Before the 2007–2008 financial crisis, federal and state authorities generally limited their appointment of monitors to cases that required the settling entity to establish ongoing compliance with a particular subject matter, such as issues with regard to the Bank Secrecy Act and anti-money laundering (BSA/AML) laws, the US Foreign Corrupt Practices Act (FCPA), healthcare or the environment, among others. This changed dramatically on 9 February 2012, when, following a years-long coordinated investigation, the US Department of Justice (DOJ), the US Department of Housing and Urban Development (HUD) and 49 state attorneys general announced a US$25 billion settlement (the National Mortgage Settlement) with the United States’ five largest mortgage servicers to address mortgage loan servicing and foreclosure abuses committed during the housing crisis. As part of this settlement, the federal government and states appointed the former North Carolina Commissioner of Banks, Joseph A Smith Jr, as monitor. In addition to being tasked with overseeing compliance with comprehensive new mortgage loan servicing standards to be implemented by each of the settling servicers – Bank of America Corporation, JPMorgan Chase & Co, Wells Fargo & Company, Citigroup Inc and Ally Financial Inc (formerly GMAC) – Mr Smith was also appointed to ensure that the servicers dedicate US$20 billion worth of ‘consumer relief’ to struggling homeowners.
This novel approach to settlements and the use of monitors marked a drastic departure from what previously had been the norm. No longer were settlements to be limited to correcting internal deficiencies and requiring ongoing compliance with the law and best practices. Instead, the servicers were required to provide relief to borrowers who were struggling to maintain their homes or had lost their homes to foreclosure, most likely as a result of the housing crisis, whether or not these borrowers suffered any loss directly as a result of unlawful conduct by the settling entities. The servicers were required, inter alia, to:
- provide principal forgiveness for borrowers who were delinquent or facing imminent default;
- refinance loans for borrowers who were ‘underwater’, meaning that they owed more than their homes were worth;
- offer forbearance for unemployed borrowers;
- support anti-blight programmes; and
- offer short sales.
As Iowa Attorney General Tom Miller, one of the four individuals announcing the settlement, bluntly put it, the settlement ‘provides badly needed relief to homeowners’.
Soon after the announcement of the National Mortgage Settlement – which addressed unfair, deceptive and unlawful servicing, and loss mitigation, unlawful foreclosures, misconduct in bankruptcy and violations of the Servicemembers Civil Relief Act, among other things – consumer relief provisions, to be overseen by monitors, were common in many federal and state settlements with global banks, with a particular focus on banks that had unlawfully packaged and sold residential mortgage-backed securities (RMBS) during the period leading up to the 2007–2008 financial crisis. The list of settling banks includes JPMorgan Chase & Co, Bank of America Corporation, Citigroup Inc, Goldman Sachs & Co, Morgan Stanley, Deutsche Bank AG, Credit Suisse Securities (USA) LLC and the Royal Bank of Scotland. The consumer relief that was required as part of these settlements was in a form substantially similar to the relief required in the National Mortgage Settlement, specifically, principal reduction for first-lien mortgages, short sales, refinancings, affordable housing financing and similar assistance to homeowners in need. It was the monitor’s responsibility to ensure that each settling bank fulfilled its obligation in a manner prescribed by the applicable agreement and consistent with the broader public goal of helping homeowners.
Role of the independent monitor in consumer relief settlements
While each consumer relief settlement is unique, and may differ from others in various respects, they all typically contain an annex to the settlement agreement, referred to as the Consumer Relief Annex, which enumerates the monitor’s responsibilities. For example, the Annex usually instructs the monitor to report on the bank’s progress towards completion of its consumer relief obligation, report on credits earned by the bank and ultimately determine and certify the bank’s compliance with the consumer relief terms of the settlement. The banks, in turn, earn credits by fulfilling different options available on a ‘menu’ of items contained in the Consumer Relief Annex.
