[Senate Hearing 113-14]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 113-14

 
HELPING HOMEOWNERS HARMED BY FORECLOSURES: ENSURING ACCOUNTABILITY AND 
              TRANSPARENCY IN FORECLOSURE REVIEWS--PART II

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
           HOUSING, TRANSPORTATION, AND COMMUNITY DEVELOPMENT

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS

                             FIRST SESSION

                                   ON

  EXAMINING THE EFFORTS TO ENHANCE TRANSPARENCY, ACCOUNTABILITY, AND 
  CONSISTENCY IN BOTH THE INDEPENDENT FORECLOSURE REVIEW AND NATIONAL 
                          MORTGAGE SETTLEMENT

                               __________

                             APRIL 17, 2013

                               __________

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


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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York         RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon                 MARK KIRK, Illinois
KAY HAGAN, North Carolina            JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia       TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts      DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota

                       Charles Yi, Staff Director

                Gregg Richard, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                      Kelly Wismer, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

   Subcommittee on Housing, Transportation, and Community Development

                 ROBERT MENENDEZ, New Jersey, Chairman

             JERRY MORAN, Kansas, Ranking Republican Member

JACK REED, Rhode Island              BOB CORKER, Tennessee
CHARLES E. SCHUMER, New York         PATRICK J. TOOMEY, Pennsylvania
SHERROD BROWN, Ohio                  MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 TOM COBURN, Oklahoma
JOE MANCHIN III, West Virginia       DEAN HELLER, Nevada
ELIZABETH WARREN, Massachusetts      RICHARD C. SHELBY, Alabama
HEIDI HEITKAMP, North Dakota

             Michael Passante, Subcommittee Staff Director

         William Ruder, Republican Subcommittee Staff Director

                Jason Lallis, Professional Staff Member

                                  (ii)
?

                            C O N T E N T S

                              ----------                              

                       WEDNESDAY, APRIL 17, 2013

                                                                   Page

Opening statement of Chairman Menendez...........................     1

Opening statements, comments, or prepared statements of:
    Senator Moran................................................    17

                               WITNESSES

Lawrance L. Evans, Jr., Director, Financial Markets and Community 
  Investment, Government Accountability Office...................     3
    Prepared statement...........................................    23
Joseph A. Smith, Jr., Monitor of the National Mortgage Settlement     4
    Prepared statement...........................................    40
David Holland, Executive Vice President, Rust Consulting.........     6
    Prepared statement...........................................    43
    Responses to written questions of:
        Senator Reed.............................................    51
Deborah Goldberg, Special Project Director, National Fair Housing 
  Alliance.......................................................     7
    Prepared statement...........................................    44

                                 (iii)


HELPING HOMEOWNERS HARMED BY FORECLOSURES: ENSURING ACCOUNTABILITY AND 
              TRANSPARENCY IN FORECLOSURE REVIEWS--PART II

                              ----------                              


                       WEDNESDAY, APRIL 17, 2013

                                       U.S. Senate,
    Subcommittee on Housing, Transportation, and Community 
                                               Development,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee convened at 10:05 a.m., in room SD-538, 
Dirksen Senate Office Building, Hon. Robert Menendez, Chairman 
of the Subcommittee, presiding.

         OPENING STATEMENT OF CHAIRMAN ROBERT MENENDEZ

    Chairman Menendez. Good morning. This hearing of the 
Subcommittee on Housing, Transportation, and Community 
Development will come to order. Let me thank you all for being 
here. I know that Senator Moran, the Ranking Member, will be 
here in short order.
    Today's hearing is about ``Helping Homeowners Harmed by 
Foreclosures and Ensuring Accountability and Transparency in 
Foreclosure Reviews.'' This issue is important to every 
homeowner, especially those harmed by illegal foreclosure 
practices. It is of particular concern to countless New 
Jerseyans who have contacted my office, almost all with 
heartwrenching stories about their experiences going through 
the foreclosure process, stories in many cases of being either 
mistreated, neglected, and in some cases insulted and 
embarrassed by their mortgage servicers.
    In response to illegal foreclosure practices, regulators 
and the Nation's five largest servicers announced a National 
Mortgage Settlement in February of 2012. As part of the 
settlement, servicers are to provide about $25 billion of 
relief to homeowners and individuals who were victims of such 
illegal practices.
    The Federal Reserve Board and the Office of the Comptroller 
of the Currency also announced the Independent Foreclosure 
Review process with 14 mortgage servicers. The goal of the IFR 
was to identify as many harmed borrowers as possible, to treat 
similarly situated borrowers across all 14 services in a 
consistent manner, and to help restore public confidence in the 
mortgage market. But challenges and the complexity of the IFR 
prevailed and regulators and 13 of the mortgage servicers 
abandoned the IFR process in January of this year and instead 
agreed to a new framework that would no longer evaluate each 
mortgage for actual harm.
    As we attempt to correct these past illegal foreclosures, 
we must have transparency, consistency, and accountability. 
After being hard hit by the foreclosure crisis and other 
economic woes, American homeowners expect and deserve 
confidence in the mortgage market, and it is our job to give 
them that confidence.
    First, we must learn from the mistakes of the past, remain 
committed to not repeating them in the future. So I asked the 
Government Accountability Office to conduct a study on the IFR, 
focusing on challenges to the achievement of the goals of the 
reviews, transparency of the process, and lessons that could be 
learned moving forward.
    It has been nearly 2 years since the Consent Orders were 
signed, and in that time, over a billion dollars went to third 
party consultants. But affected borrowers received nothing, 
even when there was documented evidence of bad practices. There 
is certainly plenty of blame to go around, but the American 
people will not accept excuses for the failures of our 
regulators. They expect our regulators to be up to the task, 
fully capable of overcoming the challenges of these 
settlements, and effective oversight of our financial system 
should be the number one priority.
    Over 4.5 million people were potentially impacted by these 
illegal foreclosure abuses and they deserve our best efforts 
and attention. The time to act is now, and that is why we are 
here today, to get to the bottom of some of these important 
issues.
    So let me, in the absence of any Member at this point to be 
here, let me start introducing our panel. Mr. Lawrance Evans is 
the Director of Financial Markets and Community Investment at 
the Government Accountability Office. He directs a body of work 
in the area of banking and financial intermediation, including 
leading efforts on the GAO study of the Independent Foreclosure 
Review. In his prior role as a Lead eConomist, he managed a 
diverse portfolio at GAO which included engagements on TARP, 
Dodd-Frank's bank capital provisions, and Sarbanes-Oxley. So we 
thank you for your work and we look forward to your testimony.
    Mr. Joseph Smith is the Monitor of the National Mortgage 
Settlement, which was announced in February of 2012 by 49 State 
Attorneys General and the Federal Government to provide $25 
billion in relief for distressed borrowers.
    Mr. David Holland is the Executive Vice President of Rust 
Consulting, Incorporated, a contractor that does outreach to 
homeowners for the foreclosure reviews and is administering the 
payments for the amended Consent Agreement for the IFR.
    And Ms. Deborah Goldberg is the Special Project Director at 
the National Fair Housing Alliance, where she advocates before 
Congress and Federal regulatory agencies on predatory lending 
and sustainable home ownership issues.
    So, let me thank you all for appearing today. We look 
forward to getting your perspective on the situation and your 
view on the approach moving forward. I am going to ask each of 
you, in the order that I introduced you, to synthesize your 
statement for about 5 minutes or so. Without objection, all of 
your entire statements will be entered into the record, and 
then we look forward to having a conversation with you.
    Mr. Evans.

   STATEMENT OF LAWRANCE L. EVANS, JR., DIRECTOR, FINANCIAL 
  MARKETS AND COMMUNITY INVESTMENT, GOVERNMENT ACCOUNTABILITY 
                             OFFICE

    Mr. Evans. Thank you. Chairman Menendez, I am pleased to be 
here this morning to discuss GAO's ongoing assessment of the 
Independent Foreclosure Review. My remarks today are based on 
our March 2013 report, developed in response to the amended 
Consent Orders that replaced the IFR for most servicers with a 
broader framework that will provide cash payments to all 
eligible borrowers.
    The IFR was intended to identify as many harmed borrowers 
as possible, to ensure consistent treatment and to help restore 
public confidence in the mortgage market. Our report 
highlighted issues stemming from insufficient planning, 
monitoring, and communication that impeded the regulators' 
ability to achieve the stated goals. I will briefly review our 
key findings, including lessons learned, which, if leveraged 
properly, can lead to better outcomes for the ongoing reviews 
and activities under the payment agreements.
    First, it is important to note that the IFR was, indeed, 
unprecedented, and the size and scope of the operation posed 
significant challenges to regulators. There were 4.3 million 
eligible borrowers across 14 different servicers, seven 
consultants, and ten law firms. The foreclosure files 
themselves were sizable and touched on a large number of 
complex issues, ranging from State and Federal laws to Loan 
Modification Program guidelines. In testimony before the Senate 
law week, both OCC and the Federal Reserve noted that they 
underestimated the scale, scope, and complexity of the reviews.
    Second, while some issues were inevitable, these challenges 
were exacerbated by overly broad guidance and limited 
monitoring for the consistency and sufficiency of the 
consultants' review activities. For example, lack of clarity in 
sampling guidance resulted in variations in methodologies used 
by consultants which would have limited the ability of 
regulators to aggregate the results and pull together a 
statistically valid description of the extent of errors in 
foreclosure processing. Moreover, the guidance did not include 
mechanisms to facilitate oversight of the extent to which 
consultants would have identified as many harmed borrowers as 
possible or targeted the appropriate high-risk categories.
    In general, these issues limited the types of information 
regulators could know and report and increased the risk of 
inconsistent results for similarly situated borrowers. Overall, 
regulators missed opportunities to develop common criteria or 
reference documents to help consultants navigate complexities 
involving State foreclosure law and loss mitigation activities, 
among other issues. In absence of such guidance, consultants 
developed their own test questions to determine harm and 
potential remediation, again, raising the risk of inconsistent 
treatment.
    Third, the absence of timely and useful communication at 
certain stages of the process undermined public confidence in 
the reviews. Although regulators released more information that 
is typically associated with Consent Orders, borrowers and the 
general public received limited information about the status of 
the reviews. Also, some stakeholders perceived informational 
gaps that raised concerns about how the reviews were being 
executed and the process for determining error and remediation.
    Last, several issues emerged as lessons learned for 
regulators. Most notably, we observed that advance planning can 
enhance project design and better ensure the achievement of 
goals. Important here is appropriate consultation with 
stakeholders and establishing mechanisms to systematically 
monitor progress toward goals. Consultation with organizations 
directly responsible for, or familiar with, particular aspects 
of the review before initiating the IFR may have allowed 
regulators to define the scope of activities more appropriately 
and issue more complete guidance. Had regulators incorporated 
monitoring mechanisms into the design, they would have been 
better equipped to produce reliable and relevant data for 
oversight and management. In the absence of systematic 
processes to monitor activities, regulators did not have an 
early warning mechanism to help identify problem areas.
    While the goals of the IFR were hampered, it is possible 
that the regulators could have taken steps to address some of 
these issues. In fact, regulators took a number of steps during 
the process to foster consistency. However, such actions are 
second best to up-front planning, as they increase the risk of 
further delays, rework, including the retraining of reviewers.
    The final lesson learned is that transparency is essential 
for public confidence, and advance planning should give 
consideration to the types of data required to credibly 
communicate useful information to the intended audience. 
Unfortunately, the regulators are limited in what they can 
report because they did not plan for reporting in the design of 
the reviews.
    Based on these findings, we offered three recommendations 
to the regulators aimed at using lessons learned to improve 
outcomes for the ongoing reviews and activities under the 
amended Consent Orders. Both OCC and the Federal Reserve were 
receptive to all three.
    Chairman Menendez and Members of the Subcommittee, this 
concludes my prepared statement. I will be happy to answer any 
questions you may have.
    Chairman Menendez. Thank you.
    Mr. Smith.

