Lucy Morris – Independent Reviewer Overseeing · PDF fileCase 11-33377 Doc 57-1 Filed 08/30 ... Reviewer documents and information relevant to the ... The servicer of a mortgage

Lucy Morris – Independent Reviewer Overseeing Compliance with Settlement Between the

United States Trustee Program and Wells Fargo Bank, N.A.

First Report on Progress of Compliance with Settlement Agreement

August 2016

Case 11-33377 Doc 57-1 Filed 08/30/16 Page 1 of 24

TABLE OF CONTENTS

I. Introduction ..................................................................................................................................... 1

II. The Green Case and Entry of Order Approving the Settlement Agreement ................................... 1

III. Wells Fargo’s Settlement Obligations To Debtors in Chapter 13 Bankruptcy Cases ....................... 2

Policy, Procedure and Process Enhancements ................................................................... 3

Payment Change Notices (PCNs) ........................................................................... 3

Legal Requirements .................................................................................. 3

Obligations Related to PCN Enhancements .............................................. 4

Escrow Analyses ..................................................................................................... 5

Legal Requirements .................................................................................. 5

Obligations Related to Escrow Enhancements ......................................... 6

Credits and Refunds ............................................................................................................ 6

Payment Change Notices (PCNs) ........................................................................... 6

Payment Increase Credit ........................................................................... 6

Reconciliation Credit ................................................................................. 7

Prior Remediation ..................................................................................... 8

Payment Decrease Credit ......................................................................... 8

Attorney Fee Reimbursement .................................................................. 8

Escrow .................................................................................................................... 9

Pro Forma Escrow Account Credit or Refund ........................................... 9

Delayed Escrow PCN Account Credit ........................................................ 9

Lump Sum Escrow Account Refund ........................................................ 10

Late Fees and Additional Fees, Penalties, and Charges ....................................... 10

Notices of Credits and Refunds............................................................................ 10

IV. Role of Independent Reviewer, WFAS, and Independent Reviewer’s Professionals .................... 11

Role of the Independent Reviewer ................................................................................... 11

Role of WFAS and the Independent Reviewer’s Professionals ......................................... 11

Role of WFAS........................................................................................................ 11

Role of the Independent Reviewer’s Professionals ............................................. 13

V. Independent Reviewer’s Mandate Under the Settlement Agreement ......................................... 13

Operational Enhancements .............................................................................................. 14

Credits and Refunds .......................................................................................................... 14

i


PCN-Related Credits and Refunds........................................................................ 14

Escrow-Related Credits and Refunds ................................................................... 15

Population Validation ....................................................................................................... 15

VI. The Work Plan ................................................................................................................................ 15

VII. Work Progress ................................................................................................................................ 17

Background ....................................................................................................................... 17

Meetings and Developments related to Wells Fargo ....................................................... 17

Meetings and Developments related to WFAS................................................................. 18

VIII. Findings Related to Compliance with Settlement Agreement ...................................................... 19

Delayed Mailing of PCNs ................................................................................................... 19

Operational Enhancements. ............................................................................................. 20

Remediation and Corrective Action. ................................................................................. 20

IX. Future Action ................................................................................................................................. 21

ii


I. Introduction

On November 5, 2015, the Department of Justice’s United States Trustee Program (“USTP”) entered into a Settlement Agreement with Wells Fargo Bank, N.A. (“Wells Fargo”) relating to Wells Fargo’s mortgage servicing practices in Chapter 13 consumer bankruptcy cases. In the Settlement Agreement, Wells Fargo acknowledged that it failed to timely file more than 54,837 payment change notices and failed to timely perform approximately 18,538 escrow analyses for homeowners in Chapter 13 bankruptcy cases between December 1, 2011, and March 15, 2015 (the “Relevant Period”). The USTP and Wells Fargo are sometimes referred to herein as the Parties. References to the Settlement Agreement include modifications thereof as agreed to by the Parties.

