Last January, dozens of independent contractors showed up for their first day of work at a large, single-story Bank of America building in Tampa to right the wrongs of a foreclosure crisis that many had witnessed firsthand. Or so they thought.
They were lawyers, paralegals and other mortgage industry veterans. Along with thousands of other contractors working at banks and auditing firms like Deloitte and PriceWaterhouseCoopers, the Tampa crew was to comb through the mortgages of people whose homes were in foreclosure at the height of that crisis, in 2009 and 2010. They were looking for lost paperwork, overcharges, botched loan modifications -- evidence of the kinds of errors and misconduct widely alleged by foreclosed borrowers.
It was called the Independent Foreclosure Review, and it was one of the most ambitious and costly auditing projects in U.S. history.
It was also, some of the contractors soon came to believe, a fiasco in the making. At Bank of America, contract employees were to answer more than 2,000 questions written by Promontory Financial, the consulting firm the bank hired to audit its mortgage loan files. Those questions, the contractors said, were confusing and open to interpretation. Training was spotty and mistakes were frequent, they said. Sometimes, when they noted bank-caused mistakes, they were told by Bank of America managers not to believe their own eyes.
That last serious irregularity, which has not been previously reported, was described by three of the five contract employees who spoke to The Huffington Post. All asked that their names not be used for fear of not getting future work in the industry.
"We knew what we were looking at," said one employee. "But we were told under threat of losing our jobs to not report what we saw."
Last week, in a surprising move with little historical precedent, bank regulators halted the program in favor of a new $8.5 billion settlement with 10 of the 14 mortgage companies, including Bank of America. Under the new deal, every homeowner who received a foreclosure notice in 2009 or 2010 -- about 4 million -- will receive some share of $3.5 billion, regulators said. Those payouts begin at $250 and peak at $125,000. The remaining $5 billion would pay for loan modifications and other homeowner assistance.
The contract employees were told to go home.
In ending the reviews, the bank regulators said that they were looking out for the best interests of homeowners, and that the new deal would speed payments, with checks arriving in late March. But inside observers who shared their experience with The Huffington Post and other regulatory experts familiar with the process said that the decision to scrap the reviews was also a tacit admission that the program, which had cost billions of dollars and one year of intense work, was too broken to save. Had the reviews continued, insiders note, they would have produced results compromised by systemic mistakes and errors made along the way by the contract employees at banks and at the auditors.
"It was like a badly-made ship designed to sink," said a Deloitte employee, who reviewed JPMorgan Chase loans.
The problem wasn't just with the banks. The regulators, led by the Office of the Comptroller of the Currency, made a colossal mistake at the outset by not insisting on a uniform and truly independent process, critics say. Moreover, regulators didn't seem to realize that the entire process was compromised until it was far too late to save it.
"It was doomed from the beginning," said Sheila Bair, the former chairman of the Federal Deposit Insurance Corp. "It was designed to generate fees for consultants, not to help homeowners."
By the time the reviews were halted, the banks had paid the consultants they hired more than $1.5 billion. PwC employees working on the review billed between $235 and $630 an hour, depending on seniority, according to the American Banker.
What happened at Bank of America is perhaps the most stark example of a process gone awry. Bank of America contractors were reviewing Bank of America loans at a Bank of America facility under the management of full-time Bank of America employees. They were reporting those results to Promontory, the outside independent consultant, whose employees started their reviews based on what Bank of America contractors had concluded.
As the auditor, Promontory had authority to overrule any conclusion drawn by a Bank of America contractor. Promontory has defended its work as independent from influence by Bank of America. But the Bank of America contractors said it was clear to them that what they noted during their reviews was integral to the process. They continued to do substantive, evaluative review work until a few months ago, they said, when they were told that their job going forward was simply to dig up documents for Promontory.
The end result is more than just a misstep, many critics say, it is a disaster that threatens to undermine whatever efforts the federal government has made in recent years to convince the public that it is an able overseer of the financial system.
