- GAO Recommends Increased Federal Oversight of Mortgage Servicing and Foreclosures
- May 30, 2011 | Authors: David N. Anthony; Jon S. Hubbard; Robert M. Luck; John C. Lynch
- Law Firms: Troutman Sanders LLP - Richmond Office ; Troutman Sanders LLP - Washington Office
Outside the origination of a home loan, mortgage servicing is primarily regulated by state law and faces limited scrutiny or oversight from federal agencies. However, in a report issued this month, the General Accounting Office has recommended that the Consumer Financial Protection Bureau (CFPB) and other agencies increase federal oversight of mortgage servicing and create national standards for foreclosure procedures.
In the fall of 2010, numerous allegations of foreclosure documentation problems surfaced, resulting in many large servicers halting or limiting foreclosures for some period of time. In response to these allegations about documentation problems and the general increase in residential foreclosures over recent years, Congress requested that the GAO examine federal oversight of mortgage servicing and foreclosures. Specifically the GAO was tasked with reviewing the extent to which federal laws and past oversight have addressed foreclosure procedures; agencies’ current and future plans for oversight; and the potential impact of continuing documentation allegations and issues on consumers, servicers, regulators and investors.
The GAO found that, for a variety of reasons, federal banking and housing regulators typically have not monitored servicers’ foreclosure activities. The GAO concluded that the allegations relating to documentation problems revealed last fall often resulted in process delays and increased judicial scrutiny of foreclosures, harming not only consumers but also increasing costs to servicers and uncertainty for investors. Recently, various federal agencies have looked at servicers and foreclosure processes with increased scrutiny. Despite increasing federal interest, the GAO found a significant lack of clarity as to the extent of future federal oversight and a lack of coordination between agencies.
Encouraging more federal supervision of mortgage servicing and foreclosures, the GAO recommended the CFPB, along with the FDIC, the Federal Reserve and other agencies, develop coordinated plans for ongoing oversight of mortgage servicing, with clearly defined goals, roles and timelines. The report also recommends that any national servicing standards include specific governance of foreclosure practices. Spurred by the GAO’s recommendation and the recent, well-publicized allegations of foreclosure problems, various regulators, including the newly created CFPB, are likely to have a substantially increased role in monitoring mortgage servicing.
New standards and federal oversight in an area that has seen very limited federal involvement in the past creates the potential for significant changes to the industry. In today’s climate, where consumer litigation and government investigations are common, an in-depth understanding of both the regulations and the regulators is necessary to ensure compliance and critical to protecting the interests of mortgage servicers and financial institutions.