  STATEMENT OF JOSEPH A. SMITH, JR., MONITOR OF THE NATIONAL 
                      MORTGAGE SETTLEMENT

    Mr. Smith. Chairman Menendez, Senator Merkley, good 
morning. Thank you for inviting me to testify about the 
implementation of the National Mortgage Settlement.
    In April 2012, the National Mortgage Settlement went into 
effect when the United States District Court for the District 
of Columbia entered five separate consent judgments that 
settled claims of improper mortgage servicing practices against 
five major mortgage servicing organizations, Bank of America, 
Citi, Chase, the ResCap parties, which are the former GMAC, and 
Wells Fargo. Government parties to the settlement included the 
Departments of HUD and Justice, Attorneys General from 49 
States and the District of Columbia, various State financial 
services regulatory agencies, and other releasing parties, 
including the CFPB and Treasury.
    The settlement can be divided into three parts: Direct 
payments to borrowers and States, consumer relief, and 
servicing standards. While I have no oversight over the direct 
payments, I am responsible for reviewing and certifying the 
discharge of the servicers' consumer relief obligations and 
monitoring implementation of the servicing standards. I am 
subject to oversight by a monitoring committee that is 
comprised of representatives of the Departments of HUD and 
Justice and representatives of 15 States.
    Under the settlement, the servicers have agreed to provide 
specific dollar amounts of relief to distressed borrowers 
within a 3-year period. In February, the servicers reported 
that during 2012, 550,000 borrowers benefited from some type of 
consumer relief, totaling $46 billion, which, on average, 
represents about $83,000 per borrower. The kinds of consumer 
relief for which a servicer can receive credit under the 
settlement are set out in detail in the consent judgments, and 
the credit varies based on the relief given. For that reason, 
the gross dollar amounts of relief the servicers reported far 
exceeds the total credited obligations under the settlement.
    To date, only the ResCap parties have requested a 
determination that they have completed their consumer relief 
obligations. In February of this year, after a review of their 
performance, I issued a report to the court that they had 
satisfied their minimum consumer relief obligations and 
partially satisfied their mandatory solicitation obligations 
under the settlement.
    In addition to consumer relief, the settlement establishes 
304 servicing standards, or rules of conduct, to which the 
servicers must adhere. Each servicer has been responsible for 
compliance with the standards since October of 2012. There are 
servicing standards related to document integrity, the loan 
modification process, dual tracking, single points of contact, 
and other customer service and more general requirements.
    Under the settlement, I measure servicer compliance with 
the servicing standards through 29 metrics, or tests. The 
servicers conduct these tests internally and report the results 
to me. Assisted by independent professionals in my employ, I 
assess the work of servicers and report my conclusions. If the 
Internal Review Groups or I find noncompliance with the 
standards, the servicer has to implement a corrective action 
plan and, in the case of widespread error, to remediate. If it 
cannot or will not correct the potential violations, 
injunctions or civil penalties can be sought through the United 
States District Court for the District of Columbia.
    My independent professionals and I are nearing completion 
of our reviews of servicer compliance with the metrics through 
year-end 2012 and intend to issue our report on it to the court 
and the public next month. Our work will continue over the next 
2 years.
    To help me better understand the settlement's impact in the 
marketplace, my colleagues and I closely review complaints we 
receive through my office as well as the complaints elected 
officials submit to the banks. I also have met with the 
Attorneys General, consumers, and professionals who represent 
them in a number of hard-hit States. As a result of what I have 
heard from consumers and professionals, I am now working with 
the banks to establish additional metrics to address what I 
have learned.
    In closing, the settlement has been successful in what I 
believe is a worthwhile effort, focusing resources on a 
specific problem in a targeted, time-limited way that augments 
and supports the work of policy makers and Government agencies. 
I look forward to continuing my work toward that goal and I 
welcome your questions.
    Thank you very much, Senators.
    Chairman Menendez. Thank you.
    Mr. Holland.

  STATEMENT OF DAVID HOLLAND, EXECUTIVE VICE PRESIDENT, RUST 
                           CONSULTING

    Mr. Holland. Senator, or Chairman Menendez, Senator 
Merkley, thank you for the opportunity to appear today on 
behalf of Rust Consulting.
    Rust Consulting has been engaged by the servicers to 
administer certain aspects of the Alternative Resolution 
Settlement, as directed by the Office of the Comptroller of the 
Currency and the Federal Reserve Board. Previously, Rust was 
engaged by the servicers to administer the Consent Orders for 
the Independent Mortgage Foreclosure Borrower Outreach Project, 
also known as the Independent Foreclosure Review or IFR.
    Under the IFR Consent Orders, our responsibilities were to 
notify homeowners about the program, to answer their questions, 
to review their requests for review forms, and to handle in- 
and outbound mail. From November 2011 through December 2012, we 
executed three mass mailings to homeowners along with a series 
of media notice campaigns. Over the same period and through 
January 2013, we received completed requests for review forms 
and forwarded them to the servicers.
    We were recently engaged by 11 of the 14 original 
servicers, along with two additional servicers, to serve as a 
paying agent under the Alternative Resolution Settlement. Our 
responsibilities under the settlement are to notify homeowners 
about the program, answer their questions, and distribute 
settlement payments in the form of checks to eligible 
homeowners.
    Rust mailed postcards on March 18, 2013, informing eligible 
homeowners that they were to receive a payment as a result of 
the settlement. Also, we received relevant settlement data from 
servicers that identified loan classifications for each 
individual loan, and subsequently received data from the OCC 
and FRB detailing the payment amounts for each loan 
classification.
    The first wave of checks were mailed on Friday, April 12. 
Yesterday, we became aware of check cashing issues that some 
payees encountered and we are addressing those issues and will 
have solutions in place today and on a go-forward basis. The 
majority of the remaining checks will be mailed in three more 
waves occurring on April 19, April 26, and May 3.
    Rust continues to staff a call center to take incoming 
calls from homeowners with questions about the program. We also 
updated the IFR Web site to provide new information regarding 
the settlement.
    At the direction of the servicers, the OCC, and the FRB, 
Rust implemented a number of address correction processes in 
order to maximize the number of homeowners who receive notice 
as part of the IFR. Rust will continue to use address 
correction processes under the settlement. In both projects, 
the National Change of Address process was used to update 
addresses. And as part of the IFR, Rust received 
``undeliverable'' notices, ran the corresponding addresses 
through a ``skip-trace'' program, and remailed notices to new 
addresses. For any of the remailed notices that were returned 
as undeliverable a second time, Rust performed another second 
type of address search and again remailed notices to new 
addresses.
    Under the settlement, Rust will receive undeliverable 
checks, attempt to find better addresses, and remail checks to 
new addresses.
    During the IFR process, Rust provided comprehensive daily 
statistical reporting to the OCC, the FRB, independent 
consultants, and the servicers. Daily meetings were held with a 
consortium of the 14 servicers and independent consultants that 
covered the current state of project execution, future 
deliverables, and next phase planning.
    As part of the settlement, Rust provides comprehensive 
daily statistical reporting to the OCC, the FRB, and the 
servicers. Daily conference calls are held with the servicers 
covering project execution. Two times weekly, conference calls 
are held with the OCC and the FRB covering project execution 
and future deliverables.
    Thank you. I would be happy to answer your questions.
    Chairman Menendez. Thank you.
    Ms. Goldberg.