Menu items and other provisions of the Consumer Relief Annex
Although the menu items in each Consumer Relief Annex may differ from others in certain respects, they generally contain some or all of the following options:
- first-lien principal forgiveness – relief of this type can help the borrower gain equity in the house;
- principal forgiveness of forbearance – this provision can help a homeowner gain equity in the house;
- first-lien forbearance – this form of relief can help reduce a homeowner’s monthly mortgage payment for a time;
- assistance to borrowers to refinance with a new lender – homeowners who are having trouble refinancing as a result of the costs associated with it are given assistance under this menu item;
- second-lien extinguishment – under this menu item, the bank may receive credit for extinguishing a borrower’s second lien, although credit will be denied if the bank also owns or services the first lien and attempts to foreclose on the first lien within the first six months of extinguishment of the second lien;
- junior-lien and unsecured mortgage debt principal forgiveness or extinguishment – the bank may receive credit for forgiving the whole of a borrower’s junior lien (a loan secured by the borrower’s residence and with less priority than second liens) and unsecured mortgage debt (debt originally secured by real property that the borrower subsequently lost to foreclosure or short sale), which may result in a reduced monthly payment and may create some equity in the home for the homeowner. As with the prior menu item, the bank will be denied credit if it also owns or services the first lien and attempts to foreclose on the first lien within the first six months of extinguishment of the junior lien or unsecured mortgage debt;
- mortgage-rate reduction – the bank may earn credit for reducing mortgage interest rates, for paying certain costs associated with refinancing or for forgiving principal to make a refinancing possible;
- low-to-moderate income and other lending – the bank may earn credit for originating loans to:
- low-to-moderate-income first-time homebuyers;
- buyers in the ‘hardest hit areas’ as defined in the Consumer Relief Annex; and
- borrowers who have previously lost a home to foreclosure or short sale;
- community reinvestment and neighbourhood stabilisation – the bank may obtain credit for forgiving the entire principal balance on an occupied home where foreclosure has not been pursued, and extinguishing any liens; and
- financing for affordable housing – the bank may receive credit for providing financing at a loss to the bank to facilitate the construction, rehabilitation or preservation of affordable low-income rental, and low or moderate income for-sale housing developments.
Some of the settlements contain certain minimum and maximum requirements for particular menu items, such as first-lien loan modifications, refinancings or affordable housing refinancing. Further, some of these allow the settling bank to receive additional credit depending on the timing of the relief provided.
For all the menu items in each of the settlements, no credit may be earned for relief implemented through a policy that violates the Fair Housing Act (FHA), the Equal Credit Opportunity Act (ECOA) or any other federal or state law. The FHA prohibits housing providers from discriminating against consumers on the basis of race, colour, national origin, religion, gender, familial status or disability. Examples of prohibited conduct include refusing to provide information on loans or imposing different terms or conditions on loans offered to consumers based on one of the factors noted above. Similarly, the ECOA prohibits discrimination on the basis of race, colour, religion, national origin, gender, marital status or age in connection with a credit transaction.
The settlements also provide that, subject to very limited exceptions, no consumer relief may be conditioned on a waiver or release by a borrower of his or her rights. Further, the bank is typically required to hold or sponsor a certain number of consumer outreach events each year in ‘geographically dispersed’ locations.
The monitor’s initial steps
Given the breadth of these specific requirements in the various Consumer Relief Annexes, the monitor usually makes it his or her first order of business to hire an expert consultant, such as a consulting firm with statistical sampling and transactional testing expertise, to assist in reviewing and verifying that any requests for credit satisfy the eligibility requirements and other applicable conditions set forth in the Consumer Relief Annex. The monitor may also hire firms that specialise in applied statistics to analyse statistical data for evidence of unfair lending or servicing practices, in light of the need to be sure that consumer relief being provided does not violate the ECOA or the FHA.
