oversight

Mortgage Foreclosures: Regulatory Oversight of Compliance with Servicemembers Civil Relief Act Has Been Limited

Published by the Government Accountability Office on 2012-07-17.

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

             United States Government Accountability Office

GAO          Report to Congressional Requesters




July 2012
             MORTGAGE
             FORECLOSURES
             Regulatory Oversight
             of Compliance with
             Servicemembers Civil
             Relief Act Has Been
             Limited




GAO-12-700
                                            July 2012

                                            MORTGAGE FORECLOSURES
                                            Regulatory Oversight of Compliance with
                                            Servicemembers Civil Relief Act Has Been Limited
Highlights of GAO-12-700, a report to
congressional requesters




Why GAO Did This Study                      What GAO Found
SCRA protects servicemembers whose          Certain protections under the Servicemembers Civil Relief Act (SCRA) only apply
active duty military service prevents       to those servicemembers who obtained mortgages prior to becoming active duty,
them from meeting financial                 but at least 15,000 instances of financial institutions failing to properly reduce
obligations, by allowing interest rates     servicemembers’ mortgage interest rates and over 300 improper foreclosures
on certain debts to be reduced and          have been identified by federal investigations and financial institutions in recent
requiring a court order before certain      years. Additional independent reviews of financial institutions’ compliance are
foreclosures on their homes can occur.      under way, and staff from some of these institutions told GAO that they have
With foreclosures rising, reports           implemented improved practices—such as creating single points of contact
surfaced of instances in which financial
                                            familiar with military issues for borrowers—to better comply with SCRA.
institutions failed to comply with SCRA.
GAO examined the (1) eligibility for        Federal regulators’ oversight of SCRA compliance has been limited. GAO
SCRA protections and extent of SCRA         estimates that from 2007 through 2011 prudential depository institution
mortgage-related violations by              regulators—the Federal Deposit Insurance Corporation, Federal Reserve Board,
depository institutions, (2) SCRA           National Credit Union Administration, and Office of the Comptroller of the
compliance oversight by prudential          Currency—reviewed 48 percent of all banks and credit unions for SCRA
regulators and other federal agencies,      compliance. Of these institutions that were reviewed for SCRA compliance, only
and (3) the military services’ efforts to   about half received examinations that involved testing of compliance by
educate servicemembers on SCRA.             reviewing loan files. Further, GAO found that examiners had only reviewed loans
GAO collected data on populations
                                            identified by the institution as involving servicemembers and had not
eligible for SCRA from DOD and SCRA
                                            independently selected a statistical sample of loan files, which would have
violations from banking and law
enforcement agencies and reviewed a         provided greater assurance of SCRA compliance. Without more testing, which
stratified random sample of prudential      examination and auditing guidance suggest provides increased verification,
regulators’ examinations of banks and       regulators are less likely to detect SCRA violations. Various other federal
credit unions. GAO also interviewed         agencies are involved in SCRA compliance oversight. The Department of Justice
regulators, law enforcement and             has explicit SCRA enforcement authority and since 2007 has brought three
military officials, and military service    cases against mortgage servicers for violations. The Department of Veterans
organizations.                              Affairs (VA), Federal Housing Administration, and Federal Housing Finance
                                            Agency—which regulates the government-sponsored enterprises—all obtain
What GAO Recommends                         information about SCRA compliance at the servicers that participate in the
                                            mortgage programs they administer or regulate, but the agencies and the
Prudential regulators should conduct        prudential regulators do not share such information among themselves.
more extensive loan file testing for        Collaboration among these agencies could lead to more effective supervision
SCRA compliance. Regulators and             and improve their awareness of potential problems with SCRA compliance.
other agencies that oversee mortgage        Further, VA oversight of mortgage servicers does not specifically review for
activities should also explore              SCRA compliance. By increasing its SCRA compliance monitoring efforts, VA
opportunities for information sharing on
                                            could better ensure that servicemembers with VA loans are better protected.
SCRA compliance oversight, and VA
should expand its SCRA compliance           SCRA requires that the Department of Defense (DOD) and Department of
monitoring efforts. Finally, DOD and        Homeland Security (DHS)—which oversees the Coast Guard—inform
DHS should assess the effectiveness         servicemembers of their SCRA rights. The military services provide this
of their efforts to provide SCRA            information in various forms, such as briefings and websites. However, some
information to servicemembers. The          military officials said that servicemembers—particularly members of the National
agencies generally agreed and noted         Guard and reserve—often receive SCRA information as part of briefings with
actions responsive to GAO’s                 numerous other topics prior to deployment and do not always retain the
recommendations.
                                            necessary awareness when they need it later. DOD and DHS do not assess the
                                            effectiveness of their SCRA education methods, such as by using focus groups
View GAO-12-700. For more information,
contact Mathew Scirè at (202) 512-8678 or   of servicemembers or testing to reinforce retention of SCRA information. Without
sciremj@gao.gov.                            such assessment, they may not be able to ensure that they are informing
                                            servicemembers of their rights in the most effective manner.
                                                                                    United States Government Accountability Office
Contents


Letter                                                                                     1
                Background                                                                4
                SCRA Eligibility, Violations, and Compliance                             13
                Federal Regulators’ Oversight of SCRA Compliance Has Been
                  Limited                                                                20
                Challenges in Ensuring Servicemembers’ Awareness of SCRA
                  Protections                                                            37
                Conclusions                                                              43
                Recommendations for Executive Action                                     46
                Agency Comments and Our Evaluation                                       46

Appendix I      Objectives, Scope, and Methodology                                       54



Appendix II     Oversight of Mortgage Servicers’ Servicemembers Civil Relief Act
                Compliance                                                               62



Appendix III    Comments from the Department of Homeland Security                        68



Appendix IV     Comments from the Department of Defense                                  70



Appendix V      Comments from the Federal Deposit Insurance Corporation                  73



Appendix VI     Comments from the Board of Governors of the Federal
                Reserve System                                                           75



Appendix VII    Comments from the Federal Housing Finance Agency                         77



Appendix VIII   Comments from the Department of Housing and Urban Development            79




                Page i                                       GAO-12-700 Mortgage Foreclosures
Appendix IX    Comments from the National Credit Union Administration                   81



Appendix X     Comments from the Office of the Comptroller of the Currency              83



Appendix XI    Comments from the Department of Veterans Affairs                         85



Appendix XII   GAO Contact and Staff Acknowledgments                                    88



Tables
               Table 1: Violations of SCRA Mortgage Protections Identified
                        through Various Reviews                                         16
               Table 2: Number of Depository Institutions in Sample                     56
               Table 3: Examination Activities Identified by GAO for SCRA
                        Compliance Reviews                                              59
               Table 4: Summary of Ongoing and Completed Federal Agency
                        Reviews of Mortgage Servicers’ SCRA Compliance                  66


Figures
               Figure 1: U.S. Military Population, 2010                                   8
               Figure 2: Estimated Percentage of Depository Institutions That
                        Serviced Mortgages That Were Examined for SCRA
                        Compliance by Year, 2007 through 2011                           24
               Figure 3: Estimated Percentage of Depository Institutions That
                        Serviced Mortgages That Were Examined for SCRA
                        Compliance by Regulator, 2007 through 2011                      26




               Page ii                                      GAO-12-700 Mortgage Foreclosures
Abbreviations
ABA          American Bar Association
CFPB         Consumer Financial Protection Bureau
DCI          Data collection instrument
DMDC         Defense Manpower Data Center
DOD          Department of Defense
DHS          Department of Homeland Security
HUD          Department of Housing and Urban Development
DOJ          Department of Justice
VA           Department of Veterans Affairs
FDIC         Federal Deposit Insurance Corporation
FFIEC        Federal Financial Institutions Examination Council
FHA          Federal Housing Administration
FHFA         Federal Housing Finance Agency
NCUA         National Credit Union Administration
OCC          Office of the Comptroller of the Currency
OTS          Office of Thrift Supervision
SCRA         Servicemembers Civil Relief Act

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Page iii                                                GAO-12-700 Mortgage Foreclosures
United States Government Accountability Office
Washington, DC 20548




                                   July 17, 2012

                                   Congressional Requesters

                                   The Servicemembers Civil Relief Act (SCRA) is intended to provide
                                   protections to servicemembers in the event that their military service
                                   prevents them from meeting financial obligations. 1 The intent of the act is
                                   to allow servicemembers to focus on their duties without having to
                                   experience difficulties in their financial affairs as a result of their service.
                                   The act provides numerous protections to servicemembers serving on
                                   active duty, 2 including prohibiting mortgage servicers—entities
                                   responsible for administering home-mortgage loans—from foreclosing on
                                   their homes without court orders, capping the interest rate and fees on
                                   their mortgages at 6 percent, and prohibiting adverse credit reporting for
                                   servicemembers who invoke their SCRA rights. In order to be eligible for
                                   some of these protections, servicemembers must have incurred their
                                   mortgage prior to their active duty service.

                                   In addition to landmark civil cases against mortgage servicers by
                                   servicemembers, record numbers of foreclosures and allegations that
                                   mortgage servicers did not ensure that all foreclosure documents were
                                   properly signed or notarized in recent years caused federal agencies to
                                   pay increased attention to servicing activities. 3 At the end of 2010, federal
                                   bank regulators conducted reviews of foreclosure processing at 14
                                   federally regulated mortgage servicers. These reviews identified
                                   instances in which servicemembers who were protected by SCRA had
                                   been foreclosed upon and led to numerous additional inquiries to
                                   determine the extent to which servicemembers’ SCRA rights had been
                                   violated. For example, in 2011, some of the nation’s largest mortgage


                                   1
                                    50 U.S.C. §§ 501 – 597b.
                                   2
                                    Active duty for armed services is defined in 10 U.S.C. §101(d)(1) as “full-time duty in the
                                   active military service of the United States.” Such terms include “full-time training duty,
                                   annual training duty, and attendance, while in the active military service, at a school
                                   designated as a service school by law or by the Secretary of the military department
                                   concerned.” The act entitles servicemembers to foreclosure protection for a period of 9
                                   months after their active duty service and to interest rate caps for up to 1 year after active
                                   duty service.
                                   3
                                    See e.g. Hurley v. Deutsche Bank Trust Company Americas, No. 1:08-CV-361, 2009 WL
                                   701006 (W.D. Mich. March 13, 2009).




                                   Page 1                                                    GAO-12-700 Mortgage Foreclosures
servicers—Chase Home Finance, LLC; BAC Home Loans Servicing, LP;
and Saxon Mortgage Services Inc.—settled lawsuits for millions of dollars
for faulty mortgage servicing and foreclosure practices that included
allegedly foreclosing on and charging excess interest and fees to
servicemembers in violation of SCRA.

In response to these identified instances of SCRA violations,
congressional requesters asked us to examine various aspects of federal
oversight of SCRA compliance. This report discusses (1) what is known
about SCRA eligibility, the number of violations that have occurred, and
practices financial institutions use to comply with SCRA, (2) what
oversight financial regulators and other federal agencies have taken to
help ensure financial institutions’ compliance with the act, and (3) actions
the Department of Defense (DOD), Department of Homeland Security
(DHS), Department of Veterans Affairs (VA), and others have taken to
ensure that servicemembers and others are informed of protections
provided under the act. As agreed with your staff, the scope of our review
includes primarily SCRA protections related to servicemembers’
residential mortgages.

To describe what is known about the practices financial institutions use to
comply with SCRA, we interviewed representatives, from a non-
generalizable sample of 4 of the 10 largest mortgage servicers based on
unpaid principal balance of mortgages serviced, about their SCRA
compliance practices and challenges and reviewed relevant policies and
procedures. We also interviewed representatives of financial industry
associations, including those that represent the mortgage industry and
financial institutions with a large military customer base. We reviewed
letters from 10 mortgage servicers on their SCRA compliance history and
activities, which were written in response to an investigation by the U.S.
House of Representatives Committee on Oversight and Government
Reform. We also reviewed data on SCRA violations found during bank
and credit union examinations conducted between 2007 and 2011 by the
prudential depository institution regulators—the Board of Governors of the
Federal Reserve System (Federal Reserve), the Federal Deposit
Insurance Corporation (FDIC), the National Credit Union Administration
(NCUA), and the Office of the Comptroller of the Currency (OCC)—as
well as data from Department of Justice (DOJ) enforcement actions and a
recent class action settlement against a large mortgage servicer.

To assess the oversight financial regulators have taken to help ensure
financial institutions’ compliance with SCRA, we reviewed prudential
regulators’ examination policies and procedures and interviewed officials


Page 2                                         GAO-12-700 Mortgage Foreclosures
from these agencies. To assess the extent to which prudential regulators
examined banks and credit unions for SCRA compliance, we selected a
stratified random sample of 160 depository institutions (40 from each of
the four prudential regulators) and reviewed the workpapers for each of
the examinations from 2007 through 2011 for 152 of these institutions. 4
Our sample included only institutions that hold mortgages in their loan
portfolios and service those loans themselves or institutions that service
mortgages for other institutions. We analyzed the examination
workpapers to estimate the percentage of institutions for which prudential
regulators conducted SCRA compliance reviews and determine the
frequencies with which different examination procedures were used for
these reviews. 5 To describe the SCRA oversight activities of other federal
agencies, we reviewed SCRA oversight policies and procedures for DOJ,
the Federal Housing Administration (FHA), government-sponsored
enterprises (the enterprises)—Fannie Mae and Freddie Mac—and VA.
We reviewed SCRA cases DOJ settled from 2007 through 2011 and
SCRA compliance oversight policies and procedures of FHA, Fannie
Mae, Freddie Mac, and VA, and we interviewed officials from these
agencies.

To determine what actions DOD, DHS, VA, and others have taken to
ensure servicemembers are informed of their SCRA rights, we reviewed
the act to determine what it requires agencies to do and interviewed two
SCRA experts. We also reviewed DOD and DHS policies and procedures
and interviewed officials from DOD’s Office of Legal Policy, DHS, and the
National Guard Bureau. To determine what actions other agencies,
including VA, Consumer Financial Protection Bureau (CFPB), and FHA,
were taking to inform servicemembers and others of SCRA protections,
we reviewed notifications they provide to mortgage servicers on SCRA
compliance and interviewed officials at these agencies. To determine how
servicemembers learn about their SCRA protections and what challenges



4
 Eight of the selected institutions were excluded from our analysis. Three institutions
regulated by the Federal Reserve were excluded because they were recently chartered
and therefore had not had an examination. We also excluded five credit unions because
they were state chartered, meaning that state supervisory authorities and not NCUA
served as the primary regulator for these institutions. See appendix I for additional
information about our sample.
5
 Estimates based on this workpaper review are subject to sampling error. All estimates
used in this report are presented along with their 95 percent confidence intervals. See
appendix I for additional information about our sample.




Page 3                                                 GAO-12-700 Mortgage Foreclosures
             they face asserting those protections, we selected six military installation
             legal assistance offices (one for the Army, Navy, Marine Corps, and
             Coast Guard and two for the Air Force) based on a geographic
             distribution of states with high numbers of foreclosures and large active
             duty and reservist populations, and interviewed the legal assistance
             attorneys who work directly with servicemembers who visit these offices.
             We reviewed examples of SCRA training and outreach that these offices
             develop and distribute to servicemembers. We also interviewed two legal
             assistance attorneys from the reserve components who were
             recommended during our interviews with legal assistance attorneys, as
             well as representatives from seven military servicemember groups that
             were selected based on their broad representation of servicemembers.
             See appendix I for more information on our objectives, scope, and
             methodology.

             We conducted this performance audit from August 2011 to July 2012 in
             accordance with generally accepted government auditing standards.
             Those standards require that we plan and perform the audit to obtain
             sufficient, appropriate evidence to provide a reasonable basis for our
             findings and conclusions based on our audit objectives. We believe that
             the evidence obtained provides a reasonable basis for our findings and
             conclusions based on our audit objectives.


             Congress passed the Soldiers’ and Sailors’ Civil Relief Act in 1940 to
Background   provide servicemembers protections to help them meet the unique
             circumstances they face when serving their country. 6 In response to the
             increased use of Reserve and National Guard military units in the Global
             War on Terrorism, Congress enacted SCRA in December 2003 as a
             modernized version of the Soldiers’ and Sailors’ Civil Relief Act. In
             addition to providing protections related to residential mortgages, the act
             covers other types of loans, such as credit card and automobile and a
             variety of other issues, such as rental agreements, eviction, installment




             6
             A prior version of the law was enacted in 1918.




             Page 4                                            GAO-12-700 Mortgage Foreclosures
contracts, civil judicial and administrative proceedings, motor vehicle
leases, life insurance, health insurance, and income tax payments. 7

SCRA provides the following mortgage-related protections to
servicemembers: 8

•   Interest Rate Cap. Servicemembers who obtain mortgages prior to
    serving on active duty status are eligible to have their interest rate
    capped at 6 percent for the duration of their active duty status and for
    12 months after returning from active duty service. 9 Interest above 6
    percent is to be forgiven by the servicer. Servicemembers are
    required to inform their servicer of their active duty status in order to
    avail themselves of this provision.

•   Foreclosure Proceedings. A servicer cannot sell, foreclose, or seize
    the property of a servicemember for breach of a pre-service obligation
    unless a court order is issued prior to the foreclosure on the




7
  A servicemember may waive many of the rights and protections provided by SCRA
provided the waiver meets certain criteria, including that it is in writing and is in a document
separate from the obligation or liability to which it applies. 50 U.S.C. § 517. The waiver
provision “is designed to induce servicemembers and their creditors to adjust their respective
rights privately and to make it clear that no restrictions have been placed upon the usual
right of the parties to re-negotiate an obligation.” The Judge Advocate General's Legal
Center & School, U.S. Army, JA 260, Servicemembers Civil Relief Act, 2-8 (March 2006).
8
 SCRA defines servicemembers as members of the uniformed services found in 10
U.S.C. §101(a)(5) which includes the commissioned corps of the National Oceanic and
Atmospheric Administration and the Public Health Service. Active duty is defined in 10
U.S.C. §101(d)(1). We did not collect any specific information related to SCRA protections
for officials from the National Oceanic and Atmospheric Administration and the Public
Health Service for this report.
9
 50 U.S.C. app. §527. The act defines interest to include service charges, renewal
charges, fees, or any other charges (except bona fide insurance). A servicer has the right
to challenge the reduction in interest in court, if it believes that the servicemember’s ability
to pay interest above 6 percent is “not materially affected by reason of the
servicemember’s military service.” 50 U.S.C. § 527(c).