   STATEMENT OF DEBORAH GOLDBERG, SPECIAL PROJECT DIRECTOR, 
                 NATIONAL FAIR HOUSING ALLIANCE

    Ms. Goldberg. Thank you, Mr. Chairman. Mr. Chairman and 
Senator Merkley, thank you for inviting me here today to 
testify, and thank you, too, for your engagement in this issue. 
You have brought much needed attention and oversight to the 
Independent Foreclosure Review process.
    The IFR is the only real Federal effort to identify and 
compensate borrowers who were harmed by their mortgage 
servicers when their loans became unsustainable and they needed 
help to save their homes. While this and other programs seek to 
prevent future foreclosures, the IFR stands alone as an effort 
to begin to make borrowers whole. This is significant because 
of the harm caused by the foreclosure crisis.
    While foreclosures have affected virtually every community, 
certain communities have suffered more than others. During the 
heyday of subprime lending, communities of color were flooded 
with unsustainable subprime loans. Borrowers who should have 
gotten safer, cheaper prime loans were given subprime loans 
because they were more profitable. This happened to borrowers 
of color much more often than to white borrowers. Not 
surprisingly, these borrowers have suffered much higher rates 
of foreclosure and they and their neighbors have lost 
tremendous wealth as a result.
    We hoped the IFR would begin to set things right, but from 
the beginning, it has been plagued with a lack of transparency 
and accountability that has undermined its success. It has 
failed to identify borrowers who suffered harm and in doing so 
to shed light on the nature and extent of the problems in the 
mortgage servicing industry. It has not provided adequate 
compensation to borrowers, and to date, it has failed to bring 
about the kind of servicing reforms that are needed to prevent 
future unnecessary foreclosures.
    With the announcement of the new settlement in January, the 
IFR game has changed. With the rest of my time, I would like to 
highlight some concerns with the settlement's $5.7 billion 
worth of noncash assistance and some ways in which the 
regulators can increase the positive impact of their Consent 
Orders.
    So this so-called soft dollar side of the IFR agreement is 
similar to the structure of the National Mortgage Settlement, 
or NMS. Unfortunately, the particulars differ from the NMS in 
three key ways that severely deflate the value and limit the 
impact of these soft dollars.
    First, it fails to make saving homes a priority. It places 
loan modifications, which can save homes, on an equal footing 
with short sales and deeds-in-lieu, which do not.
    Second, it gives the servicers credit based not on the 
amount of loan principal they forgive, but on the unpaid 
balance of the loan. This creates an incentive to modify loans 
with large balances because that is the fastest way for the 
servicers to get the most credit. It will likely mean that many 
fewer loans are modified than could have been the case.
    And third, this approach places borrowers of color and low- 
and moderate-income borrowers at a disadvantage because they 
tend to live in communities where home values and loan balances 
are smaller. Modifying their loans will put the servicers on a 
slower road to meeting their soft dollar goals.
    We are very disappointed that the settlement was structured 
this way and we are concerned that many homes that could have 
been saved from foreclosure will be lost. However, there are 
two areas in which we believe the regulators can still make a 
positive impact in implementation of the IFR Settlement.
    The first is the area of transparency. We had asked the 
regulators to make public detailed information about who is 
getting help as a result of this settlement, both through the 
direct cash payments and the noncash assistance. These data 
must be broken out by servicer and by census tract so that the 
public can see whether the communities that have suffered the 
most are getting the assistance they need and deserve. The 
timely release of such information will help to hold the 
servicers accountable. It is also necessary to begin to rebuild 
public confidence in our regulatory system.
    The second is the area of oversight. Despite all of the 
servicing rules that have been written and all of the scrutiny 
to which servicers have been subject, mortgage servicing abuses 
remain all too common. They must be brought to an end so that 
the millions of homeowners still at risk of foreclosure can get 
the help they are supposed to get to save their homes. By 
stepping up their oversight and enforcement, the regulators can 
help accomplish this goal.
    Recently, the regulators have shown some interest in 
exploring these recommendations. I am hopeful that they will do 
so and that they will put them into action. But as long as 
problems persist in the mortgage servicing industry, we need 
you in Congress to keep up the pressure and continue your 
oversight. There are still some gaps in the servicing rules 
that must be closed, such as protections for people with 
limited proficiency in English, borrowers with disabilities, 
and the widows and heirs of deceased homeowners who cannot get 
help from their servicers. We look forward to working with you 
and the regulators to address these problems.
    Thank you again for the opportunity to testify today. I 
look forward to your questions.
    Chairman Merkley. Well, thank you all very much, and we 
will start with a round of questions.
    Mr. Evans, the report by the Government Accountability 
Office found the following things. Correct me if I am wrong in 
any of them.
    Mr. Evans. OK.
    Chairman Menendez. The goals of IFR to identify as many 
harmed borrowers as possible and ensure similar results for 
similar borrowers were not met.
    The regulator guidance did not specify key sampling 
parameters to consultants for file review, resulting in delays 
and difficulty assessing borrower harm.
    Limited communication with borrowers and the public 
adversely impacted transparency and public confidence.
    Regulators considerably see more data, but express concerns 
that doing so might disclose private information.
    Borrowers face significant gaps in promised review 
documentation from regulators and consultants, with some 
waiting over a year.
    No standard sampling method or process between servicers or 
other independent consultants led to reduced reliability of 
data.
    Regulators stopped the IFR process without having a 
sufficient and objective method--a sufficient and objective 
method--to determine if the proper number of reviews had been 
sampled to uncover borrowers harmed.
    Limited regulator monitoring and inconsistencies in 
consulting methodology increased the risk of treating borrowers 
with similar types of harm differently.
    And regulators did not rely on stakeholder consultation 
enough, such as housing counselors, community groups with 
expertise in loss mitigation and loan modifications.
    Is that an accurate synthesis of the GAO report?
    Mr. Evans. I think so, in general. There are just a few 
technical notes I will make.
    Chairman Menendez. OK.
    Mr. Evans. The regulators--the rationale that they gave us 
for stopping the Independent Foreclosure Review were concerns 
about potential outcomes, and they wanted to get money out 
quickly to potentially harmed borrowers. So we, in our report, 
we say that the achievement of the goals were hindered by a 
number of missteps by the regulators.
    Chairman Menendez. So let me ask you, and maybe Ms. 
Goldberg, one of the main purposes of the review was to have 
data to enable you to tell the bank had a particular kind of 
file or type of mistake that it was repeating so you could dig 
deeper into their other files. Since the OCC and the Federal 
Reserve abandoned the review, to what extent will they be able 
to further examine whether certain banks committed systematic 
errors in their foreclosures based on either preliminary 
results or based on information that they gathered through 
regular bank examinations or other sources?
    Mr. Evans. And I think that is the right question, and I 
think there----
    Chairman Menendez. I only ask the right questions.
    [Laughter.]
    Chairman Menendez. I am just kidding.
    Mr. Evans. I will----
    Chairman Menendez. I think it is an important question, 
though.
    Mr. Evans. It is, and I think that is a good place for me 
to assert that any information based on the IFR at this point 
should be deemed incomplete, and the data does not allow us to 
render any conclusions about error rates at a particular 
servicer or make comparisons across servicers despite what has 
been reported in the press. There were different degrees of 
completion across the servicers, variations in the type of 
files that were reviewed, and also, even if it were complete, 
depending on the sampling methods used, it is possible that 
this information would still have limits. So it is impossible 
to draw any inferences about the data because they are not 
representative. So we are limited in terms of what we actually 
know.
    Now, the regulators could have additional information, 
additional judgments that may help them make decisions about 
safety and soundness and corrective actions, but at this point, 
we have not done that type of work to determine what we know 
and whether it is statistically valid.
    Chairman Menendez. Is that information that would be 
accessible to you if we asked you and charged you to do that?
    Mr. Evans. As part of our ongoing review, we will start to 
look at those issues. We are more than willing to discuss with 
your staff the protocols governing our audit documentation, 
including any legal or privacy considerations, such as those 
concerning banking information, or any agency determinations 
that might be relevant. But we will continue to do this work 
for you and have conversations with your staff.
    Chairman Menendez. Thank you.
    Ms. Goldberg, do you have any comments about this?
    Ms. Goldberg. Yes. I would add one thing, which is that one 
concern we had all along with the methodology was the potential 
problem that the files themselves would not be enough to 
understand the problems that borrowers experienced.
    So, for example, one of the most common problems that 
borrowers encountered was servicers losing their documents and 
having to resubmit them over and over and over again, or 
borrowers being told the wrong information. You have to stop 
making payments before we can consider you for a loan 
modification, you know, things along those lines.
    And it is not clear that anybody examining just the files 
would be able to tease out that kind of information and 
understand those kinds of errors. And in order to do that, what 
is really necessary is for whoever is doing the review to be 
talking, at least in selective cases, to homeowners themselves 
or to the advisers who work with them, housing counselors or 
attorneys.
    That is something that never happened as part of this 
process. It would be wonderful if it were to happen as part of 
a follow-up review, because I think you are completely right 
that getting to the bottom of this and understanding more 
clearly what problems actually took place, you know, how 
widespread they were, where, what borrowers were affected, is a 
really important lesson for us to be able to take away from 
this whole crisis in order to prevent it from happening again.
    Chairman Menendez. I have a whole host of questions, but 
one more before I turn to Senator Merkley.
    The OCC and the Federal Reserve determined that $8.5 
billion would be enough to cover the harm caused to borrowers, 
yet we know from the GAO study that there were numerous issues 
with sampling and instructions to the independent consultants. 
So how could the OCC and the Federal Reserve possibly determine 
that $8.5 billion, which would include $3.6 billion in direct 
payments to borrowers, is enough money to help these victims?
    Mr. Evans. That question was outside the scope of this 
particular study, but it is a question that we will be 
considering going forward.
    Chairman Menendez. Well, it is a question that we are going 
to look to work with you. I know that Congressman Waters also 
has joined us in this effort from the House side. I really want 
to know that, because if people went through harm, then at the 
end of the day, you have to have the resources to address the 
harm. And to come to a figure that is defective, from my 
perspective, because you do not have the sound science, so to 
speak, to make that determination, is, at best, a guess.
    Ms. Goldberg, do you have any comment on that?
    Ms. Goldberg. I would say it is probably a lowball guess.
    Chairman Menendez. OK. Senator Merkley.
    Chairman Merkley. Thank you very much, Mr. Chairman, and 
thank you all for your testimony.
    Mr. Smith, I wanted to start with a feature that was well 
publicized of the National Mortgage Settlement which said, in 
many cases, banks essentially wrote off the second loan that 
they had in the portfolio while not lowering the first loan, 
which was the bulk of the challenge for the homeowner. They did 
this for families that essentially had a foreclosure, in other 
words, did little to help the homeowner. How did this process 
of basically acting only for the loan you hold and not for the 
one that would affect the core of the family's success come 
about? Why was that acceptable?
    Mr. Smith. Well, Senator, the question you asked is 
important. The structure of the settlement itself was--I got 
it--I am administering it the way I found it. And so the 
settlement allows for different valuations, credits for 
different kinds of second loan forgiveness. The highest credits 
would be for performing loans or for loans where there is a--
where it is done in conjunction with a first loan reduction so 
that you have more affordability. But the data does not show 
that a lot of that has been done to date.
    The settlement does permit credit--at ten cents on the 
dollar, by the way, not dollar-for-dollar--for expungement of 
second liens as a goal in the effort--what the settlement 
documents say is to increase the prospects for future home 
ownership by the borrower.
    It has been brought to my attention and it has been in the 
public domain, a discussion about the issue of whether, in 
certain circumstances, a second lien release does the borrower 
any good. I will say the fact that a loan has been written 
down, of course, does not mean it is--the loan itself is still 
a legal obligation of the borrower, even after foreclosure in 
and of itself, in some States, not all, it would be an 
obligation. So it is not clear that it will not always benefit 
the borrower.
    But I think what the settlement does do is to credit second 
lien forgiveness most where they do the most good from the 
perspective of the question you just asked and least where it 
does the least good, and that is about all I can say to answer 
your question.
    Chairman Merkley. Thank you.
    Mr. Holland, I want to turn to the consultants who worked 
on the IFR. We had testimony in front of Sherrod Brown's 
subcommittee that the folks, the consultants who worked on it, 
had no idea how it was that individual homeowners got placed 
into different categories of possible financial harm. It is my 
understanding that that decision was actually made by 
servicers. How is it that the consultants who were doing the 
reviews had no idea of how individual homeowners got into 
different categories of financial harm?
    Mr. Holland. When you say consultants, are you talking 
about the independent consultants?
    Chairman Merkley. That is my understanding, yes.
    Mr. Holland. I do not have knowledge of how that process, 
or how that process came about. We received the categorizations 
directly from the servicers and the OCC provided us with the 
dollar amounts that corresponded to those categorizations.
    Chairman Merkley. How would the servicers who had not been 
the ones reviewing the files and had been essentially at the 
heart of so many pieces of this function possibly be a 
responsible party for putting people into categories of harm?
    Mr. Holland. I do not know. I do not have an answer for 
that question. I was not involved in that process.
    Chairman Merkley. Ms. Goldberg.
    Ms. Goldberg. I would like to correct one thing, Senator 
Merkley----
    Chairman Merkley. Great. Thank you.
    Ms. Goldberg. ----which is that when the independent 
reviews were stopped, the decision was made not to find harm, 
not to worry about finding harm. So the categories, as I 
understand it, the categories that borrowers were placed in for 
purposes of payments was based on how far along they had gotten 
in the loss mitigation process or the foreclosure process with 
their servicer.
    So the fact that a particular borrower was in a particular 
category was not a reflection of whether they were actually 
harmed, but just kind of what stage of the process they had 
gotten to.
    Chairman Merkley. I see.
    Ms. Goldberg. But I think your fundamental question is a 
very good one. If we know that the servicers made the mistakes 
to begin with and we know that their systems were highly 
flawed, putting them in the position of slotting people into 
different categories seems unwise.
    Chairman Merkley. Ms. Goldberg, when this IFR was 
announced, we had a hearing to have it explained to us and I 
raised the question on how is it that homeowners would feel 
confidence that their condition was going to be reviewed when 
they had had so many frustrating experiences to date and that 
the reviewers were being hired not by an independent strategy, 
but by the banks themselves, and that these reviewers were not 
third party, that they had clear financial connections to the 
banks themselves. I think then the fact that homeowners were 
promised a review and did not get the review just kind of, if 
you look at it from the street level, it seems like just one 
more farce. Is this far off the mark? That is a technical term, 
``farce.''
    [Laughter.]
    Ms. Goldberg. Well, I would say that the feedback that we 
hear is a lot of frustration and disappointment and confusion 
from borrowers on the street who, I think, do not have 
confidence that this process played out in a fair and 
evenhanded manner.
    Chairman Merkley. I have more questions, but I am over my 
time, so I will kick it back to the Chair.
    Chairman Menendez. Well, we will go through another round.
    Let me ask, Ms. Goldberg, if the settlement provides around 
$5.5 billion in other forms of consumer mortgage-related 
relief, such as loan modifications and principal reduction--
some people refer to that as soft dollars--so I would like to 
hear, to the extent that you know, more about how those soft 
dollars are being used to keep borrowers in their homes and how 
lenders are being credited under the IFR Settlement for taking 
such actions. For example, if a borrower has a $200,000 
mortgage and receives $20,000 in mortgage relief, how is that 
relief calculated under the IFR Settlement? And are servicers 
doing all they can to keep homeowners in their homes?
    And I would like to get a sense from Mr. Smith from the 
National Mortgage Settlement, how are those soft dollars 
calculated for that purpose under your settlement, and could 
you explain how each category is credited?
    Ms. Goldberg. Thank you, Mr. Chairman. So, this process has 
not actually started yet, at least to the best of my belief, 
and I am not sure what the launch date will be, but we will 
get, hopefully, more information as time goes by.
    But in terms of the way it is structured, what we know is 
that there are some specified categories of activity for which 
the servicers will get dollar-for-dollar credit. So that 
includes principal reduction, you know, loan modifications with 
principal reduction on first liens and second liens, short 
sales, and deeds-in-lieu of foreclosure. So for those four 
categories of activity, they will get dollar-for-dollar credit. 
So that is a difference from the National Mortgage Settlement, 
and Mr. Smith can explain those details much more accurately 
than I.
    And in addition, another difference from the National 
Mortgage Settlement is that rather than getting credit for the 
amount--so let us take a loan modification--the amount by which 
the principal is reduced, the $20,000 in your example, 
servicers will get credit for the full unpaid principal balance 
of that loan, or the $200,000 in your example. So the borrower 
is still going to owe $180,000, and presumably with a loan 
modification will be able to repay that $180,000, and the 
$20,000 is really the benefit that they have experienced, but 
the servicer is going to get credit for the entire $200,000.
    Chairman Menendez. What is the public policy idea behind 
that?
    Ms. Goldberg. I cannot answer that question. I cannot 
answer that question. I think that raises a lot of very serious 
concerns, some of which I mentioned in my testimony. And for 
us, one of the key ones is that----
    Chairman Menendez. If I can get ten times my investment of 
write-off, I would like to have that opportunity.
    Ms. Goldberg. Right. And it certainly would encourage you, 
if you were the servicer, to do the biggest loans--you know, 
work on the biggest loans that you can because that is going to 
be the fastest route to meeting your goal, whatever that might 
be, for your soft dollar credits.
    The downside of that is that the communities that we know 
experienced the most harm, low- and moderate-income communities 
and communities of color, where housing prices are lower and, 
therefore, loan balances are lower, it is going to take more of 
those loans to get to the same soft dollar goal, and the 
chances are too big in our estimation that those loans will be 
put aside. That is not where the priority will be focused, and 
instead it will be the higher-income, higher-balance loans that 
will get the first cut at the help.
    Chairman Menendez. That is a real concern. That is a real 
concern.
    Mr. Smith, how does it work under your----
    Mr. Smith. Very well. Under the National Mortgage 
Settlement, there are certain categories of relief that are 
required to be not less than a certain percentage of total 
relief. And I would like to exclude, for a moment, only because 
it is somewhat separate, refinancing assistance is also 
required in each of the settlements, a specific dollar amount 
based on--there is a formula there, but it is essentially a 
multiplier based on yearly interest savings, or multiplied by a 
multiplier affecting the remaining maturity of the loan.
    So that is--the principal forgiveness must comprise 60 
percent of the total relief, soft dollar relief, credited 
otherwise, and I would like to emphasize credited because this 
is important. So, for example--and half of that 60 percent has 
to be first lien principal forgiveness.
    Now, somewhat to Senator Merkley's point before. If a bank 
is a servicer and owner of a loan and forgives--and the loan 
has less than a 175 percent loan-to-value--I am going to 
simplify this slightly--but it is less than 175 percent LTV, 
owned and serviced--let us say $45,000 is written down, $45,000 
of credit is given. So the amount of relief and the credited 
amount are the same. If, on the other hand, a bank has 
originated a loan, is still servicing it, sells it into a 
securitization, to get $45,000 of credit, it has to write down 
$100,000. In other words, it is 45 cents on the dollar.
    So that the thought, again, was--the theory, as I 
understand was, there was a concern about servicers getting 
credit for loans not owned by them. And so, at the very least, 
what the settlement does is to give less credit for that--in 
that circumstance. There is a different crediting for more than 
175 percent.
    Second liens, which have been discussed--forgiveness of a 
loan that is less than 90 days past due, or 90 days delinquent, 
which is different--delinquent--is 90 cents on the dollar. 
Ninety-one to 179 days is 50 cents on the dollar. And as I was 
saying before, 180 days or more past due is ten cents on the 
dollar.
    So, again--but the amounts credited have to be--60 percent 
of the credited relief has to be principal forgiveness, and 
half of that, at least, has to be first lien principal.
    In the case of ResCap, which we just did, actually, it was 
more than 50 percent was first lien forgiveness----
    Chairman Menendez. Well, that appears to be a far more 
equitable process than----
    Mr. Smith. And it goes on--and I could go on, but it is 
pages. But, I mean, for each category of relief, I do think--
you can argue about the price, you can argue about the number 
of cents on the dollar, but I do think the settlement attempts 
to give credit that mirrors the benefit to the borrower, 
roughly, in a pretty good----
    Chairman Menendez. And that should, in my mind, be the 
principle.
    Ms. Goldberg. And if I could add one thing, Senator, one 
other difference is--so Mr. Smith talked about the 60 percent 
of the credits under the National Mortgage Settlement have to 
be for principal reduction on first lien, right? That is what 
you said?
    Mr. Smith. Well, on the total. Thirty percent has to be----
    Ms. Goldberg. OK. There is no kind of limits like that 
under the IFR settlement. So it would be possible for a 
servicer to meet their entire goal by doing short sales and 
deeds-in-lieu and be within the bounds of the settlement, as it 
is written.
    Chairman Menendez. And that would not necessarily maximize 
the goal of keeping people in their homes.
    Ms. Goldberg. It would not.
    Chairman Menendez. Senator Merkley.
    Chairman Merkley. Thank you very much, Mr. Chairman.
    I wanted to continue on this same issue. In your testimony, 
Ms. Goldberg, on page ten, you note that on a loan with an 
unpaid balance of $500,000, a loan modification that provides 
any amount of principal reduction, be that $1,000 or $10,000 or 
$100,000, yields $500,000 worth of credit for the servicers. It 
is hard for anyone apart from this process to truly believe 
that if you do a $1,000 reduction, you get $500,000 credit. Yet 
are you saying, absolutely, that is the way it works?
    Ms. Goldberg. That is what it says in the settlement. I 
have to say, Senator, that when I first read the settlement, I 
did not pick that up because it was so hard for me to believe 
it could be structured that way, as well. But, in fact, that is 
the wording of the settlement.
    Chairman Merkley. Mr. Holland, is this accurate, to your 
knowledge?
    Mr. Holland. I have no knowledge of the way the settlement 
was written. In our role, you know, we have the administrative 
back-office tasks at hand--mailing, phone calls----
    Chairman Merkley. But you have heard this issue. You have 
not found anything that contradicts what Ms. Goldberg has said?
    Mr. Holland. No. No, I have not.
    Chairman Merkley. OK. Well, I would just like to point out 
that the roughly $6 billion in soft money that is in the 
settlement, at that 500-to-one rate, that is reduced down to 
$12 million. Six billion goes to $12 million. That is a vast 
difference.
    Now, you have pointed out, Ms. Goldberg, that this creates 
a pure incentive to do reductions on large loans. Now, I live 
in a working class neighborhood, three-bedroom ranch houses. 
There are no $500,000 mortgages where I live because there are 
no $500,000 houses. So your point in your testimony is that 
working class communities, and certainly communities of color, 
are essentially--there is an incentive to kind of bypass them. 
Why would the Fed and the OCC agree to a structure that allows 
a 500-to-one or more--for that matter, it could have been one 
dollar under the argument you are making rather than a 
thousand--why would they agree to such a fictitious form of 
accounting and a structure that incentivizes the bypassing of 
working Americans in this whole process?
    Ms. Goldberg. I think that is an excellent question, 
Senator Merkley. I am afraid I cannot answer it. It would be a 
good question to ask them to explain.
    Chairman Merkley. Has anyone at the OCC or Fed explained, 
given a rational explanation of what they were possibly 
thinking?
    Ms. Goldberg. At one point, I heard one person say that 
they believed that this structure accurately reflected the 
value of the assistance that the borrower received. That is the 
only explanation that I have heard, and it is not one that I 
find credible.
    Chairman Merkley. Well, I am not sure how a borrower who 
gets $1,000 relief would feel they had gotten $500,000 of 
relief.
    Ms. Goldberg. That is right.
    Chairman Merkley. Well, and it is our working class 
neighborhoods that have been hit so hard, and in our 
communities of color where folks might have been more recent 
homeowners and had less equity, they were not in a case of 
losing a share of their equity. They were losing their entire 
house, and that brings us to the third point you have raised, 
which is that, essentially, there is no emphasis on saving the 
family, that a short sale gets the same value as preventing a 
foreclosure.
    Ms. Goldberg. That is correct.
    Chairman Merkley. Why would a settlement intended and 
publicized to help the homeowner put the same weight on a 
situation where a family loses a home as on a situation when a 
family is able to keep their home?
    Ms. Goldberg. That is another excellent question to which I 
do not have an answer, and it is really because of those flaws, 
which we view as being extremely serious and severely 
undermining the potential benefit of this settlement, that--it 
is a done deal, right. The ink has dried on these settlements 
and I do not have this sense that there is any desire on the 
part of either the regulators or the servicers to go back and 
renegotiate them.
    And so for us, that means it is really important to try and 
think about the places where something good can be rescued from 
this, and we see the two avenues to that being putting detailed 
information about who is getting help out there in the public 
arena, doing it regularly and in a timely fashion so that all 
of us can see who is and is not getting help and----
    Chairman Merkley. So you are asking for----
    Ms. Goldberg. ----and hope to help to shape that a little 
bit.
    Chairman Merkley. You are asking for data on a census tract 
basis----
    Ms. Goldberg. That is right.
    Chairman Merkley. ----so this can truly be evaluated, which 
is transparency and accountability.
    Ms. Goldberg. That is right.
    Chairman Merkley. Is that guaranteed now, or does that 
require some future decision, and where would that decision-
making power lie?
    Ms. Goldberg. So, as I understand it, and I think as is 
actually reflected in the settlement itself, the servicers are 
required to report on a 45-day schedule to the regulators. I 
believe that they are still in the process of deciding which 
information that they will ask servicers to collect and report. 
And they have told us they are prepared to put some data out 
there in the public arena, but we do not know yet exactly what 
that will look like or how often that will be made available to 
the public, you know, when and how often.
    Chairman Merkley. Mr. Chairman, I would be interested in 
pursuing this in partnership with you, that we should ask for 
such data to be part of this process for at least evaluation, 
looking back at what worked and what did not. Thank you.
    Chairman Menendez. Thank you. I am in agreement with the 
Senator. I will be happy to work with him.
    Let me recognize our distinguished Ranking Member, Senator 
Moran, for any comments or questions.

