WASHINGTON — Democratic lawmakers raised numerous concerns Wednesday over the mortgage servicer settlement announced in January, including how banks are credited for relief they provide to borrowers.

The Senate Banking subcommittee held the hearing to further examine whether the settlement, struck after regulators halted the troubled independent foreclosure review, goes far enough in relieving borrowers impacted by illegal foreclosure activity. Lawmakers expressed particular concern over a provision in the settlement that allows servicers to credit the entire unpaid balance of a mortgage when providing assistance such as principal write-downs, mortgage modifications or short sales. The settlement requires the servicers to provide roughly $5.5 billion in assistance to borrowers.

For example, if a bank writes down $20,000 on a $200,000 mortgage, it gets credited for the entire $200,000, according to Deborah Goldberg, special project director at the National Fair Housing Alliance. She argued that provision could have a significant impact on determining which borrowers are given assistance.

"It would certainly encourage you, if you were the servicer, to work on the biggest loans that you can, because that's going to be the fastest route to meeting your goal, whatever that might be, for your soft dollar credits," said Goldberg, adding that such a process could ultimately shut out assistance to lower income and minority neighborhoods.

Lawmakers repeatedly expressed incredulity over the provision, asking why regulators agreed to a settlement under those terms.

"Why would the [Federal Reserve Board] and the [Office of the Comptroller of the Currency] agree to … such a fictitious form of accounting and a structure that incentivizes the bypassing of working Americans in this whole process?" asked Sen. Jeff Merkley, D-Ore. "Has anyone at the OCC and the Fed given a rational explanation for what they were possibly thinking?"

Goldberg responded that she had not yet heard a "credible" response, noting that she missed the provision on her first reading of the settlement agreement, because she was so surprised that it would be structured that way.

"At one point I heard one person say that they believe that this structure accurately reflected the value of the assistance that the borrower received. That's the only explanation that I've heard and it's not one that I find credible," said Goldberg.

An OCC spokesman said in a statement to American Banker that the foreclosure review settlement provided for "meaningful foreclosure prevention assistance."

"While the IFR Payment Agreement provides credit to servicers based on the unpaid balance of the mortgage for activities that are eligible for credit under the National Mortgage Settlement, the amendments to the consent orders published in February also described regulators expectations for effective, meaningful foreclosure prevention assistance that 'well structured loss mitigation actions' described by regulators in Article IV of the amendment to the consent orders," the OCC statement said.

Joseph Smith, the national mortgage settlement monitor, highlighted some of the differences in how banks are credited for borrower relief under a separate foreclosure settlement between banks and 49 state attorneys general.

"Each category of relief I do think — you can argue about the price, you can argue about the number of cents on the dollar — I do think the settlement attempts to give the credit that mirrors relief to the borrower roughly, in a pretty good way," Smith said.

In some cases a bank could be credited even less than one dollar for a dollar's worth of assistance, for example, if it securitized the loan. Smith added that 60% of relief under that settlement must take place in the form of principal reductions, and half of those on first lien loans, a condition not included in the OCC and Fed mortgage servicer settlement.

Menendez and Merkley, the only lawmakers to question the panelists, also raised additional concerns about the settlement struck in January, including over regulators' ability to continue investigating bank errors.

"Since the OCC and the Federal Reserve have abandoned the review, to what extent will they be able to further examine whether certain banks committed systematic errors in the foreclosures based on either preliminary results or based on information they gather through regulator bank examinations or sources?" asked Menendez.

Lawrance Evans, director of financial markets and community investment at the Government Accountability Office, explained that the lack of data would make it difficult for conclusions to be drawn. The GAO released a critical report outlining problems with the foreclosure review process earlier this month.

"Any information based on the IFR at this point should be deemed incomplete. The data does not allow us to render any conclusions about error rates at particular servicers or make comparisons, despite what's been reported in the press," said Evans. "There were different degrees of completion across the servicers, variations in the types of files that were reviewed, and also, even if it were reviewed, depending on the sampling methods used, it's possible that this information would still have limits. So it's impossible to draw any inferences about the data because they're not representative. We're limited in what we actually know."

Goldberg added that even if the review had been completed in a systematic, statistically valid manner, there would still be questions.

"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 they can consider you for a loan modification,' she said. "And it's not clear that anybody examining just the files would be able to tease out that kind of information and understand those kinds of errors. In order to do that, what's really necessary is for whoever's doing the review to be talking, at least in selected cases, to homeowners themselves or to advisors working with them — housing counselors or attorneys."

Menendez also pointed to discrepancies in how payments are being allocated to borrowers. He said he was concerned by accounts that those who requested a review may receive twice as much as those who didn't, and whether all affected borrowers were made aware of the opportunity to request a review, particularly those in low-income or non-English speaking communities.

"If you knew that a review was likely to result in an increase in the relief that you received, and you knew about the review process … then it would be overwhelming that people would respond to receive the greater relief," said Menendez. "So this is part of the transparency that lacks here, because had that standard been set we would have known."

Lawmakers, meanwhile, also pressed Smith for an update on implementation of the national mortgage settlement. Smith said he expects to publish a report by the end of May that would offer some detail into the progress of the settlement and continuing shortfalls. He said generally he is still hearing concerns from housing counselors, but that servicers are starting to respond more quickly to borrowers and make changes to their processes for the better.

"I think the fair thing to say is, I believe we're better off now than we were a year ago … as a result of this settlement, but I'm not declaring victory," he concluded.

Smith added in an interview after the hearing that he agrees with many of the criticisms recently raised by the California Reinvestment Coalition in a report detailing servicers' failures in implementing the settlement. The report, which featured results from a survey of state housing counselors, recently spurred a request by Sen. Barbara Boxer, D-Calif., that regulators investigate the findings.

"I agree with the concerns that are expressed in the report and we're working toward addressing many of the issues" that were raised, Smith said.


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