In addition, these monitorships include a public reporting requirement and generate a substantial amount of public interest. Accordingly, the monitor usually creates a website containing information about the settlement, the monitor and other information for homeowners, such as resources available to help with foreclosure proceedings. The monitor may also want to request the bank to establish a hotline for homeowners to call if they have questions about the settlement and whether they might be entitled to relief. If such a hotline is established, it is especially important that the bank appoint a single point of contact within the bank to be responsible for responding to homeowners. Information about any hotline that is established for members of the public interested in contacting the bank directly should be included on the monitor’s website.
Relatedly, the monitor should expect to receive a substantial number of enquiries from the public about the settlement. The monitor could hire a vendor to handle these calls, emails and letters, or direct the public to reach out to the monitor directly. In either event, the monitor should endeavour to create a process to receive and respond in a timely manner to every enquiry made.
Since the Consumer Relief Annexes provide the banks with a wide variety of options, pursuant to which they may satisfy their obligations, the monitor also should establish regular calls and meetings with the bank to keep track of progress, address questions and discuss any complications that might arise. In particular, the monitor should hold meetings with representatives of the bank early in the process to understand precisely how it expects to provide relief under the settlement. In this way, the monitor and the bank can begin to discuss the testing protocols associated with each relevant menu item and the evidence necessary to satisfy it.
This process can be difficult at times, particularly since there inevitably arise questions that are not directly addressed by the Consumer Relief Annex. For example, the Annex may authorise loan originations to certain ‘credit-worthy borrowers’ but leave it to the monitor to define what it means to be ‘credit-worthy’; or the Annex may allow for loan originations to be made to certain ‘first-time homebuyers’ but not include a definition of this term. Similarly, the monitor might be called on to interpret the meaning of ‘substantially’, where the Annex allows the bank to offer modifications to borrowers with ‘loans with rates substantially above Freddie Mac’s Primary Mortgage Market Survey’. Discussions of these and similar questions before the bank begins to provide relief are essential to a successful monitorship.
In addition to identifying the proof necessary to establish each menu item, the monitor should consider the manner in which the specific relief will be provided, in particular whether the relief will be provided in a manner that actually helps, rather than harms, homeowners. A Consumer Relief Annex might not prohibit certain loan features or terms in a menu item allowing loan modifications. A monitor in this instance, then, may want to determine whether he or she will permit the bank to submit loans that include the assessment of prepayment penalties, a negative amortisation feature, a balloon or lump-sum payment (except in the case of forbearances), or interest-only terms for the life of the loan. These features have been associated with predatory practices, which put borrowers at increased risk of default. Other considerations for the monitor include whether to prohibit the bank from seeking credit for modifications in which the loan’s interest rate is higher than the pre-modification rate, or is adjustable during the life of the modification (such as an adjustable rate mortgage or step-rate loan). A monitor should give careful consideration to questions of this sort when analysing each menu item.
Similarly, the monitor will need to ensure that the bank does not seek credit for relief if the debt is time-barred by the applicable statute of limitations. This can be a challenging exercise, since state laws regarding the length of the statute of limitations vary, and the event that triggers the statutes frequently differs from state to state. An analysis of this issue, including discussions about it with the bank, are essential. The monitor also may consider it appropriate to require the bank to determine whether a borrower who was offered a modification was in active bankruptcy at the time and, if so, to prove that specific requirements arising from the bankruptcy proceeding had been satisfied. Another significant concern is to ensure that the bank does not seek credit for consumer relief provided if the debt has been discharged in bankruptcy.
These and similar issues make the consumer relief settlements particularly challenging for monitors and, regardless of how precise and specific the Annexes may be, it is inevitable that a question will arise during the course of the monitorship that had not previously been raised, but that must be answered. In these circumstances, the monitor must understand the purpose of the settlement agreement, consider fully the benefits and risks associated with the particular issue, look to relevant guidance and do his or her best to ensure that the broader public policy behind the consumer relief provision – providing relief to homeowners – is protected.
The monitor and his or her expert consultant also will want to review the bank’s system of record (SOR) to confirm the integrity and validity of the data contained. This process will include interviewing the personnel responsible for maintaining the SOR and reviewing technical documentation to ensure that sufficient controls and processes are in place.