                STATEMENT OF SENATOR JERRY MORAN

    Senator Moran. Mr. Chairman, thank you.
    I apologize for my lack of presence this morning. I am also 
the Ranking Member on an Appropriations Subcommittee that is 
meeting this morning with Secretary Duncan. But I wanted to at 
least make an appearance here at our first Subcommittee hearing 
and express my desire to be an active and full participant in 
this Subcommittee. I look forward to working with you, Mr. 
Chairman. Real estate, housing, is such an important component 
of the economy, but on a personal level, so important to 
individuals and their lives, their families.
    And so I am only here for a few moments to make certain 
that you and others understand the desire on my part to work 
with you, to see that our Subcommittee fulfills its 
responsibility in oversight as well as in pursuing legislative 
proposals to meet the real estate and housing needs of our 
country. I look forward to working with you, Chairman Menendez.
    Chairman Menendez. Well, thank you very much, and we look 
forward to working with you, as well, and to our robust agenda 
that hopefully can continue to spur our housing market and 
solidify those who are in their homes, try to keep as many as 
possible and continue to make this a cornerstone of our 
American success for families. So thank you for coming by 
today.
    I have another question or two, if I may.
    The Foreclosure Review Payment Agreement provides almost 
two times the amount of relief to borrowers who requested a 
review compared to those who did not. In my previous hearing 
and throughout this process, I have expressed concerns about 
outreach efforts to our underbanked communities, and without 
documentations from these reviews, I believe it is safe to say 
we still do not know whether folks in these communities, who 
were greatly impacted, were ever aware of their right to 
review.
    So my question is, are we giving the borrowers who may have 
never been contacted, therefore, who never requested a file 
review, the short end of the stick by offering them almost half 
of the relief as those who did request a review? Did you have 
any experience with that, Ms. Goldberg?
    Ms. Goldberg. Yes. Thank you, Senator. So I think the GAO 
did an excellent job of outlining some of the problems in the 
outreach efforts around particularly the request for review 
part of the Independent Foreclosure Review, and we certainly 
had lots of concerns about communities in which people just 
were not aware that this process was going on. And I suspect if 
you stopped the average person on the street today, most of 
them would never have heard of the Independent Foreclosure 
Review.
    I think as the result of the GAO's work, late in the game, 
the regulators made some very helpful changes in the way that 
they were doing outreach, in particular, working much more 
closely with community groups who could reach directly into the 
communities where response rates had been low and do a better 
job of making sure people knew that they had the opportunity to 
file a request for review.
    And, indeed, in the last, I guess, 6 weeks or so of the 
year, right before the final deadline, the number of requests 
that came in went up significantly. But even at its high point, 
it was only, as I understand it, a little bit over 500,000 
folks who filed a request for review out of four-point-some-odd 
million. So it is still 11 percent or something like that of 
the overall in-scope population who ever filed a request for 
review.
    And my guess is that a great many people just never knew 
that was an option. They certainly, even if they knew it was an 
option, they did not know that it would have any impact on the 
amount of compensation that they would receive because that 
decision was not made until after the deadline passed to file a 
request for review.
    So I have a grave concern about the level of differential 
in payment that is being awarded to people who filed a request 
for review and those who did not. As you point out, in many 
cases, it is double, and I think there are a lot of people who 
never knew this was an option for them who are suffering as a 
result.
    Chairman Menendez. As do I. If you knew that a review was 
likely to result in an increase in the relief that you 
received, then, number one, if you knew about the review 
process----
    Ms. Goldberg. Right.
    Chairman Menendez. ----and, second, you knew that as a 
metric it would be more likely that you would receive greater 
relief, then it would be overwhelming that people would respond 
to receive the greater relief.
    Ms. Goldberg. You would think so.
    Chairman Menendez. So this is a part of transparency that 
lacks here, because had that standard been set, we would have 
known. Mr. Evans, did you find this in your GAO report?
    Mr. Evans. Well, what I can say here is that, in terms of 
the recommendations we offered about the borrower outreach, the 
regulators did respond by targeting communities based on 
various characteristics, and they did increase their outreach 
efforts in terms of the print advertisements, the radio and 
television spots. And they also did some type of market 
analysis to identify areas and ethnic groups----
    Chairman Menendez. This is as a result of your----
    Mr. Evans. As a result of our recommendations. So that is 
someplace we can give the regulators credit, but----
    Chairman Menendez. All right. So let me--in the same vein, 
let me follow with Mr. Holland and Mr. Smith. I do not want you 
to feel out of the conversation, Mr. Holland, so I have a few. 
There is a reason you are here.
    I understand it is a very large undertaking for your firm, 
and certainly the pressure on getting these payments out in a 
proficient manner, so I appreciate you coming before the 
Committee today. But as you may know, the IFR had many flaws 
related to outreach, to materials, to assistance for those who 
speak languages other than English as their man language. Can 
you provide an update on the efforts that your company is 
taking to make sure we do not make the same mistakes this time 
around as we did with the IFR?
    For example, what channels are available to homeowners who 
contact Rust if they have questions or issues that need to be 
addressed? What steps or action plans are in place to actively 
or effectively communicate with borrowers? If somebody calls 
Rust and English is not their dominant language, are there 
other language abilities to be dealt with? Give me a sense of 
how you are working your job of this.
    Mr. Holland. Right. We have a call center and we are taking 
calls currently from people who have received the postcard 
notice as part of the settlement. And now, our first wave of 
checks that went out on Friday. So we do have the phone bank 
ready to answer any and all questions that we get from affected 
borrowers.
    We have on-site Spanish-speaking operators that can assist 
Spanish-speaking people. And there is a process by where we can 
use a third party to help translate, I believe it is up to 200 
languages, if somebody calls and has a language that we are not 
supporting live with Spanish or English. And we can get an 
operator on the phone that can help them.
    In terms of your other question about are we making efforts 
to reach out to people, we have had the data, the mailing data 
for this group of people going back to the IFR, and it went 
through several levels of mailing address correction that we 
performed. So when we had the settlement, we started with that 
address information and, once again, ran it through the 
National Change of Address data base, and we are mailing checks 
to the best address that we have currently.
    Some of those will be returned as undeliverable and we will 
make other attempts to find better address information for 
those that are undeliverable. And there is nothing in place 
yet, but we have had conversations about taking additional 
steps beyond what we have done in terms of address trace. We 
could implement an outbound calling program, email blasts. 
There are all sorts of things that may be available to us, 
nothing set yet, but those discussions are happening.
    Chairman Menendez. Those are discussions with the 
servicers?
    Mr. Holland. With the OCC and the FRB.
    Chairman Menendez. With the OCC and the FRB.
    Mr. Holland. And to the extent that, you know, even to the 
extent that somebody may receive a check and lose it, we will 
have information from the bank that shows us which checks are 
cleared, which checks are not. The regulators have said they 
want to leave the account open for up to 2 years, so that will 
give us ample time to even investigate those who do not cash 
checks, and then we can reach out to them to make sure that 
they received it and they get a chance to cash it.
    Chairman Menendez. Mr. Smith, with the National Mortgage 
Settlement, it required those five major mortgage servicers to 
comply with extensive servicing standards, including requiring 
a single point of contact for borrowers, adequate staffing 
levels and training, better communication with borrowers, 
appropriate standards for executing documents in foreclosure 
cases, ending improper fees, ending dual-track foreclosures for 
many loans.
    Now, there have been some reports that there are abuses 
that are still occurring, even for borrowers that are part of 
the settlement. Can you provide an update on what you are 
seeing and hearing as it relates to these mortgage servicing 
standards. How far along have the lenders come in terms of 
implementing the new standards, and give us a sense of how that 
is moving forward.
    Mr. Smith. I will, Senator. Well, the standards were in 
place effective October 2nd or 3rd, 2012, so they are all to be 
applicable now. A thing that needs to be understood about the 
settlement is that my enforcement capacity, as I said in my 
written and oral testimony, is based on metrics which are tests 
of particular aspects of the standards.
    We will issue our first report--we intend to issue a report 
on our initial testing of that performance in May. I mean, I 
say ``intend'' only because these are--we are doing a very 
thorough job, and if I have learned one thing from what I have 
heard today, it is do not rush to judgment. We are going to be 
sure we do a thorough job before we issue a report to the court 
and to the public. But I think I am hopeful that it will get 
done by the end of May. This will give us the beginning of 
insight based on sampling under the settlement, which, by the 
way, will be done under consistent standards that will be 
comparable across servicers. So we will be able to compare 
performance. And so I am hopeful that will begin to be some 
answers for you.
    In our work this year, and because I have gone out and 
talked to a number of people who represent distressed 
borrowers, we believe we need additional metrics, that the 
metrics we have are good, but we need to fill in some spaces, 
and so I am hopeful within the next month, also, to get some 
additional metrics out, including an additional one on--we have 
one on single point of contact that will be tested, will be in 
our first report. We need more. The metric is OK, but it needs 
supplementation. And I think in a couple of other topics, we 
will do the same thing.
    I think it is--I will tell you about a conversation one of 
my colleagues--to answer your question, generally, how they are 
doing, one of my colleagues, Josh Stein, had a Skype 
conversation with New Jersey advocates and counselors this last 
week. And what he heard were two things, and I want to make 
sure I will tell you both.
    The first was that they are beginning to see an increase in 
responsiveness by the servicers over what they had experienced 
in the past. Quicker responses. They may not like the 
responses, but they are getting it quicker. Less lost 
documents. Less static. Not no static, but less. They did not 
say they were satisfied. There are still issues of concern and 
contention that need to be worked out. We have got a long way 
to go.
    And so I think the fair thing to say is, I believe we are 
better off now than we were a year ago as a result--at least 
with regard to the five, as a result of the settlement. But I 
am not declaring victory. I think we have got a lot more work.
    Chairman Menendez. And just to follow up on your answer, 
all the elements that I mentioned that are part of the 
settlement, do you have metrics as it relates to all of those 
elements?
    Mr. Smith. No. I cannot honestly say that. I think the 
metrics--I think it is fair to say that the metrics cover a 
broad enough representation of what is required under the 
settlement to be pretty representative. But the short answer to 
your question is there are--I have got it here, actually--113 
of the 304 are mapped to particular--of the standards are 
mapped to metrics. That leaves a number not mapped. So what we 
are doing, Senator, I think it is fair to say, is to give, I 
believe, a good insight and a good--we will give a good 
representation of where the servicers are. But it is 
supplemental to what their primary regulators, what the CFPB 
and others need to be doing going forward.
    Chairman Menendez. So let me close with one other question 
to you, which is in line with some of what we are talking 
about. I understand that most of the information that you are 
now able to report has been self-reported by the banks. Is that 
accurate?
    Mr. Smith. Yes.
    Chairman Menendez. OK. And while I am somewhat troubled by 
that idea, because that has not been a particularly good record 
by some of these institutions, can you explain what authority 
you have as the monitor to verify the information you receive 
from these servicers? How are you able to determine from the 
data that your most recent reports will be accurate? And is 
there any policy in place that would allow you to verify 
information in cases where you felt the self-reporting data 
lacked accuracy?
    Mr. Smith. Yes. The short answer--first, the self-reporting 
is the servicer, that is to say the firm, reports responses to 
these metrics, the questions on the metrics test. The servicers 
are required by the settlement to establish an Internal Review 
Group, which is to be separate from the mortgage servicing and 
the mortgage line of business. So it is--I would analogize it 
to the independent audit capacity in most organizations, which 
is to report separately outside the business operation.
    That Independent Review Group will itself assess whether it 
agrees. It will test itself and will test whether it agrees 
with the servicer's assertion of compliance or if--of 
compliance. I then have an accounting firm of my own which 
reviews the work papers that the IRG has produced and has the 
capacity--and we have done additional tests and we have asked 
additional questions and we are going to--we are doing our best 
to tease out of all what we have gotten, all the information 
you can get to assure that what they are telling us is true. 
The one reason I cannot tell you for sure we are going to 
report in May is because we having prayer, shall I say, over a 
bunch of items now with regard to some of the servicers.
    So we will--we are--what we have got is what I would say is 
a targeted approach to determining compliance. But we are going 
to do our very best to assure that we get everything we can out 
of that process and publicly report it so you can review and 
see what you think, how you think we did. I mean, I think--I am 
under no illusion that what we report will not be widely read 
and discussed, and that is good. That is intentional.
    Chairman Menendez. Well, I can assure you it will be widely 
read by this Committee, so----
    Mr. Smith. I am sure it will.
    Chairman Menendez. Let me thank you all for your testimony. 
It has been very elucidating in many respects. I have real 
concerns, as I have expressed early on to the regulators about 
this, and unfortunately, my concerns that were expressed going 
back some time ended up being, unfortunately, the reality.
    It is the intention of this Committee to continue to pursue 
all the elements of this as we move forward with the 
regulators. I think that Ms. Goldberg's suggestions, making the 
best of what we have right now, are important ones and we look 
forward to pursuing that, as well. At the end of the day, those 
who were harmed should have the appropriate relief. They should 
know what that relief can be. They should be able to maximize 
that relief, and it seems to me a little perverse that you can 
get a lot--that the servicers, the institutions can get a lot 
but do a little in comparative ways, much different than the 
National Mortgage Settlement process. So those are real 
concerns to me as the Chair and I will look forward to 
continuing to pursue these. This record will remain open for 2 
days for any Members who have questions for the record.
    And with the thanks of the Committee, this hearing is 
adjourned.
    [Whereupon, at 11:12 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

