oversight

Enhanced FHFA Oversight Is Needed to Improve Mortgage Servicer Compliance with Consumer Complaint Requirements

Published by the Federal Housing Finance Agency, Office of Inspector General on 2013-03-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

          FEDERAL HOUSING FINANCE AGENCY
            OFFICE OF INSPECTOR GENERAL

         FEDERAL HOUSING FINANCE AGENCY
       Enhanced FHFA
           OFFICE   OFOversight Is Needed
                        INSPECTOR         to Improve
                                    GENERAL
        Mortgage Servicer Compliance with Consumer
                 Complaint Requirements




AUDIT REPORT: AUD-2013-007                       March 21, 2013


EVALUATION REPORT: EVAL-2012-XX           DATED: Month XX, 2012
                                                    AT A GLANCE
              Enhanced FHFA Oversight Is Needed
                                           title to Improve Mortgage Servicer
                    Compliance with Consumer Complaint Requirements
                                                                          to escalated cases in only 1 of 38 reviews of its largest national
Why OIG Did This Audit
                                                                          and regional servicers that it conducted in 2012. Freddie Mac
By the end of 2012, Freddie Mac owned or guaranteed over             titlehas also neglected to establish penalties (such as fines) for
                                                                     title
10.6 million residential mortgages with a combined unpaid
                                                                          servicers that do not report escalated cases.
principal balance of $1.6 trillion. It pays mortgage servicers to
collect payments from and interact with the borrowers                     Third, FHFA did not identify the foregoing problems through its
(hereinafter “consumers”) associated with its residential                 own examination of Freddie Mac’s implementation of the SAI.
mortgages. Such interaction includes handling complaints.                 Rather than independently testing servicers’ compliance with
                                                                          complaint reporting requirements, the FHFA examination team
Serious complaints, known as escalated cases, may allege
                                                                          relied exclusively on Freddie Mac’s onsite operational review
servicing fraud or regulatory violations. Freddie Mac and its
                                                                          reports, which did not mention problems with servicer
eight largest servicers together received over 34,000 escalated
                                                                          reporting. Additionally, FHFA lacks guidance for examination
cases between October 2011 and November 2012.
                                                                          teams to use when testing the implementation of directives, such
In accordance with FHFA’s Servicing Alignment Initiative                  as its SAI. Further, without reports on escalated cases from
(SAI), servicers are required to report on the escalated cases            servicers, FHFA will be unable to monitor servicer compliance
they receive and resolve those cases within 30 days.                      and take appropriate action to ensure that escalated cases are
Additionally, Freddie Mac’s Servicing Guide specifically                  timely resolved. Strengthened oversight—through actions aimed
requires servicers to report monthly on the escalated cases they          specifically at improving servicer compliance with escalated case
receive.                                                                  requirements—can benefit homeowners, Freddie Mac, and
The objective of this performance audit was to assess FHFA’s              taxpayers.
oversight of Freddie Mac’s controls over servicers’ handling              What OIG Recommends
of escalated cases.                                                       We recommend, first, that FHFA ensure that Freddie Mac
What OIG Found                                                            requires its servicers to report, timely resolve, and accurately
Mortgage servicers, Freddie Mac, and FHFA have not                        categorize escalated cases; second, that FHFA ensure that
adequately fulfilled their respective responsibilities to address         Freddie Mac enhances its oversight of its servicers through
and resolve escalated cases. First, evidence suggests that most of        testing servicer performance and establishing fines for
Freddie Mac’s servicers are not complying with reporting                  noncompliance; and third, that FHFA improve its oversight of
requirements for escalated cases. As of December 2012, 1,179              Freddie Mac by developing and implementing examination
or 98% of Freddie Mac’s servicers had not reported on any                 guidance related to testing the implementation of directives.
escalated cases even though they managed 6.6 million                      FHFA provided comments agreeing with the recommendations
mortgages for Freddie Mac. Of Freddie Mac’s eight largest                 in this report. Overall, FHFA concurs with the importance of
servicers—which serviced nearly 70% of its loans—four did                 ensuring timely and responsive resolution of consumer
not report any information about escalated cases despite                  complaints, particularly the more serious escalated cases. FHFA
handling more than 20,000 such cases during the 14-month                  plans to implement the audit recommendations by working with
period between October 2011 and November 2012. Further,                   Freddie Mac and Fannie Mae to conform consumer complaint
of the 25,528 escalated cases resolved by the eight largest               processing under the SAI and ensure compliance with new
servicers during the 14-month period between October 2011                 regulatory requirements announced by the Consumer Financial
and November 2012, 5,372 or 21% were not timely resolved                  Protection Bureau. Further, FHFA has made review of the
within 30 days.                                                           implementation of the SAI a supervisory priority in 2013 and
Second, Freddie Mac’s oversight of servicer compliance has                will develop detailed plans for reviewing escalated cases.
been inadequate. It has not implemented procedures for
testing servicer compliance. As a result, it had findings related
 Audit Report: AUD-2013-007                                                                                           March 21, 2013
TABLE OF CONTENTS
TABLE OF CONTENTS ................................................................................................................ 3
ABBREVIATIONS ........................................................................................................................ 4
PREFACE ....................................................................................................................................... 5
BACKGROUND ............................................................................................................................ 7
      Handling of Escalated Cases ................................................................................................... 8
      Oversight of Escalated Cases .................................................................................................. 9
FINDING ...................................................................................................................................... 11
      FHFA and Freddie Mac Oversight Failed to Identify Servicer Noncompliance with
      Consumer Complaint Requirements ..................................................................................... 11
       Servicers Did Not Uniformly Comply with Escalated Case Requirements ......................... 11
       Freddie Mac Oversight Did Not Adequately Address Escalated Cases ............................... 14
       FHFA Oversight Failed to Identify Noncompliance with Consumer Complaint
       Requirements ........................................................................................................................ 16
CONCLUSION ............................................................................................................................. 18
RECOMMENDATIONS .............................................................................................................. 19
SCOPE AND METHODOLOGY ................................................................................................ 20
APPENDIX A: FHFA’S COMMENTS ON FINDING AND RECOMMENDATIONS ........... 22
APPENDIX B: OIG’S RESPONSE TO FHFA’S COMMENTS................................................ 25
APPENDIX C: SUMMARY OF MANAGEMENT’S COMMENTS ON THE
RECOMMENDATIONS ............................................................................................................... 26
ADDITIONAL INFORMATION AND COPIES ........................................................................ 27




            Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                                       3
ABBREVIATIONS
BB&T .....................................................................................Branch Banking & Trust Corporation
CORE ............................................................................. Counterparty Operational Risk Evaluation
Enterprises.......................................................................................... Fannie Mae and Freddie Mac
Fannie Mae......................................................................... Federal National Mortgage Association
FHFA ........................................................................................... Federal Housing Finance Agency
Freddie Mac .................................................................. Federal Home Loan Mortgage Corporation
OIG ................................................. Federal Housing Finance Agency Office of Inspector General
SAI ....................................................................................................Servicing Alignment Initiative




           Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                                  4
                                  Federal Housing Finance Agency
                                    Office of Inspector General
                                          Washington, DC


                                          PREFACE
In a 2011 audit, we found that FHFA did not adequately process consumer complaints.1
Specifically, the agency did not sufficiently define its role in processing complaints; it lacked
related policies, procedures, and a consolidated system for tracking complaints; and it failed to
perform various oversight functions to ensure compliance with its records management policy
and safeguards for personally identifiable information. Because FHFA lacked a sound internal
control environment for handling complaints, we concluded that the agency could not provide
reasonable assurance that alleged fraud and improper foreclosures were addressed efficiently and
effectively.

We therefore recommended that FHFA implement comprehensive policies, procedures, and
controls for consumer complaints; assess its allocation of resources for dealing with those
complaints; and address any unresolved complaints alleging potential fraud or criminal activity.
The agency accepted these recommendations. As of August 2011, it had reviewed an additional
27 complaints alleging fraud. In March 2012, it assessed the sufficiency of allocated resources,
and in August 2012 it designed and implemented updated consumer complaints procedures.

This report continues our work in the consumer complaints area by assessing FHFA’s oversight
of Freddie Mac’s controls over mortgage servicers’ handling of “escalated” consumer
complaints. Servicers’ failure to resolve quickly escalated cases can prevent foreclosure
alternatives from being adequately explored and may result in losses to the enterprises. The goals
of the SAI—developed to help servicers and the enterprises work better with delinquent
borrowers and to mitigate enterprise losses—will be difficult to achieve if consumer complaints
are not dealt with in an appropriate and timely manner.

OIG is authorized to conduct audits, evaluations, investigations, and other law enforcement
activities pertaining to FHFA’s programs and operations. As a result of our work, we may
recommend policies that promote economy and efficiency in administering FHFA’s programs
and operations, or that prevent and detect fraud and abuse in them. We believe that this report’s



1
 OIG, Audit of the Federal Housing Finance Agency’s Consumer Complaints Process (AUD-2011-001, June 21,
2011), available at http://www.fhfaoig.gov/Content/Files/AUD-2011-001.pdf.




         Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                     5
recommendations (along with those in prior reports) will increase FHFA’s assurance that the
enterprises are operating safely and soundly, and that their assets are preserved and conserved.

OIG appreciates the cooperation of all those who contributed to this audit, which was led by
Tara Lewis, Audit Director, who was assisted by Andrew W. Smith, Audit Manager. It has been
distributed to Congress, the Office of Management and Budget, and others and will be posted on
OIG’s website, www.fhfaoig.gov.




Russell A. Rau
Deputy Inspector General for Audits




        Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                    6
BACKGROUND
Freddie Mac owns or guarantees over 10.6 million residential mortgages with a combined unpaid
principal balance of $1.6 trillion as of the end of 2012. It pays mortgage servicers fees to interact
with consumers (i.e., the borrowers associated with its mortgages) and collect mortgage
payments. Among other things, interacting with consumers involves handling complaints that
may cover a range of issues, from late fees to claims of inappropriate denial of a loan
modification or foreclosure alternative. Most complaints are submitted to mortgage servicers,
although Freddie Mac and FHFA also receive them.

More serious complaints are called “escalated cases.” According to FHFA and Freddie Mac’s
Servicing Guide, escalated cases involve:

            Foreclosure actions initiated or continued in violation of Fannie Mae or Freddie Mac
             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 the time permitted for borrower response.2
During the 14-month period between October 1, 2011, and November 30, 2012, Freddie Mac and
its eight largest servicers (in terms of the number of loans that they service) received over 34,000
complaints that became escalated cases (Figure 1). FHFA received 565 consumer complaints
about Freddie Mac mortgages during this same period.3




2
 FHFA, Servicing Alignment Initiative, (April 28, 2011); and Freddie Mac, Single Family Selling/Servicing Guide,
Vol. 2, Sec. 51.5.1 (November 18, 2011).
3
  FHFA does not determine whether complaints are escalated cases, but instead forwards the complaints it receives
to Freddie Mac or its servicers, as appropriate.




          Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                        7
           Figure 1: Escalated Cases Received, October 1, 2011, to November 30, 20124
                                           30,000




                         # of Complaints
                                           25,000
                                           20,000
                                           15,000
                                           10,000
                                            5,000
                                               0
                                                    Freddie Mac      Freddie Mac's Top 8
                                                                          Servicers


Handling of Escalated Cases

Specific procedures for handling escalated cases vary from servicer to servicer, but they
generally follow a similar process. A servicer’s agent, typically working in a call center, receives
a complaint and attempts to resolve it, and if it cannot be resolved through the normal channels,
it is sent to the escalated complaint department. Similarly, if an elected official (state or federal)
or regulating body (such as the Consumer Financial Protection Bureau, Department of Housing
and Urban Development, or an attorney general) forwards to a servicer a consumer’s complaint,
it is automatically referred to the servicer’s escalated complaints department. A letter
(acknowledging receipt of the complaint) is sent to the borrower or their representative, and all
contact with the borrower is documented in a tracking system. An agent in the escalated
complaints department is assigned to the case as the single point of contact and corresponds with
the borrower until the case is resolved. This agent works with the servicer’s business units to
resolve the case, performing additional research as needed. Once the agent determines the
resolution, a letter describing the steps of the resolution process is sent to the borrower and the
tracking system is updated to reflect the resolution date. The amount of time that elapses between
the date a complaint is received and the date it is resolved is known as the “resolution time” or
“time to resolve.”

If Freddie Mac receives a consumer complaint, it is routed to agents who determine if the
borrower has contacted the servicer. Freddie Mac then acts as a liaison between the borrower and
the servicer. Freddie Mac’s agents record all communications with consumers and can access
resources within Freddie Mac to answer most questions.




4
    Source: OIG analysis of consumer complaint data from Freddie Mac and its top eight servicers.




            Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                              8
If a borrower contacts FHFA, FHFA encourages the consumer to access publicly available
information and resources. Those resources include the borrower’s servicer, the servicer’s
primary regulators, the Consumer Financial Protection Bureau’s Hotline, and Fannie Mae’s and
Freddie Mac’s websites. FHFA also attempts to determine if the inquiry involves an enterprise-
owned loan. However, FHFA does not specifically advocate for consumers or resolve consumer
issues. Instead, it uses consumer complaint information to improve regulatory oversight. In most
cases, the agency forwards the inquiry to the enterprises, which work with their servicers and
borrowers to resolve cases.