For the OCC, in particular, the failure is damning. The agency was already widely viewed as a handmaiden to the financial sector for not sounding alarm on the rampant risk-taking in advance of the subprime collapse. It also inexplicably stood on the sidelines as the mortgage arms of the banks struggled to keep up with millions of loans that were failing all at once. Now, its attempt to clean up the mess it helped cause was botched, too.
"This is a big black eye for the agency and for the government," said Bair, who has previously called for the OCC to be dismantled. The failure "will have real economic consequences" and slow the housing recovery, she said.
The OCC, however, contends the new settlement is a better deal for borrowers than the foreclosure review and will mean higher payouts. “I can guarantee that the amount paid out would have been much less than the amount of the [current] settlement,” said Bryan Hubbard, a spokesperson for the agency
As of yet, under the new settlement, bank regulators have not given clear answers about how mortgage companies will go about determining who gets what relief.
In 2011, in announcing the deal with the mortgage companies that led to the foreclosure reviews, the OCC promised "appropriate compensation to borrowers who suffered financial harm." The former reviewers told The Huffington Post that this goal is now impossible to meet. People who wrongly lost their homes will get lumped in with applicants who claimed the same, but who actually simply stopped paying their mortgage and were correctly foreclosed on, they said. And no one will be checking the banks' work.
Mary Ann Kelly and her husband fit into the former category. The Kellys claim that Citibank foreclosed on their Santa Clarita, Calif., home while they were under court-ordered bankruptcy protection, which followed a job loss and spiking monthly payment on their adjustable-rate mortgage.
Had the bank put the foreclosure on hold, as required by law, the Kellys say they would have had time to apply for a loan modification program. Instead, the Kellys lost their $58,000 down payment and thousands of dollars in improvements they made to the home.
Mary Ann Kelly said she wasn't surprised that the review fell apart because regulators kept changing their answer about when payouts might come. "I knew it was sinking like a bag of hammers," she said.
As is to be expected with the humiliating demise of such a high-profile program, the parties involved -- the banks, the consultants they hired, and the regulators -- have all begun blaming each other for the failure.
“The consultants provided original engagement letters with estimations that were far off” the eventual scope and cost of the project, Bryan Hubbard, the OCC spokesman, told The Huffington Post.
“By seeing their work cancelled, they are being held accountable,” Hubbard said
From the the consultants' point of view, it was the government regulators who had some explaining to do. First there was the constant change in guidance, throughout at least the first eight months of the process, as to what they wanted the auditors to do and how they wanted them to do it, they said. The back-and-forth was so constant, one of the consultants involved with the process said that specific guidelines for determining if a mortgage borrower had been harmed by certain kinds of foreclosure fraud still weren’t in place as late as November 2012.
Consultants also claimed that the OCC insisted on keeping the different institutions involved in the review process -- bankers, lawyers and auditors -- from communicating with each other, instead requiring they direct their requests for information to the OCC. This proved a massive headache for the consultants, who had also staffed up to handle the reviews.
A consultant at Deloitte, hired by JPMorgan Chase to review its loan files, said that his team simply didn't understand many of the bank's processes, and weren't permitted to ask. "It was like trying to read a book written in a foreign language," he said of initial attempts to audit the bank's loans.
For the first eight months of the reviews, his team, which looked for mistakes made during an application for a government-sponsored loan modification, did not realize a code embedded in the loan file meant that an application had been denied. The employee said that this misunderstanding meant that the loan reviews essentially had to start over from scratch.
All the while, this Deloitte employee said, regulators were pressuring the auditors to hurry up -- pressure that trickled down to floor-level reviewers. "Just hold your nose and click submit," he said one manager told him.
“Because of confidentiality constraints, we are not at liberty to discuss details of the engagement," a Deloitte spokesman said in response to a HuffPost query. "However, we strongly disagree with this individual’s characterization of the complex independent foreclosure review process and fully stand behind the quality of our work.”