Moreover, the monitor is likely to want to review the bank’s internal governance and structure by which it expects to handle its consumer relief responsibilities. For example, although not required, most banks in this situation have created an internal review group (IRG), an independent organisation within the bank that, pursuant to a work plan created in consultation with the monitor, reviews the bank’s formal requests for a consumer relief credit, certifies and submits them to the monitor for validation, and responds to any questions the monitor may have regarding the submissions. Further, also in consultation with the monitor, the IRG will create process flows, testing scripts and testing protocols for each of the available menu items.
Last, the monitor may decide to conduct interviews with those of the IRG’s members and other individuals within the bank who are responsible for supporting the bank’s consumer relief efforts, including key members of the bank’s management board. The purpose of these interviews is to learn about each individual’s anticipated role in the bank’s consumer relief efforts, verify that the members of the IRG are independent from the bank’s business operations, ensure that the individuals involved possess the requisite experience and are otherwise qualified for the job, and confirm that they understand and are committed to following the relevant consumer protection laws and regulations relating to the consumer relief options, and their plans for doing so. Another purpose of these interviews is to verify that the internal oversight of the bank’s consumer relief effort is rigorous and reflects the appropriate ‘tone from the top’.
Beyond these initial steps, the ongoing work of the consumer relief monitor is varied and complex. For example, under the ongoing Deutsche Bank monitorship, the bank is allowed to provide consumer relief, such as loan originations and modifications, through financing arrangements with counterparties. The Annex contemplates that the bank and the monitor will perform due diligence on these counterparties in certain circumstances. As part of this diligence process, the monitor interviewed the management and operations teams of the counterparties, reviewed their relevant policies and procedures, and attempted to learn how they implement their policies and procedures in their day-to-day operations. This process included on-site visits, requesting and reviewing specific documentary material, and requesting additional interviews when necessary.
In addition, as noted above, each of the Consumer Relief Annexes states that the bank cannot obtain credit for relief that is provided in violation of the ECOA or the FHA. On the one hand, a monitor could determine that it is sufficient to conduct interviews and review the entity’s fair lending programme, policies and testing practices to ensure they are reasonably designed to prevent and detect violations of the FHA and ECOA. A more robust practice, on the other hand, would be to conduct a statistical analysis of the relief provided, which the monitor should discuss with the bank in advance.
The monitor of the Citigroup consumer relief settlement, moreover, conducted interviews with developers and visited construction sites of affordable rental housing developments ‘to learn more about the process from their perspectives’, understand the importance of the bank’s loans ‘to the success of the project’ and discover any ‘improvements that could be made in any future settlements of this type’.
Expectations for the future
From 2012 to 2017, the inclusion of consumer relief provisions – and the related appointment of monitors – in bank settlements with the DOJ was relatively routine. Then, just as suddenly as the concept was introduced in the National Mortgage Settlement, it ended. Specifically, on 5 June 2017, the then US Attorney General Jeff Sessions issued a memorandum, ‘Prohibition on Settlement Payments to Third Parties’, in which he criticised prior settlements that directed payments to ‘non-governmental, third-party organizations’ that were ‘neither victims nor parties to the lawsuit’ and stated that the practice would stop going forward. He was careful to note, however, that this prohibition does not apply to restitution payments to victims or payments that ‘otherwise directly remed[y] the harm that is sought to be redressed’. Thus, this memo went straight to the heart of the consumer relief settlements, since they never required proof that the individuals obtaining relief were directly harmed by the settling entities’ unlawful conduct.
Not surprisingly, following the issuance of this memorandum, the DOJ’s settlements with banks relating to similar misconduct did not contain consumer relief provisions. In particular, in 2018, the DOJ settled with Barclays, HSBC, RBS, Wells Fargo and Nomura for unlawfully packaging and selling RMBS. None of these settlements contained a consumer relief provision or required the appointment of a monitor.