Oversight of Escalated Cases

In early 2011, FHFA announced its SAI directive, which was intended to address concerns that
the enterprises’ differing standards and processes were causing problems in mortgage servicing.
In particular, the agency sought to streamline and expedite outreach to delinquent borrowers,
align mortgage modification terms, and determine eligibility for and offer foreclosure
alternatives to distressed homeowners. The SAI includes requirements for Fannie Mae and
Freddie Mac to establish a consistent schedule of performance-based incentive payments for
servicers that perform well and penalties for those that do not.

FHFA, through the SAI, and the enterprises, through their Servicing Guides, require servicers to
promptly handle and resolve escalated cases within 30 days of receiving them. Servicers must
also satisfy the following requirements when handling escalated cases:

          Ensure that staff resolving an escalated case are independent from the personnel that
           initially handled the borrower’s request for assistance;
          Have written procedures and sufficient, adequately trained staff to track and respond
           to escalated cases;
          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.
The enterprises incorporated the SAI into their Servicing Guides and all servicers doing business
with the enterprises agree to follow the guides. Additionally, in June 2011 Freddie Mac issued a
bulletin to servicers that required them to provide monthly reports on escalated cases beginning
in October 2011. In November 2011, the reporting requirement—which includes describing the




        Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                    9
events of each escalated case by the 12th business day of each month—was consolidated into
Freddie Mac’s Servicing Guide. Servicers must continue to report each escalated case to Freddie
Mac in the monthly report until the case is resolved.5 According to Freddie Mac officials, if a
servicer has not received any escalated cases and has no unresolved cases, it is not required to
submit a report. See Figure 2 for a timeline illustrating the implementation of these requirements.

            Figure 2: Development and Implementation of New Servicing Requirements 6
                                                                    6/30/2011
                                                           Freddie Mac Issued Bulletin
                                                                                                                  11/18/2011
                                                       to Servicers Announcing Servicing
                                                                                                         Freddie Mac Updated Servicing
                                                       Alignment Initiative Requirements
                                                                                                         Guide to Include New Servicing
                     2/18/2011
                                                                                                        Alignment Initiative Requirements
        FHFA Instructed Enterprises to Develop
      Servicing Alignment Initiative Requirements




    January 2011                                                                                                                  December 2011


                                              4/28/2011                                           10/1/2011
                                     FHFA Directed Enterprises to                       Effective Date of Servicing Alignment
                                    Implement Servicing Alignment                 Initiative Requirements Announced in Bulletin
                                       Initiative Requirements




5
 According to the SAI, an escalated case is considered resolved when the complaint has been reviewed in
accordance with applicable guidelines; has been evaluated to require no change to the original determination or a
proposed resolution has been identified; the proposed resolution has been documented in the applicable servicing
system or mortgage file; and the first action to implement the resolution has been taken.
6
 Source: FHFA News Release, Fannie Mae and Freddie Mac to Align Guidelines for Servicing Delinquent
Mortgages, April 28, 2011; Freddie Mac, Servicing Alignment Initiative, Bulletin 2011-11, June 30, 2011; and
Freddie Mac, Single Family Selling/Servicing Guide, volume 2, chapter 51, section 5.1, November 18, 2011.




              Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                                        10
FINDING
FHFA and Freddie Mac Oversight Failed to Identify Servicer Noncompliance with
Consumer Complaint Requirements

Freddie Mac servicers have largely failed to implement the SAI and Servicing Guide
requirements for escalated consumer complaints, particularly those governing reporting to
Freddie Mac. Further, seven of Freddie Mac’s eight largest servicers did not resolve all escalated
cases within the required 30 days and some servicers did not accurately categorize the nature of
their cases. This lack of compliance is a result of Freddie Mac’s failure to assess escalated case
requirements in its servicer reviews and to include consequences for noncompliance in its
Servicing Guide. Also, FHFA’s own examination of the SAI implementation did not identify
servicers’ failures to report escalated case information. Rather than conduct independent testing,
FHFA relied on internal reports produced by Freddie Mac. FHFA also lacks guidance for
examination teams to use when testing the implementation of directives such as the SAI.

Servicers Did Not Uniformly Comply with Escalated Case Requirements

           Escalated Cases Not Reported

Evidence suggests 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 2012.7 However, when contacted by OIG in connection with this audit, these servicers
indicated that they would begin reporting to Freddie Mac.