Congress also grew increasingly concerned with the foreclosure reviews. At the urging of legislators including Rep. Brad Miller, a democrat who represented North Carolina until the end of the last Congress, the Government Accountability Office launched a review of the project sometime last year. As HuffPost previously reported, Miller said the GAO was preparing a report "critical" of the reviews. A spokesman for the GAO, which is an independent arm of Congress, said that report is due for release in March.
When news broke that a new settlement to replace the reviews was in the works, the Republican Chairman and Democratic Ranking Member of the House Oversight Committee sent a letter to regulators asking for a meeting to clarify exactly what was going on.
Those institutions essentially ignored the lawmakers and, even after they made the official announcement, refused to tell the congressmen exactly what had happened in any detail.
“The OCC and the Federal Reserve Board have terminated the independent foreclosure review process without providing any explanation of why or how the process was too costly and time-consuming to be continued,” Rep. Elijah Cummings (D-Md.) said in a statement. “Even more troubling, the agencies seem unable to provide any details regarding the process by which compensation will be provided to borrowers who have suffered harm."
"The Whole Project Was A Facade"
The Bank of America reviewers began their work, it could be said, at the scene of the crime. The buildings in which they worked were formerly an outpost of Countrywide Financial, the giant subprime mortgage company that had nearly collapsed under the weight of its own shoddy and fraudulent lending practices.
After a training session, they started cracking open loans sent to them by Promontory Financial, the "independent consultant" the bank had hired to investigate homeowner claims. Promontory had written more than 2,000 questions for the reviewers to answer, including one catch-all that prompted reviewers to note any other mistakes they came across.
The catch-all question also proved hugely troublesome. Those who answered the question got push-back from managers -- who, again, were full-time Bank of America employees. "Stop digging," reviewers said they were told.
"It became pretty apparent that the whole project was a facade," said one reviewer, whose job it was to look for improper fees tacked onto borrower accounts.
Another contract employee recounted the time he noted in a file that he couldn't find vital documents, such as notice supposedly sent to a homeowner that a foreclosure was pending. "Change your answer," he said he was told on several occasions by his manager.
Sometime last summer, the contractors said they were given a new mandate: only investigate problems identified by the homeowners in their applications. This, they felt, was absurd. "How is someone supposed to know that a law was violated if they don't know the law?" one reviewer said.
Later, after regulators got wind of this, reviewers were told to note anything out of the ordinary.
The role of the Bank of America contract employees did not change to simply doing support work for Promontory until near the end of last year. That happened after ProPublica reported that Promontory's employees were checking over Bank of America's work, rather than conducting a fully independent review.
In an email, Bank of America spokesman Dan Frahm said the settlement, "addresses claims like these" -- claims that the review process was flawed -- "by ensuring every eligible borrower across all participating servicers will receive compensation."
"More specifically, of course, it is impossible for us to react to these claims given you are not providing the source of the claims or any detail that would allow us to investigate the matter," he wrote. He directed further questions to Promontory or the OCC.
Debra Cope, a Promontory spokeswoman, said that Bank of America's responsibility from the start was to gather documents and prepare files for review by Promontory workers. "Promontory resources reviewed the files, performed all tests, and reached independent conclusions, without input or influence from Bank of America," she said.
Her company, she said, "adhered carefully to the scope and intent of the reviews prescribed by the OCC enforcement actions, using a methodology that the OCC approved."
For all their concerns, the contractors said they still felt like they had a chance to help homeowners. "I really felt like I was making a difference," one said.
The reviewer said she found some kind of bogus fee in every file she looked at, ranging from a few dollars to a few thousand dollars. Another who looked for errors that violated state statutes estimated that 30 to 40 percent of loan files contained mistakes. These reviewers said they wanted their work to count for something.
Last Monday, around 10 a.m., these same contract employees were told to stop what they were doing and leave the building.
"Pencils down," one said he was told.