It seems clear, therefore, that, at least for the foreseeable future, the DOJ will no longer impose consumer relief requirements upon settling banks. However, this change in policy has not stopped the states from continuing to include them. In 2018, for example, the New York Attorney General announced RMBS settlements with UBS and RBS that required the banks to provide consumer relief, overseen by a monitor, to New York residents.
Whether the approach to consumer relief created in the National Mortgage Settlement and subsequent settlements is correct or whether the reasoning of the Sessions Memorandum is more appropriate is beyond the scope of this chapter. Certainly, the consumer relief settlements required the banks to help struggling homeowners through a variety of means. First-lien principal forgiveness that reduces a loan-to-value to 100 per cent or lower, for example, provides the homeowner with an opportunity to earn some equity in the home. Similarly, forbearance can reduce a homeowner’s monthly payments. Or the banks can help homeowners who may be unable to take advantage of available lower interest rates and refinance a loan because the costs associated with a refinancing are too expensive.
On the other hand, critics of these settlements have argued that the relief was going to individuals whose suffering had nothing to do with the banks’ misconduct. Another group of critics have complained that the consumer relief provisions allowed the banks to obtain credit for operating ‘business as usual,’ since they would have offered these modifications even in the absence of the settlements because it is in their interest to turn non-performing loans into performing loans. Still others have argued that the consumer relief provisions provided the banks with a profit opportunity, especially since the agreements do not impose any limitation on the ability of the banks to profit from their consumer relief activities.
One thing is certain, however: as long as there are consumer relief settlements, whether through the work of federal or state authorities, for them to have any chance at success, the selection of the monitor is critical. The monitor will preferably have a strong and demonstrated background in protecting the public from housing-related and similar misconduct. He or she should possess a deep understanding of issues involving origination, mortgage loan servicing, refinancing, a variety of modifications and affordable housing financing, and the manner in which these issues have been regulated and enforced by federal and state authorities. For loan originations, for example, the monitor must understand the key laws and regulations governing them (such as the TILA-RESPA Integrated Disclosure Rules) and other indicia of potentially unlawful, even fraudulent, activity in the transaction (such as unexplained discrepancies in borrower income or assets provided in connection with a loan application). And for modifications, the monitor must know the mortgage servicing rules contained in the Real Estate Settlement Procedures Act and its implementing regulation, Regulation X, and issues involving mitigation, early intervention, bankruptcy, foreclosure, short sales, error resolutions or requests for information, servicing transfers, among others.
Equally important, since the consumer relief agreements have a public-reporting requirement, the monitors must be prepared to provide full transparency into the activities of both the bank and the monitor. This includes describing what actions have been taken and, ultimately, offering detailed explanations for his or her decisions, even when there does not seem to be any clear answer to the particular issue. The accountability to the public that is a part of these consumer relief settlements makes it markedly different from many other monitorships, which often remain confidential and, if filed with a court, under seal.
The goal of all consumer relief settlements is to provide ‘badly needed relief to homeowners’. Each monitor who is selected understands the enormity of this responsibility and the complexities associated with it, accepts the role with gratitude and approaches it with diligence.
1 Michael J Bresnick is a partner at Venable LLP and the DOJ-selected independent monitor of the consumer relief settlement agreement with Deutsche Bank AG. Mr Bresnick expresses his deep gratitude to Venable partners Andrew E Bigart and Michael S Blume, and Venable counsel Meredith L Boylan and Alexandra Megaris, and to Control Risks LLC’s partner Brian Mich and all members of the monitorship team, for their assistance with this chapter.
3 This settlement was announced by the US Department of Justice [DOJ] and the attorneys general in California, Delaware, Illinois and Massachusetts in 2013. Mr Smith was appointed independent monitor of this settlement.
4 The DOJ and the attorneys general in California, Delaware, Illinois, Maryland, New York and Kentucky announced this settlement in 2016. Professor Eric D Green was appointed independent monitor of this settlement. He is one of the pioneers of alternative dispute resolution in the United States and around the world, and co-founder of alternative dispute resolution and mediation firms, Endispute (now part of JAMS (Judicial Arbitration and Mediation Services)) and Resolutions LLC.
