Friday, March 9, 2012

Action Plans to Correct Deficiencies

On March 8, 2012, the Federal Reserve Board (FRB) released the action plans for three supervised financial institutions to correct deficiencies in residential mortgage loan servicing and foreclosure processing. The three institutions are HSBC North America Holdings, Ally Financial, and IMB.

This is the second set of Action Plans that the FRB has made public.

On February 27, 2012, the FRB released the Action Plans of Bank of America, Citigroup, EverBank, JPMorgan Chase, MetLife, PNC, SunTrust, US Bancorp, and Wells Fargo.
The FRB will release additional Action Plans soon.

We have been monitoring and reporting on this matter for some time in newsletters and articles.

The Action Plans are required by formal enforcement actions issued by the FRB last year. Release of the Action Plans follows reviews conducted from November 2010 to January 2011, in which examiners found unsafe and unsound processes and practices in residential mortgage loan servicing and foreclosure processing at a number of supervised institutions.
  • The enforcement actions required Action Plans that describe, among other things, the strengthening of compliance programs.
  • Of instructional interest in learning about the adverse findings is the opportunity to review some of the ways and means adopted by the aforementioned institutions to resolve such deficiencies.
Particularly interesting are the consistent features of the mortgage compliance programs, and the training needed to effectuate corrective actions.

I hope you will take the time to consider how best to improve your own institution's compliance program.

Best wishes,
Jonathan Foxx *
Mortgage Compliance Program
Training Methods

A consistent feature of the Mortgage Compliance Programs (MCPs) is the emphasis on the institution's culture. One respondent stated that its MCP includes a commitment to determining how compliance risks are considered at planning meetings, identifying the applicable resources, compliance issues, risk reporting, and employee accountability, and instituting processes to identify compliance gaps and potential risks early in the new business or product development cycle.

The following outline sums up a broad and robust approach to readiness taken by respondents. This list combines features from various Action Plans that proved acceptable to the FRB.

Controls and Supervision
An institution should have processes to determine if appropriate controls are in place when enhancements are required, and how risks and issues are tracked and escalated within the organization.

Policies and Procedures
A description of the inventory, development, maintenance, approval and communication of policies and procedures.

Monitoring, Testing, and Reporting
Processes for mapping the laws, rules and regulations to system controls, evaluating the effectiveness of monitoring activities, determining the effectiveness of the compliance mandates and adherence to such guidelines, maintaining plans for activities to be monitored, and reporting monitoring and testing results to the management.

Implement processes to ensure the qualifications of current management and supervisory personnel responsible for mortgage operations and mortgage compliance, including collections, loss mitigation and loan modification, are appropriate, and a determine whether any staffing changes or additions are needed.

Loan Reviews
Establish an independent Loan Review and Quality Control function to provide continuous transactional testing.

Comprehensive risk assessment and remediation of any identified gaps should be performed to evaluate processes, controls and compliance with these requirements.

Procedures for integrating compliance competencies into the mortgage processes, how training is tracked and measured, identifying new compliance training, and determining when employees have sufficient awareness of laws, rules and regulations.

Management Reporting and Analysis
Inventory of management reports that address compliance, processes to determine accuracy of management reports, and how compliance risks and issues are reported

Regulatory Oversight
Procedures for maintaining and updating federal, state, and local laws, rules and regulations, and processes for management to respond to requests from regulators.

Thursday, March 8, 2012

The Cost of Consumer Financial Protection

Recently, I met with several accomplished compliance professionals for lunch. There was considerable discussion about the continuing growth of the regulatory frameworks, the bureaucracies to maintain them, and economic burden on financial institutions. *

One individual expressed the importance of financial protection of the consumer, while recognizing that such protection causes incremental compliance requirements; another individual agreed that such protection was needed, but worried that the costs to provide that protection would ultimately be borne by the consumer through increased pricing. 

In a way, these views reflect an ethical dilemma, and I would like to explore this seeming conundrum and offer a resolution.

An Unfettered Market
Protecting the Consumer
"Remember that credit is money."
Ethical Dilemma
Discussion Forum

An Unfettered Market

There is no political economy that we know of, since the dawn of recorded history, in which an unfettered market has existed.

Theories abound about how such a market might function. Whether we term such markets as "unfettered" or use the more emotionally appealing word "free," these markets are nonetheless only theories, howsoever popular in the public mind, and have virtually no extrapolation into economic reality. Better to call such theoretical legerdemain "utopian markets" and leave them to their rightful place in speculative philosophy and treatises on metaphysics.

Of course, utopias are attractive and always will be, even if we instinctively know that their viability is inherently unsupported by human experience and their imagined structure is ultimately dissolved in the unsentimental crucible of human history.


All markets are a remunerative way of exchanging information, which we call goods and services. Pricing is that information means by which markets communicate value relative to goods and services. And pricing is communicated through the conveyance of planning.

Markets contain an element of planning - some in extreme, others much less so. The plan, or the framework, is often in control of market participants by virtue of the very act of pricing. It is not possible to remove pricing from a market. Even a market predicated on bartering utilizes the "quid pro quo" as its informational pricing signal.


In the absence of a framework there is no market. It is not the framework that encourages commerce; rather, it is the commerce itself that encourages the formation of the framework. Innovative commerce often bleeds through and beyond an old framework, thus creating the need for a new framework.

And there is often reactionary resistance to the new framework. Those market participants who are paying attention to the informational signals of a new market are already finding ways and means to act in the new framework, while those whose commerce has not kept pace with innovation tend to resist the change mightily, hopelessly trying to preserve what they have by "fighting the tape."


Over the years I have found that the word "regulations" has become a euphemism for all manner of mischief perpetrated by politicians and market participants. Notice I differentiate the two: while some politicians may be market participants, most market participants are not politicians. Yet politicians spend quite a bit of their time crafting regulations! The mischief takes the form of viewing regulations as not only coercive (which they are) but also capricious (which they are not).

Both the politicians and the market participants rail on and on between and amongst each other about the coercion and the capriciousness of regulations, yet none of them ever really defines what actually is an efficient regulation. That is because, often, neither side has any idea how best to define such a thing.

But I'll define an "efficient regulation" right here and now:

An efficient regulation is the means by which the framework is preserved. Nothing more.

An inefficient regulation is the means by which the framework is destroyed. QED.

Protecting the Consumer

The consumer and the provider of goods and services in a market are economic equals. These actors are not two sides of the same coin. They comprise the market itself! The consumer's impact on regulation is what economists call "endogenous;" that is, acting in the aggregate, consumers influence a regulatory framework by accentuating certain preferences, such as encouraging diversity and innovation.

And providers of goods and services influence regulations by discouraging monopoly, reducing inefficiencies, constraining the inappropriate acquisition of ownership and irreversible wealth accumulation, and so forth.

Protecting the consumer is really just another way of protecting the provider.

But it comes at a cost to both of them.