Further, Freddie Mac data on all of its servicers reveals that about 98% (1,179 of 1,207) did not
report any escalated cases as of December 2012.8 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. In fact,

7
 These large servicers also did not submit escalated case reports in December 2012. Moreover, CitiMortgage and
Wells Fargo did not submit reports in January 2013. The complementary four largest servicers, Branch Banking &
Trust Corporation (BB&T), GMAC Mortgage, JPMorgan Chase Bank, and US Bank, provided the required
escalated case reports.
8
    Freddie Mac noted that 55% of its servicers (661 of 1,207) manage 500 or fewer loans.




            Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                          11
four of Freddie Mac’s largest servicers, which did not report any escalated cases (despite
handling more than 20,000 of them), are included within the 98% of non-reporting servicers.
This strongly suggests that many other servicers handled escalated cases but did not comply with
the reporting requirements.

A Freddie Mac official asserted there is no way to identify servicers that have received escalated
cases but have failed to report such information. Specifically, Freddie Mac does not require
servicers to provide a negative response if they have not received any escalated complaints.

The four large non-reporting servicers provided us with various reasons for not reporting
escalated cases to Freddie Mac. One servicer told us that it was not aware of the requirement and
another said that Freddie Mac had not requested the information during an onsite examination
conducted in September 2012. A third servicer stated that it had quality control and governance
issues related to reporting escalated cases, and it had informed Freddie Mac that these issues
were delaying the servicer’s implementation of the SAI.

Together, Freddie Mac’s servicers managed loans with a combined unpaid principal balance of
more than $1.6 trillion as of December 2012. Many of these servicers also manage loans for
Fannie Mae.

       Escalated Cases Not Timely Resolved Within 30 Days

Freddie Mac’s eight largest servicers handled 26,196 escalated cases during the 14 months
between October 2011 and November 2012, and they resolved 25,528 of them during this period.
Of the resolved cases, 5,372 (or 21%) exceeded the 30-day time limit specified by FHFA’s SAI
and Freddie Mac’s Servicing Guide. 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. Of that number, 1,875 (or 47%) were not resolved within the 30-day time limit;
overall, Bank of America took an average of 52 days to resolve its cases, and the longest case
required 392 days to resolve. With respect to other large servicers:

          JP Morgan Chase handled 4,367 escalated cases; over 1,200 took over 30 days to
           resolve; and the longest case required 304 days to resolve;
          CitiMortgage handled 11,503 escalated cases; over 1,700 took over 30 days to
           resolve; and the longest case required 313 days to resolve;
          Wells Fargo handled 4,784 escalated cases; almost 400 took over 30 days to resolve;
           and the longest case required 95 days to resolve; and
        Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                   12
          Provident handled 345 escalated cases; approximately 30 took over 30 days to
           resolve; and the longest case required 205 days to resolve.
Figure 3 shows the level of compliance among the eight largest servicers.

           Figure 3: Consumer Complaints Taking More Than 30 Days to Resolve


      Branch Banking & Trust
                       GMAC
                     US Bank
                   Provident
                 Wells Fargo
                CitiMortgage
            JP Morgan Chase
             Bank of America

                               0%         20%           40%         60%        80%         100%

                            Resolved Under 30 days            Resolved Over 30 Days



FHFA implemented the SAI to enhance the quality of servicing practices by placing a strong
emphasis on earlier and more frequent borrower contact to expedite borrower resolution for a
foreclosure alternative. When properly implemented and followed, the 30-day resolution
requirement is intended to assist at-risk borrowers to maintain homeownership. Equally
important, it helps minimize Freddie Mac’s credit losses related to additional foreclosure actions
and maintaining an inventory of foreclosed properties.

       Escalated Case Resolutions Inaccurately Categorized

Some of Freddie Mac’s largest servicers also did not accurately categorize the nature of their
escalated cases. According to the SAI and Freddie Mac’s Servicing Guide, an escalated case is
considered resolved when the complaint has been reviewed in accordance with applicable
guidelines and the servicer:

          Determines that there is no change in its original determination or identifies a
           proposed resolution that corresponds to one of the resolution categories;
          Documents the proposed resolution in its servicing system or mortgage file including
           the date the resolution was reached; and
          Takes the first action to implement the resolution.

        Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
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Servicers are required to report the resolution of escalated cases, using the following 13
resolution categories:

      Foreclosure Completed                                  HAMP Trial Period Plan
      Loan Payoff                                            Non-HAMP Modification
      Deed-in-Lieu of Foreclosure                            Other Foreclosure Alternative
      Forbearance Plan                                       Repayment Plan
      Foreclosure Initiated/Pending                          Short Sale
      Action Not Allowed – Bankruptcy in                     No Action Taken (Borrower current
       Progress                                                and determined able to pay)
      Home Affordable Modification Program
       (HAMP)
We 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
escalated cases. In 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. Using inaccurate and inconsistent resolution categories (or not using them
at all) is problematic because, without such data, Freddie Mac’s ability to identify significant
trends in the nature of escalated cases and how they are handled may be impaired.

Freddie Mac Oversight Did Not Adequately Address Escalated Cases

       Servicer Reviews Did Not Include Testing for Escalated Case Requirements

During 2012, Freddie Mac conducted 38 onsite operational reviews of its largest national and
regional servicers. With the exception of one servicer review conducted in March 2012, Freddie
Mac made no findings at all regarding its servicers’ handling of escalated cases. In the case of
the one servicer, Freddie Mac found that the servicer failed to establish a process for reviewing
and responding to escalated cases as required by the SAI. As of January 2013, Freddie Mac had
approved the servicer’s corrective action plan to resolve the issue.

Notably, Freddie Mac reviewed one servicer three times (in June, September, and November
2012) without making any findings related to escalated cases. By contrast, Fannie Mae reviewed
the same servicer once and determined that it was not in compliance with the SAI and Fannie
Mae’s guidance governing the handling of escalated cases. Fannie Mae then directed the servicer
to implement new controls to resolve escalated borrower inquiries in a timely manner in
accordance with its Servicing Guide.

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. The Freddie Mac officials we interviewed
        Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
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stated that they planned to add steps related to escalated cases to their review plans in January
2013.

         Servicing Guide Lacked Performance-Based Incentives Related to Escalated Cases

According to FHFA, implementation of the SAI must include performance-based incentive
payments for compliance and penalties for noncompliance. Our analyses showed that, although
Freddie Mac established consequences in its Servicing Guide (such as fees) for failing to perform
foreclosure actions in accordance with required timelines, there were no corresponding penalties
(such as fines) for servicers’ lack of reporting escalated cases in either FHFA or Freddie Mac
guidance. Indeed, Freddie Mac’s Servicing Guide, servicer scorecard, and related performance
evaluation, all of which are tools used by the enterprise to measure servicers’ performance, did
not include penalties for failure to report escalated case information. Freddie Mac officials
informed us that they plan to add reporting of escalated cases to its servicer scorecard in the near
future.9

         Escalated Case Information Not Used Internally

Freddie Mac did not use the escalated case information it received from servicers to identify
areas of elevated risk. The Counterparty Operational Risk Evaluation (CORE) team—which
reviews servicer performance for compliance with Freddie Mac’s requirements—used a risk-
based approach to enhance its standard review programs. The CORE team’s approach included
meeting with various business line managers to understand the emerging risks of their servicers.
This process of internally sharing escalated case information, to be used to identify elevated risk,
is illustrated in the CORE Manual, which includes the following:

         The CORE team will strive to capitalize on the wealth of information already
         maintained by Freddie Mac relative to each Counterparty through effective and
         regular communication with Business Units. This is to ensure that CORE remains
         aligned with Freddie Mac’s overall risk management efforts.

Although the CORE team relies on input from Freddie Mac’s business units, it did not
incorporate escalated case data, which can be an important indicator of the quality of servicing
and underwriting of enterprise loans, into its risk analysis. Specifically, for the 28 servicers that
reported escalated case information, Freddie Mac did not forward the escalated case information
9
  In February 2013, Freddie Mac provided us with its updated servicer scorecards (also known as the Executive
Summary Reports) dating back to November 2012. The scorecards included escalated case information from
those servicers who were reporting or identified certain servicers who did not provide information for that month.
However, as noted in this report, there is no way to determine the accuracy of this information because servicers are
not required to provide a negative response if they did not have escalated cases to report.




          Federal Housing Finance Agency Office of Inspector General • AUD-2013-007 • March 21, 2013
                                                         15
to its CORE team. As a result of our review, Freddie Mac officials stated that they would provide
escalated case information to the CORE team for consideration in performing reviews.