The Parties appointed Lucy Morris as the Independent Reviewer to oversee and assess Wells Fargo’s compliance with the Settlement Agreement. Pursuant to the Independent Reviewer’s mandate set forth in Paragraph 46 of the Settlement Agreement, this first report (the “Report”) details the Independent Reviewer’s assessments of Wells Fargo’s ongoing compliance with the terms of the Settlement Agreement. The Settlement Agreement is attached as Exhibit 1. Modifications to the Settlement Agreement include: (i) the Letter Agreement between Wells Fargo and the USTP dated March 17, 2016 attached as Exhibit 2 (the “March Letter Agreement”); and (ii) the Letter Agreement between Wells Fargo and the USTP regarding the Certificate of Service issue dated August 24, 2016 attached as Exhibit 3 (the “COS Agreement”).

This Report discusses the circumstances leading to the Settlement Agreement, Wells Fargo’s obligations under the Settlement Agreement, the Independent Reviewer’s role and mandate under the Settlement Agreement, the work progress to date, findings related to Wells Fargo’s compliance with the Settlement Agreement to date, and the Independent Reviewer’s future actions. II. The Green Case and Entry of Order Approving the Settlement Agreement

The Settlement Agreement was entered in In re Green, Case No. 11-33377-TJC (D. Md.). In the Green case, Wells Fargo serviced Ms. Green’s (the “Debtor”) mortgage loan. The Debtor filed a Chapter 13 bankruptcy petition on November 30, 2011. On March 12, 2012, Wells Fargo filed a proof of claim asserting a secured claim in the amount of $178,243.00 in connection with a Note and Deed of Trust dated October 25, 2005 on the Debtor’s home (the “Proof of Claim”). Documentation attached to the Proof of Claim asserted that the Debtor’s monthly mortgage payment was $1,387.56.

Page 1 of 21


Wells Fargo filed a payment change notice on December 16, 2014, showing an increase

in the Debtor’s monthly payment due to a change in the Debtor’s escrow obligation and establishing a new monthly payment amount of $1,413.33 with an effective date of January 15, 2015 (the “2014 PCN”). The escrow documentation attached in support of the 2014 PCN had an escrow analysis date of January 14, 2014, which was more than eleven months before Wells Fargo filed the 2014 PCN. The escrow documentation also stated that the Debtor’s current monthly payment amount was $1,381.50, which was inconsistent with the $1,387.56 monthly payment amount set forth in the Proof of Claim filed on March 12, 2012. See Claims Register for Case No. 11-33377, Claim No. 3.

In addition to failing to timely file one or more payment change notices (“PCNs”) in the Green case, Wells Fargo failed to file or untimely filed PCNs in other bankruptcy cases in districts nationwide. In response to an inquiry from the Executive Office for United States Trustees (“EOUST”), Wells Fargo confirmed systemic issues with filing PCNs, as well as systemic issues related to the preparation of annual escrow analyses for debtors in Chapter 13 bankruptcy cases, and the proper application of escrow shortage payments.

Subsequently, the Parties entered into the Settlement Agreement and the United States Bankruptcy Court for the District of Maryland (the “Court”) entered the Order Approving Settlement on November 19, 2015. III. Wells Fargo’s Settlement Obligations to Debtors in Chapter 13 Bankruptcy Cases

The Settlement Agreement requires Wells Fargo to: (1) improve its policies and procedures to ensure that PCNs are timely filed and served in Chapter 13 bankruptcy cases; (2) improve its policies and procedures to ensure that escrow analyses are timely performed and communicated to debtors in Chapter 13 bankruptcy cases; (3) provide approximately $81.6 million in credits or refunds to certain impacted debtors who had a Chapter 13 bankruptcy case pending between December 1, 2011 and March 31, 2015; (4) provide the Independent Reviewer documents and information relevant to the Settlement Agreement that are reasonably necessary to complete the Independent Reviewer’s mandate; and (5) take such other corrective active from time to time as specified in the Settlement Agreement.

