Regulators have identified how borrowers may have been harmed by a multitude of foreclosure errors, but they are largely leaving it to the servicers and their consultants to figure out how to fix it.
While the regulators will ultimately approve any remediation plan as part of the independent foreclosure review, they have encouraged the independent consultants to work with the 14 servicers to come up with a template for remediation.
The group is meeting in Washington this week to hash out more details, but sources familiar with the process say competing interests from large and small servicers — and strong differences of opinions about how to compensate borrowers — will make it difficult to achieve consensus. Some suggested federal regulators will have to be more explicit about what they will approve.
"This has been the most complex aspect of the overall consent order process to date," said Catherine Brown, a managing director at Treliant Risk Advisors, one of eight independent consultants. "There are some issues that I'm just not sure we can obtain absolute consensus on without more definitive direction by the regulators."
Sources said the Office of the Comptroller of the Currency (OCC) has not required the group to work together, but has urged them to come up with a framework for remediation that can be applied consistently.
Under the consent orders signed in April by the 14 largest mortgage servicers, the independent consultants will review loan files to determine if errors have occurred, whether those errors resulted in financial injury and how the borrower should be compensated.
The orders technically require the servicers to submit their own remediation plans. But sources said the responsibility for crafting those plans shifted to the independent consultants over the summer when regulators decided they wanted the consultants to report their findings and recommend remediation on a rolling basis.
A steering committee of several consultants has been working for weeks on a draft text that gives more detail about types of financial injury that could result from servicing errors, and offers guidelines for servicers to remedy borrower harm.
But there are concerns among some people involved in the process that the servicers — particularly the larger ones — may be playing too large a role in shaping the remediation guidelines.
"Even though the overall burden has shifted to the independent consultants from a formal perspective, from a practical perspective the servicers have still had a lot of involvement," said an individual working for one of the independent consulting firms. "There is some concern that the regulators will be critical of that, and that ultimately it's the servicers' agendas that are precluding greater consensus, rather than the independent consultant's agendas."
The regulators and servicers insist that the process, including the development of remediation guidelines, is independent.
"The independent reviewer makes the recommendations, which then the servicers have to respond to and all of that will be reviewed by the regulators, so it will be an independent process with oversight from the regulators," said Paul Leonard, the vice president of government affairs for the Financial Services Roundtable's Housing Policy Council, which is coordinating communications for the servicers related to the consent orders.
Bryan Hubbard, a spokesman for the OCC, said the independence of the consultants and their reviews has been a priority from day one.
"The OCC and other federal regulators have been very clear on this issue, and rejected some proposed consultants and law firms to avoid conflicts of interests," Hubbard said. "Regulators required language in the engagement letters to ensure independence. As we progress, we will be monitoring the conduct of the reviews to ensure they are free from undue influence."
The OCC intends to use the proposal from the steering group as a basis for additional guidance on remediation, and will be asking the group to submit final recommendations within the next several weeks.
Although some consensus has been reached, sources said it's doubtful that the group will reach unanimous agreement on a final plan.
"I think we'll get a document that many people are comfortable with, that the OCC and the Fed will probably push us to go further with in many respects, and some people will probably say, 'I don't support this, I think it's wrong for legal reasons or political reasons,'" another person participating in the discussions said this week.