FHFA Oversight Failed to Identify Noncompliance with Consumer Complaint Requirements

       Examination of Freddie Mac’s Implementation of the SAI Failed to Identify Servicer
       Noncompliance

FHFA’s examination of Freddie Mac’s implementation of the SAI, which was being finalized as
of January 2013, did not identify servicers’ failure to report escalated cases or resolve them
within 30 days. In August 2012, FHFA initiated its first examination of Freddie Mac’s
implementation of the SAI. The planned scope of the examination included, among other things,
Freddie Mac’s monitoring of the servicers’ compliance with the SAI. Specific to consumer
complaints, FHFA’s examination included the following planned procedures:

          For borrower contact, review the adequacy and effectiveness of new standards and
           timelines for borrower calls and call center activities. Also, review new processes and
           controls put in place to monitor compliance with the SAI.
          For delinquency management, review the adequacy and compliance with the process
           for reviewing and escalating borrower complaints and disputes.
However, our interviews with FHFA officials about the examination’s findings revealed 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. Yet, as
described above, our analyses showed that 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 and faulty conclusions about Freddie Mac’s implementation and oversight of the
SAI.

       No Examination Guidance for FHFA Directives

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




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bulletins, and the Supervision Handbook do not contain guidance as to how to test enterprise
compliance with FHFA directives.10 FHFA agreed that as of February 2013, there is no explicit
guidance controlling examinations of compliance with FHFA’s directives; however, FHFA
officials advised that they are now discussing developing such guidance.

As of February 2013, FHFA has issued 133 directives: 59 to both enterprises, 41 to Freddie Mac,
and 33 to Fannie Mae. According to FHFA, guidance on examining directives would provide a
high-level framework for an examiner who intends to review the implementation of an FHFA
directive.




10
  FHFA, Supervisory Guide, Version 2.0 (September 8, 2009). FHFA, Supervision Handbook, Version 2.1 (June
16, 2009).




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CONCLUSION
FHFA developed the SAI as part of an effort to keep homeowners in their homes; help servicers
interact with delinquent borrowers in a way that is timely, efficient, and fair; and make enterprise
loss mitigation programs more effective. However, these goals are at risk of not being achieved.
Servicers, Freddie Mac, and FHFA have not adequately fulfilled their respective roles relative to
an important aspect of the SAI: 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. Strengthened
oversight—through actions aimed specifically at improving servicer compliance with escalated
case requirements—can benefit homeowners, Freddie Mac, and ultimately taxpayers.




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RECOMMENDATIONS
To improve servicer compliance with escalated case requirements, FHFA should perform
supervisory review and follow-up to ensure that Freddie Mac requires its servicers to:

       1. Report escalated consumer complaint information—to include a negative response if
          servicers have not received any escalated complaints—on a monthly basis.

       2. Resolve escalated consumer complaint information within 30 days.

       3. Categorize resolved escalated consumer complaint information in accordance with
          resolution categories defined in the Servicing Guide.

To enhance Freddie Mac’s oversight of its servicers, FHFA should perform supervisory review
and follow-up to ensure that Freddie Mac:

       4. Includes testing of servicers’ performance for handling and reporting escalated cases
          as part of its reviews of servicers’ performance.

       5. Identifies and addresses servicer operational challenges with implementing the
          escalated case requirements as part of the testing of the servicers’ performance for
          handling and reporting escalated cases.

       6. Establishes penalties in the Servicing Guide, such as fines or fees, for servicers’ lack
          of reporting escalated cases.

       7. Expands the servicer scorecard and servicer performance evaluations to include
          reporting of escalated cases.

       8. Provides information on escalated cases received from servicers to internal staff (the
          CORE team) responsible for testing servicer performance.

To improve its own oversight, FHFA should:

       9. Develop and implement FHFA examination guidance related to enterprise
          implementation and compliance with FHFA directives.




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SCOPE AND METHODOLOGY
The objective of this performance audit was to assess FHFA’s oversight of Freddie Mac’s
controls over servicers’ handling of escalated consumer complaint cases.

We performed fieldwork for this audit from August 2012 through February 2013. We conducted
this audit at FHFA’s office in Washington, D.C., and Freddie Mac’s office in McLean, Virginia.
We interviewed FHFA, Freddie Mac, and selected servicer personnel.

The scope of our audit related specifically to escalated consumer complaints received by selected
servicers for Freddie Mac funded loans. We relied on computer-processed and hardcopy data
from FHFA, Freddie Mac, and selected servicers.

