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