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Board officials have not finalized a strategy to end the payment agreement, although the Board has developed and discussed with the OCC alternatives to conclude the payment agreement and distribute any remaining funds. As of August 15, 2014, borrowers of the 13 servicers that joined the payment agreement in January 2013 have cashed or deposited checks totaling about $3.15 billion of the total $3.67 billion paid into the QSF accounts by those servicers.23 As there will likely be money remaining in the QSF accounts—possibly as much as $500 million or more—an approved plan is necessary to address any claims on remaining funds and to administer the residual. The Board and the OCC intentionally deferred resolving this issue in order to initiate the payment agreement as quickly as possible. The lack of an approved plan or strategy creates uncertainty about how the remaining funds will be distributed and may subject the Board to further stakeholder criticism.
Board officials have not finalized a strategy to end the payment agreement process because the Board's limited advance planning efforts did not involve preparing for the eventuality that all borrowers would not be located and that all checks would not be cashed or deposited. Board officials have acknowledged that it is unlikely that all borrowers will cash or deposit their check. As of August 15, 2014, borrowers of the 13 servicers that joined the payment agreement in January 2013 had cashed or deposited checks totaling about $3.15 billion, or about 86 percent, of $3.67 billion that those servicers paid into the QSF accounts for those borrowers. Therefore, as of August 15, 2014, approximately $520 million in funds were remaining in those QSF accounts. Borrowers may not have cashed or deposited checks for varying reasons, including failure to locate the borrower or, in limited cases, fraud. For instance, some borrowers were difficult to locate due to changes in residence, divorce, name changes, and deaths. As Board staff concluded, it is unlikely that they or Rust will be able to locate addresses for all borrowers, and as such, funds will be remaining in the QSF accounts. Thus, the Board must determine its strategy to eventually wind down this activity.
Board officials anticipated challenges locating every borrower. Interviewees indicated that the Board's primary focus during the term sheet negotiation process was providing remediation to borrowers as quickly as possible. As a result, we understand that Board officials chose to defer developing and finalizing the plan for distributing any residual funds until the execution phase of the payment agreement. The lack of an approved strategy to address how the remaining funds will be distributed creates uncertainty. As the Board has not yet finalized a plan to end the payment agreement, the Board exposes itself to additional stakeholder criticism and reputational risk.
Board officials have discussed with the OCC alternatives for finalizing the payment agreement. During the course of our evaluation, the Board addressed the need to develop a plan to complete the payment agreement and distribute any remaining funds, although as of September 18, 2014, it had not finalized a plan. Board officials have held meetings internally and with their OCC counterparts. Separately from the OCC, the Board has started to consider the pros and cons and evaluate the feasibility of various alternatives for completing the payment agreement and distributing any remaining funds.
We recommend that the Directors of BS&R, DCCA, and the Legal Division
The Director of BS&R, the Director of DCCA, and the Board's General Counsel agreed with our recommendations. In their consolidated response to recommendation 4, the Board officials indicated that the agency has begun working on a plan to end the process for paying in-scope borrowers, including continuing efforts to locate uncompensated borrowers and to appropriately allocate any funds remaining in the QSFs. We understand that the Board has discussed its plans with the OCC. In their consolidated response to recommendation 5, the Board officials indicated that they plan to consider potential options for distributing any residual amounts as part of the planning process in similar complex enforcement actions in the future.
In our opinion, the actions described by the Division Directors and the Board's General Counsel are responsive to our recommendations. We plan to follow up on the Board's actions to ensure that these recommendations are fully addressed.