Page 5                                                     GAO-12-700 Mortgage Foreclosures
      property. 10 This protection is effective until 9 months after the term of
      active duty service ends. 11 If the servicer files an action in court to
      enforce the terms of the mortgage, the court may stay any
      proceedings or adjust the obligation to preserve the interests of the
      parties.

•     Mortgage prepayment penalties. A court may decide that
      servicemembers who have mortgages that impose penalties for
      paying off the balance early are not subject to these penalties if the
      servicemember incurs such fees due to military service and the ability
      of the servicemember to pay the fees is materially affected by military
      service. 12 For example, a servicemember who receives a permanent
      change-of-station order to relocate to another area may receive a
      court order that waives the penalty for selling his or her home and
      paying off the mortgage early.

•     Adverse credit reporting protections. A servicer may not report
      adverse credit information to a credit reporting agency solely because
      a servicemember exercises his or her SCRA rights, including a
      request to have his or her mortgage interest rate and fees be capped
      at 6 percent. 13




10
  50 U.S.C. app. § 533(c). This provision is directed at foreclosures that are referred to as
non-judicial. Once a mortgage servicer decides to foreclose, it follows either a judicial or
non-judicial foreclosure method, depending on state law. In a judicial foreclosure,
servicers initiate a formal foreclosure action by filing a lawsuit in court. The presiding
judge, upon the conclusion of a hearing, will, in the appropriate circumstances, issue an
order for the foreclosure to proceed. By contrast, a non-judicial foreclosure process takes
place outside the courtroom and is typically conducted by the trustee named in the deed-
of-trust document. Trustees, and sometimes servicers, generally send a notice of default
to the borrower and publish a notice of sale in area newspapers or legal publications.
Pursuant to 50 U.S.C. § 533(c), if a lender in a non-judicial foreclosure state forecloses on
a servicemember that took out his or her mortgage prior to active duty service without a
court order, the foreclosure is invalid.
11
  In 2008, P. L. 110-289, § 2203, extended this protection for servicemembers from 90
days after active duty service to 9 months after active duty service, effective until
December 31, 2010. In 2010, P. L. 111-346, § 2 changed the expiration date of the 9-
month protection to December 31, 2012; on January 1, 2013, the period prohibiting
foreclosure without a court order will revert to 90 days.
12
    50 U.S.C. app. §523(b).
13
    50 U.S.C. app §518.




Page 6                                                   GAO-12-700 Mortgage Foreclosures
In addition to SCRA, the Housing and Urban Development Act of 1968
includes a requirement applicable to institutions that service mortgages.
This act requires that all mortgage servicers that service home loans
provide notification of the availability of homeownership counseling
offered by the lender to eligible homeowners who fail to pay any amount
by the due date. 14 In 2006, changes were made to the homeownership
counseling notice requirement. Mortgage servicers are required to alert
borrowers of SCRA protections if they are in default on their mortgage,
and the notice instructs borrowers to notify their servicer if they believe
they are eligible for SCRA protections. 15 Servicers must provide the
notification within 45 days from the date a payment was missed by a
borrower. The Department of Housing and Urban Development (HUD)
developed and disseminated the format for this notice.

SCRA provides protections to active duty servicemembers in all five of
the military services—Army, Navy, Air Force, Marine Corps, and Coast
Guard—as well as members of each of these services’ reserve
component. 16 These components include the Army Reserve, Navy
Reserve, Marine Corps Reserve, Air Force Reserve, Coast Guard
Reserve, Army National Guard, and Air National Guard. 17 In 2010, active



14
  Section 106(c)(5) of the Housing and Urban Development Act of 1968 (12 U.S.C. 1701x
(c)(5)). (“Home loan” means a loan secured by a mortgage or lien on residential property.
A homeowner is eligible for counseling if (1) the loan is secured by the homeowner’s
principal residence, (2) the home loan is not assisted by the U.S. Department of
Agriculture’s Rural Housing Service, and (3) the homeowner is, or is expected to be,
unable to make payments, correct a home loan delinquency within a reasonable time, or
resume full home loan payments due to a reduction in the homeowner’s income. In lieu of
providing notification of available homeownership counseling offered by the lender,
servicers may provide either a list of HUD-approved nonprofit homeownership counseling
organizations or the toll-free number HUD has established through which a list of such
organizations can be obtained.)
15
  Section 688 of the National Defense Authorization Act for Fiscal Year 2006 (Public Law
109-163, enacted January 6, 2006) amended the required content of notifications of
homeownership counseling availability under §106(c)(5)(A)(ii) of the Housing and Urban
Development Act (12 U.S.C. 1701x(c)(5)(A)(ii)) and directed HUD to develop and
disseminate a format for the required notice.
16
 DHS oversees servicemembers in the Coast Guard and the Coast Guard Reserve.
17
  The reserve components consist of three categories: Ready Reserve, Standby Reserve,
and Retired Reserve. The Ready Reserve is comprised of the Selected Reserve, the
Individual Ready Reserve, and the Inactive National Guard. Because Selected Reserve
members train throughout the year and participate annually in active duty training
exercises, our report discusses this category of the reserve.




Page 7                                                 GAO-12-700 Mortgage Foreclosures
duty servicemembers comprised 63 percent of the military’s force, and
the reserve components represented the remaining 37 percent of the
military force. 18 Figure 1 shows the distribution of the military population
and shows that the Army constitutes the greatest percentage of both
active duty servicemembers and the reserve forces.

Figure 1: U.S. Military Population, 2010




Note: Data on the reserve components represent only the Selected Reserve within the Ready
Reserve.


While the Army Reserve, the Navy Reserve, the Marine Corps Reserve,
and the Air Force Reserve are federal entities, the Army National Guard
and the Air National Guard (known collectively as the National Guard)



18
  The data on the reserve components represent only those of the Selected Reserve.




Page 8                                                     GAO-12-700 Mortgage Foreclosures
have both federal and state missions. 19 Members of the National Guard
who are eligible for SCRA protections are those who have been called
into federal active duty service. 20 In addition, members of the National
Guard recalled for state duty are also eligible for SCRA protections under
certain circumstances. 21

The responsibility of extending mortgage-related SCRA protections to
eligible servicemembers often falls to mortgage servicers. While some
institutions that originate home mortgage loans hold the loans as assets
on their balance sheets, institutions generally sell them to other financial
institutions or the enterprises—Fannie Mae or Freddie Mac. The
enterprises purchase mortgages from primary mortgage lenders. They
hold some of the mortgages they purchase in their portfolios, but they
package the majority into mortgage-backed securities and sell them to
investors in the secondary mortgage market. The enterprises guarantee
these investors the timely payment of principal and interest. If a mortgage
originator sells its loans to either an investor or to an institution that
securitizes them, another financial institution or other entity is appointed
as the mortgage servicer to manage payment collections and other
activities associated with these loans. Mortgage servicers, which can be
large mortgage finance companies, commercial banks, or small specialty
companies unaffiliated with a larger financial institution, earn a fee for
duties they perform, such as sending borrowers monthly account
statements, answering customer-service inquiries, collecting monthly
mortgage payments, maintaining escrow accounts for property taxes and
hazard insurance, and forwarding proper payments to the mortgage
owners. Other mortgage lenders that hold the mortgages they originate
may service the loans internally or outsource this function.


19
  The National Guard is comprised of 54 separate organizations: one for each state, and
one each for Puerto Rico, Guam, the U.S. Virgin Islands, and the District of Columbia.
20
  Members of the National Guard who are called to federal active duty service are under
Title 10 of the United States Code. When under the command of their respective
governors, National Guard members operate under Title 32 status and may be called
upon to carry out a number of domestic missions, such as responding to natural disasters,
protecting state assets from terrorist attack, and training for their federal missions.
21
  National Guard members are eligible for SCRA protections when called to state active
duty under 32 U.S.C. § 502(f) if the duty is because of a federal emergency, the request is
made by the President or the Secretary of Defense, and the member is activated for
longer than 30 days. 50 U.S.C. app. § 511(2)(A)(ii). An example of National Guard
members fitting into this category would be those members activated by the states, at the
request of the President, to provide airport security after the 9-11 attacks.




Page 9                                                  GAO-12-700 Mortgage Foreclosures
In the event that a borrower becomes delinquent on loan payments, the
mortgage servicer must decide whether to pursue a home retention
workout or foreclosure alternative, such as a short sale, or proceed with
foreclosure. If the mortgage servicer determines that foreclosure is the
most appropriate option, it follows one of two foreclosure methods,
depending on state law. In a judicial foreclosure, a judge presides over
the process in a court proceeding. Mortgage servicers initiate a formal
foreclosure action by filing a lawsuit with a court. A nonjudicial foreclosure
process takes place outside the courtroom and is typically conducted by a
trustee named in the deed-of-trust document that accompanied the
mortgage. Trustees, and sometimes mortgage servicers, generally send a
notice of default to the borrower and publish a notice of sale in area
newspapers or legal publications.

Prudential regulators—FDIC, Federal Reserve, NCUA, and OCC—have
the authority to conduct reviews of any aspect of banks’ activities,
including compliance with applicable consumer protection laws, such as
SCRA. 22 OCC charters and supervises national banks and federal thrifts.
The Federal Reserve supervises state-chartered banks that opt to be
members of the Federal Reserve System, bank holding companies, thrift
holding companies, and the nondepository institution subsidiaries of those
institutions. FDIC supervises FDIC-insured state-chartered banks that are
not members of the Federal Reserve System, as well as federally insured
state savings banks and thrifts. NCUA charters and supervises federally
chartered credit unions and insures savings in federal and most state-
chartered credit unions. 23 OCC regulates the vast majority of mortgage
servicing in the United States. For example, OCC-regulated servicers
accounted for close to 80 percent of the unpaid principal balance on
serviced mortgages in the third quarter of 2011. The prudential regulators
conduct risk-based examinations of the institutions they oversee on a
routine basis. Because examinations are risk-based and there are a



22
 12 U.S.C. §1818; 12 U.S.C. §1786.
23
  The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203,
124 Stat. 1376 (2010), eliminated the Office of Thrift Supervision (OTS), which chartered
and supervised federally chartered savings institutions and savings and loan holding
companies. Supervisory authority was transferred to OCC for federal savings
associations, to FDIC for state savings associations, and to the Federal Reserve for
savings and loan holding companies and their subsidiaries, other than depository
institutions. The transfer of these powers was completed on July 21, 2011, and OTS was
officially dissolved 90 days later.




Page 10                                               GAO-12-700 Mortgage Foreclosures
number of consumer compliance laws for which examiners assess
compliance during an examination, SCRA compliance is not assessed
during every examination.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-
Frank Act) established CFPB and provided it with the authority to regulate
mortgage servicers with respect to federal consumer financial law. 24
Consumer financial protection functions from seven existing federal
agencies were transferred to the new agency. 25 For mortgage servicers
that are depository institutions with more than $10 billion in assets or their
affiliates, CFPB will have exclusive supervisory authority and primary
enforcement authority to ensure compliance with federal consumer
financial law. 26 Additionally, if a mortgage servicer is a nondepository
institution, CFPB will have both supervisory and enforcement authority to
ensure compliance with federal consumer financial law. 27 Finally, CFPB
will have rulemaking authority with respect to mortgage servicers,
including authority that transfers from other federal agencies such as the
Federal Reserve and the Federal Trade Commission. 28 SCRA, however,
was not one of the enumerated laws for which oversight transferred to
CFPB. The prudential regulators remain responsible for overseeing
compliance with the law for any of the entities they supervise that are
servicing mortgages.

Other federal agencies are involved in the mortgage market by operating
mortgage programs aimed at expanding homeownership for populations
who may encounter difficulties in obtaining mortgages. For example, FHA


24
  Federal consumer financial law is a defined term in the Dodd-Frank Act that includes
over a dozen existing federal consumer protection laws, including the Truth in Lending
Act, the Real Estate Settlement Procedures Act, and the Equal Credit Opportunity Act, as
well as the provisions of title X of the Dodd-Frank Act itself. 12 U.S.C. § 5481(12), (14).
25
 The seven agencies are the Federal Reserve, FDIC, Federal Trade Commission,
NCUA, OCC, OTS, and HUD.
26
  12 U.S.C. § 5515.
27
  CFPB’s nondepository supervision authorities specifically extend to any covered person
that “offers or provides origination, brokerage or servicing of loans secured by real estate
for use by consumers primarily for personal, family or household purposes, or loan
modification or foreclosure relief services in connection with such loans.” 12 U.S.C. §
5514(a)(1)(A).
28
  12 U.S.C. § 5512. The Federal Trade Commission will retain its current enforcement
authority.




Page 11                                                  GAO-12-700 Mortgage Foreclosures
has played a large role in assisting minority, lower-income, and first-time
homebuyers in obtaining mortgages. FHA’s program insures private
lenders against losses from borrower defaults on mortgages that meet
FHA criteria for properties with one to four housing units. As of
September 2011, almost 3,700 lending institutions were approved to
participate in FHA’s mortgage insurance programs for single-family
homes. FHA also offers special protections for servicemembers who have
FHA-insured loans. For example, FHA-approved lenders are authorized
to postpone principal payments and foreclosure proceedings for
servicemembers on active duty who have FHA-insured mortgages. 29

VA is also active in the mortgage market through its Home Loan Guaranty
program, which provides lenders a guaranty on a portion of mortgage
loans for eligible veterans, active duty servicemembers, surviving
spouses, and members of the reserve components in recognition of their
service. According to VA, the program operates by substituting the federal
government’s guaranty for a down payment that might otherwise be
required. VA guarantees a portion of the mortgage loan in the event that
borrowers default, providing lenders with substantial financial protections
against some of the losses that may be associated with extending such
mortgage loans. In 2011, VA guaranteed over 350,000 loans to veteran
borrowers.

The Housing and Economic Recovery Act of 2008 created the Federal
Housing Finance Agency (FHFA) and gave it responsibility for, among
other things, the supervision and regulation of the housing-related
enterprises: Fannie Mae, Freddie Mac, and the 12 federal home loan
banks. 30 Specifically, FHFA was assigned responsibility for ensuring that
each of the regulated entities operates in a safe and sound manner,
including maintenance of adequate capital and internal controls, and
carries out its housing and community development finance mission.
FHFA has no direct authority over mortgage servicers, but does have
authority to ensure that the housing enterprises are being run safely and
soundly, as well as the power to impose operational, managerial, and
internal control standards on the companies.




29
 24 CFR 203.610, 24 CFR 203.345 and 203.346.
30
 Pub. L. 110-289, sec. 1101.




Page 12                                        GAO-12-700 Mortgage Foreclosures
SCRA Eligibility,
Violations, and
Compliance

SCRA Requirements Limit    The total number of servicemembers eligible for the mortgage protections
Eligibility for Mortgage   provided by SCRA is not known, but the size of this population is likely
Protections                limited because the act provides protections only to servicemembers who
                           meet certain eligibility requirements. The maximum number of
                           servicemembers potentially eligible for mortgage protections under SCRA
                           at any one time includes those servicemembers on active duty service
                           and those who have recently left it. 31 According to DOD, between 2007
                           and 2010 about 2 million servicemembers, including those activated from
                           the reserve components, were on active duty. 32 However, the number of
                           servicemembers who may actually qualify for the SCRA mortgage
                           protections is a smaller portion of this population because some of the
                           act’s protections only extend to servicemembers who obtained their
                           mortgages prior to entering active duty service or servicemembers whose
                           military service materially affects their ability to pay their mortgage.
                           However, representatives from all the mortgage servicers with whom we
                           spoke stated that they do not assess whether a servicemember’s ability to
                           pay has been materially affected by their active duty status and that they
                           provide eligible servicemembers SCRA protections regardless of whether
                           their ability to pay is materially affected or not.

                           According to DOD officials, representatives from industry trade groups,
                           SCRA experts, and military service organizations, the servicemembers
                           most likely to be eligible for SCRA mortgage protections are members of
                           the reserve components. These servicemembers are more likely to have
                           had mortgages prior to entering active duty service and some may
                           potentially experience a decline in their incomes as they leave their
                           civilian employment and begin receiving their military pay. We have


                           31
                             Reserve personnel are entitled to most of SCRA’s protections on the date they receive
                           active duty orders. 50 U.S.C. App. § 516(a).
                           32
                             Because some members of the reserve components may have been activated more
                           than once between 2007 and 2010, this estimate may represent a larger population of
                           servicemembers than those that were eligible for SCRA mortgage protections during this
                           period.




                           Page 13                                               GAO-12-700 Mortgage Foreclosures
previously reported, however that servicemembers belonging to the
reserve components on average earn more income while activated. 33
According to DOD officials, the number of servicemembers activated from
the reserve components from 2007 through 2010 was approximately
576,500.

The maximum number of servicemembers who are eligible for SCRA
mortgage protections is also a smaller portion of the total military
population because many do not own homes for which they have taken
out mortgage loans. According to the Census Bureau, the U.S.
homeownership rate was about 67 percent in 2010. However, research
shows that servicemembers are generally less likely to own their own
homes. 34 For example, according to DOD’s 2008 annual Status of Forces
surveys—surveys that DOD sends annually to active duty
servicemembers and members of the reserve components to evaluate
various programs and policies and their impact on servicemembers—only
34 percent of active duty servicemembers and 55 percent of reserve
component servicemembers reported that they owned or made mortgage
payments on a home in the previous 12 months. 35 However, even those
military families who have mortgages may not be eligible for SCRA
protections. First, some SCRA mortgage protections only apply to
servicemembers who took out their mortgage before being placed on
active duty. Also, given that mortgage interest rates have been at historic
lows in recent years, servicemembers who took out mortgage loans
during this period before being placed on active duty may be likely to
have loans with rates lower than the SCRA-mandated level of 6 percent.




33
  GAO, Military Personnel: Reserve Component Servicemembers On Average Earn More
Income while Activated, GAO-09-688R (Washington, D.C.: June 23, 2009), p.3.
34
  Census computes the homeownership rate by dividing the number of owner-occupied
housing units by the number of occupied housing units or households.
35
  DOD Status of Forces Survey of Active Duty Members (August 2008) and Status of
Forces Survey of Reserve Component Members (November 2008). The margin of error
for active duty servicemembers is plus or minus 1 percent and plus or minus 2 percent for
reserve component members. Survey results do not include responses from members of
the Coast Guard and Coast Guard Reserve.