              PREPARED STATEMENT OF LAWRENCE L. EVANS, JR.
   Director, Financial Markets and Community Investment, Government 
                         Accountability Office
                             April 17, 2013



































               PREPARED STATEMENT OF JOSEPH A. SMITH, JR.
              Monitor of the National Mortgage Settlement
                             April 17, 2013
Introduction
    Thank you Chairman Menendez, Ranking Member Moran, and Members of 
the Subcommittee for inviting me today to testify about implementation 
of the National Mortgage Settlement. It is a pleasure to be here with 
you to talk about this important issue.
    As you know, on April 5, 2012, the National Mortgage Settlement 
went into effect when the United States District Court for the District 
of Columbia entered five separate consent judgments that settled claims 
of alleged improper mortgage servicing practices against five major 
mortgage servicing organizations: Bank of America, N.A., CitiMortgage, 
Inc., JPMorgan Chase Bank, N.A., Residential Capital LLC and affiliates 
(formerly GMAC) and Wells Fargo & Company and Wells Fargo Bank, N.A. 
Government parties to the settlement include the U.S. Department of 
Housing and Urban Development, the U.S. Department of Justice, 
Attorneys General from 49 States and the District of Columbia, various 
State financial services regulatory agencies and other releasing 
parties, including the Consumer Financial Protection Bureau and the 
U.S. Department of Treasury.
    The settlement was an unprecedented and collaborative bipartisan 
effort by the States and the Federal Government to improve the way 
mortgage servicers work with distressed borrowers while also providing 
much needed relief to homeowners across the Nation.
    The settlement can be divided into three parts: direct payments to 
borrowers and States, consumer relief and servicing standards. While I 
have no oversight over the direct payments, as the monitor of the 
settlement, I am responsible for reviewing and certifying the discharge 
of the servicers' consumer relief obligations and overseeing their 
implementation of and compliance with the servicing standards.

Organizational Overview
    As monitor, I am subject to oversight by a Monitoring Committee 
that is comprised of representatives of the U.S. Department of Housing 
and Urban Development, the U.S. Department of Justice, and 
representatives of 15 States. My office operates under a budget I 
prepare annually in consultation with the Monitoring Committee and 
servicers and is paid for by the servicers out of their corporate 
funds. My budget for fiscal year beginning July 1, 2012, was so 
prepared and is in effect. At the end of this fiscal year, I will make 
publicly available a report with audited financial statements covering 
my operations.
    To assist me in enforcing the settlement, I am authorized to employ 
a primary professional firm (PPF) agreed to by the servicers. In 
selecting the PPF, my goal was to find a firm that not only had the 
organizational capacity and subject matter expertise to do the work 
well, but also was independent of all five servicers. I conducted a 
thorough selection process during which I invited 46 firms to submit a 
proposal and reviewed 23 proposals. At the end of this process, I 
retained BDO Consulting. BDO has substantial financial services 
industry experience, yet has no meaningful conflict with any of the 
servicers.
    As the PPF, BDO is responsible for ensuring quality control and 
making sure that the review of the servicers' implementation of and 
compliance with the servicing standards is done in a consistent way. 
BDO is also responsible for reviewing and confirming the consumer 
relief that the servicers extend to borrowers under the terms of the 
settlement and has been performing that work to exacting standards over 
the last 6 months.
    To assist in the review of servicer implementation of and 
compliance with the servicing standards, I also have retained five 
separate secondary professional firms (SPFs), including Baker Tilly 
Virchow Krause, LLP; BKD, LLP; Crowe Horwath LLP; Grant Thornton LLP; 
and McGladrey LLP. Each SPF is assigned to a specific servicer. As with 
BDO, each SPF is free of any relationship to its assigned servicer that 
would undermine public confidence in its work.
    Each servicer also has an internal review group (IRG), or group of 
employees and/or independent contractors and consultants that is 
responsible for performing reviews of the servicer's compliance with 
the settlement and whose members are required to be separate and 
independent from the line of business being reviewed. My office and its 
associated professional firms have also reviewed the qualifications and 
resources of each IRG to ensure it has the capacity and independence to 
do a credible job.
    In addition to the PPF and SPFs, the settlement authorizes me to 
retain attorneys and other professionals to help me carry out my 
duties. Accordingly, I have engaged the law firms of Poyner Spruill and 
Smith Moore Leatherwood; the forensic accounting firm of Parkside 
Associates; the accounting firm Cherry, Bekaert & Holland; and the 
communications firm Capstrat. As required by the settlement, each firm 
is independent of the servicers.
    Though it was not required by the settlement, I have sponsored the 
creation of the Office of Mortgage Settlement Oversight (OMSO), a not-
for-profit organization that provides administrative support for my 
work, including acceptance and payment of money and the maintenance of 
books and records. OMSO enables me to carry out my duties transparently 
and independently with administrative oversight from an independent 
Board of Directors.

Consumer Relief
    Under the settlement, the servicers have agreed to provide specific 
dollar amounts of relief to distressed borrowers within a 3-year 
period. This relief includes first and second lien modifications, short 
sale assistance, deficiency waivers, forbearance for unemployed 
borrowers, antiblight activities, benefits for members of the armed 
services, and refinancing programs.
    Within limits, the servicers have flexibility to apply these 
different kinds of relief as they see fit to meet their overall 
obligations. The settlement specifies that certain types of relief must 
make up a certain percentage of each servicer's commitment. For 
example, 60 percent of the total credited relief must come from first 
and second lien modifications; of that at least half must be 
modifications made on first liens.
    Under the consumer relief terms of the settlement, the servicers 
are required to make quarterly reports to the States (with copies to 
the Monitoring Committee and to me) of relief during that quarter in 
each State and in the Nation as a whole. They have done so, in November 
of last year and February of this, and the data they provided was the 
basis of my progress reports to the public issued in the same months.
    The kinds of consumer relief for which a servicer can receive 
credit under the settlement are set out in detail in the consent 
judgments and the credit varies based on the relief given. For example, 
servicers can receive dollar for dollar credit for principal 
forgiveness on loans both owned and serviced by the servicer and as 
little as five cents on the dollar for certain forbearance activities. 
For that reason, the gross dollar amounts of relief the servicers have 
delivered to homeowners far exceeds their total credited obligations 
under the settlement.
    For each amount of relief it has provided to borrowers on or after 
March 1, 2012, a servicer will receive credit against the commitments 
it made when it entered the settlement. To encourage the servicers to 
make substantial progress in the first year of the settlement, it gives 
them an additional 25 percent credit for any credited first or second 
lien principal reductions or refinancing activities that take place 
within the 12 months after March 1, 2012. If a servicer's total 
commitment is not fully satisfied within 3 years, it will be required 
to pay a penalty of no less than 125 percent of its unmet commitment 
amount.
    A servicer can choose to seek a determination by me of its 
satisfaction of its consumer relief obligations whenever it has 
asserted such satisfaction to its IRG, its IRG has confirmed such 
satisfaction and such confirmation is reported to me. In November 2012, 
the ResCap parties requested a satisfaction review. In February of this 
year, after a review of their performance, I issued a report confirming 
their satisfaction of their minimum consumer relief obligations and 
partial satisfaction of their mandatory solicitation requirements. My 
report was filed with the United States District Court for the District 
of Columbia and is available for review on my Web site. In February, 
each of the other four servicers requested a determination of partial 
satisfaction of their consumer relief obligations through December 31, 
2012. A review of the assertions of completed consumer relief by the 
servicers and the confirmation of completion by their IRGs is in 
progress. I will publicly report my determination later this year after 
my review is done.
    In their latest reports to the States, compiled in my most recent 
progress report, the servicers have reported that from March 1, 2012, 
to December 31, 2012, 554,389 borrowers benefited from some type of 
consumer relief totaling $45.83 billion, which, on average, represents 
about $82,668 per borrower. This figure includes both completed relief 
and active first lien trial modifications. The amounts reported are 
gross dollar figures rather than credited relief under the settlement 
and, except for amounts reported by the ResCap parties, have not been 
reviewed or scored by the PPF or by me.
    Additional information with regard to consumer relief to date under 
the settlement is available in my most recent report, titled ``Ongoing 
Implementation''.

