Progress in 
January, 2011. \1\ The second is an article in the Los Angeles Times 
from March 6, 2011, which described some of my personal experiences as 
a homeowner with the mortgage servicing industry. \2\ In 2006 and 2007 
my servicer, Washington Mutual, repeatedly purchased duplicate flood 
insurance for my house in Bethesda. After dozens of calls, and the 
erroneous imposition of numerous late fees, I was eventually able to 
resolve this problem with WaMu without paying such fees. I have also 
attached a time line of the dispute that I sent to WaMu in 2007.
---------------------------------------------------------------------------
     \1\ http://www.americanprogress.org/issues/2011/01/
fcra_mortgage_servicing.html
     \2\ Lew Sichelman, ``Mortgage Servicing Errors Highlight Need for 
Change'', L.A. Times, March 6, 2011, available at http://
articles.latimes.com/2011/mar/06/business/la-fi-lew-20110306.
---------------------------------------------------------------------------
Background of the Witness
    I am now C. William O'Neill Professor of Law at the Moritz College 
of Law of the Ohio State University, and Senior Fellow at the Center 
for American Progress. From July, 2009 through August, 2010 I served as 
Special Assistant to the President for Economic Policy, serving under 
Lawrence Summers in the National Economic Council. At the NEC, my 
biggest task was to coordinate the interagency process for housing and 
housing finance issues. In this role, I worked extensively on mortgage 
servicing issues, including the Home Affordable Mortgage Program 
(HAMP), and servicing and other issues affecting the Federal Housing 
Administration, Government sponsored enterprises (GSEs), and possible 
reform of the GSEs. In this role, I met on a number of occasions with 
mortgage servicing executives, as well as a wide variety of other 
stakeholders concerned about the mortgage servicing process.
    Before and after my NEC service, I have worked on a range of other 
policy issues. My work is likely best known in the privacy area. I 
served as Chief Counselor for Privacy in the Office of Management and 
Budget under President Clinton, and I testified on the Fair Credit 
Reporting Act before the Housing Financial Services Committee in 2003.
What the Fair Credit Reporting Act Should Teach Us About Mortgage 
        Servicing
    My report on the Fair Credit Reporting Act (FCRA) makes a simple 
point. The sorts of market failures that led to the creation of the 
FCRA in 1970 also exist for mortgage servicers. The single most 
important fact is that the consumers--the homeowners--are not the 
clients. The clients for the credit reporting agencies are the 
companies that pay for the credit reports, such as lenders or 
employers. The clients for the mortgage servicers are the companies 
that invest in mortgages. Mortgage servicers owe their legal duties and 
market loyalties to the investors, not the homeowners.
    This testimony will not repeat the report's discussion of the 
history of mortgage servicing and all of the policy analysis. Instead, 
it is important to understand that consumers have no market or legal 
checks on the servicers. The homeowner doesn't choose the servicer--
that choice is made by the company originating the loan or by a 
subsequent owner of the mortgage. If the homeowner has a bad experience 
with the servicer--as so many consumers have--the homeowner can't even 
quit. Even if the homeowner refinances the loan, concentration in the 
servicing market means the homeowner quite possibly will get the same 
servicer the next time.
    Homeowners not only lack any market choice, but they currently lack 
legal remedies if the servicer performs badly. That is the reason that 
national standards for mortgage servicing are so important. Where there 
are no market forces to protect consumers, then something else must 
fill the gap. An effective set of consumer rights could be embodied in 
national mortgage servicing standards. I hope that that will happen.
Dispute on My Mortgage With Washington Mutual's Servicing Arm in 2006-
        2007
    To prepare for this testimony, I have reviewed the files from my 
dispute with Washington Mutual in 2006 and 2007 about flood insurance 
on my family's home on a hill in Bethesda. This dispute was the subject 
of the Los Angeles Times article by Mr. Sichelman in March.
    I am sorry to report that I stated some details incorrectly to Mr. 
Sichelman when I did the interview with him for the story. The 
interview began as a discussion about the FCRA and mortgage servicing 
policy, and so I did not review the file before speaking with him. 
Specifically, my family did have flood insurance on the house from the 
time we bought it in 2002. The house is within a couple of hundred 
yards of the top of a large hill in Bethesda, it has never flooded to 
my knowledge since it was built in the 1960s, and I personally did not 
believe it needed flood insurance. Upon review of the file, however, I 
learned that we had prudently kept flood insurance in effect from the 
time we bought the house and throughout the dispute with WaMu.
    I provide that detail because the file vividly shows the cascade of 
mistakes that the servicing company made, despite several dozen calls 
by me to the company and detailed documentation. The basic problem, 
beginning in early 2006, was that WaMu bought ``force placed 
insurance''--duplicate flood insurance on my house despite the fact 
that State Farm repeatedly sent them proof of coverage. In numerous 
instances, WaMu would impose a ``late fee'' on my family. We had 
automatic payment each month for our mortgage payment, and so we were 
never late on any payment. The WaMu practice, however, was to charge us 
for flood insurance without telling us, and then declare us ``late'' 
for the entire monthly mortgage payment. The next month would also be 
``late,'' and subject to additional fees, because of the second month's 
duplicate flood insurance fee.
    In May, 2007, I informed WaMu that I would contact regulators and 
the Congress if they did not resolve the problem. My letter to WaMu 
said:

        The amount of time it is taking for me to resolve this matter 
        resembles a major piece of litigation. I feel very sorry for 
        the other customers who get caught in this cycle of uninformed 
        debt collectors, automatic threatening letters of no insurance, 
        lost faxes by WaMu, an apparent policy of ignoring many proofs 
        of insurance coverage, systems that suppress notes saying a 
        customer will not be subject to collection calls and late fees, 
        large late fees due to no fault of the customer, and so on.

    This letter led to a phone response that made me believe that the 
problem was resolved. Soon, however, the problems began again, and it 
was not until October, 2007, that the matter was finally resolved.
    In conclusion, I have taught both banking law and consumer 
protection, and I feel fortunate that I could advocate for myself and 
avoid the thousands of dollars of fees that the servicer erroneously 
sought to impose on my family. Most homeowners, however, are not 
banking law professors. Before the financial crisis of 2008, my 
experience with WaMu sensitized me to the flaws in our current mortgage 
servicing system. My experience in Government and since has taught me 
there are numerous hard-working and talented individuals in the 
mortgage servicing industry. The incentives, however, do not work for 
consumers. In the absence of market discipline on servicers, an 
effective national set of mortgage standards is essential.
    I thank the Committee for its attention to these important matters, 
and I welcome any questions you may have.
































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