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Board Report: 2014-SR-B-015 September 30, 2014

Opportunities Exist to Enhance the Boardís Oversight of Future Complex Enforcement Actions

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Finding 1: The Boardís Advance Planning Efforts Were Not Commensurate With the Agreementís Complexity

The Board staff's advance preparation and planning efforts for the payment agreement were not commensurate with the agreement's complexity. The Board was responsible for overseeing the corrective action at an individual-borrower level for more than 4 million borrowers on an interagency basis across multiple mortgage servicers supervised by three Reserve Banks. Nevertheless, the Board engaged in limited planning activities for this unprecedented enforcement strategy. When a financial institution is subject to an enforcement action involving significant corrective action, the enforcement action typically requires the relevant institution to submit a detailed implementation plan to its Reserve Bank or to the Board for approval. We attribute the Board's limited planning to the compressed time frame associated with the transition from the IFR to the payment agreement and the aggressive deadlines imposed by the term sheets so that remediation could be provided to borrowers as quickly as possible. The Board's limited planning activities represent a missed opportunity to assess the feasibility of implementing the payment agreement; to define the success measures for the payment agreement, such as the percentage of borrowers cashing or depositing a check; to assess whether the Board had the requisite skills and capabilities to oversee the exercise; to consider the possible risks associated with its chosen course of action, including measures to mitigate those potential risks; and to vet fully alternative courses of action.

The Board Prepared Limited Documentation Outlining Its Plans to Oversee This Unprecedented Enforcement Strategy

In general, there was limited formal documentation of the Board staff's planning activities for the payment agreement. Based on interviews, we understand that Board staff held meetings internally and with the servicers and OCC staff during the negotiation of the payment agreement and provided briefings to senior Board officials on the merits and risks associated with the proposed payment agreement. For some of these meetings, Board staff prepared briefing materials describing the proposed payment agreement, including the objectives, key terms, and potential risks of replacing the IFR with the payment agreement. We believe that planning activities should be commensurate with the complexity of the activity to be conducted. In our opinion, overseeing an unprecedented enforcement strategy such as the payment agreement should (1) involve vetting and planning activities prior to implementation to identify risks, (2) consider the costs and benefits associated with particular alternatives, and (3) anticipate foreseeable hurdles to successful implementation.

Board staff did consider some inherent limitations and challenges associated with the approach as they prepared to announce the payment agreement. For example, in briefings to senior Board officials regarding the proposed payment agreement, the team acknowledged that the payment agreement would not identify actual harm to borrowers. While identifying actual harm was the goal of the IFR, under the payment agreement, the servicers slotted borrowers into various categories based on possible, not actual, harm. Board staff explained that borrowers did not have to waive any legal rights they had against the servicer as a condition of accepting their payment. Additionally, the briefing materials presented to senior Board officials also acknowledged that it may be difficult to verify the accuracy of the servicers' processes for slotting borrowers.

Board staff used their briefing materials during consultations with Board members. As the Board has explained in a letter to Congress, prior to agreeing to the payment agreement,

Board staff frequently consulted with Board members. These consultations included discussions with individual Board members subject to the Board member's availability. Based on these consultations, the Board's General Counsel approved entering into these actions, with the concurrence of the appropriate delegee of the Director of BS&R. Consistent with the General Counsel's approval, the Deputy General Counsel signed the documentation memorializing that approval.18

Despite acknowledging challenges and inherent limitations, we believe that the briefing materials did not contain additional information that would have proved useful in weighing the costs and benefits associated with the proposed approach. Specifically, the briefing materials did not

  • detail how the Board team would oversee the slotting process or the payment process
  • assess whether Board officials had the skills necessary to oversee this complex undertaking
  • identify success measures or benchmarks for the exercise, such as an estimate of how many borrowers would likely obtain remediation
  • indicate whether those success measures could be incorporated into the SOWs between the servicers and Rust as service-level agreements19 to incentivize performance under those agreements consistent with the Board's expectations
  • address key assumptions underpinning the exercise, such as the impact that unreliable data in the servicers' systems would have on the project's results
  • describe possible alternatives, such as a victims' relief fund, or outline the costs and benefits associated with such an approach
  • estimate the length of time necessary to complete the payment process or outline options for distributing residual funds

While Board staff did hold planning meetings and consider some risks and possible alternatives as it negotiated the payment agreement, they did not record formal minutes of meetings or prepare a formal project plan. Board staff did, however, create a document to track progress on several project tasks, and approved the supervisory expectations document to guide the oversight of the slotting process. Board staff explained that the compressed time frame imposed by the payment agreement term sheets precluded formal planning activities and that engaging in such activities would have caused further delays in getting remediation to borrowers. Board staff said that they consulted with staff from other agencies familiar with these types of agreements, although the insights from these interactions were not formally documented. Given the lack of formal documentation, we could not determine the extent to which the knowledge gained from these other agencies informed the Board's oversight of the implementation phase of the payment agreement.