Page 14                                                GAO-12-700 Mortgage Foreclosures
Thousands of Mortgage-    Although the total number of SCRA violations is not known, thousands of
Related SCRA Violations   SCRA violations have been identified from a number of sources. First,
Have Been Identified to   DOJ—which is responsible for enforcing SCRA—settled investigations in
                          2011 with two mortgage servicers and identified 165 instances of active
Date                      duty servicemembers who had their homes foreclosed upon without the
                          mortgage servicer seeking the proper court order as required by the act. 36
                          Second, in July 2011, as part of its investigation into SCRA violations, the
                          U.S. House of Representatives Committee on Oversight and Government
                          Reform sent letters to 10 large mortgage servicers requesting them to
                          identify the total number of improper foreclosures and interest-rate and
                          fee violations they had committed. In their responses, 6 mortgage
                          servicers reported having conducted a total of at least 148 improper
                          foreclosures against servicemembers and failing to reduce interest rates
                          or fees on the mortgages for over 14,000 servicemembers since 2005.
                          Third, as the result of a class-action lawsuit filed by several
                          servicemembers, as of January 2012, Chase Home Finance, LLC had
                          issued refunds to approximately 13,500 borrowers for interest and fees
                          charged in excess of SCRA protections since 2005. 37 Many of the
                          mortgage servicers involved in these investigations are among the largest
                          in the industry and service millions of loans. Table 1 summarizes the
                          various SCRA violations identified by these sources to date.




                          36
                            United States of America v. BAC Home Loans Servicing, Civil No. 2:11-cv-04534-PA-
                          MRW (C.D. Cal. 2011) and United States of America v. Saxon Mortgage Services, Inc.,
                          Civil No. 3:11-cv-0111-F (N.D. Tex. 2011). BAC Home Loans Servicing, LP, was formerly
                          known as Countrywide Home Loans Servicing and is a subsidiary of Bank of America
                          Corporation. Saxon Mortgage Services was a subsidiary of Morgan Stanley.
                          37
                           Rowles v. Chase Home Finance, Civil No. 9:10-cv-01756-MBS (D.S.C. 2011).




                          Page 15                                              GAO-12-700 Mortgage Foreclosures
Table 1: Violations of SCRA Mortgage Protections Identified through Various Reviews

                                                                                                            Number of                Number of instances
                                                                                                        improper SCRA              in which interest rates
                                                                                                          foreclosures                  and fees charged
Mortgage servicer               Source of data              Period in review                                 identified                 were not reduced
BAC Home Loans Servicing        DOJ                         Jan. 2006–May 2009                                            143                     Not specified
Wells Fargo                     Self-reported               Foreclosure – Jan. 2006–                                       17                                3,224
                                                            June 2010
                                                            Interest rate and fees–Jan.
                                                            2006–June 2011
JPMorgan Chase                  Self-reported               Jan. 2005–July 2011                                            54                              10,000


                                Class action                Jan. 2005–Jan 2012                               Not specified                                 13,500
                                settlement
Citi                            Self-reported               Foreclosure– Jan. 2007–                                          0                                 140
                                                            June 2011
                                                            Interest rate and fees–Jan.
                                                            2006–June 2011
Ally Financial                  Self-reported               Not specified                                                  77                                  923
PHH Mortgage                    Self-reported               Jan. 2006–June 2011                                              0                                 304
SunTrust Mortgage               Self-reported               Not specified                                                    0                                     2
Saxon Mortgage Services, Inc.   DOJ                         Jan. 2006–Dec. 2010                                            22                     Not specified
                                         Source: GAO analysis of DOJ complaints and mortgage servicers’ responses to House Committee on Oversight and Government
                                         Reform requests.



                                         Through their compliance examinations, prudential regulators identified
                                         251 instances of SCRA compliance problems at depository institutions
                                         between 2007 and 2011. FDIC identified the vast majority—230—of these
                                         issues, with Federal Reserve staff identifying 16, OCC staff identifying 4,
                                         and NCUA staff identifying 1 instance. However, these SCRA compliance
                                         issues may not specifically concern mortgages—for example, they may
                                         have involved non-mortgage-loan products, such as credit card loans.

                                         A more complete picture of the extent of SCRA violations may result from
                                         three large-scale federal agency reviews that are ongoing. Recent
                                         enforcement actions taken by DOJ, Federal Reserve, and OCC require
                                         mortgage servicers to conduct historical reviews of their mortgage loan
                                         files to determine if servicemembers who were eligible for the SCRA
                                         mortgage protections received them, among other things. If violations are
                                         identified, the mortgage servicers are required to provide compensation to
                                         the servicemembers. Appendix II contains a detailed explanation of these
                                         reviews.




                                         Page 16                                                                     GAO-12-700 Mortgage Foreclosures
In the wake of identified SCRA violations, some mortgage servicers have
implemented procedures to enhance their compliance with SCRA. Some
large mortgage servicers have instituted several military status checks
during the foreclosure process. For example, one large mortgage servicer
now requires its foreclosure counsel to check a customer’s military status
prior to the initiation of foreclosure proceedings, 1 week prior to a
foreclosure sale, and 1 day prior to the scheduled sale date. Some
mortgage servicers have also created dedicated customer service
support for military servicemembers, including telephone hotlines and
websites. For example, representatives from one mortgage servicer told
us that they had developed a dedicated team that is staffed with former
servicemembers to assist customers with SCRA requests. These
customer-support representatives also receive training on military
financial issues and serve as the points of contact for any problems with
delinquency, remediation, and foreclosure.

Finally, as a result of identified violations and SCRA investigations, some
servicemembers will be receiving SCRA protections that go beyond those
stated in the act. For example, three mortgage servicers that responded to
the House Committee on Oversight and Government Reform letters noted
that they have reduced the interest rate they charge on servicemembers’
mortgages to 4 percent—which is below the 6 percent required in SCRA.
Additionally, the National Mortgage Settlement between the federal
government, 49 state attorneys general, and five large mortgage servicers
that occurred in February 2012 requires the five mortgage servicers to
implement new mortgage servicing standards. These new standards
expand protections to certain servicemember customers of these five
mortgage servicers beyond those provided in SCRA. For example, the new
standards extend foreclosure protections to any servicemember—
regardless of whether their mortgage was obtained prior to active duty
status—who is receiving Hostile Fire/Imminent Danger Pay or is serving at
a location more than 750 miles away from their home. This means that any
servicemember meeting these conditions and living in a nonjudicial state
who obtained a mortgage after obtaining active duty status could not be
foreclosed upon without a court order. More information on the National
Mortgage Settlement is contained in appendix II.




Page 17                                       GAO-12-700 Mortgage Foreclosures
Mortgage Servicers and       Representatives from some mortgage servicers and industry associations
Others Cited Challenges to   cited challenges that make complying with SCRA difficult. First, mortgage
Complying with SCRA          servicers may not know at the time a mortgage is originated whether a
                             borrower will be eligible for SCRA protections in the future. For example,
                             a borrower would become eligible for SCRA mortgage protections after
                             obtaining his or her mortgage by joining the active duty military or being
                             called into active duty service while serving as a member of the reserve
                             components. Therefore, mortgage servicers may not be able to flag loans
                             at origination that could potentially become eligible for SCRA protections
                             at a later date. Second, representatives from some mortgage servicers
                             and industry associations also noted that military orders, which
                             servicemembers must provide to their mortgage servicers in order to
                             receive the SCRA interest rate protection, can be difficult to interpret. In
                             particular, a representative from one mortgage servicer noted that the
                             orders do not always clearly specify the start and end dates of active duty
                             service and that the format and content of these orders can vary
                             considerably across services, which may lead to mistakes by mortgage
                             servicer personnel responsible for determining eligibility. Further, a DOD
                             official explained that in some instances, military orders may not be
                             available in a timely manner. For example, he stated that members of the
                             reserve components may be alerted that their unit is being mobilized on a
                             certain date; however, the servicemembers may not get the actual military
                             orders until weeks later. This delay could lead to problems for both a
                             servicemember and a mortgage servicer. For example, if a
                             servicemember has been deployed, he or she may encounter difficulties
                             sending orders to his or her mortgage servicer. Without the orders, a
                             mortgage servicer may encounter difficulties verifying the
                             servicemember’s active duty start date in order to appropriately adjust
                             their payment amounts.

                             One of the primary tools mortgage servicers use to comply with SCRA is
                             a website operated by DOD’s Defense Manpower Data Center (DMDC)
                             that allows mortgage servicers and others to query DMDC’s database to
                             determine the active duty status of a servicemember. DMDC collects,
                             archives, and maintains DOD personnel data. Representatives from
                             mortgage servicers indicated that they use this website to confirm if a
                             borrower is an active duty servicemember and may be eligible for SCRA
                             protections and that they rely on the site to confirm if a servicemember is
                             on active duty status prior to conducting a foreclosure. Representatives
                             from one mortgage servicer also noted that they use the website to
                             confirm the period of time that borrowers are eligible for the SCRA
                             interest rate protections. The website is an important compliance tool
                             because servicemembers are eligible for the foreclosure protections even


                             Page 18                                       GAO-12-700 Mortgage Foreclosures
if they do not notify their mortgage servicers that they are serving on
active duty.

However, many representatives from mortgage servicers and industry
associations with whom we spoke cited challenges with the usability of
the website. Moreover, confusion appears to exist in the mortgage
servicing industry about the availability of information in the database. For
example, prior to April 2012, the website only allowed mortgage servicers
to inquire about borrowers’ active duty status one individual at a time. The
inability to test large numbers of borrowers simultaneously—known as
batch testing—made confirming borrowers’ SCRA eligibility difficult given
the large volumes of mortgages that some institutions service.
Representatives from some mortgage servicers also indicated that
sometimes the personnel information available from DMDC is not
complete or accurate and that the database may produce a false-negative
result. That is, it will indicate that servicemembers were not on active duty
status when in fact they were. DMDC officials explained that information
contained in the database depends on information provided to DMDC by
the various services. Therefore, if a service has not reported a
servicemember to DMDC as being on active duty status, the database will
report that the servicemember is not on active duty. Additionally,
representatives from mortgage servicers told us that they believe some
servicemembers are not listed in the database. For example, one
explained that, in some instances they have received orders from
servicemembers, but when they query the database to confirm the active
duty status, the servicemembers are not listed as on active duty. Other
mortgage servicer representatives believed that some servicemembers
may not be listed in the database for national security reasons, such as
those serving in the Special Forces. However, DMDC officials told us that
active duty status is updated for all servicemembers, including those on
special operations.

To help address these challenges, DOD is working with the mortgage
servicing industry and industry associations to improve both the usability
of the website and the readability of military orders. First, to aid mortgage
servicers’ ability to query the database, DMDC has developed and
implemented a way for mortgage servicers and others to conduct batch
queries of the database from the website for up to 250,000




Page 19                                        GAO-12-700 Mortgage Foreclosures
                           servicemembers at a time. 38 DOD officials also noted that they are trying
                           to develop the capability of the database to query historical information
                           and also to distinguish between those active duty periods for
                           servicemembers in the National Guard that provide SCRA protections
                           and those that do not.

                           Second, DOD has collaborated with the financial industry through the
                           Financial Services Roundtable’s Housing Policy Council—a consortium of
                           financial institutions that provide mortgage credit—to develop an
                           alternative military order form that servicemembers can attach to or
                           provide in lieu of their military orders when requesting relief under SCRA
                           from their mortgage servicers. This form is intended to be easier for
                           mortgage servicers to interpret as it is shorter and more standardized
                           than official orders, which can vary by service. According to DOD officials,
                           this alternative form was approved by DOD in December 2011 and has
                           been distributed to the military services as well as to financial institutions
                           and is being used by servicemembers.



Federal Regulators’
Oversight of SCRA
Compliance Has Been
Limited

Prudential Regulators      Prudential regulators—FDIC, Federal Reserve, NCUA, and OCC—are
Examine for SCRA           responsible for supervising depository institutions’ compliance with
Compliance Based on Risk   various federal consumer laws including SCRA. Consumer compliance
                           examinations are one of the primary tools regulators use to assess this
Factors                    compliance. Prudential regulators all use a risk-based approach to
                           consumer compliance examinations to determine which areas to target,
                           with areas of higher risk receiving greater focus during examinations. For
                           example, according to the FDIC consumer compliance examination



                           38
                              DMDC made changes to the website in April 2012. These changes removed the data
                           field on active duty start date from search results. However, according to a representative
                           of a large mortgage servicer, it used that field to determine if servicemembers obtained
                           their mortgages prior to active duty status. In May 2012, DMDC announced that this field
                           would again be made available from database queries.




                           Page 20                                                 GAO-12-700 Mortgage Foreclosures
manual, riskier areas may include ones that involve regulatory changes or
complex products. Regulatory officials also told us that because of this
risk-based approach, SCRA may not be included or fully addressed within
the scope of an examination. For example, officials from one regulator
told us that when deciding to include SCRA in an examination they may
consider, among other things, consumer complaints, internal audit results
of the institution’s compliance management system, and problems raised
in the media. Regulators also use the risk-based approach to determine
the specific examination procedures they use to assess compliance.
Areas of higher risk would be subject to more extensive review
procedures, while areas of lower risk would receive less extensive review.
For example, according to OCC’s examination manual, areas of greater
risk may involve more extensive testing of loan transactions for
compliance.

In 2009, the regulators developed interagency examination procedures
related to SCRA through the Federal Financial Institutions Examination
Council (FFIEC), including a specific checklist that examiners can use in
their examinations. 39 The interagency SCRA procedures and checklist
indicate that examiners should determine whether depository institutions
applied and properly calculated interest-rate reductions, whether any
foreclosures were conducted without a court order, and whether any
servicemember requests for SCRA protection were inappropriately
reported as adverse information to a credit reporting agency. Additionally,
the interagency procedures suggest, among other things, that examiners
(1) consider reviewing SCRA policies, procedures, and account
documentation when assessing the adequacy of the institution’s internal
controls and (2) review whether the depository institution’s compliance
reviews and audit materials include transaction testing of samples
covering relevant product types. The checklist contains a series of
questions related to different sections of SCRA, including the ones that
apply to residential mortgages.

In addition to routine risk-based consumer compliance examinations,
prudential regulators conduct targeted reviews of areas of high concern.



39
  FFIEC is an interagency body that prescribes uniform principles, standards, and report
forms for depository institution examinations. Its members currently include CFPB, FDIC,
Federal Reserve, NCUA, and OCC. A representative state regulator also serves as a
voting member of FFIEC. SCRA was not one of the enumerated laws under the Dodd-
Frank Act for which oversight transferred to CFPB.




Page 21                                                GAO-12-700 Mortgage Foreclosures
                         For example, FDIC, Federal Reserve, and OCC conducted an interagency
                         review of the foreclosure policies and practices of 14 mortgage servicers in
                         late 2010, in response to the large number of foreclosures since 2007 and
                         continued weaknesses in the mortgage market. The examiners evaluated
                         the adequacy of each mortgage servicer’s operating procedures and
                         controls and preparation of foreclosure documentation, among other things.
                         Although the interagency review was not intended to directly assess SCRA
                         compliance, during the course of this effort, two mortgage servicers
                         nonetheless identified SCRA compliance problems. 40 Additionally, in June
                         2011, OCC issued guidance to all of its regulated institutions that required
                         them to conduct self-assessments of their foreclosure management
                         practices. OCC examiners will review the self-assessments in the
                         subsequent examination of the institutions. 41


Oversight of SCRA        The extent to which SCRA was reviewed varied by the size of the
Compliance Varied by     depository institution, the year in which the examination took place, and
Institution, Year, and   the regulator that conducted the examination from 2007 through 2011.
                         Based on our review, we estimate that from 2007 through 2011,
Regulator                prudential regulators reviewed SCRA compliance in at least one
                         examination for 48 percent of all the institutions they oversaw that
                         serviced mortgages. 42 This estimate includes documentation of an SCRA
                         review for any type of loan product (e.g., residential mortgage, credit card,
                         automobile, and other types of products). Some of the reasons bank
                         examiners cited for including SCRA in the scope of an examination


                         40
                          GAO, Mortgage Foreclosures: Documentation Problems Reveal Need for Ongoing
                         Regulatory Oversight, GAO-11-433 (Washington, D.C.: May 2, 2011), p.28.
                         41
                           The prudential regulators and others recently took steps intended to address mortgage
                         servicer practices that may pose risk to homeowners serving in the military. In June 2012,
                         FDIC, Federal Reserve, OCC, NCUA, and CFPB issued joint guidance to mortgage
                         servicers regarding servicemembers with permanent change-of-station orders. Because
                         such physical relocations can affect servicemembers’ ability to pay their mortgages, the
                         guidance states that mortgage servicers should ensure that their employees are
                         adequately trained about options for homeowners undergoing such relocations and take
                         steps to ensure that information on relevant assistance programs is accurate and readily
                         understandable. Similarly, in June 2012, FHFA announced that Fannie Mae and Freddie
                         Mac will consider a servicemember’s receipt of permanent change-of-station orders as
                         making such borrowers eligible for a short-sale, even if the borrower is current on his or
                         her mortgage.
                         42
                           All estimates from our workpaper review are subject to sampling error. For this estimate,
                         we are 95 percent confident that the actual population value is between 45 percent and 52
                         percent.




                         Page 22                                                 GAO-12-700 Mortgage Foreclosures
included the need to follow up on previous violations and deficiencies,
changes in regulatory requirements, and identification of SCRA loans
being serviced. To determine the extent to which SCRA compliance was
included in examinations of depository institutions and the procedures
examiners used to assess SCRA compliance, we reviewed workpapers
for examinations conducted by FDIC, Federal Reserve, NCUA, and OCC.
We reviewed the workpapers for examinations from 2007 to 2011 for a
sample of 152 institutions that service mortgages they hold in their loan
portfolios or service mortgages for other institutions. 43 The 152 institutions
represented a stratified random sample of institutions based on size and
regulator examined from 2007 through 2011. Because officials from some
regulators told us that they may not conduct an examination for every
institution every 12 months, and because SCRA might not be covered in
each risk-based examination, we looked at examinations spanning a 5-
year period.