Servicing Standards
    In addition to consumer relief, the settlement establishes 304 
servicing standards, or rules of conduct, to which the servicers must 
adhere. These servicing standards are intended to redress the practices 
in mortgage servicing that led to the claims that resulted in the 
settlement. It is important to note that the servicing standards apply 
to all loans serviced by the servicers, regardless of the loan's owner. 
Each servicer has been responsible for implementation of and compliance 
with the standards since October 2, 2012.
    There are servicing standards related to document integrity, the 
loan modification process, dual tracking, single points of contact, 
other customer service requirements, and other more general 
requirements.
    Under the settlement, I am directed to measure servicer compliance 
with the servicing standards through 29 metrics--tests designed to 
determine whether one or more of the servicing standards are being 
followed. The servicers conduct these tests through their IRGs, who 
then report the results to me. Assisted by my PPF and SPFs, I assess 
the work of the servicers and report my conclusions. If the IRGs or I 
find potential violations--noncompliance with the standards--the 
servicer has to implement a corrective action plan and remediate any 
identified potential violations. In the case of a widespread error, the 
servicer has to search for all potential violations since 
implementation of the servicing standard and remediate them. If it 
can't or won't correct the potential violations, injunctions or civil 
penalties can be sought through the United States District Court for 
the District of Columbia.
    We have completed our first review of servicer compliance under the 
settlement--for the calendar quarter ended on September 30, 2012--and 
have nearly completed our second quarterly review. When that review is 
complete, I will report to the Court and to the public on how the 
servicers have performed. I intend to deliver that report next month. 
This process will continue for the next 2 years.

Complaints
    To help me better understand the settlement's impact in the 
marketplace, my colleagues and I closely review consumer complaints we 
receive through my office as well as the complaints elected officials 
escalate to the servicers. As part of the settlement's terms, the 
servicers are required to provide me with access to all the complaints 
submitted to them by Members of Congress, Attorneys General and other 
governmental agencies. I also have met with Attorneys General, their 
staffs, lawyers who represent borrowers and housing counselors in hard 
hit States such as Florida, Nevada, California, Illinois, and Arizona, 
and I look forward to doing as much more of this as is possible. 
Further, I have recently entered an information sharing relationship 
with the Consumer Financial Protection Bureau that has great promise.
    Through the complaints and my meetings with Attorneys General 
staff, housing counselors and lawyers, I have learned about the issues 
that borrowers continue to experience. While I have heard about 
progress and success in obtaining consumer relief, problems with the 
servicing standards, including single points of contact, dual tracking 
and the loan modification process in general are still occurring all 
too often. These are the issues that guide my conversations with the 
servicers.
    The settlement anticipated situations in which there would be 
issues surrounding servicing standards not tested by a metric and 
allowed me the opportunity to develop three discretionary metrics. As a 
result of what I have heard from consumers and professionals, I am now 
working with the servicers to establish my discretionary metrics. They 
are not yet completed, but they will address what I have learned in the 
last year.

Conclusion
    In closing, the settlement has been successful in what I believe is 
a worthwhile effort: focusing resources on a specific problem in a 
targeted, time-limited way that augments and supports the work of 
policy makers and governmental agencies. I applaud the bipartisan 
leaders who crafted this settlement to address serious issues with 
local and national implications. Properly implemented and enforced, the 
settlement has the potential to result in a substantial public benefit. 
I look forward to continuing my work toward that goal and welcome your 
questions.
                                 ______
                                 
                  PREPARED STATEMENT OF DAVID HOLLAND
               Executive Vice President, Rust Consulting
                             April 17, 2013
Introduction
    My name is David C. Holland. I am an executive vice president based 
in Rust Consulting's Minneapolis, Minnesota, office. Rust Consulting, 
or ``Rust,'' has been engaged by the servicers to administer certain 
aspects of the Alternative Resolution Settlement as directed by the 
Office of the Comptroller of the Currency (OCC) and the Federal Reserve 
Board (FRB). Previously, Rust was engaged by the servicers to 
administer the Consent Orders for the Independent Mortgage Foreclosure 
Borrower Outreach project, also known as the Independent Foreclosure 
Review (IFR).
    Rust provides project management, data management, notification, 
contact centers, claims processing, and fund distribution, typically in 
support of large, complex, and time-sensitive programs. Rust has 
handled more than 4,000 programs in all.

Independent Foreclosure Review
    Rust was originally engaged by 14 servicers to serve as the 
administrative provider under the IFR Consent Orders. Broadly speaking, 
our responsibilities under the Consent Orders were to notify homeowners 
about the program, to answer their questions, to receive their Request 
for Review forms, and to handle in- and outbound mail. From November 
2011 through December 2012, we executed three mass mailings to 
homeowners. Over the same period and through January 2013, we received 
and forwarded homeowner Requests for Review forms.

Alternative Resolution Settlement
    Rust was recently engaged by 11 of the 14 original servicers, along 
with two additional servicers, to serve as the Paying Agent under the 
Alternative Resolution Settlement (Settlement). Our responsibilities 
under the Settlement are to notify homeowners about this program, to 
answer their questions, and distribute settlement payments in the form 
of checks to eligible homeowners.

  1.  Rust updated the ending-IFR-program database of homeowner 
        addresses through the National Change of Address service and 
        mailed postcards on March 18, 2013, informing homeowners that 
        they were eligible to receive a payment as a result of the 
        Settlement.

  2.  Rust received relevant data from servicers that identified loan 
        classifications for each individual loan and subsequently 
        received data from the OCC and FRB detailing the payment 
        amounts for each loan classification. The first wave of checks, 
        approximately 1.4 million, were mailed on Friday, April 12. The 
        majority of the remaining checks will be mailed in three more 
        waves occurring on April 19, April 26, and May 3.

  3.  Rust continues to staff a call center to take incoming calls from 
        homeowners with questions about the program and update the Web 
        site for the IFR project to provide new information regarding 
        the Settlement.
Outreach Efforts
    At the direction of the servicers, the OCC, and the FRB, Rust 
implemented a number of address correction processes to maximize the 
number of homeowners who received notice as part of the IFR. Rust will 
continue to use address correction processes under the Settlement.

  1.  In both projects, the NCOA process was used to update addresses.

  2.  As part of the IFR, Rust received undeliverable notices, ran the 
        corresponding addresses through a ``skip-trace'' process, and 
        whenever possible, remailed notices to new addresses.

  3.  For any of the remailed notices that were returned as 
        undeliverable, Rust performed another second type of address 
        search, and again, whenever possible, remailed notices to new 
        addresses.

  4.  Under the Settlement, Rust will receive undeliverable checks and 
        attempt to find better addresses and, whenever possible, remail 
        the checks to new addresses.

Reporting
    During the IFR process, Rust provided comprehensive daily 
statistical reporting to the OCC, the FRB, independent consultants, and 
the servicers. Daily meetings were held with the consortium of the 14 
servicers and independent consultants that covered the current state of 
project execution, future deliverables, and next-phase planning.
    As part of the Settlement, Rust provides comprehensive daily 
statistical reporting to the OCC, the FRB and the servicers. Daily 
conference calls are held with the servicers covering project 
execution. Two times weekly, conference calls are held with the OCC and 
the FRB covering project execution and future deliverables.
                                 ______
                                 
                 PREPARED STATEMENT OF DEBORAH GOLDBERG
        Special Project Director, National Fair Housing Alliance
                             April 17, 2013

    Chairman Menendez, Ranking Member Moran, and Members of the 
Subcommittee, my name is Debby Goldberg, and I am a special project 
director with the National Fair Housing Alliance (NFHA). Founded in 
1988 and headquartered in Washington, DC, the National Fair Housing 
Alliance is a consortium of more than 220 private, nonprofit fair 
housing organizations, State and local civil rights agencies, and 
individuals from throughout the United States. Through comprehensive 
education, advocacy and enforcement programs, NFHA protects and 
promotes residential integration and equal access to apartments, 
houses, mortgage loans, and insurance policies for all residents of the 
Nation.
    I want to thank you for the opportunity to testify here today about 
the Independent Foreclosure Review (IFR). The IFR was one component of 
consent orders that the Office of the Comptroller of the Currency and 
the Federal Reserve Board signed 2 years ago with 14 mortgage 
servicers, later expanded to 16 companies. Those consent orders were 
intended to address widespread failures in those companies' mortgage 
servicing and loss mitigation systems, as identified in the 
``horizontal review'' that the regulators conducted in the wake of the 
so-called robo-signing scandal.
    NFHA and many other civil rights and consumer organizations 
welcomed the announcement that the regulators had entered into consent 
orders with these servicers and supported the dual goal of the orders: 
to ensure that the servicers made changes to their staffing, systems 
and oversight that would prevent future borrowers from experiencing the 
kinds of problems that could lead to unnecessary foreclosures; and to 
identify borrowers whose servicers acted improperly in the foreclosure 
process and the events leading up to it, and compensate those borrowers 
for the financial harm they suffered. We only wish that the 
announcement had come much sooner, so that some of the four million or 
more homes that have been lost to foreclosure since 2008 might have 
been saved. \1\
---------------------------------------------------------------------------
     \1\ CoreLogic, ``CoreLogic Reports 767,000 Completed Foreclosures 
in 2012'', February 1, 2013, available at http://www.corelogic.com/
research/national-foreclosure-report-december-2012. pdf.
---------------------------------------------------------------------------
The Negative Impact of the Foreclosure Crisis on Communities of Color
    For NFHA, the 2011 consent orders represented an important 
regulatory milestone. Four years earlier, in 2007, we and four other 
national civil rights organizations called for a national moratorium on 
foreclosures. We did so because we were hearing from our members and 
others about the massive level of foreclosure activity occurring in 
communities of color all across the country. The situation had reached 
crisis proportions and called for a national response. In previous 
years, communities of color had been flooded with subprime and other 
unsustainable mortgages. African American borrowers were 3 times more 
likely, and Latino borrowers were 2.5 times more likely to be placed in 
subprime loans than their white counterparts. \2\ Research indicated 
that significant numbers of these borrowers had credit that was good 
enough to qualify them for safer, less costly prime loans. \3\ Recent 
settlements between the U.S. Department of Justice and several major 
mortgage lenders illustrate how financial incentives encouraged 
mortgage brokers and loan officers to charge higher fees to hundreds of 
thousand of African American and Latino borrowers. These incentives 
also encouraged lenders to steer tens of thousands of borrowers who 
qualified for prime loans into subprime mortgages that were more 
profitable for the loan originators, but proved to be disastrous for 
the borrowers, their communities and our economy as a whole.
---------------------------------------------------------------------------
     \2\ Bocian, Debbie Gruenstein, Wei Li, Carolina Reid, and Roberto 
G. Quercia, ``Lost Ground, 2011: Disparities in Mortgage Lending and 
Foreclosures'', Center for Responsible Lending, November 2011.
     \3\ Brooks, Rick, and Ruth Simon, ``Subprime Debacle Traps Even 
Very Creditworthy'', Wall Street Journal, December 3, 2007.
---------------------------------------------------------------------------
    While the foreclosure crisis has affected a great many borrowers 
and communities, some have been hit harder than others. According to 
research by the Center for Responsible Lending (CRL), by early 2011, 25 
percent of all African American and Latino homeowners who had mortgages 
originated between 2004 and 2008 had either lost their homes to 
foreclosure or were seriously delinquent, a rate twice that of white 
borrowers. The impact of these foreclosures has been devastating, not 
only for the families who have lost their homes, but also for their 
neighbors whose lives and communities and property values have all be 
affected. CRL' s research indicates that $2 trillion of wealth has been 
lost as a result of the foreclosure crisis. Half of that amount, $1 
trillion, has been lost by communities of color. \4\ It may be a full 
generation or more before this lost wealth is regained, and the 
implications of this loss for our country are profound.
---------------------------------------------------------------------------
     \4\ Bocian, Debbie Gruenstein, Peter Smith, and Wei Li, 
``Collateral Damage: The Spillover Costs of Foreclosures'', Center for 
Responsible Lending, October 24, 2012.
---------------------------------------------------------------------------
    NFHA's own work shows that the negative impact of foreclosures 
lasts far beyond the event itself. We have investigated the practices 
of mortgage servicers with respect to maintenance, management and 
marketing of the homes they have taken back through foreclosure (i.e., 
their real-estate owned or REO properties). We have found that, 
compared to REO homes in white communities, REOs in communities of 
color are many times more likely to have multiple problems with respect 
to their physical condition, such as leaking roofs, broken windows, 
unsecured doors, trash in the yard, poorly maintained yards, and the 
like. They are less likely to be marketed effectively, are more likely 
to linger on the market longer, and are more likely to be bought by an 
investor rather than an owner occupant. \5\ All of creates eyesores and 
hazards and depresses property values for the homeowners who remain.
---------------------------------------------------------------------------
     \5\ National Fair Housing Alliance, ``The Banks Are Back, Our 
Neighborhoods Are Not: Discrimination in the Maintenance and Marketing 
of REO Properties'', April 4, 2012.
---------------------------------------------------------------------------
    In sum, the foreclosure crisis has had a significant impact on 
people and communities of color. For us at NFHA, addressing the sources 
of these problems and protecting against their recurrence have been a 
high priority, and one that we see as consistent with our civil rights 
mission. We were pleased when the OCC and the Federal Reserve announced 
their consent orders, and were hopeful that the effort to identify and 
compensate aggrieved borrowers would be an important step towards 
mitigating some of the damage done by servicers' abuses. We also hoped 
that the servicing provisions of the consent orders and the regulators' 
increased focus on servicing practices would result in better loss 
mitigation so that more borrowers would receive the loan modifications 
for which they were eligible and be able to stay in their homes.

