Green Tree Servicing Fails Mortgage Settlement Tests; Banks Pass

The top four mortgage servicers passed the latest compliance tests for the $25 billion national mortgage settlement, but a relative newcomer to the field, Green Tree Servicing, failed eight tests, prompting further scrutiny of nonbank servicers' processes.

Joseph A. Smith Jr., the settlement monitor, said Wednesday that Bank of America (BAC), Citigroup (NYSE:C), JPMorgan Chase (JPM), and Wells Fargo (WFC) complied in the second half of last year with the servicing rules required by the 2012 settlement agreement. The settlement with federal regulators and 49 state attorneys general resulted from servicers' robo-signing foreclosure documents and other lapses, including failures to accurately state the total amounts due from borrowers in affidavits in bankruptcy proceedings.

Green Tree, a unit of Walter Investment (WAC), based in Tampa, Fla., and Ocwen Financial (OCN), in Atlanta, became parties to the settlement after purchasing mortgage servicing rights last year from Residential Capital, the former lending arm of General Motors that is now a unit of Ally Financial. Ally has fulfilled its requirements under the settlement.

Green Tree's bad report card comes as regulators and lawmakers are scrutinizing nonbank servicers that have aggressively purchased mortgage servicing rights from banks. In February, Ocwen's strategy was upended when New York regulator Benjamin Lawsky put a halt to a deal to buy a servicing portfolio from Wells Fargo. This week, the American Bankers Association repeated its calls for regulators to change Basel III requirements that have caused many large banks to sell servicing rights to nonbanks.

Smith said Wednesday that Green Tree had failed more metrics at any one time than all of the other banks and servicers.

"I think it's too early to tell why they failed but this is their first go-round and we're working on corrective action plans now," Smith says. "In some ways the more important thing is how they respond, how quickly we get those plans in place."

Green Tree did not immediately respond to a request for comment. Its parent company was the ninth-largest servicer, with $198 billion, at yearend, according to mortgagestats.com.

Green Tree failed eight tests conducted in the fourth quarter including failing to accurately state the amount due from borrowers in proofs of claims and affidavits filed in bankruptcy processing; inability to state whether loans were delinquent at the time a foreclosure was initiated; failing to provide borrowers with timely notification of a foreclosure; and refusing to waive fees, charges or expenses required by the settlement. Green Tree also failed to document its procedures to oversee third-party vendors.

B of A is the only servicer still working on a corrective action plan for one of the tests it failed last year.

In the last report card, issued in December, the top four banks failed a combined seven tests from the first half of 2013. But the failures have been relatively few considering the monitor is looking at 29 different metrics to determine compliance with more than 300 servicing standards.

The top servicers still have plenty of work to do, Smith reiterated, because four new metrics that deal with more stringent reviews of the loan modification process and how servicers handle denials, single point of contact and billing accuracy were adopted in October. Those new tests are underway. In addition, the servicers now have to comply with the Consumer Financial Protection Bureau's mortgage servicing rules that went into effect in January.

Smith says he is "hesitant to declare victory" because complex, automated servicing systems often result in failures or system errors when there are changes to regulations.

"A lot of what we found to be failures in the past two years resulted from programming or system errors so every time there is a change in regulations, they have to reprogram their system and update training to incorporate compliance into their operations," he says.