Based on our sample, we found that prudential regulators included a
review of SCRA compliance in at least one examination for a greater
percentage of large institutions than all other institutions. In this report,
the 40 large institutions are comprised of the 10 largest mortgage
servicers regulated by each of the four prudential regulators. Specifically,
we found that about 70 percent of these large institutions were reviewed
for SCRA compliance at least once from 2007 through 2011 compared
with an estimated 48 percent of all other institutions for the same period. 44
Officials from one regulator indicated that one reason for this difference
might be that the larger institutions conducted more mortgage lending
than smaller institutions; therefore, examiners may be more likely to
review SCRA compliance at larger institutions.

We also found that the extent to which examiners reviewed for SCRA
compliance varied by year. In 2010, examinations for SCRA compliance



43
  We selected a sample of 160 institutions, but a total of 8 were determined to be out of
the scope of our study for various reasons, such as being new institutions that had yet to
have been examined. See appendix I for additional information about our sampling
methodology.
44
   We reviewed examinations for all 40 of the large institutions, and therefore the
percentage presented is the percentage of these 40 large institutions, and is not an
estimate. For our estimates of the remaining institutions, we are 95 percent confident that
the actual population of these institutions that were examined for SCRA is between 45
percent and 52 percent.




Page 23                                                 GAO-12-700 Mortgage Foreclosures
occurred in an estimated 26 percent of all institutions, compared with
2007 when about 4 percent of all institutions were reviewed for SCRA.
Figure 2 shows the distribution in the percentage of institutions examined
for SCRA compliance for each year from 2007 through 2011. Some of the
regulatory officials told us that reasons for the differences by year may
include the adoption of SCRA interagency examination procedures in
2009 and increased attention to the impacts of the financial crisis on
servicemembers in recent years.

Figure 2: Estimated Percentage of Depository Institutions That Serviced Mortgages
That Were Examined for SCRA Compliance by Year, 2007 through 2011




Note: The percentage of institutions that had an examination in each year is not mutually exclusive.
This means that one institution could have had an examination that addressed SCRA in more than 1
year. The error bars represent 95 percent confidence intervals for each of these estimates. The
confidence intervals represent the upper and lower bounds of our estimates.


We also found that among just the 40 large institutions, a greater
percentage had an SCRA compliance review in 2010 and 2011 compared
with earlier years:

•    in 2010 and also in 2011, about 40 percent of the institutions had an
     SCRA review,

•    about 13 percent of these institutions were reviewed for SCRA
     compliance in 2009,

•    about 23 percent of these institutions were reviewed for SCRA
     compliance in 2008, and




Page 24                                                       GAO-12-700 Mortgage Foreclosures
•      in 2007, 10 percent were reviewed for SCRA compliance. 45

Our analysis also revealed differences by regulator in the extent to which
SCRA was reviewed for compliance. Figure 3 shows that both FDIC and
Federal Reserve reviewed a significantly higher percentage of institutions
for SCRA compliance compared with NCUA and OCC. It also shows that
OCC reviewed a greater percentage of institutions than NCUA. NCUA
officials explained that the agency does not have a separate consumer
compliance examination function and that consumer compliance is part of
its overall evaluation of the safety and soundness of institutions. The
officials said that given the recent economic crisis, the agency has placed
more focus on the safety and soundness of credit unions than on
compliance with consumer regulations. They said that this is part of the
reason the percentage of credit unions that received an SCRA
compliance review is so low. However, our prior work has found that
mortgage servicing problems, including inadequate controls over
foreclosure processes, have led to risks to the safety and soundness of
depository institutions. 46




45
 We reviewed examinations for all 40 of the large institutions, and therefore the
percentages presented are the percentages of these 40 large institutions, and are not
estimates.
46
     GAO-11-433, pp. 48-52.




Page 25                                                GAO-12-700 Mortgage Foreclosures
Figure 3: Estimated Percentage of Depository Institutions That Serviced Mortgages
That Were Examined for SCRA Compliance by Regulator, 2007 through 2011




Note: Error bars in this graph represent the 95 percent confidence intervals for estimates displayed.
Six of the depository institutions in the sample were regulated by the Office of Thrift Supervision
(OTS) until July 2011. The Dodd-Frank Act eliminated OTS and supervisory authority of these six
depository institutions was transferred to OCC. We included these six institutions in our sample strata
for large and OCC-regulated institutions because at the time we selected our sample, these six
institutions were under OCC’s supervisory authority. OCC officials explained that OTS conducted
most of the examinations of these institutions during the period we reviewed and that OTS’s
examination practices related to SCRA may have differed from those of OCC.


For the estimated 52 percent of institutions that were not examined for
SCRA compliance from 2007 through 2011, examiners did not document
their reasons for excluding SCRA for at least 95 percent of these
institutions. 47 In our review, we found four examinations for which
examiners had documented in the workpapers a reason for not including
SCRA compliance. For three of these examinations, the reason cited was
that examiners had recently examined for SCRA compliance and found
no violations, deficiencies, or other concerns. The fourth examination
reviewed the depository institutions’ progress in addressing consumer
compliance issues identified in the previous examination and because
SCRA compliance was not one of the issues of concern identified in the
previous examination, it was excluded from the examination we reviewed.

Regulatory officials offered a few reasons to explain why an examiner
may not include SCRA compliance in an examination. For example,
officials from one regulator said that some depository institutions might


47
  We are 95 percent confident that the actual population value for institutions that were
not examined for SCRA is between 48 percent and 56 percent. We are 95 percent
confident that the actual population value for institutions for which examiners failed to
document their reasons for excluding SCRA is between 95 percent and 100 percent.




Page 26                                                        GAO-12-700 Mortgage Foreclosures
                           not serve large military populations. Therefore, examiners might not
                           consider compliance with SCRA mortgage protections a substantial risk
                           to these institutions. Additionally, officials from one prudential regulator
                           indicated that examiners may choose to exclude SCRA compliance from
                           an examination if the institution had received few complaints concerning
                           SCRA-related issues. The regulators indicated that they had received
                           very few SCRA complaints related to residential mortgages between 2007
                           and 2011 compared with the number of consumer complaints they
                           received overall during this period. 48


Examiners Generally Used   As part of our review of examination workpapers for the 152 institutions in
Limited Loan Testing       our sample, we collected information on the procedures examiners used
                           to assess compliance with SCRA if an examination reviewed residential
                           mortgage loans or if the workpapers did not specify the loan product
                           being addressed. We included examinations in which the loan product
                           was not specified to help ensure that we reviewed any examination
                           procedures that may have addressed residential mortgages. Our review
                           found a total of 83 institutions for which examiners either reviewed SCRA
                           compliance for residential mortgage loans or did not specify the loan
                           product being reviewed. The figures presented for this analysis are not
                           generalizable to the population of institutions that service mortgages.
                           After reviewing examination guidance and auditing standards, we
                           grouped examiners’ documented examination procedures into three
                           categories based on our professional judgment as to the extent that each
                           type of procedure would provide assurance that financial institutions were
                           complying with SCRA:

                           •    Interviews with depository institution personnel. This category
                                includes activities in which examiners interviewed staff at the
                                depository institution for information on, among other things, their
                                compliance management systems and whether the institution services
                                loans to servicemembers eligible for SCRA protections.

                           •    Assessments of depository institutions’ compliance management
                                systems. This category includes instances in which examiners


                           48
                             In addition, our review of the regulators’ 2007 through 2011 complaint data revealed that
                           collectively they had received 201 SCRA complaints from 2007 through 2011, 88 (44
                           percent) of which pertained to residential mortgages. This number represents less than 1
                           percent of all complaints the prudential regulators received during this period.




                           Page 27                                                 GAO-12-700 Mortgage Foreclosures
    documented that they reviewed the quality of depository institutions’
    compliance management systems, such as reviewing institutions’
    SCRA policies and procedures, internal controls, and training
    programs.

•   Testing loan files for SCRA compliance. This category includes
    activities such as testing a limited number of loan files the institution
    identified as SCRA-eligible or conducting more comprehensive
    testing, such as reviewing a statistical sample of loan files.

Of these categories, the first category—interviews with depository
institution personnel—provides the least assurance of SCRA compliance
because the examiner would be relying primarily on assertions provided
by institution personnel rather than an independent assessment or
verification of these assertions. The second category—assessments of
institutions’ compliance management systems—provides greater
assurance of SCRA compliance because these procedures require
examiners to independently assess the quality of the depository
institutions’ procedures and internal controls. The final category—testing
of loan files—provides even greater assurance of SCRA compliance
because examiners can independently verify whether the institution’s
personnel provided all necessary SCRA protections.

Although in many examinations examiners documented that they used an
assortment of examination procedures from different categories to assess
compliance with SCRA, we categorized each of the 83 institutions whose
SCRA compliance was assessed during the 5-year period of our review
by the highest assurance level of the examination procedures that were
used in any of the examinations done of that institution from 2007 through
2011. Based on this analysis, we found that only about half of these
institutions had any testing conducted during this 5-year period.
Specifically, of these 83 institutions, we found that

•   6 institutions had examinations during this period that relied on
    interviews of depository institution staff to assess SCRA compliance
    as their highest category of examination procedure,

•   36 institutions had examinations in which the highest category of
    examination procedure used to assess SCRA compliance was to
    review the institution’s compliance management system, and

•   41 institutions had examinations that involved testing of loan files as
    the highest category of examination procedure—the examination



Page 28                                          GAO-12-700 Mortgage Foreclosures
                           procedure category that provides a greater level of assurance for
                           SCRA compliance than the previous two categories.

                       However, at the 41 institutions at which examiners tested loan files, we
                       found that the type of testing conducted was limited. Examiners can
                       choose from different types of testing methods that provide differing levels
                       of assurance that an institution is complying with SCRA. For example,
                       within the testing category, testing a limited sample of loan files that
                       depository institutions identified as SCRA-eligible provides less
                       assurance of compliance because it relies on assertions by depository
                       institutions of SCRA eligibility, whereas testing a statistical sample of
                       loans provides greater assurance because it allows examiners to
                       independently select files for testing, and the results would be
                       representative of the institution’s compliance. In the examinations we
                       reviewed, the examiners mostly tested a limited sample of loans that the
                       depository institution had identified as SCRA-eligible and, therefore,
                       provided less assurance that the institution was complying with SCRA.
                       We found no instances between 2007 and 2011 in which examiners
                       tested a statistical sample of either loans in foreclosure or mortgage loan
                       files in general, which would have provided the greatest assurance of an
                       institution’s SCRA compliance. By testing only foreclosure files or
                       mortgage loan files that the depository institution had identified as SCRA-
                       eligible, examiners cannot fully determine if the institution has
                       appropriately identified all eligible servicemembers. By expanding the
                       scope of testing to include a larger sample of foreclosure and mortgage
                       loan files, beyond just those files that the depository institution had
                       identified as SCRA-eligible, examiners could better ensure that
                       institutions are appropriately identifying eligible servicemembers and
                       providing them all of the protections to which they are entitled. To
                       minimize the burden on institutions and examiners, such reviews could be
                       conducted as part of samples of loans drawn for examining compliance
                       with other regulatory requirements.


Coordination of SCRA   In addition to the prudential regulators, other federal agencies conduct
Oversight Lacking      oversight of SCRA compliance. SCRA authorizes DOJ to commence a
                       civil action against any person who engages in a pattern or practice of
                       violating the act or if a violation of the act raises an issue of significant




                       Page 29                                          GAO-12-700 Mortgage Foreclosures
public importance. 49 DOJ staff indicated that they consider military
attorneys to be the most likely staff to help ensure that a servicemember
is afforded their SCRA protections. For cases in which a military attorney
is unable to obtain voluntary compliance from a mortgage servicer or
other person or entity doing business with a servicemember, DOJ has a
system in place to receive referrals for these cases and to open
investigations. DOJ officials told us and military attorneys confirmed that,
in most cases, military attorneys are able to resolve SCRA matters
without referring them to DOJ. DOJ also receives referrals for SCRA
investigations from private attorneys and individual servicemembers and
their families. When DOJ receives an SCRA referral, officials investigate
the matter and determine if a full investigation should be opened. 50
Investigations can result in DOJ filing a civil action against the party in
court for alleged SCRA violations, or a resolution with the party may be
reached without filing the case in court.

DOJ filed a total of five cases in court from 2007 through 2011 for SCRA
violations. Two of these cases—BAC Home Loans Servicing, LP and
Saxon Mortgage Services, Inc.—involved SCRA violations regarding
servicemembers’ mortgages. In May 2011, DOJ took enforcement actions
against both mortgage servicers for wrongfully foreclosing upon active
duty servicemembers without obtaining court orders. DOJ alleged that
both mortgage servicers did not consistently check the military status of
borrowers on whom they foreclosed, resulting in 165 improper
foreclosures between 2006 and December 2010 (as listed previously in
table 1). In its enforcement actions, DOJ required each of these mortgage
servicers to pay damages to servicemembers and conduct a variety of
remedial actions. For example, BAC Home Loans Servicing agreed to
pay at least $20 million to resolve the lawsuit, and Saxon Mortgage
Services agreed to pay at least $2.35 million. The mortgage servicers
were also required to, among other things, (1) implement revised SCRA
policies and procedures for using the DMDC website, (2) implement a
foreclosure monitoring program, (3) provide SCRA compliance training to
all applicable employees, and (4) conduct reviews to identify additional



49
  50 U.S.C. app. § 597. This provision was added to SCRA in October 2010. See Pub. L.
111-275, § 303(a), 124 Stat. 2877.
50
  We use the term investigation to refer to a written or oral inquiry for which a DOJ official
spends at least 2 hours investigating. DOJ uses the term matter to describe these
instances.




Page 30                                                   GAO-12-700 Mortgage Foreclosures
servicemembers who may have had their SCRA rights violated and
compensate them. Appendix II discusses these reviews in more detail. In
addition to the 5 SCRA cases DOJ filed in court, DOJ opened 45
additional SCRA investigations from referrals it received between 2007
and 2011, 9 of which involved servicemembers’ mortgages. 51 One of
these referrals involved a servicemember’s request to waive the
prepayment penalty on her mortgage when she received a permanent
change-of-station order and sold her home to move closer to the new
base. DOJ was able to reach a resolution with the mortgage servicer
without trying the case in court. Another investigation involved allegations
of a mortgage servicer charging interest in excess of the SCRA maximum
of 6 percent. DOJ officials stated that this investigation was resolved in
favor of the servicemember. Finally, in February 2012, DOJ settled with
five of the nation’s largest mortgage servicers for a variety of improper
mortgage servicing procedures, including allegations of SCRA violations.
More information on the National Mortgage Settlement is contained in
appendix II.

Other federal agencies that operate mortgage programs also oversee
certain aspects of SCRA compliance. For example, to participate in FHA’s
mortgage programs, mortgage servicers must comply with the agency’s
program requirements, which include complying with all applicable laws
and regulations, including SCRA. FHA officials explained that they use a
risk-based approach to monitor the institutions that service the loans the
agency insures. Officials told us that from 2007 through 2011, FHA
conducted about 200 mortgage servicer monitoring reviews. They
explained that each review consists of a sample of the mortgage
servicer’s loan files and FHA staff use a checklist to help ensure that the
mortgage servicer is in compliance with a variety of servicing
requirements for each loan in the sample. One of the requirements
reviewed for each loan is the distribution of the HUD counseling notice
that includes information on SCRA eligibility to borrowers who are at least
45 days delinquent. Agency officials explained that a more thorough
review of SCRA compliance is conducted if a mortgage servicer has
identified that the borrower is an active duty servicemember. For loans
that a mortgage servicer has marked with a code to indicate that the
borrower is an active duty servicemember, FHA staff conduct additional


51
  Because DOJ does not document inquiries that require less than 2 hours of
investigation, the number of investigations listed here may underestimate the number of
SCRA referrals DOJ received.




Page 31                                                GAO-12-700 Mortgage Foreclosures
steps to better ensure that the mortgage servicer has provided the
servicemember appropriate SCRA protections, as well as additional
protections that FHA provides to active duty servicemembers who have
FHA-insured loans. These steps include ensuring that the interest rate
has been appropriately adjusted and that foreclosure was postponed.
FHA officials stated that they rely on mortgage servicers to appropriately
identify active duty servicemembers. Although they may review SCRA
compliance on specific loans, FHA officials told us that their reviews are
not intended to assess the adequacy of the mortgage servicers’ SCRA
compliance policies and procedures or to determine whether these
policies are functioning for all of a servicer’s activities. As a result of
FHA’s servicer monitoring reviews, some SCRA compliance problems
have been identified. For example, FHA officials told us that between
2007 and 2011 the agency found two instances of SCRA noncompliance
during its mortgage servicer monitoring reviews. One of these instances
involved a mortgage servicer failing to send the HUD counseling notice
that includes information on SCRA eligibility to borrowers delinquent 45 or
more days, and the other violation involved a mortgage servicer failing to
verify a borrower’s active duty status prior to foreclosure.

Although VA interacts with mortgage servicers as part of its Home Loan
Guaranty Program, VA officials explained that the program currently does
not conduct in-depth reviews of mortgage servicers’ policies and
procedures and loan files to review overall compliance with SCRA
mortgage protections. The officials explained that they are in the process
of finalizing a program that will conduct on-site audits of mortgage
servicers’ functions and that they expect the program to be implemented
in late 2012. VA officials explained that this program will include reviews
of servicers’ loan files and policies and procedures for monitoring and
identifying SCRA-eligible borrowers to determine servicers’ overall
compliance with SCRA mortgage protections. Officials explained that in
the wake of recently identified SCRA violations, they conducted a review
of all VA loan files that were in foreclosure from October 2009 to January
2011 to determine if any of the borrowers were possibly eligible for SCRA
mortgage protections. The officials said that they identified approximately
30,000 borrowers in foreclosure during that period and that they
conducted an in-depth review of 47 loans that were potentially eligible for
SCRA mortgage protections. VA determined that none of these borrowers
were improperly foreclosed upon. They have recently expanded this
review to include a longer time period, but as of June 2012, they had not
completed the review to determine if any borrowers were improperly
foreclosed upon.