Importance of the Independent Foreclosure Review and Consent Orders
    The 2011 OCC/FRB consent orders, with their provisions requiring 
the servicers to conduct independent foreclosure reviews, were one of 
several efforts under way in recent years to address the foreclosure 
crisis. In 2009, Making Home Affordable was launched, with its HAMP, 
HARP, and Hardest Hit Funds programs. In February, 2012, 49 State 
attorneys general and several Federal agencies reached an agreement 
with five major mortgage servicers, \6\ the National Mortgage 
Settlement (NMS). These efforts are aimed at preventing further 
foreclosures, by reforming mortgage servicing practices, standardizing 
loan modification terms and conditions, increasing the use of principal 
reduction in loan modifications, and making it possible for homeowners 
who were current on their mortgages but underwater to refinance into 
loans with lower interest rates. What sets the IFR apart from these 
other efforts is its emphasis on identifying and compensating borrowers 
who were harmed by problems in the way their servicer handled their 
mortgages and their requests for assistance when they could no longer 
make their payments.
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     \6\ The servicers covered by the National Mortgage Settlement 
include Bank of America, Citi, JPMorgan Chase, Wells Fargo, and GMAC/
Ally (see, www.nationalmortgagesettlement.org for further details). All 
of these servicers also entered into consent orders with OCC and/or the 
Federal Reserve Board in April, 2011 and were subject to the 
requirements of the IFR.
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    This approach is particularly important from a civil rights 
perspective. As noted above, a disproportionate number of unsustainable 
subprime loans were made to African American and Latino borrowers. Many 
of these loans became unaffordable and unsustainable, forcing the 
borrowers into default, in the earliest waves of foreclosures. By the 
time the consent orders were signed, many of these borrowers may have 
already lost their homes. However, even if it was too late to help 
these borrowers save their homes, it was not too late to find them and 
compensate them, at least in part, for the harm they suffered. For this 
reason, NFHA has taken a particular interest in the implementation of 
the IFR process.

Concerns With the Independent Foreclosure Review
    The IFR had two components. One of these was the ``look-back'' 
process, for which the independent consultants (ICs) that the servicers 
were required to hire would review samples of files, and where a 
certain level of errors was found, expand those samples to capture all 
of the files of borrowers with similar characteristics. The second 
component was the Request for Review (RFR) process, which provided an 
opportunity for borrowers who believed they had been harmed to request 
a review of their particular file, whether or not it was also captured 
in one of the samples reviewed by the ICs.
    Reviewing the files of 4.4 million borrowers who faced foreclosure 
to determine whether their servicers acted properly, whether the 
borrowers suffered financial harm, and quantifying that harm is a big, 
complex undertaking. For NFHA and the civil rights and consumer 
advocates with whom we work, it was important for the reviews to be:

    conducted in a timely and transparent manner,

    thorough while focusing in on the problems experienced most 
        frequently by borrowers,

    fair and even-handed by capturing the borrower's side of 
        the story, and

    consistent, resulting in comparable outcomes for similarly 
        situated borrowers with different servicers.

    Transparency, consistency, and fairness have all proven problematic 
in the IFR process, as is evident in the record compiled by this 
Committee through its earlier hearings, and in the two reports 
published by the Government Accountability Office (GAO). With respect 
to the look-back process, NFHA and other advocates raised several key 
concerns.
    Our first concern was the lack of transparency due to the 
regulators' reluctance to make public the rulebook for this 
undertaking. Despite numerous requests, the regulators never released 
the guidance they provided the ICs about how to implement the reviews 
and how to resolve any issues that arose. This lack of transparency 
undermined public confidence in the process and made it difficult to 
have confidence that the ICs knew what to look for in the files or how 
to interpret what they found (or didn't find). This lack of 
transparency also undermined public confidence that the outcomes would 
be consistent across servicers.
    Further, the process did not allow for input from the borrower 
about his or her interactions with the servicer. This was necessary to 
identify cases where borrowers were given incorrect inconsistent or 
conflicting information by their servicers, and to shed light on the 
many instances in which borrowers submitted the documents required to 
be considered for a loan modification or other loss mitigation 
options--often several times--but servicers claimed never to have 
received them. For many borrowers, this had caused significant and 
costly delays in the processing of their loan modification 
applications. In some cases, the mounting arrearages made them 
ineligible for the modification they requested.
    The Request for Review (RFR) process also raised many concerns. 
Again, the GAO report on the subject lays them out clearly. Many of 
these problems stemmed from the failure to provide for the kind of 
outreach necessary for the RFR process to be successful. This was a 
problem in the consent orders themselves. No resources were allocated 
for outreach; no organizations that work closely with borrowers, such 
as housing counseling agencies or legal services offices, were 
consulted about the best way to reach borrowers or what role they might 
play in doing so; no provisions were made for developing effective 
outreach materials; and no consideration was given to a reasonable 
timetable for such an effort.
    A second, more targeted outreach effort was conducted during the 
last 6 weeks or so before the final application deadline. This resulted 
in a substantial increase in the number of borrowers who filed an RFR, 
but in the end only some 11 percent of eligible borrowers made such a 
request. Many borrowers may not have been in a position to submit an 
RFR, others may have lacked confidence that the outcome would justify 
the effort required, and a great many others may simply never have 
known that the IFR process existed and they could file a request to 
have their file reviewed. These are just a few of the concerns about 
the RFR process. Others were detailed in the testimony provided to this 
Committee by Alys Cohen, of the National Consumer Law Center, on 
December 13, 2011. \7\
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     \7\ Cohen, Alys, ``Helping Homeowners Harmed by Foreclosures: 
Ensuring Accountability and Transparency in the Foreclosure Reviews'', 
Testimony before the United States Senate Subcommittee on Housing, 
Transportation, and Community Development of the United States Senate 
Committee on Banking, Housing, and Urban Affairs, December 13, 2011.
---------------------------------------------------------------------------
Concerns With the January, 2013 IFR Settlement
    On January 7, 2013, the regulators announced that they had reached 
a settlement with 13 of the IFR servicers, were halting the IFR process 
at those companies and replacing it with a combination of direct 
payments to borrowers and other forms of mortgage assistance. The 
settlement was valued at $9.3 billion, including $3.6 billion in direct 
payments to 4.2 million borrowers, and $5.7 billion in other 
assistance. The agencies expressed concern about the slow pace of the 
IFR process and the substantial cost of the Independent Consultants, 
already reported to be $2 billion, and stated their belief that the new 
settlement would put more money in the hands of more borrowers more 
quickly.

Questions About the Cash Distribution
    Borrowers and their advocates certainly shared the regulators' 
frustration over the pace and cost of the reviews. Whether the new 
settlement provides a more equitable distribution of relief, however, 
is a different matter. Last week the regulators released a chart that 
details how payments will be allocated among 3.9 million borrowers 
(payment details have yet to be released for borrowers whose loans were 
serviced by Goldman Sachs and Morgan Stanley). They range from $300 to 
$125,000. At the top end of the scale, 2,041 borrowers will receive 
$125,000. These are borrowers who were protected under the provisions 
of the Servicemembers Civil Relief Act (SCRA), but whose servicers 
foreclosed on their homes anyway. Another 98 borrowers who were never 
in default but still lost their homes to foreclosure will also receive 
$125,000. At the bottom end of the scale, 2,358,441 borrowers whose 
servicers brought foreclosure actions against them after approving 
their request for a loan modification, whose servicers never reached 
out to them to offer assistance, or who fall into an ``other'' category 
will receive $300 apiece. None of these borrowers filed an RFR. Their 
260,623 counterparts in the same categories who did file an RFR will 
receive either $500 or $600.
    The chart raises more questions than answers. For example, it is 
not clear why responsibility for ``slotting'' borrowers into specific 
categories was given to the servicers and why their record systems, 
which are known to be seriously flawed, were used as the basis for the 
slotting process. Nor is it clear why certain categories of borrowers 
were awarded one amount of money and other categories were awarded a 
different amount. In the end, no determinations were made about which 
borrowers experienced financial harm. With the exception of the SCRA 
violations and the borrowers who were never in default, the fact that a 
borrower falls into a category higher on the chart is no indication 
that he or she actually experienced harm. Similarly, the fact that a 
borrower is slotted into a category lower on the chart is no indication 
that he or she did not experience harm. Given this, it is not clear why 
there are so many different categories of borrowers and awards, or even 
any categories at all. And given the likelihood that a great many 
borrowers never knew about the IFR at all, let alone that they could 
file a request for review, and the fact that no borrowers knew that 
doing so would affect the amount of compensation they would receive, it 
is not clear why borrowers who filed an RFR were awarded so much more 
compensation than their counterparts who did not file such a request.
    These questions are confusing and distressing to borrowers, and I 
suspect many of the Members of this Committee are hearing from your 
constituents with these and other concerns about how this process has 
played out.
    Advocates have many concerns about the payment process itself. As 
with the initial RFR process, no resources were allocated for outreach 
to borrowers to let them know about the change in plans and the fact 
that checks will be coming their way. Postcards from the payment agent, 
Rust Consulting, were mailed to borrowers, but these postcards are 
subject to the same critiques that GAO cited in its report on the 
previous IFR outreach process. We are already hearing reports that 
borrowers are confused about the postcards, believe they may come from 
scam artists, or are simply throwing them out as junk mail.
    This, in turn, raises concerns about whether, when the IFR checks 
are mailed, borrowers will actually open the letters and cash the 
checks. It is critical for the regulators to track returned mail and 
cashed checks to determine whether the funds are not getting through in 
certain geographic areas or to groups of borrowers, particularly those 
who may not be proficient in English and may not fully understand the 
letter of explanation accompanying the checks. Despite advocates' 
recommendation, the regulators did not send postcards or letters in 
both English and Spanish, let alone any other languages. If gaps are 
identified among those borrowers cashing the checks, the regulators 
should take additional steps to ensure that they have the correct 
address for borrowers. They should also conduct additional, and where 
appropriate language specific, outreach in those communities to ensure 
that borrowers actually receive the funds to which they are entitled.
    In addition, it is inevitable that some funds will go unclaimed. 
The regulators have not announced what will be done with such funds. 
After every effort is made to locate those borrowers who did not cash 
their checks and encourage them to do so, we recommend that remaining 
funds be earmarked to support housing counseling, legal services and 
other foreclosure prevention services.

Questions About the Other Forms of Assistance to Borrowers
    There are also many questions and concerns about the provisions of 
the settlement relating to nonmonetary assistance to borrowers, the so-
called soft dollar side of the settlement. The $5.7 billion worth of 
assistance will be provided to borrowers in the form of loan 
modifications, short sales, deficiency waivers and the like. The 
servicers themselves will determine which borrowers will receive 
assistance, how much, and in what form. The structure of this side of 
the settlement resembles the structure of the National Mortgage 
Settlement (NMS), in that servicers will receive credit towards their 
targeted level of borrower assistance for the specified activities.
    There are some significant differences between the IFR settlement 
and the NMS, however, and many of these are cause for concern because 
they undermine the regulators' stated goal for this part of the 
settlement, which is to help save people's homes.
    Our greatest concern is that, unlike the NMS, the IFR settlement 
bases the amount of credit the servicer receives on the unpaid balance 
of the loan, rather than the amount of assistance provided to the 
borrower. In other words, if a servicer forgives $50,000 worth of 
principal on a $500,000 loan, it receives soft dollar credit not for 
$50,000 but for $500,000. This severely inflates the amount of credit 
the servicer receives, and dramatically reduces the number of borrowers 
who are likely to receive assistance through this program.
    An equally alarming aspect of this approach is that it creates an 
incentive for servicers to focus their efforts on higher-priced homes 
with larger unpaid loan balances. On a loan with an unpaid principal 
balance of $500,000, a loan modification that provides any amount of 
principal reduction--be that $1,000, $10,000, or $100,000--will yield 
$500,000 worth of credit for the servicer. A modification that provides 
the same amount of principal reduction on a loan with an unpaid 
principal balance of $150,000 will only yield $150,000 worth of credit.
    This crediting structure encourages servicers to focus their 
efforts on large-balance loans. It is likely to disadvantage borrowers 
in communities of color, where home prices and therefore loan balances 
are systematically lower than those of comparable homes in 
predominantly white communities. Thus a process that initially held 
promise for remediating some of harm suffered by borrowers in 
communities of color may instead leave those borrowers out in the cold.
    In another contrast to the NMS, the IFR settlement places loan 
modifications which have the real potential to save the borrower's 
home--on equal footing with short sales, in which the borrower loses 
the home. Both receive dollar for dollar credit under the IFR 
settlement. Unlike the NMS, the IFR settlement places no cap on the 
amount of credit that servicers can receive for short sales, so if they 
choose, servicers can meet their entire soft-dollar goals through short 
sales. Nor does the IFR settlement make any provision for resources to 
support outreach to borrowers and counseling or legal assistance. 
Funding for these efforts, which is strictly left to the discretion of 
individual servicers, will come out of the soft-dollar side of the 
settlement.

