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Can a captured regulator change his ways, or the leopard his spots? [ClearOnMoney]
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Can a captured regulator change his ways, or the leopard his spots?

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Commentary

Can a captured regulator change his ways, or the leopard his spots?

17 Feb 2011 by Jim Fickett.

(With apologies to the prophet Jeremiah.)

In a progress report on implementing Dodd-Frank reform, John Walsh of the Office of the Comptroller of the Currency gives the depressing news that (1) the Office of Thrift Supervision will not be fundamentally changed, but will instead move as a unit to become essentially a sub-agency of the OCC, and (2) the OCC investigation of foreclosure processes finds no fundamental problem in ownership transfers of mortgages.

Today the Senate Committee on Banking, Housing, and Urban Affairs heard testimony regarding progress on Dodd-Frank reforms. The testimony of John Walsh, Acting Comptroller of the Currency (from the Office of the Comptroller of the Currency, OCC), makes depressing reading.

Among the several banking regulatory agencies, all of which should have done much more to prevent the financial crisis, the Office of Thrift Supervision (OTS) was perhaps the worst, actively colluding with thrifts to hide problems. Dodd-Frank decreed that OTS would be merged into the OCC, part of the Treasury. How much difference will this make? Probably not much. The OTS will be moved more or less en masse, kept under the leadership of one of their own, and will function essentially as a sub-agency within the OCC:

most of the OTS’s approximately 1,000 employees will transfer to the OCC. The OCC recognizes that retaining the unique talent and experience of OTS staff is essential for the effective supervision of federal savings associations going forward. … I designated Timothy T. Ward to be Deputy Comptroller for Thrift Supervision. Mr. Ward, who joined the OCC after 26 years at the OTS and its predecessor agency, reports to the Senior Deputy Comptroller for the OCC’s Midsize/Community Bank Supervision (M/CBS) and is leading the planning process for integration of the OTS’s examination and supervision functions and staff. …

The OCC will assign OTS employees, to the extent practicable, to OCC positions performing the same functions and duties that the OTS employees performed prior to the transfer.

The OCC is carrying out the Treasury's investigation of foreclosure processes. At first glance, it sounds like they are coming down hard on the big servicers:

In general, the examinations found critical deficiencies and shortcomings in foreclosure governance processes, foreclosure document preparation processes, and oversight and monitoring of third party law firms and vendors. These deficiencies have resulted in violations of state and local foreclosure laws, regulations, or rules

But not really. Walsh goes on to say (contrary to many other sources) that there are no really fundamental problems with the ownership of mortgages and the standing to foreclose, just some carelessness that will be fixed by new rules:

Despite these deficiencies, the examination of specific cases and a review of servicers’ custodial activities found that loans were seriously delinquent, and that servicers maintained documentation of ownership and had a perfected interest in the mortgage to support their legal standing to foreclose. In addition, case reviews evidenced that servicers were in contact with troubled borrowers and had considered loss mitigation alternatives, including loan modifications. …

The OCC and the other federal banking agencies with relevant jurisdiction are in the process of finalizing actions that will incorporate appropriate remedial requirements

The key claim here is that there was a “perfected interest”, which means that transfers of ownership were indeed properly recorded.

A perfected security interest is a lien placed on the debtor's property with the debtor's written consent. A lien is only valid if it has been “perfected,” meaning that it has been properly recorded in accordance with a law commonly referred to as Article 9 of the Uniform Commercial Code.

The most obvious examples of perfected interests are (a) home mortgages recorded in the Official Records of the county in which the home is located and (b) the actual appearance of a lien holder's name on your car title. If the creditor fails to properly record the security interest, it is not perfected, and the debt is unsecured.

Perhaps the servicers were allowed to pick the example cases examined.