5 The DOJ and the attorneys general in California, New York, Delaware, Illinois and Massachusetts announced this settlement in 2014. Thomas J Perrelli, the former Associate Attorney General at the DOJ and architect of the working group on residential mortgage-backed securities [RMBS] within the presidentially created Financial Fraud Enforcement Task Force, was appointed independent monitor of this settlement.
6 The DOJ and the attorneys general in California and Illinois announced this settlement in 2016. Professor Eric D Green was appointed independent monitor.
7 The attorney general in New York announced this settlement in 2016. Professor Eric D Green was selected to serve as independent monitor of this settlement.
8 Michael J Bresnick, the author and former executive director of the presidentially created Financial Fraud Enforcement Task Force within the US DOJ and former federal prosecutor, was selected to serve as independent monitor of this settlement, announced by the DOJ and the attorney general in Maryland in 2017.
9 Neil M Barofsky was appointed as independent monitor for this settlement, announced by the DOJ in 2017. Mr Barofsky is the former – and first – presidentially appointed special inspector general of the historic US$700 billion Troubled Asset Relief Program and former prosecutor within the US Attorney’s Office for the Southern District of New York.
10 The attorney general in New York announced this settlement in 2018. Professor Eric D Green was selected to serve as independent monitor.
11 This six-month prohibition was not included in the first Consumer Relief Annexes and was added only after Mr Perrelli, monitor of the Citigroup RMBS settlement, recognised the need for it during the course of his monitorship. See Citi Monitorship Fourth Report, at p. 8, at www.citigroupmonitorship.com/wp-content/uploads/2016/01/Citi_Monitorship_fourth_report_1-29-2016.pdf.
12 The idea is to make sure the outreach events are available to as many people throughout the country as possible, rather than have them all clustered in and around the same area.
13 For example, as independent monitor of the Deutsche Bank AG RMBS settlement, Mr Bresnick hired the expert consulting firm Control Risks LLC to help develop the processes to ensure the integrity of the information submitted by the bank, test and validate the data submitted by the bank in connection with requests for credit, verify that such requests are eligible for credit, and calculate the amount of credit awarded for these requests.
14 It might seem to some that the term ‘first-time homebuyer’ is not ambiguous at all or subject to personal interpretation. In fact, the US Department of Housing and Urban Development [HUD] and Internal Revenue Service guidance define a first-time homebuyer as someone who has not owned a principal residence in the past three years. See ‘HUD HOC Reference Guide, First-Time Homebuyers’, Ch. 3-02 (archived 7 November 2012), available at https://archives.hud.gov/offices/hsg/sfh/ref/sfhp3-02.cfm; Internal Revenue Service, ‘First-Time Homebuyer Credit Questions and Answers: Basic Information’ (updated 6 August 2017), at https://www.irs.gov/newsroom/first-time-homebuyer-credit-questions-and-answers-basic-information.
15 The concept of an internal review group finds its origin in the National Mortgage Settlement, which required each of the settling servicers to designate an entity of this type.
16 See Deutsche Bank AG Monitorship Second Report, at p. 4, at: https://deutschebankmortgagemonitor.com/wp-content/uploads/2017/11/Second-Monitor-Report-November-2017.pdf.
17 See Citi Monitorship Sixth Report, at p. 17, at http://www.citigroupmonitorship.com/wp-content/uploads/2017/02/Citi_Monitorship_sixth_report_2-21-2017.pdf.
20 In November 2018, the DOJ filed a lawsuit against UBS for similar misconduct and, to date, this case has not been resolved.
21 The sole exception is the banks’ ability to obtain consumer relief credit through the subordinate financing of affordable housing developments, which is calculated by the amount of loss incurred by the banks.
22 Integrated Mortgage Disclosures Under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z), 78 Fed. Reg. 79730 (31 December 2013), as amended (codified at 12 C.F.R. pts. 1024 and 1026).
23 See footnote 2, above.