Page 32                                       GAO-12-700 Mortgage Foreclosures
VA officials explained that they do conduct reviews of the adequacy of
servicing being conducted by servicers. These reviews—Adequacy of
Servicing reviews—are conducted on all loans over 120 days delinquent
to determine if servicers have provided adequate servicing to borrowers,
but according to VA officials, they are intended to explore loss mitigation
options and not to examine for SCRA compliance. The officials explained
that during these reviews, VA reviews mortgage servicers’ notes on the
account to determine if they have provided adequate servicing to the
borrower. Specifically, they check to see if the mortgage servicer has
contacted the borrower, if a reason for default has been determined, if
loss mitigation options have been considered, and why any loss
mitigation options that were considered were not completed. Officials
explained that if the mortgage servicer has taken the appropriate steps,
VA would determine that the servicing provided was adequate. If VA
determines that the servicing being provided was not adequate, or if the
servicer was unable to contact the borrower, it conducts supplemental
servicing on the loan and works with the borrower directly to explore loss
mitigation options. According to VA officials, they may learn during these
reviews that the loan involves an active duty servicemember. However,
the Adequacy of Servicing reviews currently do not evaluate the extent to
which servicers have assessed whether borrowers are eligible for SCRA
mortgage protections. They also explained that while their procedures for
conducting these reviews do not address reviewing for compliance with
SCRA mortgage protections, VA loan technicians encourage borrowers to
review their SCRA mortgage protections with military attorneys.
Additionally, VA officials explained that they do not have a mechanism for
tracking if these reviews have identified SCRA-eligible borrowers. As part
of VA’s mission to serve servicemembers, VA officials told us that they try
to ensure that servicemembers have received every opportunity to keep
their homes and avoid foreclosure. VA officials explained that they rely on
federal regulators to investigate and enforce statutory requirements, such
as SCRA. However, given that VA staff also oversee servicers’ activities,
they do have the opportunity to review servicers’ efforts to determine
SCRA eligibility, such as by making an inquiry with the servicer of the
loan or consulting DOD records to determine if the borrower is an active
duty servicemember. Without such a review, the extent to which the
agency is ensuring servicemembers are receiving all protections to which
they are entitled is not clear.

The enterprises—Fannie Mae and Freddie Mac—also conduct SCRA
compliance monitoring at the mortgage servicers that service loans on
their behalf. This monitoring focuses on enforcing contractual
requirements between the enterprises and mortgage servicers to ensure


Page 33                                       GAO-12-700 Mortgage Foreclosures
that mortgage servicers are following the servicing guidelines issued by
the enterprises. The servicing guidelines outline mortgage servicers’
compliance obligations for several different laws and regulations,
including SCRA. The SCRA components of the guidelines include
information for mortgage servicers on, among other things, how SCRA
relief is initiated and how interest rates are reduced, as well as
foreclosure proceedings and credit reporting. Enterprise officials
explained that SCRA compliance is not included in each review
conducted. If it is included, Fannie Mae officials explained that examiners
seek to understand how a mortgage servicer checks for SCRA
compliance and conducts testing of the servicers accounting methods for
SCRA compliance. 52 For example, if a servicemember has an interest
rate that is greater than 6 percent, examiners test to ensure that interest
rate and payment amounts have been properly reduced. Freddie Mac
officials told us they assess the mortgage servicer’s understanding of
SCRA and the procedures in place to ensure compliance. The
enterprises’ SCRA compliance monitoring efforts have identified some
instances of noncompliance. For example, Fannie Mae identified 13
instances of noncompliance with its SCRA guidelines between 2007 and
2011, and Freddie Mac has identified 2 instances. These instances of
noncompliance involved issues such as mortgage servicers not having
comprehensive SCRA compliance policies and procedures and mortgage
servicers not properly verifying the active duty status of servicemembers.
Officials from FHFA—the enterprises’ regulator—stated that its
supervisory focus for SCRA compliance is to confirm that the enterprises
are taking steps to ensure that the mortgage servicers with which they
have contracts comply with the contracts’ requirements which include
compliance with applicable laws.

Although the prudential regulators, FHA, VA, and FHFA all have a role in
helping ensure that mortgage servicers provide appropriate SCRA
protections to eligible servicemembers, currently none of these entities




52
   A Fannie Mae official told us that as of November 2011, the examiner guidance they
used for SCRA compliance reviews only included procedures for examining for
compliance with the interest rate provisions of SCRA, but that they were working to update
it for 2012 to incorporate compliance with SCRA’s foreclosure provisions.




Page 34                                                GAO-12-700 Mortgage Foreclosures
share information related to SCRA compliance with one another. 53 While
the extent of oversight conducted by these entities varies, they do review
for some of the same SCRA provisions, such as those related to interest
rate reductions and foreclosures. Furthermore, some of the mortgage
servicers that participate in FHA’s and VA’s loan programs and service
loans on behalf of the enterprises are also subject to oversight by one of
the prudential regulators, which review for SCRA compliance during their
examinations. Although these agencies obtain SCRA-related information
about many of the same institutions, FHA, VA, and FHFA officials stated
that they have not coordinated with the prudential regulators on SCRA
compliance issues. Further, FHFA officials stated that while they
participate in some forums with the prudential regulators to coordinate on
various issues, they were not aware of any coordination related to SCRA
compliance.

In our work on the many agencies that are involved in the federal financial
regulatory system, we have previously stated that collaboration among
financial regulatory agencies with common responsibilities is essential to
ensuring consistent and effective supervisory practices. 54 Further, we
have previously reported that federal agencies and prudential regulators
do coordinate on oversight of other consumer protection laws, such as
the Fair Housing Act and Equal Credit Opportunity Act, known collectively
as “fair lending laws.” 55 Similar to oversight of SCRA, responsibility for
oversight of the fair lending laws is shared among the prudential
regulators and other federal agencies, including DOJ, HUD, and the
Federal Trade Commission. We reported that these agencies had taken
several steps to establish common policies and procedures and share


53
  The prudential regulators already have an agreement to share such information with
another financial regulator. In May 2012, the prudential regulators and the Consumer
Financial Protection Bureau issued a Memorandum of Understanding (MOU) that clarifies
how the agencies will coordinate their supervisory activities. Under the MOU, the agencies
will coordinate examinations and other supervisory activities and share certain material
supervisory information concerning compliance with federal consumer financial laws and
certain other federal laws that regulate consumer financial products and services,
including SCRA.
54
  GAO, Financial Market Regulation: Agencies Engaged in Consolidated Supervision Can
Strengthen Performance Measurement and Collaboration, GAO-07-154 (Washington,
D.C.: Mar. 15, 2007).
55
  GAO, Fair Lending: Data Limitations and the Fragmented U.S. Financial Regulatory
Structure Challenge Federal Oversight and Enforcement Efforts, GAO-09-704
(Washington, D.C.: July 15, 2009).




Page 35                                                GAO-12-700 Mortgage Foreclosures
information about their fair lending oversight programs. For example, the
agencies established the Interagency Fair Lending Task Force to develop
a coordinated approach to address discrimination in lending and adopted
a policy statement on how the various agencies were to conduct oversight
and enforce the fair lending laws. At that time, federal officials said that
coordinating on fair lending issues allows the agencies to exchange
information on a range of common issues, informally discuss fair lending
policy, and confer about current trends or challenges in fair lending
oversight and enforcement. FHFA officials explained that the agency has
existing memorandums of understanding with prudential regulators and
HUD that establish the protocols they use to discuss trends, risks, and
other emerging issues on a variety of topics with these other agencies,
but that SCRA has not been a topic during these discussions. FHFA does
not currently have a memorandum of understanding with VA to share
information, but the officials explained that they have worked with the
agency in the past on issues such as appraisals and that they have done
so through letter arrangements that allow them to share information.
These existing arrangements could provide a mechanism for SCRA
information to be shared between FHFA and the prudential regulators,
FHA, and VA. However, currently no such sharing arrangements exist
between the prudential regulators, FHA, and VA. Although FHA, VA, and
the enterprises that FHFA oversees have identified limited instances of
SCRA violations in recent years, the sharing of information related to
SCRA trends, emerging risks, or types of weaknesses found in mortgage
servicers’ policies among all agencies that play a role in SCRA
compliance oversight could increase awareness of potential problems
and improve their ability to identify SCRA violations.




Page 36                                       GAO-12-700 Mortgage Foreclosures
Challenges in
Ensuring
Servicemembers’
Awareness of SCRA
Protections

DOD and DHS Education   Under SCRA, DOD services’ Secretaries and the Secretary of Homeland
Efforts                 Security have the primary responsibility for ensuring that servicemembers
                        receive information on their SCRA rights and protections. 56
                        Servicemembers are informed of their SCRA rights in a variety of ways.
                        For example, briefings are provided on military bases and during
                        deployment activities; legal assistance attorneys provide counseling; and
                        a number of outreach media, such as publications and websites, are
                        aimed at informing servicemembers of their SCRA rights. According to
                        DOD officials, the legal assistance attorneys are primarily responsible for
                        leading the military’s SCRA education efforts. Each of the military
                        services, including the Coast Guard under DHS, operates a number of
                        legal assistance offices throughout the country. 57 Legal assistance offices
                        are operated by military and civilian legal assistance attorneys who are
                        responsible for providing support to servicemembers on a variety of legal
                        issues, including family law and estate planning. 58 As part of their
                        responsibilities, they inform servicemembers about their rights and
                        benefits under SCRA.

                        Legal assistance attorneys provide SCRA support to servicemembers
                        using various methods. We spoke with legal assistance attorneys at six
                        military installations across the five services. They told us that they



                        56
                          Section 105, Codified at 50 U.S.C. App §515 and §690 of the National Defense
                        Authorization Act of Fiscal Year 2006, P.L. 109-113, codified at 50 U.S.C. App §515a.
                        57
                          As of May 2012, there were a total of 175 legal assistance offices throughout the country
                        and over 60 legal assistance offices located internationally.
                        58
                          10 U.S.C 1044. All regular, active duty servicemembers and members of the reserve
                        components on active duty for 30 days or more are eligible to obtain legal support from a
                        legal assistance office. For members of the reserve components, this access extends for a
                        period twice the length of the servicemembers’ active duty period when the
                        servicemember is no longer on active duty service.




                        Page 37                                                GAO-12-700 Mortgage Foreclosures
provide servicemembers with information on SCRA during routine
briefings on military installations, in handouts, and during one-on-one
sessions with individual servicemembers. Two legal assistance attorneys
told us that they alert installation staff, including unit commanders, to
direct servicemembers to their legal assistance offices if they have a
problem. Legal assistance attorneys also told us that they will contact
depository institutions on behalf of servicemembers to help them receive
their SCRA protections. Some legal assistance attorneys also told us that
they provide templates of letters for servicemembers to send to their
mortgage servicer to request a reduction in their mortgage interest rate.
Additionally, legal assistance attorneys told us that they will refer
servicemembers to the American Bar Association’s (ABA) Military Pro
Bono Project if they are unable to resolve an SCRA matter for a
servicemember. ABA’s program connects active duty servicemembers to
pro bono attorneys who assist them with civil legal problems. 59

SCRA requires that servicemembers be informed of the rights and
protections available under SCRA upon entry into the military, during
initial orientation training, and, in the cases of members of the reserve
components, when called to active duty for a period of more than 1
year. 60 Predeployment briefings generally occur at the military installation
that deploys the servicemember and, in addition to SCRA, cover a range
of other legal and financial issues, such as the preparation of wills and
powers of attorney. According to DOD officials, members of the reserve
components may receive this briefing numerous times at their home
station prior to deployment. Servicemembers are also provided with an
additional opportunity to learn about their rights under SCRA upon
returning from deployment. According to DOD officials, because some
SCRA protections extend for a 9- or 12-month period beyond
servicemembers’ active duty service, obtaining information at the end of
deployment is critical for those servicemembers who will no longer be on
active duty and will lose access to military-provided legal assistance. As a
result, the Army reserve component—which includes the Army Reserve
and Army National Guard and is the largest portion of the reserve



59
  Only junior-enlisted (E6 or below) servicemembers are eligible for assistance through
the Military Pro Bono Project unless there are compelling circumstances and at the
discretion of the pro bono attorney or firm.
60
 Section 105, Codified at 50 U.S.C. App §515 and §690 of the National Defense
Authorization Act of Fiscal Year 2006, P.L. 109-113, codified at 50 U.S.C. App §515a.




Page 38                                                GAO-12-700 Mortgage Foreclosures
                      components—requires that members receive standardized post-
                      deployment training on SCRA.

                      DOD and DHS use a number of other methods to deliver SCRA
                      information to servicemembers, including military training courses,
                      publications, websites, and other family support services. For example,
                      DHS officials told us that all Coast Guard members are informed of their
                      SCRA rights during basic training. Some others may receive additional
                      SCRA training during their initial officer training at the Coast Guard
                      Academy or other advanced classes. DOD also publishes general articles
                      in newsletters and installation publications explaining servicemembers’
                      SCRA rights and more specific articles on the relationship between
                      mortgage difficulties and SCRA. Additionally, several military websites
                      contain information on SCRA, including websites for individual services
                      and military installations and sites such as Military OneSource—a DOD
                      online resource that is staffed with counselors who offer assistance to
                      servicemembers on a variety of topics, including financial counseling. 61
                      DOD also provides financial management and family support services
                      through the family readiness centers located at military installations.
                      These centers provide general financial management counseling on
                      topics such as reducing debt and saving for college to servicemembers’
                      families during periods of deployment and also share information on
                      SCRA and refer family members to the legal assistance office if they have
                      an SCRA issue.


Other SCRA Outreach   Other federal agencies also provide SCRA outreach and support to
Efforts               servicemembers and financial institutions in a variety of ways, including
                      oral briefings, written notifications, and websites. For example, VA
                      officials told us that some servicemembers who leave active duty service
                      participate in a multiday briefing conducted in partnership with VA, DOD,
                      and the Department of Labor. This briefing discusses reentering civilian
                      life, SCRA protections, and veterans’ benefits. Additionally, both VA and
                      FHA provide SCRA-related outreach to the institutions that participate in
                      their mortgage programs. For example, VA periodically sends written
                      notifications to all of its loan servicers reminding them of their compliance
                      responsibilities and alerts them to changes in the act when they occur.
                      FHA also provides information to its mortgage servicers on SCRA. Its



                      61
                       See www.militaryonesource.mil.




                      Page 39                                        GAO-12-700 Mortgage Foreclosures
website contains a list of questions and answers for mortgage servicers
on SCRA, servicemembers’ eligibility criteria, and FHA policies with
respect to servicing FHA-insured mortgages in compliance with SCRA.

The Consumer Financial Protection Bureau (CFPB) has an Office of
Servicemember Affairs that also plays a role in providing SCRA outreach
to servicemembers and mortgage servicers responsible for complying
with the act. As of May 30, 2012, CFPB officials had conducted 37 visits
to military installations and National Guard units and met with legal
assistance attorneys to discuss consumer protection issues
servicemembers have been facing, including SCRA. CFPB also sent
letters to 25 large mortgage servicers in 2011 alerting them of
servicemembers’ rights under SCRA and their responsibilities to comply
with the act. The letters specifically urged mortgage servicers to educate
their employees about SCRA and review their loan files to ensure
compliance with the law. Additionally, CFPB has held meetings in which
representatives from DOD and DHS and other federal agencies, financial
institutions, and trade associations discussed issues related to SCRA
compliance. CFPB officials also held a forum in which financial institutions
discussed activities—some that go beyond those required by SCRA—
they were undertaking to assist servicemembers’ with their mortgages. In
July 2011, CFPB and the Judge Advocate Generals of the Army, Marine
Corps, Navy, Air Force, and Coast Guard developed a joint statement of
principles to provide stronger protections for servicemembers in
connection with consumer financial products and services. Finally,
through its consumer response function, CFPB also works directly with
servicemembers by collecting consumer complaints against depository
institutions and coordinating those complaints with servicemembers’
depository institutions and if necessary, the appropriate legal assistance
offices.

Finally, military servicemember groups also assist servicemembers with
SCRA issues. Organizations such as the National Military Family
Association, the Military Officers Association of America, the Reserve
Officers Association, and others provide information on SCRA to their
members in a variety of ways. A representative from one military
servicemember group explained that its website—which contains
background information on SCRA and legal reviews of specific SCRA
provisions—is the group’s primary means of providing information to
servicemembers and the public on SCRA issues. Other representatives
with whom we spoke said that they provide information to their members
when changes to SCRA have occurred. For example, one military



Page 40                                       GAO-12-700 Mortgage Foreclosures
                             servicemember group highlights applicable legislative changes in weekly
                             electronic notifications to its members.


Servicemembers Face          DOD officials, legal assistance attorneys, and representatives of military
Challenges Asserting Their   servicemember groups with whom we spoke noted a number of
SCRA Protections, Raising    challenges with ensuring that servicemembers are aware of their SCRA
                             protections. One main challenge cited was servicemembers’ retention of
Questions about Training     the SCRA information they receive from DOD and DHS. Attorneys at
Effectiveness                each of the six legal assistance offices told us that servicemembers are
                             not aware of the full extent of their SCRA rights. In addition, several
                             military servicemember group representatives, a National Guard Bureau
                             official, and an SCRA expert told us that despite available information on
                             SCRA, servicemembers are not adequately prepared to invoke their
                             rights when needed.

                             According to DOD officials, the bulk of the SCRA education provided to
                             servicemembers occurs at military installations that focus on regular
                             active duty servicemembers. However, members of the reserve
                             components—those most likely to qualify for SCRA’s mortgage
                             protections—may not be located at military installations and, therefore,
                             have less access to these services and trainings. One DOD official told us
                             that members of the reserve components may receive SCRA briefings at
                             their home station. However, legal assistance attorneys at five of the six
                             legal assistance offices with whom we spoke told us that members of the
                             reserve components have limited access to legal assistance offices on
                             military installations when they are not on active duty. Having this limited
                             access to legal assistance could affect reserve components members’
                             ability to avail themselves of their SCRA protections when needed.
                             Additionally, some members of the reserve components face geographic
                             challenges with accessing legal assistance offices due to their distance
                             from military installations. About half of the military installations in the
                             United States are located in just 10 states, while members of the reserve
                             components live throughout the country. For example, the Chief Legal
                             Assistant for the Ninth Coast Guard District explained that the legal
                             assistance office for that district is located in Cleveland, Ohio, but the
                             office provides legal services to the entire Great Lakes Region.