To achieve the audit objective, we:

          Judgmentally selected and tested the consumer complaints processes for Freddie
           Mac’s eight largest servicers (measured in terms of volume of loans managed);
          Analyzed escalated consumer complaint case data, related specifically to Freddie Mac
           funded loans, from October 2011 to November 2012, for the eight largest servicers;
          Interviewed FHFA officials on policies and examination work related to the
           implementation of the SAI; and
          Reviewed onsite servicer reviews conducted by Freddie Mac and Fannie Mae.
We also assessed the internal controls related to our audit objective. Internal controls are an
integral component of an organization’s management that provides reasonable assurance that the
following objectives are achieved:

          Effectiveness and efficiency of operations,
          Reliability of financial reporting, and
          Compliance with applicable laws and regulations.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives, and include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance. Based on the work completed on this
performance audit, we consider weaknesses in FHFA’s supervisory oversight of Freddie Mac’s
controls over servicers’ handling of escalated consumer complaint cases to be significant in the
context of the audit’s objective.



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We conducted this performance audit in accordance with Generally Accepted Government
Auditing Standards. Those standards require that we plan audits and obtain sufficient,
appropriate evidence to provide a reasonable basis for our finding and conclusions based on our
audit objective. We believe that the evidence obtained provides a reasonable basis for the finding
and conclusion included herein, based on our audit objective.




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APPENDIX A:
FHFA’s Comments on Finding and Recommendations




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APPENDIX B:
OIG’s Response to FHFA’s Comments

On March 15, 2013, FHFA provided comments to a draft of this report, agreeing with the
recommendations and identifying FHFA actions to address them.

FHFA stated it concurs with the importance of ensuring timely and responsive resolution of
consumer complaints, particularly complaints of a more serious nature deemed to be escalated
cases.

FHFA plans to implement the audit recommendations by working with both enterprises—
Freddie Mac and Fannie Mae—to conform consumer complaint processing under the SAI and
ensure compliance with new regulatory requirements announced by the Consumer Financial
Protection Bureau in final rules issued in January 2013. The new requirements implement
provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Further, FHFA
has made review of the SAI a supervisory priority in 2013 and will develop detailed plans for
reviewing escalated cases. Finally, FHFA plans to develop supervisory guidance for examining
compliance with FHFA directives.

We consider FHFA’s actions to be sufficient to resolve the recommendations, which will remain
open until we determine that the agreed upon corrective actions are completed and responsive to
the recommendations. We have attached the agency’s full response (see Appendix A), which was
considered in finalizing this report. Appendix C provides a summary of management’s
comments on the recommendations and the status of agreed-to corrective actions.




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APPENDIX C:
Summary of Management’s Comments on the Recommendations

This table presents management’s responses to the recommendations in our report and the status
of their resolution as of the date when the report was issued.

                                                      Expected
                 Corrective Action: Taken or         Completion       Monetary        Resolveda      Open or
 Rec. No.                  Planned                      Date          Benefits        Yes or No      Closedb
1 through 8     FHFA agrees to implement             1/10/ 2014         $0              Yes           Open
                the recommendations as the
                agency works with the
                enterprises during 2013 to
                not only conform consumer
                complaint processing under
                the Servicing Alignment
                Initiative, but to ensure all
                servicer operations comply
                with the new requirements
                of Regulation X and Z by
                January 10, 2014, the
                effective date of these
                regulations.
                FHFA will develop more                6/30/2013           $0             Yes           Open
                detailed plans to review
                escalated cases by June 30,
                2013.
      9         FHFA will develop separate            3/31/2014           $0             Yes           Open
                general supervisory
                guidance for examining
                compliance with FHFA
                directives within one year of
                the issuance date of the OIG
                report.

(a) Resolved means: (1) management agrees with the recommendation, and the planned, ongoing, or completed
corrective action is consistent with the recommendation; (2) management does not agree with the recommendation,
but alternative action meets the intent of the recommendation; or (3) management agrees to the OIG monetary
benefits, a different amount, or no ($0) amount. Monetary benefits are considered resolved as long as management
provides an amount.
(b) Once OIG determines that the agreed-upon corrective actions have been completed and are responsive to the
recommendations, the recommendations can be closed.


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ADDITIONAL INFORMATION AND COPIES
For additional copies of this report:

          Call OIG: 202-730-0880

          Fax your request: 202-318-0239

          Visit OIG’s website: www.fhfaoig.gov

To report alleged fraud, waste, abuse, mismanagement, or any other kind of criminal or
noncriminal misconduct relative to FHFA’s programs or operations:

          Call our Hotline: 1-800-793-7724

          Fax your written complaint: 202-318-0358

          Email us: oighotline@fhfaoig.gov

          Write us:     FHFA Office of Inspector General
                         Attn: Office of Investigations – Hotline
                         400 Seventh Street, S.W.
                         Washington, DC 20024




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