In terms of planning for its oversight of the implementation phase, the Board considered the foreseeable challenge of locating addresses for some borrowers. At the outset of the implementation of the payment agreement, Board staff explained that Rust would be able to skip trace borrowers who had relocated to a new address by checking various databases, such as the U.S. Postal Service's national change of address database. The Board did not prepare an estimate of the likelihood that Rust's skip tracing process would be effective.

The Board Sought to Negotiate the Payment Agreement as Quickly as Possible

We attribute Board staff's limited advance planning to the narrow window of time between the decision to replace the IFR and the completion of the amended consent orders containing the payment agreement. Board officials emphasized providing remediation to borrowers in a timelier fashion than would have likely occurred had the IFR been allowed to continue. Therefore, timely action was a primary consideration underpinning the Board's decision to transition to the payment agreement.

Board staff began negotiating the payment agreement in late 2012. Beginning on January 7, 2013, the Board, the OCC, and the servicers signed the payment agreement term sheets, and the Board and the OCC announced the payment agreement. Board staff's primary focus during this compressed time frame was negotiating the payment agreement, which afforded little time for adequate planning. One member of the Board's oversight team explained that if the Board had stopped the IFR without an alternative that could be implemented quickly, the Board would have faced further stakeholder criticism. In this context, the Board prioritized replacing the IFR as quickly as possible with an alternative that provided payments to borrowers in a timelier manner than would have occurred under the IFR. This prioritization and sense of urgency limited the opportunity for advance planning. 

As a result of limited planning, Board staff missed opportunities to assess the feasibility of executing the payment agreement, its likelihood of success, and whether Board staff had the requisite skills and capabilities to oversee the exercise. The Board also did not fully consider measures to mitigate the potential risks and vet possible alternative courses of action. In our opinion, the sense of urgency to transition to the payment agreement and the resulting limited planning and preparation placed the Board's oversight team in a position in which its approach to problem solving was more reactive and ad hoc than it otherwise might have been.


The Board sought to provide payments to borrowers as quickly as possible. The short time frame provided in the payment agreement term sheets afforded little time for adequate planning to oversee this complex, unprecedented initiative. Because of this limited planning, the Board staff did not identify project success measures, assess the project's likelihood of success, analyze alternative approaches to achieve the Board's desired objectives, or assess whether the Board had the right mix of skills and expertise to manage the payment agreement.


We recommend that the Directors of BS&R, DCCA, and the Legal Division

  1. Develop a framework to guide planning, vetting, and approving activities for large, complex enforcement strategies that may involve multiple institutions, multiple Board divisions, or multiple Reserve Banks. This framework could include planning and risk assessment activities such 
    1. identifying key risks and possible risk-mitigating activities.
    2. assessing the feasibility of the intended corrective action.
    3. vetting possible alternatives.
    4. identifying documentation standards for the relevant initiative.
    5. defining performance measures as indicators of success and creating key interim milestones to monitor progress.
    6. assessing whether service-level agreements could be used to incentivize vendor performance consistent with expectations.
    7. identifying key assumptions.
    8. assessing whether the Board has the necessary skill sets and the resources available to oversee the intended corrective action.
    9. defining roles and responsibilities among the Board team overseeing the corrective action.

Management's Response

The Director of BS&R, the Director of DCCA, and the Board's General Counsel agreed with our recommendation. In their consolidated response to recommendation 1, the Board officials indicated that they plan to leverage information learned throughout the IFR process and the implementation of the payment agreement to ensure an appropriate level of planning, vetting, and approving activities for similar enforcement actions in the future.

OIG Comment

In our opinion, the actions described by the Division Directors and the Board's General Counsel are responsive to our recommendation. We plan to follow up on the Board's actions to ensure that the recommendation is fully addressed.