                             Another challenge in ensuring that servicemembers are aware of their
                             SCRA protections when needed is the effectiveness of the educational
                             briefings provided by DOD and DHS. As discussed above, SCRA
                             requires that servicemembers receive SCRA training upon entry into the
                             military, during initial orientation training, and, for members of the reserve


                             Page 41                                         GAO-12-700 Mortgage Foreclosures
components, when called to active duty for a period of more than 1 year.
However, legal assistance attorneys who conduct this training and military
servicemember groups explained that its effectiveness is diminished
because of the volume of information presented, the timing of the training,
and the availability of legal assistance resources. For example, four
military officials told us that during predeployment activities and annual
National Guard weekend training activities, servicemembers attend
multiple, back-to-back briefings, which cover a variety of legal and
financial issues that are focused on a number of important topics, such as
family law and estate planning. One military attorney referred to these
briefings as “baptism by a fire hose” when trying to illustrate the volume of
information provided to servicemembers at these critical times. Further,
military attorneys with whom we spoke told us that the amount of time
legal assistance attorneys are able to spend with servicemembers during
pre- and postdeployment activities is limited due to the volume of
servicemembers deploying and returning from deployment. For example,
one military attorney told us that legal assistance attorneys might assist
250 deploying servicemembers with their legal affairs prior to deployment
and that during deployment there is limited time available to provide legal
assistance. Another legal assistance attorney stated that it would be
beneficial for members of the reserve components to have more time to
access military legal assistance resources when they return from
deployment because of concerns that they do not retain the information
they receive during postdeployment briefings. One legal assistance
attorney that assists members of the reserves specifically explained that
when he provides SCRA-related briefings to deployed servicemembers
who should have received SCRA briefings prior to deployment; many
seem like they are hearing the information for the first time. He suggested
that servicemembers’ retention of information could be improved if
deploying servicemembers receive more comprehensive briefings with
smaller groups of servicemembers. Additionally, a National Guard Bureau
official told us that predeployment briefings contain too much information
for servicemembers to absorb, including the relatively small portions of
the briefings that include information on SCRA. These methods of
providing SCRA information to servicemembers raise concerns about
their ability to retain the information they receive during these trainings.

Without adequate awareness, servicemembers may not take full
advantage of their protections under SCRA. As discussed above, the
methods of SCRA training and outreach provided by DOD and DHS to
regular active duty servicemembers and members of the reserve
components may not be adequate to ensure that these servicemembers
are aware of and benefiting from the full protections provided by the act.


Page 42                                        GAO-12-700 Mortgage Foreclosures
              In 2008, DOD asked in its annual Status of Forces Surveys if active duty
              servicemembers and members of the reserve components had received
              SCRA trainings. Forty-seven percent of members of the reserve
              components—including those who had been activated in 2008—reported
              in the survey that they had received SCRA training and only 35 percent of
              regular active duty servicemembers reported that they had received
              training. 62 While these numbers may not reflect the number of
              servicemembers who received SCRA training, they do provide an
              indication as to the number of servicemembers who recalled receiving
              such training. DOD also surveys servicemembers on a variety of issues
              related to their benefits; however, according to DOD officials who conduct
              these surveys, servicemembers have not been surveyed on the
              effectiveness of DOD’s SCRA educational efforts. DHS officials also told
              us they have not evaluated the effectiveness of their SCRA education
              methods to members of the Coast Guard and Coast Guard Reserve. In
              addition to surveying servicemembers on the effectiveness of SCRA-
              related education methods, DOD and DHS could use other techniques to
              assess the effectiveness of their education efforts. For example,
              servicemembers could be tested after a period of time to determine how
              much information they retained from the SCRA component of their
              predeployment briefings. Additionally, focus groups could be held with
              servicemembers to review the understandability of written materials
              provided on SCRA. Without understanding the extent to which existing
              SCRA educational efforts are effective, DOD and DHS are not able to
              determine if their methods are adequate to ensure that servicemembers
              avail themselves of the benefits to which they are entitled.


              Ensuring that mortgage servicers fully comply with SCRA can protect
Conclusions   servicemembers from undue financial harm. Our analysis of risk-based
              compliance examinations conducted by the four prudential regulators
              estimated that about half of all the depository institutions that serviced
              mortgages were reviewed for SCRA compliance from 2007 through 2011.
              However, during these examinations, examiners only conducted testing of
              loan files at 41 of the 83 institutions for which we reviewed the procedures



              62
                DOD Status of Forces Survey of Active Duty Members (August 2008) and Status of
              Forces Survey of Reserve Component Members (November 2008). The margin of error
              for both active duty servicemembers and reserve components members is plus or minus 2
              percent. Survey results do not include responses from members of the Coast Guard and
              Coast Guard Reserve.




              Page 43                                             GAO-12-700 Mortgage Foreclosures
used by examiners over the 5-year period to verify that mortgage
servicers’ SCRA compliance processes and controls were functioning
properly. For these 41 institutions, examiners did not use the testing
procedures most likely to detect instances of noncompliance.
Examination guidance and auditing standards suggest that testing is a
part of effective monitoring. Furthermore, additional testing of loan files
using methods that provide greater assurance of compliance is warranted
given that thousands of violations at some large mortgage servicers have
been documented through federal agencies’ targeted reviews and
mortgage servicers’ own internal reviews, but not through the prudential
regulators’ routine compliance examinations. Without additional testing of
foreclosure files and, as appropriate, other mortgage loan files not
identified by the depository institution as SCRA-eligible, and without
employing testing methods that provide greater assurance of compliance,
prudential regulators may not be able to determine whether these
institutions are extending protections to all eligible servicemembers.

Although not a direct regulator of financial institutions that service
mortgages, VA does interact with mortgage servicers as part of its Home
Loan Guaranty program and therefore has an interest in ensuring that
these institutions are complying with SCRA. However, the current level of
monitoring that VA conducts of mortgage servicers that participate in its
program provides little assurance that eligible servicemembers with VA-
guaranteed loans are receiving their full SCRA mortgage protections. By
not routinely reviewing mortgage servicers’ overall compliance with SCRA
mortgage protections, the agency cannot be assured that mortgage
servicers participating in its program have policies and procedures that
function properly to provide these protections. The agency’s development
of a new program to conduct on-site audits of mortgage servicers’ overall
operations provides a good opportunity for the agency to expand its
efforts related to SCRA compliance. Further, if VA determines that
servicers’ loss mitigation efforts have either not been successful or
adequate during its Adequacy of Servicing reviews, it provides
supplemental servicing on loans. During its Adequacy of Servicing
reviews and while conducting supplemental servicing, VA would have the
opportunity to take steps to determine if servicers assessed whether
borrowers were eligible for SCRA protections. Because the agency’s
entire mission is dedicated to benefiting individuals who have served the
country through military service, expanding its procedures to review for
SCRA compliance at mortgage servicers that participate in its mortgage
program could help the agency achieve its mission and better ensure that
servicemembers are receiving all benefits to which they are entitled.



Page 44                                       GAO-12-700 Mortgage Foreclosures
Because multiple federal agencies’ play a role in ensuring that mortgage
servicers provide SCRA protections to eligible servicemembers, sharing
information on SCRA compliance could benefit these agencies’
respective SCRA oversight efforts. Most agencies responsible for SCRA
oversight conduct risk-based reviews and therefore do not always include
SCRA compliance in their reviews. Sharing information on SCRA
compliance issues could alert agencies to potential problems and improve
agencies’ ability to identify SCRA violations. We have previously found
that collaboration among supervisory agencies can lead to more effective
supervision and that such collaboration does occur for certain consumer
compliance laws. However, no such sharing of information related to
SCRA compliance information currently takes place routinely between the
prudential regulators, FHA, VA, and FHFA. Further, because these
entities monitor SCRA compliance at many of the same institutions, the
sharing of information could help them to more quickly identify
compliance problems that may adversely affect servicemembers. Many of
these agencies already have existing mechanisms for sharing information
that could be used or expanded to periodically share information on
SCRA compliance.

The Secretaries of the Army, Navy, Air Force, and Homeland Security are
responsible for educating servicemembers on their SCRA rights. DOD and
DHS provide this information through a variety of methods throughout
servicemembers’ military careers. However, servicemembers may often be
unaware of their SCRA rights for a variety of reasons, such as the volume
and variety of information they must retain from educational briefings.
Members of the reserve components in particular face unique challenges
that can affect whether they learn of and are able to obtain assistance with
SCRA protections because they have more limited access to military legal
assistance locations and to SCRA-related training opportunities.
Additionally, the recently created CFPB’s Office of Servicemember Affairs
has been working with DOD and DHS to identify opportunities to increase
servicemembers’ awareness of SCRA protections and its results could
provide useful information to assist in this effort. While DOD has surveyed
servicemembers on whether they had received SCRA training, neither
DOD nor DHS has assessed the effectiveness of their educational methods
to determine if better ways exist to ensure that servicemembers retain the
information they receive on SCRA and can recall it when they need it.
Without such an assessment, such as by using focus groups of
servicemembers or testing to reinforce retention of SCRA information, DOD
and DHS may not be able to ensure they are reaching servicemembers in
the most effective manner.



Page 45                                       GAO-12-700 Mortgage Foreclosures
                      To better ensure SCRA compliance oversight, we recommend that the
Recommendations for   Comptroller of the Currency, the Chairman of the Board of Governors of
Executive Action      the Federal Reserve System, the Chairman of the Federal Deposit
                      Insurance Corporation, and Chairman of the National Credit Union
                      Administration take steps to increase the frequency with which examiners
                      (1) conduct testing of foreclosure files and as applicable, other mortgage
                      loan files; and (2) employ testing methods that provide greater assurance
                      that mortgage servicers are complying with SCRA.

                      To help ensure that VA assists servicemembers with remaining in their
                      homes and avoiding foreclosure, the Secretary of Veterans Affairs should
                      ensure that a review for SCRA compliance is included in the department’s
                      new mortgage servicer monitoring program and that additional steps to
                      assess SCRA compliance are taken by VA staff during its Adequacy of
                      Servicing reviews and while conducting supplemental servicing.

                      Additionally, to increase agencies’ awareness of potential problems with
                      SCRA compliance, the Comptroller of the Currency, the Chairman of the
                      Board of Governors of the Federal Reserve System, the Chairman of the
                      Federal Deposit Insurance Corporation, the Chairman of the National
                      Credit Union Administration, the Acting Director of the Federal Housing
                      Finance Agency, the Secretary of Housing and Urban Development, and
                      the Secretary of Veterans Affairs should explore options to use existing
                      mechanisms or develop new ones to share information related to SCRA
                      compliance oversight.

                      Finally, the Secretary of Defense—through the Secretaries of the Army,
                      Air Force, and Navy—and the Secretary of Homeland Security should
                      assess the effectiveness of their efforts to educate servicemembers on
                      SCRA to determine better ways for making servicemembers aware of
                      their SCRA rights and benefits, including improving the ways in which
                      members of the reserve components obtain such information.


                      We requested comments on a draft of this report from CFPB, DHS, DOJ,
Agency Comments       DOD, FDIC, Federal Reserve, FHFA, HUD, NCUA, OCC, and VA. We
and Our Evaluation    received formal written comments from DHS, DOD, FDIC, Federal
                      Reserve, FHFA, HUD, NCUA, OCC, and VA; these are presented in
                      appendixes III through XI, respectively. We also received technical
                      comments from CFPB, DOJ, DOD, FDIC, Federal Reserve, FHFA, OCC,
                      and VA, which we incorporated as appropriate.




                      Page 46                                      GAO-12-700 Mortgage Foreclosures
Federal Reserve, NCUA, and OCC agreed to take actions in response to
our recommendations that they increase the frequency with which their
examiners conduct testing of mortgage and foreclosure files and employ
testing methods that will provide greater assurance of mortgage servicers’
compliance with SCRA.

•   The Federal Reserve’s Director of the Division of Consumer and
    Community Affairs noted that Federal Reserve examiners apply
    interagency examination procedures to test the sufficiency of a
    depository institution’s program for ensuring its employees provide
    appropriate protections to active duty servicemembers, and that it will
    work with the other federal financial regulators to consider appropriate
    ways to update the interagency SCRA examination procedures. The
    Director’s letter notes that Federal Reserve considers interviews with
    bank staff and reviews institutions’ compliance management systems
    to be types of examiner testing. Although our report acknowledges
    that such steps can provide useful information regarding an
    institution’s SCRA compliance, we recommended that the regulators
    provide greater assurance of SCRA compliance by increasing the
    frequency of loan file testing.

•   NCUA’s Executive Director agreed that additional testing of loan files
    would provide greater assurance of SCRA compliance. His letter also
    notes that NCUA has made recent changes to its examination
    process to raise the importance of consumer protection issues, noting
    that beginning with its 2011 examinations, staff separate from safety
    and soundness examiners review the lending practices of federal
    credit unions to ensure compliance with SCRA. Further, NCUA noted
    that it has also incorporated reviews for SCRA compliance into its
    analysis and investigations of complaints.

•   The Comptroller of the Currency noted that OCC will update its
    examination guidelines to ensure that a review of SCRA compliance is
    conducted during each supervisory cycle for its regulated institutions,
    and that such reviews will include the testing of loan files selected
    using an appropriate methodology to assess compliance with SCRA.

FDIC’s Director of their Division of Depositor and Consumer Protection
did not comment on our recommendation but agreed that testing a
representative sample of loans for compliance with SCRA is an effective
tool to assess compliance with SCRA for large mortgage servicers.
However, his letter also noted that having examiners interview bank
employees also serves as an effective tool for assessing compliance with



Page 47                                        GAO-12-700 Mortgage Foreclosures
consumer protection laws and regulations, and that such interviews are
often used to verify that the depository institution is conducting sufficient
employee training and is enforcing its policies and procedures. We agree
that conducting interviews of depository institution personnel can be a
useful procedure to examine for SCRA compliance, but supplementing
such actions with increased testing of loan files provides an even greater
level of assurance that an institution is complying with SCRA.

VA concurred with our recommendation that they ensure that a review for
SCRA compliance is included in its new mortgage servicer monitoring
program and also indicated their staff would be taking additional steps to
assess SCRA compliance during Adequacy of Servicing reviews and
while conducting supplemental servicing. In a written response, VA’s
Chief of Staff noted several activities the agency conducts to help ensure
that veterans are aware of their SCRA protections. He stated that VA will
revalidate and, as necessary, revise its focus and procedures to ensure
veteran borrowers are receiving all SCRA protections to which they are
entitled. Additionally, he noted that VA will include in its mortgage servicer
monitoring program a review to ensure that servicers’ appropriately afford
SCRA-eligible borrowers their mortgage protections as part of their loss
mitigation efforts. Finally, he said that VA will incorporate additional steps
into its Adequacy of Servicing reviews to assess whether the servicer
appropriately provided SCRA mortgage protections to eligible borrowers.

Federal Reserve, FHFA, HUD, NCUA, OCC, and VA agreed with our
recommendation that the federal agencies involved in overseeing
mortgage servicers’ SCRA compliance should explore using existing
mechanisms or developing new ones to share information related to
SCRA compliance oversight.

•   Federal Reserve Division of Consumer and Community Affairs
    Director noted that additional interagency collaboration related to
    SCRA compliance trends and emerging risks may be appropriate and
    useful in improving supervisory practices related to SCRA
    compliance, and she agreed to explore other opportunities to share
    information related to SCRA compliance with other federal agencies.
    She stated that their staff are currently planning an interagency
    servicemember financial protection webinar for financial industry
    participants that is to include panelists from the federal supervisory
    agencies, as well as representatives from other agencies with SCRA
    oversight responsibility.




Page 48                                         GAO-12-700 Mortgage Foreclosures
•   FHFA’s Deputy Director for the Division of Enterprise Regulation also
    agreed that increased information sharing among supervisors of
    mortgage lending industry participants could assist in identifying
    potential compliance problems and in some cases could improve the
    identification of SCRA violations. He noted that FHFA’s supervision
    function will consider whether the agency’s existing memorandums of
    understanding are sufficient or should be expanded to cover more
    types of information or more agencies to broaden information sharing
    on issues of supervisory concern, including SCRA compliance. He
    also noted that the supervision function would consider whether
    compliance oversight would be improved by developing processes for
    more frequent routine communications with supervisors of other
    market participants subject to mortgage lending compliance
    requirements.

•   HUD’s Acting Assistant Secretary for Housing-Federal Housing
    Commissioner agreed that HUD should participate in agencies’
    discussions to explore options to share information related to SCRA
    compliance, noting that HUD’s should be a participatory role rather
    than a leadership one because it does not have responsibility for
    overseeing SCRA. Her letter also notes they believe that the scope of
    such collaboration should be broadened beyond just SCRA
    compliance to include all agencies’ mutual interests in single family
    housing issues, which we agree could be useful.

•   The NCUA Executive Director’s letter notes that NCUA will use its
    participation in FFIEC and other interagency working groups to share
    information regarding the supervision of financial institutions and
    compliance concerns, and that it currently shares information with
    CFPB regarding consumer compliance oversight and is working with
    federal financial regulators to develop tools to facilitate information
    sharing.

•   The Comptroller of the Currency stated in his response that OCC will
    continue to be an active member of the FFIEC Task Force on
    Consumer Compliance, which is an interagency organization that
    works collectively to develop examiner guidance and examination
    procedures and to discuss emerging risks or trends regarding new
    products and services. He also noted that OCC, the other prudential
    regulators, and CFPB have signed a memorandum of understanding
    on supervisory coordination that outlines the coordination of
    examinations and the sharing of compliance oversight information,
    including information on SCRA.




Page 49                                       GAO-12-700 Mortgage Foreclosures
•   VA’s Chief of Staff noted that VA will collaborate with the agencies
    involved in SCRA compliance oversight to share information related to
    SCRA compliance.

FDIC did not comment on this recommendation.

DHS concurred and DOD partially concurred with our recommendation
that they assess the effectiveness of their efforts to educate
servicemembers on SCRA to determine better ways for making
servicemembers aware of their SCRA rights and benefits, including
improving the ways in which members of the reserve components obtain
such information. DHS’s Director of Departmental GAO-OIG Liaison
Office noted that the Coast Guard strives to keep all its members fully
aware of SCRA benefits and rights and that it will explore measures to
assess the effectiveness of these efforts in the future. DOD’s Office of
Legal Policy Director stated that the education and protection of
servicemembers is DOD’s highest priority and that it continuously
evaluates the effectiveness of training to servicemembers on their
protections under SCRA and that it will continue to do so bearing our
recommendation in mind. His letter also notes that DOD recently testified
before Congress on efforts to conduct a survey on financial issues
affecting servicemembers which will further inform DOD’s efforts.




