The Office of Inspector General (OIG) for the Federal Housing Finance Agency (FHFA) has released critical preliminary findings from an audit conducted on FHFA's oversight of Fannie Mae's default-related legal services. The audit was requested by Representative Elijah Cummings (D-MD) to examine "widespread allegations of abuse by ...law firms hired to process foreclosures."
Fannie Mae established a Retained Attorney Network (RAN) in 1997 to perform default-related legal services for foreclosures, bankruptcies, loss mitigation, eviction, and REO closings. Fannie Mae, which delegates to its servicers the management of individual law firms working on its loans, states that RAN allows it to control expenses through negotiated rates with the law firms and provides for consistent actions and control of timelines and efficiency.
In August 2008 Fannie Mae expanded the RAN to 140 law firms in 31 jurisdictions and has subsequently expanded it again to 190 firms within 45 states. After the initial expansion Fannie Mae required that servicers refer all foreclosure and bankruptcy cases to the network.
When it assumed conservatorship of Fannie Mae and Freddie Mac (the Enterprises) FHFA did not consider the RAN to be a high risk area and focused instead on areas such as credit risks. During the time covered by the audit it also focused on evaluating loan modifications and loss mitigation proposals from the Enterprises and scaled back scheduled examinations. The agency viewed foreclosures as the responsibility of servicers.
As early as December 2003 Fannie Mae heard of foreclosure abuse allegations in Florida and hired an outside law firm to investigate. In May of 2006 the firm issued a report which stated, "Foreclosure attorneys in Florida are routinely filing false pleadings and affidavits.... The practice could be occurring elsewhere." While Fannie Mae claims to have notified OFHEO, its regulator at the time, of the findings, FHFA could find no record of the communication.
In 2008, news stories began to circulate about "foreclosure mills" managing defaulted loans for the Enterprises. The New York Times reported on complaints that firms used improper or duplicative foreclosure and bankruptcy pleadings and levied inappropriate fees on borrowers. In mid-2009 FHFA also began receiving consumer complaints about foreclosure practices involving Fannie Mae loans but an earlier OIG examination found that FHFA did not assess overall trends related to consumer complaints.
In June 2010 FHFA staff met with 17 representatives from the mortgage industry, legal community, and federal and state governments in Florida and reported to the Acting Director that servicers, attorneys, and other supporting personnel were overloaded by foreclosures, the average timeline had increased from 150 to 400 days, documentation problems were evident and law firms (referred to as "foreclosure mills") were not devoting adequate time to their cases due to Fannie Mae's flat fee structure and volume-based processing model. FHFA staff submitted a list of five actionable items for the agency.
Two months later a news article asserted that the Enterprises had failed to oversee their networks of law firms and that some of those firms had filed forged documents in judicial foreclosure procedures. Other media followed with similar reports and federal and state regulators and law enforcement initiated probes into whether banks and law firms had improperly seized homes using fraudulent or incomplete paperwork. Shortly thereafter the robo-signing scandal became nationwide news.
In November 2010, FHFA initiated concurrent reviews of RAN and Freddie Mac's Designated Counsel Program (DCP) to determine whether they met safety and soundness standards. Examiners concluded that Fannie Mae could have reacted to foreclosure deficiencies sooner based on warning signals and that its existing control structure for RAN did not meet standards in areas such as a cost benefit analysis of the program, and having adequate controls, training and monitoring of RAN firms in place. While FHFA briefed the OIG on its review, it has never published its findings or reported them to the Enterprise.
Fannie Mae also took steps to address reports of foreclosure abuse. They conducted audits and reviews of RAN law firms to assess compliance with engagement letters, fees and costs charged, the accuracy of the language used in pleadings to describe the standing of the servicer, and compliance with state laws. Through the end of June 2011, Fannie Mae contractors have conducted 49 on-site reviews of RAN law firms. Fannie Mae also sent questionnaires to all firms to assess the adequacy of their policies and procedures to ensure compliance with applicable laws and their employees and/or third parties adherence to procedures. Fannie Mae also stated that it worked with several firms that reported problems and appointed its staff to oversee remediation.
The OIG audit reached the following conclusions:
1. Various indicators could have led FHFA to identify and address the heightened risk posed by foreclosure abuses prior to late 2010. These included the deteriorating financial conditions of the Enterprises that led to conservatorship, consumer complaints and public court filings alleging improper foreclosures; and contemporaneous media reports about foreclosure abuses. Based on the evidence regarding these indicators and the FHFA response, FHFA needs to develop procedures to identify and assess new or heightened risks.
2. FHFA's supervisory planning and guidance do not adequately address default-related legal services. To date, the OIG says FHFA has neither an ongoing risk-based supervisory plan for examination and supervision of default related neither legal services nor guidance for use in performing targeted examinations and monitoring of such services. Its existing handbooks are general in nature and not specific to operational risk areas nor do they address specific third-party vendor risks.
3. FHFA does not have a formal process for the Enterprises to share information about problem law firms. The agency needs to address concerns such as poor or inappropriate performance associated with third-party vendors that do business with both Enterprises and ensure that dismissal and other disciplinary actions by one Enterprise are communicated to the other.
The OIG concludes:
"The Agency's special review of the RAN framework is a positive step and the Agency should continue with undertaking such reviews. FHFA-OIG contends however that the Agency should have paid closer attention to the highly dynamic housing foreclosure environment between 2008 and 2010 and, in the future, should become more proactive in its oversight of the RAN in particular and the foreclosure process in general. The Agency needs to apply a proactive approach going forward to identify and assess new and emerging risks and to develop detailed guidance on conducting targeted examinations of the Enterprises' operational risks associated with their vendors. This guidance should incorporate continuous supervision, special reviews, and targeted examinations and address crossover issues that affect both of the Enterprises and their relationships with third-party vendors."