Ways in Which the IFR Settlement Could Still Be Helpful
    The results of the 2011 consent orders and the IFR process to date 
have been extremely disappointing. They have failed to identify 
borrowers who were harmed by the actions or inactions of their 
servicers, and the checks that are being sent to borrowers will not 
adequately compensate those who were harmed. Nonetheless, the orders 
still provide the regulators with two key opportunities to help keep 
borrowers in their homes, if they choose to use them. These are through 
reforming servicing practices and ensuring that help goes to those 
borrowers and communities that have been hardest hit.

Servicing Reforms Needed
    Servicing abuses remain widespread, and too often, servicers still 
are not providing borrowers with the loan modifications for which they 
are eligible. This is a problem that the 2011 consent orders were 
intended to fix, although this component of the orders has received 
little attention from the regulators, who have been focused on the IFR. 
While the regulators report that more than half of the more than 4 
million homeowners who were in scope for the IFR process have 
subsequently lost their homes to foreclosure, as many as two million 
have not. For these and other at-risk homeowners, it is critical that 
the regulators step up their focus on loss mitigation and servicing 
reforms.
    In addition to the servicing reforms spelled out in the consent 
orders, the regulators have broad supervisory authority to ensure that 
servicers comply with other contractual and programmatic requirements. 
If the regulators were to put more emphasis on servicing reforms in 
their compliance reviews, borrowers would benefit tremendously. To do 
this, they must bring their examination teams up to speed on what 
servicers should be doing, and get input from the field about how 
servicers are actually performing.
    The ongoing servicing problems are illustrated by a survey of 
housing counselors in California, released earlier this month by the 
California Reinvestment Coalition. \8\ The survey focused on the 
provisions of the NMS and the servicers to which it applies, but the 
results are indicative of more widespread problems in the industry. 
Seventy percent of the counselors who responded to the survey reported 
that the single point of contact provided to borrowers by their 
servicer to manage and assist in their request for a loan modification 
was never, rarely, or only sometimes accessible, consistent or 
knowledgeable. More than 60 percent of counselors reported that the 
servicers always, often or sometimes pursue foreclosure while the 
borrower is still under review for a loan modification. Sixty percent 
or more of counselors reported that servicers never or rarely make 
decisions about loan modifications within 30 days of receiving a 
completed modification, and a majority of counselors reported that 
servicers rarely or never acknowledge receipt of applications in a 
timely manner or notify borrowers of documents needed to complete their 
applications. Counselors also reported problems with servicers giving 
borrowers enough time to supply missing documents, losing documents, 
and improperly denying loan modifications to borrowers who appear to be 
qualified for them.
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     \8\ California Reinvestment Coalition, ``Chasm Between Words and 
Deeds IX: Bank Violations Hurt Hardest Hit Communities'', April, 2013. 
Available at www.calreinvest.org/.
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    Through aggressive use of their authority under the provisions of 
the consent orders, as well as their broader supervisory authority, the 
OCC and the Federal Reserve could help to bring about much-needed 
changes in servicing practices and help homeowners keep their homes. 
Advocates have recommended that the regulators take some specific steps 
to accomplish this:

  1.  The regulators should increase their oversight of loss mitigation 
        practices and the servicers' compliance with contract, 
        regulatory, and programmatic standards.

  2.  The regulators should require those servicers covered by the 
        consent orders to certify that they have properly reviewed 
        borrowers for loan modifications or other loss mitigation 
        options before moving forward with any action that results in 
        the loss of a home.

  3.  The regulators should establish a separate appeals or complaint 
        process for IFR borrowers who believe their servicer has acted 
        improperly, and inform those borrowers of this channel for an 
        outside review of their case. Foreclosures should be halted 
        until any such complaints are resolved.

  4.  In cases where servicers consistently break the rules, the 
        regulators should impose significant penalties.

    These four steps could make a big difference for millions of 
homeowners seeking to stay in their homes.

Ensuring That Help Goes to Those Most in Need
    While the consent orders and recent settlement agreements provide 
the regulators with few tools to ensure that help goes to those most in 
need, they do allow for the regulators to collect detailed information 
on the actions that servicers take to meet their soft-dollar crediting 
targets. Servicers will submit reports to the regulators every 45 days. 
The regulators should make this information available to the public at 
a granular level to establish some accountability for the servicers.
    Advocates have recommended that the regulators collect and disclose 
the detailed information by servicer and census tract. The data 
collected should include, at a minimum:

    the number of borrowers still in their homes,

    the number who have applied for loan modifications,

    the number of modifications approved for both first and 
        second liens (linked where possible),

    the terms of the modification (interest rate reduction, 
        principal reduction, change in payment amount, etc.),

    the number of modifications denied and the reasons for 
        denial,

    the number and dollar value of short sales, deeds in lieu 
        of foreclosure, and associated deficiency waivers, and

    the dollars allocated for housing counseling services.

    It is critical for these data to be reported at the census tract 
level. This is the only way to determine whether the allocation of the 
IFR' s soft dollar assistance is going to communities most in need. The 
lack of such data under the NMS has been a major source of frustration 
for civil rights groups, community organizations and counseling/legal 
services agencies. Many of these groups report that their clients and 
constituents are not receiving offers of assistance under that 
settlement, and wonder where the help is going. The OCC and Federal 
Reserve have the opportunity to do a better job of tracking the funds, 
and we hope Congress will encourage them to do so.

Conclusion
    Congress has a crucial role to play in making sure that the Federal 
regulatory agencies responsible for policing the Nation's mortgage 
market do their jobs. Unfortunately, we are not yet at the point where 
either Congress or the public can have confidence that mortgage 
servicers are in compliance with their obligations under various 
enforcement actions, program guidelines or their contractual with their 
investors. The problems are widespread and long-lasting, with millions 
of homeowners still at risk of foreclosure, it is important that 
servicers correct these problems in order to prevent unnecessary 
foreclosures and speed our economic recovery.
    Looking ahead, NFHA is concerned about gaps in the existing 
servicing standards and those that will go into effect next year. Among 
other things, these gaps leave borrowers with disabilities, those with 
limited English proficiency, and the widows and heirs of deceased 
borrowers without the protections they need to get the help they 
deserve from their mortgage servicers. We look forward to working with 
you to address these gaps in the servicing standards and to make it 
possible for the greatest possible number of vulnerable borrowers to 
keep their homes.
    Thank you for the opportunity to testify here today, and for your 
ongoing oversight of the Independent Foreclosure Review process. I will 
be happy to answer any questions you may have.

         RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
                       FROM DAVID HOLLAND

Q.1. How closely did the OCC and the Federal Reserve monitor 
and oversee your participation in and your duties with respect 
to the IFR settlement? How often and in what manner?

A.1. The Federal Banking Regulators participated in and 
monitored key decisions and elements of the Settlement process. 
This included but was not limited to matters of:

    Structuring of the Qualified Settlement Fund 
        Entities and bank accounts.

    How settlement funds were deposited.

    Coordination of borrower loan classification on 
        behalf of the Servicers.

    Reconciliation of the data loan classifications 
        between Rust, the Servicers, and the Regulators.

    Review and approval of all correspondence.

    Review and approval of call center scripting.

    Review and approval of Web site content.

    Review and approval of letter and check mailing 
        schedules.

    In-person, on-site review of the end-to-end process 
        the print vendor implemented for print production, and 
        the quality check steps incorporated throughout the 
        printing process.

    During the early stages of the Settlement, the OCC 
        was on-site at Rust for the purposes of gathering 
        information and exploring settlement administrative 
        options. Subsequently, Rust had weekly planning 
        sessions with the OCC to discuss the implementation and 
        production schedules. These planning sessions were 
        conducted via teleconference, and decisions were 
        documented in an End-to-End Implementation Plan. The 
        Rust IFR Payment Agreement Processes were also reviewed 
        and documented. As we moved closer to the initial check 
        mailing date, a second weekly meeting was added to 
        ensure all the necessary items were addressed and 
        considered leading up to the check mailings.

    Once checks were mailed, daily conference calls 
        were established which included the OCC, FRB, Rust, and 
        Huntington National Bank. These daily calls reviewed 
        operational performance, issues logs, check clearing 
        status and future processes.

Q.2. What procedures did you have in place to ensure checks did 
not bounce?

A.2. We believe it is important to first clarify that a 
``bounced'' check is intrinsically different than a situation 
in which a check-cashing store or other financial institution 
declines to cash a check. Huntington Bank has indicated that no 
valid checks were returned for insufficient funds (bounced). 
However, a small number of checks were not honored at the point 
of cashing for reasons detailed in this response.
    Rust was responsible for working with OCC and Federal 
Reserve to:

    Execute advance notification to borrowers.

    Establish a schedule for payment waves.

    Arrange for servicer deposits of funds at 
        Huntington National Bank.

    Establish and staff toll-free phone numbers for 
        borrowers to call with questions and for financial 
        institutions to call to verify checks and funds 
        availability.

    Print and mail checks.

    Review Huntington National Bank's prepared reports 
        for fraud attempts.

    Rust also implemented the additional safeguard of 
        printing a toll-free number on the back of checks to 
        assist borrowers and financial institutions with check 
        processing.

    At Rust's recommendation, Huntington National Bank of Ohio 
was selected by the OCC and Federal Reserve as the financial 
institution in which settlement funds would be deposited and 
that would process and clear the settlement checks.
    Rust sent postcards to the 4.2 million borrowers notifying 
them in advance of their eligibility to receive payment under 
the agreement.
    Funds for payment were deposited with Huntington National 
Bank by the 13 servicers at various times on or before April 5, 
2013. The first wave of check was mailed on April 12, 2013.
    A collaborative decision was made by the regulators, 
Huntington Bank and Rust, that checks were to be cleared 
through a ``zero balance'' account in Huntington National Bank. 
In a ``zero balance account'', checks are paid without holding 
excess funds in a checking account. All interest earned on the 
funds accrues to the benefit of the fund.
    To assist borrowers and to mitigate opportunities for 
fraud, Rust Consulting printed a toll-free number on the back 
side of each check to allow check-cashing stores and other 
financial institutions to call Rust and validate the check. 
Through April 25, 2013, more than 44,000 callers to this number 
had spoken with a Rust customer service representative. Through 
April 24, 2013, we have identified thirty-two (32) fraudulent 
checks submitted as settlement payments. Huntington National 
Bank, in its role as the issuing bank, initiated an Early 
Warning Service for the payments on April 16, 2013, four days 
after the first wave of checks were mailed.

Q.3. Have you addressed your flaws in internal controls and 
procedures that led to this unfortunate outcome?

A.3. Response:

    Huntington National Bank instituted the Early 
        Warning System on April 16, 2013.

    Huntington National Bank removed the zero balance 
        account structure so that Huntington National Bank 
        tellers would no longer see a zero balance when 
        accessing the checking account.

    We have determined that when some check stores 
        called to validate checks, they also asked Rust 
        Consulting to guarantee that adequate funds were 
        available, which only a bank representative can do. In 
        response, we established a process to link callers to 
        Huntington National Bank for the necessary guarantee.

    As of April 25, 2013, almost 1.1 million settlement 
        checks worth over $1 billion have cleared.

    We continue to work with Huntington National Bank 
        and borrowers to ensure that future payments can be 
        negotiated without unnecessary delay.

Q.4. In light of this setback, would you agree to have your 
fees withheld until all payments are satisfactorily delivered 
to their intended recipients? If not, what protections are 
currently in your contract that ensure that these sorts of 
mistakes do not happen again?

A.4. Response:

    While we have been disappointed to learn that a 
        relatively small number of check recipients encountered 
        problems when they tried to cash their checks, we are 
        also very proud of the assistance that we have provided 
        to thousands of recipients whose checks were validated 
        via our toll-free number for financial institutions.

    We have addressed check-processing issues with 
        Huntington National Bank, in their role as the check-
        issuing institution, and they have assured us that 
        appropriate banking procedures and market notifications 
        are now in place to prevent a recurrence of issues 
        experienced by a relatively small number of borrowers 
        in the first wave of checks.

    Working with the OCC, Rust has developed extensive 
        processes and procedures to ensure a smooth and error 
        free plan of administration. We believe to date the 
        plan has been executed by Rust and the results to date 
        have been favorable.

    We have individual contracts with the 13 servicers. 
        Our contracts generally focus on defining our 
        arrangements, scope of work and liability with regard 
        to errors that result in a financial loss.

    We do not believe a delay in payment of Rust 
        Consulting's fees is warranted.

        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
        