Page 50                                      GAO-12-700 Mortgage Foreclosures
We are sending copies of this report to appropriate congressional
committees, the Chairman of the Board of Governors of the Federal
Reserve System, the Secretary of Defense, the Chairman of the Federal
Deposit Insurance Corporation, the Acting Director of the Federal
Housing Finance Agency, the Secretary of Homeland Security, the
Secretary of Housing and Urban Development, the Chairman of the
National Credit Union Administration, the Comptroller of the Currency, the
Secretary of Veterans Affairs, the Director of the Consumer Financial
Protection Bureau, and the U.S. Attorney General. The report also is
available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions about this report, please contact
me at (202) 512-8678 or sciremj@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. GAO staff who made major contributions to this report
are listed in appendix XII.




Mathew Scirè
Director
  Financial Markets and
Community Investment




Page 51                                      GAO-12-700 Mortgage Foreclosures
List of Requesters

The Honorable Jeff Miller
Chairman
The Honorable Bob Filner
Ranking Member
Committee on Veterans’ Affairs
House of Representatives

The Honorable Dan Benishek
House of Representatives

The Honorable Gus Bilirakis
House of Representatives

The Honorable Bruce Braley
House of Representatives

The Honorable Corrine Brown
House of Representatives

The Honorable Jeff Denham
House of Representatives

The Honorable Joe Donnelly
House of Representatives

The Honorable Bill Flores
House of Representatives

The Honorable Tim Huelskamp
House of Representatives

The Honorable Doug Lamborn
House of Representatives

The Honorable Michael Michaud
House of Representatives

The Honorable Silvestre Reyes
House of Representatives




Page 52                          GAO-12-700 Mortgage Foreclosures
The Honorable Phil Roe
House of Representatives

The Honorable Linda Sanchez
House of Representatives

The Honorable Cliff Stearns
House of Representatives

The Honorable Marlin Stutzman
House of Representatives




Page 53                         GAO-12-700 Mortgage Foreclosures
Appendix I: Objectives, Scope, and
                  Appendix I: Objectives, Scope, and
                  Methodology



Methodology

                  Our objectives were to examine (1) what is known about Servicemembers
                  Civil Relief Act (SCRA) eligibility, the number of violations that have
                  occurred, and practices financial institutions use to comply with SCRA; (2)
                  what oversight financial regulators and other federal agencies have taken
                  to help ensure depository institutions’ compliance with the act; and (3)
                  actions the Department of Defense (DOD), Department of Homeland
                  Security (DHS), Department of Veterans Affairs (VA), and others have
                  taken to ensure that servicemembers and others are informed of
                  protections provided under the act. With the exception of our regulatory
                  compliance review, the scope of our review includes only SCRA
                  protections related to servicemembers’ residential mortgages.


SCRA Compliance   To describe what is known about the practices depository institutions use
                  to comply with SCRA, we interviewed representatives from a non-
                  generalizable sample of four large mortgage servicers and one national
                  consumer credit reporting agency about their SCRA compliance practices
                  and challenges and reviewed relevant policies and procedures. We
                  selected 4 mortgage servicers that were among the 10 largest based on
                  data from the Consolidated Reports of Condition and Income (Call
                  Reports) on the unpaid principal balance of residential mortgages
                  institutions own and service, plus mortgage loans they service on behalf
                  of other institutions, and mortgage servicers that had participated in either
                  the prudential regulators’ interagency review of foreclosure policies and
                  practices or the U.S. House of Representatives Committee on Oversight
                  and Government Reform’s investigation. 1 We interviewed representatives
                  of financial industry trade associations, including those that represent the
                  mortgage industry, depository institutions with a large military customer
                  base, and the credit reporting industry. We also interviewed officials from
                  DOD’s Defense Manpower Data Center, which operates the website that
                  depository institutions and others use to verify the active duty status of
                  servicemembers. To determine what is known about SCRA violations that


                  1
                   The Consolidated Reports of Condition and Income (Call Reports) are a primary source
                  of financial data used for the supervision and regulation of banks. They consist of a
                  balance sheet, an income statement, and supporting schedules. The Report of Condition
                  schedules provide details on assets, liabilities, and capital accounts. The Report of
                  Income schedules provide details on income and expenses. Every national bank, state
                  member bank, and insured state nonmember bank is required to file a consolidated Call
                  Report normally as of the close of business on the last calendar day of each calendar
                  quarter. The specific reporting requirements depend upon the size of the bank and
                  whether it has any foreign offices.




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                  Appendix I: Objectives, Scope, and
                  Methodology




                  have occurred we reviewed letters from 10 large mortgage servicers
                  written in response to a House of Representatives Committee on
                  Oversight and Government Reform investigation on mortgage servicers’
                  SCRA compliance history and practices. We also reviewed data on SCRA
                  violations found during bank and credit union examinations conducted
                  from 2007 through 2011 by the prudential regulators—the Board of
                  Governors of the Federal Reserve System (Federal Reserve), the Federal
                  Deposit Insurance Corporation (FDIC), the National Credit Union
                  Administration (NCUA), and the Office of the Comptroller of the Currency
                  (OCC). We also reviewed available information from legal actions taken
                  by the Department of Justice (DOJ) against two mortgage servicers for
                  SCRA violations and a class action settlement against a large mortgage
                  servicer for SCRA violations. Finally, we reviewed DOJ, Federal Reserve,
                  and OCC enforcement actions against mortgage servicers for, among
                  other things, foreclosure documentation problems that require the
                  mortgage servicers to conduct reviews, which are currently ongoing, to
                  determine historical SCRA violations.


SCRA Compliance   To assess the oversight prudential regulators have taken to help ensure
Oversight         depository institutions’ compliance with SCRA, we reviewed their
                  examination policies and procedures and interviewed agency officials
                  about their oversight activities related to SCRA. We also reviewed
                  interagency examination procedures and checklists the regulators
                  developed in 2009 to aid their oversight of SCRA. To assess the extent to
                  which prudential regulators examined for SCRA, we selected a stratified
                  random sample of 160 institutions from the population of all depository
                  institutions that serviced mortgages as of November 2011 for institutions
                  regulated by FDIC, Federal Reserve, and OCC, and September 2011 for
                  institutions regulated by NCUA. We developed a certainty stratum
                  composed of the 10 largest institutions regulated by each of the four
                  prudential regulators—FDIC, Federal Reserve, NCUA, and OCC—for a
                  total of 40 institutions. The remaining 120 institutions comprised an
                  additional four strata of institutions of varying sizes—one stratum per
                  prudential regulator. We used the Call Reports to identify mortgage
                  servicers based on data the institutions reported on the unpaid principal
                  balance of residential mortgages they own and service, plus mortgage
                  loans they service on behalf of other institutions. 2 We selected credit



                  2
                  We included institutions from all U.S. states and territories.




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Methodology




unions that service mortgage loans using data from the SNL Financial
Database on the unpaid principal balance of real estate loans owned and
serviced, plus those serviced on behalf of other institutions. 3 We
confirmed our use of the relevant mortgage variables with the SNL
Financial Database with NCUA. We excluded any depository institutions
that did not service mortgages. We then used these data to select a
stratified random sample from the population of depository institutions
that service mortgages. While we initially selected a sample of 160
institutions (40 for each regulator), we excluded 8 of the selected
institutions from our analysis. Three institutions regulated by the Federal
Reserve were excluded because they were recently chartered and
therefore had not had an examination. We also excluded five credit
unions because they were state-chartered, meaning that state
supervisory authorities and not NCUA served as the primary regulator for
these institutions. Table 2 provides more detail on the population, sample,
and sample disposition by stratum.

Table 2: Number of Depository Institutions in Sample

                                                                              Sample     Out of    In-scope
                                                         Population          selected    scope       sample
 Largest 10 institutions for each                                       40         40         0           40
 regulator
 Remaining institutions regulated by                             4,555             30         0           30
 FDIC
 Remaining institutions regulated by                                   807         30         3           27
 Federal Reserve
 Remaining institutions regulated by                             5,280             30         5           25
 NCUA
 Remaining institutions regulated by                             1,910             30         0           30
 OCC
 Total                                                          12,592            160         8          152
Source: GAO analysis of Call Report and SNL Financial Database data.




3
 NCUA maintains a financial reporting system for credit unions separate from the Call
Reports FDIC maintains for depository institutions. Credit unions submit financial reports
to NCUA credit union regulators (also referred to as Call Reports), which are then
compiled into quarterly listings referred to as the 5300 Call Report.




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Methodology




To determine the extent to which prudential regulators included SCRA
compliance within the scope of their examinations, we requested SCRA-
related examination workpapers, as well as documents examiners
prepare to determine the scope of their examinations for all consumer
compliance examinations the prudential regulators conducted from 2007
through 2011. We reviewed examinations conducted over a 5-year period
because regulatory officials told us that they may not conduct an
examination for a particular institution every 12 months, and because
SCRA might not be covered in each risk-based examination. We relied on
the examination documentation provided to us by the prudential
regulators to represent the full universe of examinations that were
conducted for each institution in our sample between 2007 and 2011. We
did not independently verify that the examination documentation they
provided to us represented the full universe of examinations they
conducted over this period. We reviewed the documents we received and
developed a data collection instrument (DCI) to capture the information
we found in the examination documentation in a consistent manner. We
determined that a depository institution had received an SCRA
compliance review if examination workpapers revealed an SCRA
compliance review for any type of loan product covered by the act (for
example, residential mortgages, automobile loans, or credit cards loans).
We aggregated this examination-level data to the institution level and
used the data to produce estimates of the percentage of all institutions for
which the prudential regulators included an SCRA compliance review
within an examination at least once during the 5-year period.
Because we followed a probability procedure based on random
selections, our sample of institutions is only one of a large number of
samples that we might have drawn. Since each sample could have
provided different estimates, we express our confidence in the precision
of our particular sample’s results as a 95 percent confidence interval (for
example, plus or minus 10 percentage points). This is the interval that
would contain the actual population value for 95 percent of the samples
we could have drawn. For estimates used in this report, we report the 95
percent confidence intervals along with the estimates themselves. We
also report percentages based on the 10 largest institutions per regulator.
Since these percentages are based on the total population of such
institutions, they have no sampling error and consequently confidence
intervals are not reported for these percentages.

We reviewed examination workpapers and used our DCI to document the
procedures examiners indicated they used to assess SCRA compliance.
We only noted the examination procedures for SCRA compliance reviews
that involved residential mortgage loans or did not specify the type of loan


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product covered. Eighty-three institutions in our sample met these criteria.
SCRA examination procedures for exams that solely focused on other
loan products, such as credit cards and automobile loans, were outside
the scope of our review. We then grouped the data we collected on
examination procedures into four categories:

•   Requests for information from depository institutions. This includes
    activities such as requests for institutions’ internal audit results,
    policies and procedures, SCRA complaints, and lists of SCRA loans. 4

•   Interviews with depository institution personnel. This includes
    activities in which examiners interviewed staff at the depository
    institution for information on, among other things, their compliance
    management systems and whether the institution services SCRA
    loans.

•   Assessments of depository institutions’ compliance management
    systems. This category includes instances in which examiners
    documented that they reviewed the quality of depository institutions’
    compliance management systems, such as reviewing institutions’
    SCRA policies and procedures, internal controls, and training
    programs.

•   Testing loan files for SCRA compliance. This category includes
    activities such as testing a limited or statistical sampling of loans the
    institution identified as SCRA-eligible or conducting more
    comprehensive testing, such as reviewing a statistical sample of loan
    files.

Table 3 provides additional detail on the individual examination activities
that comprise each of these categories.




4
 Our review did not identify any institutions that had examinations for SCRA compliance
from 2007 through 2011 that consisted only of requests for information.




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                                           Appendix I: Objectives, Scope, and
                                           Methodology




Table 3: Examination Activities Identified by GAO for SCRA Compliance Reviews

Category of Activity                          Examples of examination activities documented
Requests for information from depository      •  Requests for lists of loans the depository institution self-identified as SCRA-eligible
institutions                                  •  Requests for consumer complaints against the depository institution involving
                                                 SCRA
                                              •  Requests for internal audit results regarding SCRA
Interviews with depository institution        •  Interviews with depository institution personnel (for example, compliance officers
personnel                                        or senior managers) about whether they service any SCRA loans
                                              •  Interviews with depository institution personnel about internal controls and other
                                                 measures they take to ensure SCRA compliance
Assessments of depository institutions’       •     Reviews of depository institutions’ Board of Directors’ or Compliance Committee’s
compliance management systems                       meeting minutes regarding SCRA
                                              •     Reviews of consumer complaints against a depository institution (either received
                                                    by the institution or the relevant prudential regulator)
                                              •     Evaluations of the adequacy of depository institutions’:
                                                     • SCRA policies and procedures
                                                     • self-assessments on foreclosure management policies, particularly those
                                                           related to SCRA
                                                     • SCRA compliance training programs
                                              •     Evaluations of the functioning of a depository institution’s internal controls related
                                                    to SCRA
                                              •     Evaluations of the depository institution’s internal audit results regarding SCRA
                                              •     Assessments of the depository institution’s effort to address previous SCRA
                                                    violations or deficiencies
Testing loan files for SCRA compliance        •     Testing either a limited or a statistical sampling of loans that the depository
                                                    institution had self-identified as SCRA-eligible
                                              •     Testing a limited or statistical sampling of a depository institution’s entire portfolio
                                                    of mortgage loans for SCRA compliance
                                           Source: GAO analysis of prudential regulator examination workpapers.



                                           We reviewed prudential regulators’ examination guidance and
                                           government auditing standards, which note that various activities can
                                           provide increasing levels of assurance that reviewed entities are following
                                           their stated policies and procedures and that internal controls are
                                           functioning. Based on this review, we grouped examiners’ documented
                                           examination procedures into four categories based on our professional
                                           judgment as to the extent to which the examination activities involved
                                           verification of assertions made by the depository institution regarding
                                           compliance with SCRA. For example, based on our categories, category
                                           1—requests for information from depository institutions—provides the
                                           least assurance of SCRA compliance because it does not involve an
                                           assessment of compliance, but rather the collection of information.
                                           Category 2—interviews with depository institution personnel—also
                                           provides less assurance because it relies primarily on assertions provided


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                          Methodology




                          by the institution. Whereas category 4—testing of loan files—provides the
                          greatest assurance of SCRA compliance within our categories because
                          testing loan files allows examiners to independently verify whether an
                          institution’s compliance procedures are functioning properly and whether
                          SCRA protections are being appropriately extended to eligible borrowers.
                          Examination guidance from three of the four prudential regulators cite the
                          testing of individual loan transactions as the most extensive level of
                          review for assurance that a depository institution is complying with laws
                          and regulations. They also indicate that testing a larger sample of loans,
                          including a statistical sample, provides a fuller assessment of compliance
                          than testing a limited sample. We placed institutions in each of the four
                          categories based on the highest level of examination activity conducted
                          from 2007 through 2011. The figures presented for this analysis are not
                          generalizable to the population of institutions that service mortgages.

                          To describe the SCRA compliance oversight activities of other federal
                          agencies, we reviewed DOJ’s policies and procedures for receiving
                          SCRA referrals and investigating SCRA cases and interviewed agency
                          officials. We also reviewed DOJ enforcement actions and investigations
                          that DOJ was able to resolve without filing a court case related to
                          servicemembers’ mortgages from 2007 through 2011. We also reviewed
                          the SCRA compliance monitoring activities and policies and procedures
                          of other federal agencies that play a role in the mortgage market. These
                          agencies include the Federal Housing Administration (FHA), the Federal
                          Housing Finance Agency (FHFA), and VA. We also reviewed the SCRA
                          compliance monitoring efforts of two government-sponsored
                          enterprises—Fannie Mae and Freddie Mac. We reviewed the guidance
                          these agencies and enterprises provide to mortgage servicers
                          participating in their programs and interviewed agency officials.


Servicemember Education   To determine what actions DOD, DHS, VA, and others have taken to
and Awareness             ensure servicemembers are informed of their SCRA rights, we reviewed
                          the act to determine what it requires agencies to do and interviewed two
                          SCRA experts. To describe what actions individual agencies were taking to
                          inform servicemembers of their rights, we reviewed DOD and DHS policies
                          and procedures and SCRA training materials and publications, and
                          interviewed representatives from these agencies, including officials from
                          DOD’s Office of Legal Policy, DHS, and the National Guard Bureau. We
                          also reviewed DOD’s Status of Forces surveys to active duty
                          servicemembers and members of the reserve components to determine
                          efforts DOD has taken to assess the effectiveness of its methods of
                          educating servicemembers about SCRA benefits. We selected six military


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Methodology




installation legal assistance offices (one for the Army, Navy, Marine Corps,
and Coast Guard and two for the Air Force) based on a geographic
distribution of states with high numbers of foreclosures and large active
duty and reservist populations and interviewed legal assistance attorneys
who work in these offices to learn how the attorneys teach servicemembers
about their SCRA protections and discuss the challenges servicemembers
face asserting those protections. The six installations were: Fort Drum,
New York; Randolph Air Force Base, San Antonio, Texas; Fort Sam
Houston, San Antonio, Texas; Marine Corps Recruit Depot, San Diego,
California; Coast Guard 9th District Command Center, Ohio; and Naval Air
Station Pensacola, Florida. We reviewed examples of SCRA training and
outreach that these offices develop and distribute to servicemembers. To
learn about the specific challenges that members of the reserve
components face, we also spoke with legal assistance attorneys from the
Naval Reserves and the Ohio National Guard who were recommended to
us by legal assistance attorneys with whom we spoke.

To determine what actions other agencies, including VA, the Consumer
Financial Protection Bureau, and FHA were taking to inform
servicemembers and others of SCRA protections, we reviewed
notifications they provide to mortgage servicers on SCRA compliance and
interviewed officials at these agencies. We also interviewed
representatives from the American Bar Association’s Legal Assistance for
Military Personnel program to learn how they coordinate with legal
assistance attorneys and assist servicemembers with SCRA issues.
Finally, we interviewed representatives from seven military
servicemember groups whose memberships represent a broad population
of servicemembers and their families. These groups included the Reserve
Officers Association, National Military Family Association, Military Officers
Association of America, Air Force Sergeants Association, National Guard
Association of the United States, Naval Enlisted Reserve Association,
and Retired Enlisted Association.

