Freddie Mac owned or guaranteed 10.6 million mortgages
that were being serviced by third parties at the end of 2012. Servicer responsibilities include handing of
consumer complaints but if these complaints become serious enough to fall into
the category of "escalated cases" there are special procedures to
handle them. According to the Federal
Housing Finance Agency's (FHFA) Servicing Alignment Initiative (SAI) servicers are required to report on the escalated cases
they receive and resolve those cases within 30 days. Additionally, Freddie
Mac's Servicing Guide specifically requires servicers to report monthly on the
escalated cases they receive.
During the 14 month period ended November 30, 2012
Freddie Mac received 34,000 and FHFA received 565 consumer complaints about the
servicers that fell into the category of "escalated cases" involving:
initiated or continued in violation of Fannie Mae or Freddie guidelines;
Allegations of fraudulent servicing practices;
Complaints that the borrower was not appropriately evaluated for or inappropriately denied a foreclosure alternative;
Threats of litigation; or
Violations of Fannie Mae or Freddie Mac policy timeframes for borrower outreach,
evaluation, or response.
addition to the requirement that servicers must handle escalated cases within
30 days, servicers must also satisfy the following requirements when handing
Ensure that staff resolving an escalated case are independent from the personnel that initially handled
the borrower's request for
Have written procedures and sufficient, adequately trained staff to track and respond to
Regularly review and assess the adequacy of internal controls and procedures in connection
with servicing activities; and
Take remedial steps if any deficiencies are identified as a result of their review of
internal controls, and formally document
the results and make them available to the enterprise upon request.
According to the SAI, an escalated case is considered
resolved when the complaint has been resolved in accordance with the
guidelines, has been evaluated to require no change to the original
determination or a proposed solution has been identified and the proposed
solution appropriately documented and the first action taken to implement the
Office of Inspector General (OIG) recently undertook a performance audit to assess
Freddie Mac's controls over servicer handing of escalated cases. OIG found that most of Freddie Mac's
servicers have not complied with escalated case reporting requirements.
Among Freddie Mac's eight largest servicers-which serviced nearly
70% of Freddie Mac's 10.6 million mortgages-four (Bank of America, CitiMortgage,
Provident, and Wells Fargo Bank) did not report any escalated cases to Freddie Mac despite handling more than 20,000 such cases during the 14-month period between October 2011 and November 2012.
Further, Freddie Mac data on all of its servicers reveals that about 98% (1,179 of 1,207)
including four of the largest did not
report any escalated cases as of December 2012. Although Freddie Mac officials told us that
reports are only required of servicers with escalated cases-and, thus, the lack of reporting may
indicate that there were no escalated cases to report-it is highly unlikely that 98% of its servicers had no escalated cases to report given the 6.6 million
loans that they manage.
Reasons for not reporting given by the four large non-reporting servicers included
being unaware of the requirement or that the information had not been
requested. One servicer stated it had informed Freddie Mac of internal issues that were delaying the
of the SAI.
Freddie Mac's eight largest servicers handled 26,196 escalated
cases during the 14 month
period and resolved 25,528
of them during this period
but 21% of the resolved cases exceeded the 30-day time limit.
In addition, of the 668 unresolved
cases as of November 30, 2012,
398 (or 60%) had not
been resolved within the required 30 days.
Among the eight largest servicers, only Branch Banking & Trust Corporation (BB&T) resolved all of its escalated cases within 30 days, but that bank had significantly fewer cases to process. The worst performing servicer, Bank of America, handled 4,404 escalated cases and resolved
3,950 of them. Bank of America took an average of 52 days to resolve its cases, and the longest case
required 392 days to resolve.
Servicers are required to report the resolution of escalated cases, using 13
that include bankruptcy, initiation of some type of modification, or a final resolution
such as a short sale, completed foreclosure, or loan payoff.
OIG found notable
instances of inconsistencies and inaccuracies among the categories used by the
largest eight servicers to track the proposed resolutions in the servicing
system. For example, instead of 13, one servicer used 61 different categories to identify the types of resolutions of its
addition, about 2,000 (or 8%) of the 25,528
cases resolved by Freddie Mac's eight largest servicers between October 1, 2011, and November 30, 2012, lacked a resolution category, as required.
OIG also found that Freddie Mac's oversight did not
adequately address escalated cases. Out
of 38 onsite operational reviews of the largest servicers Freddie Mac made only
one finding regarding handling of escalated cases.
Whereas Fannie Mae has implemented testing procedures
with respect to its servicers,
Freddie Mac has not. Lack of testing procedures reduces the likelihood of finding servicer
noncompliance with escalated case requirements.
OIG also found that Freddie Mac's Servicing Guide lack
performance-based incentives such as penalties related to escalated cases and
that Freddie Mac did not use the escalated case information it did receive to
identify areas of elevated risk.
The report also finds that FHFA oversight had failed to
identify noncompliance with consumer complaint requirements.
In August 2012, FHFA initiated its first examination of Freddie Mac's implementation of the SAI
which included, among other things,
Freddie Mac's monitoring of the servicers' compliance with the SAI. OIG found in interviews with FHFA officials that
their examination team was unaware that almost all of Freddie Mac's servicers failed to report escalated cases to Freddie Mac. The examination team did not perform independent testing of
servicer compliance, but instead relied on internal reports produced by Freddie Mac related to
testing servicers' compliance with implementation of the SAI. The examination team noted
that the enterprise's reports did not identify any problems with servicers failing to report. As OIG had found, Freddie Mac
was not testing servicers' compliance with
requirements for handling
escalated cases, which explains why Freddie Mac's reports- with one exception-did not contain instances of reporting
violations. FHFA's failure to conduct
independent testing of servicer compliance resulted in its reliance on incomplete data supplied by Freddie Mac
faulty conclusions about Freddie Mac's implementation and oversight of the SAI.
Finally, FHFA did not publish guidance for examining
Freddie Mac's implementation of FHFA
directives, including the SAI. Specifically, FHFA's Supervisory Guide, related advisory bulletins, and the Supervision Handbook do not contain guidance as to how to test enterprise compliance with FHFA directives.
OIG concluded that FHFA developed the SAI as part of an effort to keep homeowners in their
homes; help servicers interact with delinquent borrowers in a timely, efficient, and fair way;
and make enterprise loss
mitigation programs more effective. These goals are at risk of not being achieved
because none of the parties have adequately fulfilled their respective roles relative to addressing and resolving escalated consumer complaints in a
timely and consistent manner.
FHFA must take immediate
action to improve servicer reporting which will in turn help the agency to ensure
that escalated cases are resolved before homeowners and the enterprises unnecessarily suffer adverse consequences such as foreclosure.
OIG recommends that servicers
be required to report consumer complaint information, to include that no
escalated complaints have been received, on
a monthly basis and that escalated complains are resolved within
30 days. Servicers should also be
required to categorize information
in accordance with the resolution categories in the Servicing Guide.
To enhance Freddie Mac's oversight of its servicers, FHFA should
perform supervisory review
follow-up to ensure that Freddie Mac included testing of servicers' performance for handling and reporting escalated cases,
identifies and addresses servicer operational challenges with implementing
the escalated case requirements,
and establishes penalties for servicers' lack
of reporting escalated cases. FHFA should also expand the servicer scorecard and servicer performance evaluations to include reporting of escalated cases and communicate information on
escalated cases to its internal staff.