The Independent Foreclosure Review was supposed to be a full and fair investigation of the big banks' foreclosure abuses, and it was trumpeted as the government's largest effort to compensate victimized homeowners. Federal regulators, who designed the review, forced banks to spend billions to carry it out. Millions of homeowners were eligible and hundreds of thousands submitted claims. But Monday morning, the very regulators who launched the program 18 months ago announced that it had all been a massive mistake and shut it down.
Instead, 10 banks have agreed to pay a total of $3.3 billion in cash to the 3.8 million borrowers who had been eligible for the review. That's an average of around $870 per borrower. But typical of a process that's been characterized by confusion, delays and secrecy, regulators said the details of how the money will be doled out were not yet available.
The headline number for the settlement is $8.5 billion, but that includes $5.2 billion in "credits" the banks will receive for actions they take to avoid foreclosures, such as providing loan modifications. That's very similar to the separate $25 billion settlement reached last year between five banks, 49 states and the federal government. That settlement has been criticized for awarding credit to banks for things they were already doing.
Banks paid private consultants more than $1.5 billion to review cases, but none of that work resulted in a single payment to a borrower.
Officials from Office of the Comptroller of the Currency, one of the federal regulators that ran the review and negotiated the new settlement, did not say how they arrived at the $3.3 billion in cash. Pressed on this question during a conference call with reporters on Monday, an official would only say, "The best way to think about that is that it was a negotiated amount. It represents an acceleration of payments to consumers that results in more consumers getting more money in a much quicker time frame."
Critics had assailed the original review since it was launched. Regulators required each bank to hire an "independent" consultant to review the case of each eligible homeowner, evaluate if the bank had committed errors or abuses and, if so, determine how much money, up to $125,000, that the bank would have to pay the borrower.
But those consultants turned out to be companies that had other contracts with the banks and so relied on them for business, causing consumer advocates and some members of Congress, among others, to question how independent the consultants could be. Fueling suspicion was the fact that many details of how the banks and the consultants actually worked together were kept secret. Last year, ProPublica published a series of articles revealing that the banks' own employees were heavily involved in the supposedly independent review, calling into question its fundamental integrity.
Regulators dumped the review and struck a deal for two main reasons, OCC officials said on the Monday conference call with journalists. The officials spoke on the condition they not be named.
First, they said, the reviews had taken far too much time. That was great news for the consultants that had been hired by the banks to conduct the reviews, because the banks have paid them more than $1.5 billion. But all that work has not resulted in a single payment to a borrower.
Second, months and perhaps years from now, when the consultants finally finished their work, most borrowers still would not have received compensation. The officials said only 6.5 percent of the case reviews completed so far had produced evidence of harm to the borrower.
Given the flaws in the review, it's questionable whether that rate is "remotely accurate," said Alys Cohen of the National Consumer Law Center. "Because the reviews were flawed," she said, "basing a total settlement number on them would grossly understate the harm and really be an abdication of responsibility on the part of regulators."
Divvying Up the $3.3 Billion
The OCC officials said the details of how the $3.3 billion will be distributed had not been finalized and likely would not be made public for several more weeks. But they outlined the basic approach.
As originally designed, the review identified 13 categories of potential harm and put a price tag on each. For the worst errors, banks would have had to pay victimized borrowers up to $125,000, while for lesser problems they would have had to pay only $1,000 or even no cash compensation at all.
The new settlement will work in a similar way. Each of the 3.8 million homeowners will be placed in categories, they said. The categories would be broadly similar to the ones from the review. For instance, one category might be homeowners who were denied a loan modification and later lost their home to foreclosure. Another might be those who were put in foreclosure, but received a modification and are still in the home.
Each category will have an associated payment. Borrowers who fall in more than one category will receive the highest category payment they qualify for.
As for the amounts borrowers in each category might receive, it will likely range from $125,000 down to a few hundred dollars. Officials said the precise amounts had not yet been decided.
Unlike the original review, no case-by-case effort will be made to sort out who was really the victim of a bank error or abuse and who was not. Instead, basic criteria will be used to assign homeowners to a category, and everyone in the same category will receive the same amount.
The banks themselves will sort all the homeowners into the various categories, the officials said, but regulators will oversee that process. They argued that the banks had no incentive to game the process since the total amount each bank will have to pay out had already been determined. There is no way for a bank to reduce that sum.
495,000 borrowers submitted claims as part of the original review process. Those borrowers will receive a higher payment than borrowers who did not submit a complaint, but the officials would not say how much that would be.
It's unclear when regulators will release the full details of the process, but they did commit to a timeline: Borrowers will be contacted by the end of March with news of their payment amount.
ProPublica will continue to provide details as they become available.