We conducted this performance audit from August 2011 to July 2012 in
accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.




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Appendix II: Oversight of Mortgage Servicers’
                          Appendix II: Oversight of Mortgage Servicers’
                          Servicemembers Civil Relief Act Compliance



Servicemembers Civil Relief Act Compliance

                          As of June 2012, three federal agency reviews were under way to
                          determine if servicemembers who were eligible for SCRA mortgage-
                          related protections received them. A total of 14 mortgage servicers are
                          involved in these reviews as a result of recent enforcement actions taken
                          by the Office of the Comptroller of the Currency (OCC), the Board of
                          Governors of the Federal Reserve System (Federal Reserve), and the
                          Department of Justice (DOJ). While each review is separate, some
                          overlap exists in the institutions and timeframes being reviewed.
                          However, officials from DOJ told us they are coordinating the reviews to
                          eliminate unnecessary duplication and overlap at institutions. DOJ also
                          completed one review of a mortgage servicer—Saxon Mortgage
                          Services—in May 2012.


Federal Reserve and OCC   In response to deficiencies in the foreclosure process that various
Enforcement Actions       mortgage servicers publicly announced beginning in September 2010,
                          OCC and the Federal Reserve conducted a coordinated (interagency) on-
                          site review of 14 mortgage servicers to evaluate the adequacy of controls
                          over their foreclosure processes and their policies and procedures for
                          compliance with applicable federal and state laws. 1 This review identified
                          various weaknesses and deficiencies in these mortgage servicers’
                          foreclosure operations, including violations of SCRA. As a result of these
                          reviews, OCC and the Federal Reserve issued consent orders to the 14
                          mortgage servicers and their affiliates in April 2011, requiring these
                          institutions to make various corrective actions. One of these actions
                          required each of the mortgage servicers to retain a third-party consultant
                          to conduct independent reviews of foreclosure actions that were initiated,
                          pending, or completed on primary residences from January 1, 2009
                          through December 31, 2010, to identify borrowers who suffered financial
                          injury as a result of errors, misrepresentations, or other deficiencies in


                          1
                           The 14 mortgage servicers included in the consent order are Ally Bank/GMAC Bank;
                          Aurora Bank, FSB; Bank of America, N.A.; Citibank, N.A.; EverBank; HSBC Bank, USA,
                          N.A.; JPMorgan Chase Bank, N.A.; MetLife Bank, N.A; OneWest Bank, FSB; PNC Bank,
                          N.A.; Sovereign Bank; SunTrust Bank; U.S. Bank, N.A.; and Wells Fargo Bank, NA.
                          According to OCC and Federal Reserve’s report on this interagency review, these 14
                          institutions represented over two-thirds of the mortgage servicing industry as of the end of
                          2010. The former Office of Thrift Supervision (OTS)—a prudential regulator—was also
                          involved in the review and resulting enforcement actions. However, the Dodd-Frank Wall
                          Street and Consumer Protection Act of 2010 eliminated the agency effective July 2011
                          and transferred the supervisory authority for its institutions to the Federal Deposit
                          Insurance Corporation (FDIC), Federal Reserve, and OCC. FDIC participated in this
                          interagency review in a backup role.




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                          foreclosure actions, and to remediate those borrowers, as appropriate. As
                          part of these independent reviews, the consultants are required to review
                          100 percent of the foreclosure actions during 2009 and 2010 that involved
                          servicemembers who may have been protected under SCRA.

                          Because examiners reviewed a relatively small number of foreclosure
                          files during the original interagency review, the reviews required by the
                          consent orders are intended to be more comprehensive. The consent
                          orders require the third-party consultants to develop detailed sampling
                          methodologies for identifying foreclosure actions to include in the review.
                          These methodologies are subject to OCC’s and the Federal Reserve’s
                          approval. OCC officials told us that, in conjunction with DOD and DOJ,
                          they have worked with the third-party consultants to develop a process to
                          access the Department of Defense’s Defense Manpower Data Center’s
                          database with custom queries in order for the third-party consultants to
                          accurately identify the pool of potential SCRA-eligible borrowers. To
                          supplement the independent reviews, the regulators also required
                          mortgage servicers and consultants to establish an outreach process for
                          borrowers, including servicemembers, who believe they were financially
                          harmed by improper foreclosure practices to request a review of their
                          foreclosure case. These requests for review must be submitted to the
                          mortgage servicers by September 30, 2012. According to officials from
                          OCC and the Federal Reserve, as of May 2012, preliminary results from
                          this review on instances of SCRA noncompliance were not available. 2


DOJ Enforcement Actions   On May 26, 2011, DOJ settled two cases against Saxon Mortgage
                          Services and BAC Home Loans Servicing for allegations of violations of




                          2
                           GAO issued a report on the actions of the regulators and servicers involved in these
                          reviews. See GAO, Foreclosure Review: Opportunities Exist to Further Enhance Borrower
                          Outreach Efforts, GAO-12-776 (Washington, D.C.: June 29, 2012). GAO also has ongoing
                          work looking at the actions of the regulators and servicers.




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SCRA’s foreclosure provision. 3 The consent orders for each of these
cases dictated that damages be paid to affected servicemembers and
remedial actions be taken by the mortgage servicers. BAC Home Loans
Servicing agreed to pay at least $20 million to resolve the lawsuit, and
Saxon Mortgage Services agreed to pay at least $2.35 million. The
consent orders also required the mortgage servicers to, among other
things, (1) implement revised SCRA policies and procedures specifically
about querying the Department of Defense’s Defense Manpower Data
Center database that contains information on servicemembers’ active
duty status, (2) implement a foreclosure monitoring program, (3) provide
SCRA compliance training to all applicable employees, and (4) conduct
reviews to identify additional servicemembers who may have had their
SCRA rights violated and compensate them. The reviews required by the
consent orders included the following:

•   Saxon Mortgage Services was required to review all nonjudicial
    foreclosures conducted from January 1, 2006, through December 31,
    2010, to determine compliance with SCRA. This review was
    completed in May 2012 and a total of 22 servicemembers were
    identified as having been improperly foreclosed upon.

•   BAC Home Loans Servicing is required to conduct reviews for both
    the foreclosure and interest-rate provisions of SCRA. Specifically,
    BAC Home Loans Servicing is to review all nonjudicial foreclosures it
    conducted from January 1, 2006, through December 31, 2010, for
    SCRA compliance. For the interest-rate review, the consent order
    required BAC Home Loans Servicing to retain an independent
    accounting firm to review a statistically valid sample of home
    mortgage files from January 1, 2008, through December 31, 2010,
    and issue a report on whether the mortgage servicer appropriately



3
 50 U.S.C. App. §533. United States v. Saxon Mortgage Services Inc. (Northern District of
Texas, Dallas Division). DOJ’s complaint alleged that Saxon’s conduct violated §533(c) of
SCRA and constituted a pattern or practice of foreclosing on servicemembers without
court orders during a period of military service, or a period otherwise protected by SCRA.
Saxon Mortgage Services, Inc. is a subsidiary of Morgan Stanley. United States v. BAC
Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP (Central District
of California). DOJ’s complaint alleged that BAC Home Loans Servicing’s conduct violated
§533(c) of SCRA and constituted a pattern or practice of foreclosing on servicemembers
without court orders during a period of military service, or a period otherwise protected by
SCRA. BAC Home Loans Servicing LP, formerly known as Countrywide Home Loans
Servicing LP, is a subsidiary of Bank of America Corporation.




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                        applied interest rates and fees to servicemembers’ mortgages as
                        required by SCRA.

                    DOJ officials told us that, as of June 2012, the BAC Home Loans
                    Servicing review is ongoing.


National Mortgage   In February 2012, DOJ and 49 state attorneys general settled with five of
Settlement          the largest national mortgage servicers for a variety of improper mortgage
                    servicing procedures, including allegations of SCRA violations. 4 The $25
                    billion settlement was one of the largest financial recoveries obtained by
                    the attorneys general in history and contains a number of provisions
                    related to SCRA designed to protect servicemembers’ rights and to
                    provide them additional benefits. To resolve allegations of liability that
                    have not previously been settled, five mortgage servicers—Ally Financial
                    Inc., Bank of America Corp., Citigroup Inc., JPMorgan Chase Bank, N.A.,
                    and Wells Fargo & Company—agreed to conduct a full review, overseen
                    by DOJ’s Civil Rights Division, to determine whether any servicemembers
                    were foreclosed on in violation of SCRA since January 1, 2006.
                    Additionally, four of the mortgage servicers— Ally Financial Inc., Bank of
                    America Corp., Citigroup Inc., and Wells Fargo & Company—agreed to
                    conduct a thorough review of mortgage loans to determine whether any
                    servicemember, since January 1, 2008, was charged interest in excess of
                    6 percent after submitting a valid request to lower the interest rate. The
                    agreement also specifies compensation above the $25 billion settlement
                    amount for any SCRA foreclosure or interest-rate violations. 5 Compliance


                    4
                     The five servicers were Ally Financial Inc./GMAC, Bank of America Corp., Citigroup Inc.,
                    JPMorgan Chase Bank, N.A., and Wells Fargo & Company.
                    5
                     Under the settlement agreement, Ally Financial Inc., Bank of America, Citigroup Inc., and
                    Wells Fargo & Company will be required to provide any servicemember subjected to a
                    wrongful foreclosure with a payment equal to the servicemember’s lost equity, plus
                    interest, and an additional $116,785 or an amount provided for the same violation under
                    the review conducted by OCC or the Federal Reserve, whichever is higher. To ensure
                    consistency with an earlier private settlement, JPMorgan Chase will provide any
                    servicemember who was a victim of a wrongful foreclosure as a result of a violation of
                    SCRA either his or her home free and clear of any debt plus compensation for additional
                    harm or the cash equivalent of the full value of the home at the time of sale plus
                    compensation for additional harm suffered. Ally Financial Inc., Bank of America, Citigroup
                    Inc., and Wells Fargo & Company will be required to provide any servicemember who was
                    wrongfully charged interest in excess of 6 percent with a payment equal to a refund, with
                    interest, of any amount charged in excess of 6 percent plus triple the amount refunded or
                    $500, whichever is larger. JPMorgan Chase had already compensated servicemembers
                    charged excess interest through the earlier private settlement.




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                                         with the SCRA provisions of the settlement will be overseen by DOJ’s
                                         Civil Rights Division. Table 4 summarizes these three reviews.

Table 4: Summary of Ongoing and Completed Federal Agency Reviews of Mortgage Servicers’ SCRA Compliance

                                                                                                              Timeframes for
                                                                                         SCRA provision(s)    mortgages
Review                  Description of review         Mortgage servicer                  reviewed             reviewed
OCC and Federal        Under consent orders issued    •   Ally Bank/GMAC Bank            Foreclosure          2009–2010
Reserve Consent Orders by OCC and the Federal         •   Aurora Bank, FSB                                    (January 1, 2009
                       Reserve, 14 mortgage                                                                   through December
                                                      •   Bank of America, N.A.
                       servicers are required to                                                              1, 2010)
                       retain third-party consultants •   Citibank, N.A.
                       to conduct independent         •   EverBank
                       reviews of foreclosure         •   HSBC Bank, USA, N.A.
                       actions to identify borrowers
                       who were financially harmed    •   JPMorgan Chase, N.A.
                       as a result of certain         •   MetLife, N.A.
                       deficiencies.                  •   OneWest Bank, FSB
                                                      •   PNC Bank, N.A.
                                                      •   Sovereign Bank
                                                      •   SunTrust Bank
                                                      •   U.S. Bank, N.A.
                                                      •   Wells Fargo Bank, NA
DOJ Consent Orders      Under the consent order,        Saxon Mortgage Services, Inc. Foreclosure             2006–2010
Saxon Mortgage          Saxon Mortgage Services         (a subsidiary of Morgan                               (January 1, 2006
Services (Morgan        was required to review          Stanley)                                              through December
Stanley)a               nonjudicial foreclosures (i.e.,                                                       31, 2010)
                        foreclosures that took place
                        in states that do not require a
                        court order for foreclosure
                        proceedings).
BAC Home Loans          Under the consent order,        BAC Home Loans Servicing (a      Foreclosure          2006–2010
Servicing (Bank of      BAC Home Loans Servicing subsidiary of Bank of America)                               (January 1, 2006
America)                is required to review                                                                 through December
                        nonjudicial foreclosures (i.e.,                                                       31, 2010)
                        foreclosures that took place
                        in states that do not require a
                        court order for foreclosure
                        proceedings).




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                                                                                                                            Timeframes for
                                                                                                      SCRA provision(s)     mortgages
Review              Description of review               Mortgage servicer                             reviewed              reviewed
                    Under the consent order,                                                          Interest rate         2008–2010
                    BAC Home Loans Servicing                                                                                (January 1, 2008
                    is required to retain an                                                                                through December
                    independent accounting firm                                                                             31, 2010)
                    to review a statistically valid
                    sample of home mortgage
                    files from January 1, 2008,
                    and issue a report on
                    whether the mortgage
                    servicer appropriately
                    applied interest rates and
                    fees to servicemembers’
                    mortgages as required by
                    SCRA.
National Mortgage   Five mortgage servicers             •     Ally Financial Inc.                     Foreclosure           2006–present
Settlement          agreed to conduct a full            •     Bank of America Corp.
                    review, overseen by DOJ’s
                                                        •     Citigroup Inc.
                    Civil Rights Division, to
                    determine whether any               •     Wells Fargo &
                    servicemembers were                       Company
                    foreclosed on in violation of       •     JPMorgan Chase Bank,
                    SCRA.                                     N.A.
                    Four mortgage servicers             •     Ally Financial Inc.                     Interest rate         2008–present
                    agreed to conduct a                 •     Bank of America Corp.
                    thorough review overseen by
                                                        •     Citigroup Inc.
                    DOJ’s Civil Rights Division of
                    mortgage loans to determine         •     Wells Fargo & Company
                    whether any servicemember
                    since January 1, 2008, was
                    charged interest in excess of
                    6 percent after submitting a
                    valid request to lower the
                    interest rate.
                                       Source: GAO analysis of OCC, Federal Reserve, and DOJ consent orders.
                                       a
                                        DOJ completed the Saxon Mortgage Servicing Review in May 2012.




                                       Page 67                                                                  GAO-12-700 Mortgage Foreclosures
Appendix III: Comments from the
             Appendix III: Comments from the Department
             of Homeland Security



Department of Homeland Security




             Page 68                                      GAO-12-700 Mortgage Foreclosures
Appendix III: Comments from the Department
of Homeland Security




Page 69                                      GAO-12-700 Mortgage Foreclosures
Appendix IV: Comments from the
                          Appendix IV: Comments from the Department
                          of Defense



Department of Defense


GAO received DOD’s
letter on July 2, 2012.




                          Page 70                                     GAO-12-700 Mortgage Foreclosures
Appendix IV: Comments from the Department
of Defense




Page 71                                     GAO-12-700 Mortgage Foreclosures
Appendix IV: Comments from the Department
of Defense




Page 72                                     GAO-12-700 Mortgage Foreclosures
Appendix V: Comments from the Federal
             Appendix V: Comments from the Federal
             Deposit Insurance Corporation



Deposit Insurance Corporation




             Page 73                                 GAO-12-700 Mortgage Foreclosures
Appendix V: Comments from the Federal
Deposit Insurance Corporation




Page 74                                 GAO-12-700 Mortgage Foreclosures
Appendix VI: Comments from the Board of
             Appendix VI: Comments from the Board of
             Governors of the Federal Reserve System



Governors of the Federal Reserve System




             Page 75                                   GAO-12-700 Mortgage Foreclosures
Appendix VI: Comments from the Board of
Governors of the Federal Reserve System




Page 76                                   GAO-12-700 Mortgage Foreclosures
Appendix VII: Comments from the Federal
              Appendix VII: Comments from the Federal
              Housing Finance Agency



Housing Finance Agency




              Page 77                                   GAO-12-700 Mortgage Foreclosures
Appendix VII: Comments from the Federal
Housing Finance Agency




Page 78                                   GAO-12-700 Mortgage Foreclosures
Appendix VIII: Comments from the
             Appendix VIII: Comments from the Department
             of Housing and Urban Development



Department of Housing and Urban
Development




             Page 79                                       GAO-12-700 Mortgage Foreclosures
Appendix VIII: Comments from the Department
of Housing and Urban Development




Page 80                                       GAO-12-700 Mortgage Foreclosures
Appendix IX: Comments from the National
             Appendix IX: Comments from the National
             Credit Union Administration



Credit Union Administration




             Page 81                                   GAO-12-700 Mortgage Foreclosures
Appendix IX: Comments from the National
Credit Union Administration




Page 82                                   GAO-12-700 Mortgage Foreclosures
Appendix X: Comments from the Office of
              Appendix X: Comments from the Office of the
              Comptroller of the Currency



the Comptroller of the Currency




              Page 83                                       GAO-12-700 Mortgage Foreclosures
Appendix X: Comments from the Office of the
Comptroller of the Currency




Page 84                                       GAO-12-700 Mortgage Foreclosures
Appendix XI: Comments from the
             Appendix XI: Comments from the Department
             of Veterans Affairs



Department of Veterans Affairs




             Page 85                                     GAO-12-700 Mortgage Foreclosures
Appendix XI: Comments from the Department
of Veterans Affairs




Page 86                                     GAO-12-700 Mortgage Foreclosures
Appendix XI: Comments from the Department
of Veterans Affairs




Page 87                                     GAO-12-700 Mortgage Foreclosures
Appendix XII: GAO Contact and Staff
                  Appendix XII: GAO Contact and Staff
                  Acknowledgments



Acknowledgments

                  Mathew J. Scirè, (202) 512-8678, or sciremj@gao.gov
GAO Contact
                  In addition to the individual named above, Cody Goebel, Assistant
Staff             Director; Meghana Acharya; Rachel Batkins; Rudy Chatlos; Christine
Acknowledgments   Houle; John McGrail; Mark Ramage; and Jennifer Schwartz made key
                  contributions to this report.




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                  Page 88                                   GAO-12-700 Mortgage Foreclosures
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