In addition and as discussed further below in Section VIII, subsequent to the Settlement

Agreement and as a result of the Independent Review process, Wells Fargo has agreed to provide additional relief to debtors in Chapter 13 bankruptcy cases. In particular, Wells Fargo will take corrective action to address newly-discovered issues relating to untimely service of

Page 2 of 21


PCNs to debtors in Chapter 13 bankruptcy cases. Wells Fargo identified approximately 7,950 additional accounts that may be eligible for a credit or refund as a result of the delayed mailing of PCNs to debtors. Wells Fargo also agreed to enhance its policies and procedures ensure the timely mailing of PCNs. See Exhibit 3.

Policy, Procedure and Process Enhancements

Payment Change Notices (PCNs)

Legal Requirements

During the course of a Chapter 13 bankruptcy proceeding, the monthly mortgage payments due from a debtor may change because of a number of events, such as interest rate fluctuations on adjustable rate mortgages, changes in the amount of payment required to fund the escrow account, and changes resulting from loan modifications. In order to keep debtors and trustees informed of such changes, the Federal Rules of Bankruptcy Procedure were amended to adopt Bankruptcy Rule 3002.1 (“Rule 3002.1”), which became effective December 1, 2011.

In Chapter 13 bankruptcy cases, Rule 3002.1 applies to claims that are secured by a security interest in the debtor’s principal residence and provided for in the debtor’s plan under § 1322(b)(5) of the Bankruptcy Code.1 Rule 3002.1 requires the holder of the claim —typically the lender or servicer for the debtor’s home mortgage—to file and serve on the debtor, debtor’s counsel, and the trustee “a notice of any change in the payment amount, including any change that results from an interest rate or escrow account adjustment, no later than 21 days before a payment in the new amount is due.” Rule 3002.1(b). Such Payment Change Notices are referred to as “PCNs.” Timely notice of changes to post-petition payment obligations permits the debtor or trustee to challenge the validity of any such changes or, if appropriate, adjust post-petition mortgage payments to cover any undisputed claimed adjustment. See Committee Notes on Rule-2011. A PCN that was filed and served, but not within the required 21-day period, is referred to in this Report as an untimely PCN; a PCN that was not filed and served is referred to in this Report as a missed PCN.

1 Bankruptcy Code Section 1322(b)(5) provides for bankruptcy plans that allow a debtor to cure a default and maintain regular payments to a creditor during the plan.

Page 3 of 21


Obligations Related to PCN Enhancements

Wells Fargo agreed to make operational changes to ensure that PCNs are properly filed in Chapter 13 bankruptcy cases, and to have such enhancements in place on or before November 30, 2015. Specifically, Wells Fargo agreed to:

• Enhance policies and procedures for the preparation, signing, and filing of PCNs at least 21 days before a payment in the new amount is due;

• Implement a comprehensive training program for all PCN reviewers/signers, including three initial training sessions, annual refresher training, access to current policies and procedures for all team members, job aids, and tracking of team members’ performance and completion of training sessions;

• Implement a certification process for team members upon completion of a training program, which grants the team member authority to sign documents on behalf of Wells Fargo;

• Develop a process for PCN reviewers/signers to follow to ensure PCNs are properly completed and reviewed prior to signing and filing;

• Implement a monitoring process to validate that PCN reviewers/signers have the proper authority and electronic court filing accreditation to file documents in the various bankruptcy courts; and

• Implement a control process to review the timeliness, quality, and accuracy of PCNs, including the population requiring a PCN filing, which process must include:

o Reviews of the timeliness, quality, and accuracy of PCNs through monthly

sampling of the reviewers’/signers’ work by random selection of PCN reviewers/signers by two different teams, including an internal quality assurance team and a compliance team which does not report to mortgage servicing management;

o Preparation of reports showing all future changes in the monthly payment

amount for customers in bankruptcy, and reviews of the populations identified in those reports to ensure that PCNs were timely and properly filed; and

Page 4 of 21


o Delivery of reports to senior management within the bankruptcy unit and

mortgage servicing for review.

See Settlement Agreement, Paragraphs 12(a)-(e).

Escrow Analyses

Legal Requirements The servicer of a mortgage loan secured by real property often pays amounts due for

real estate taxes and assessments, property insurance, and mortgage insurance. The servicer pays these amounts from an escrow account funded by the borrower and maintained by the servicer. The Real Estate Settlement Procedures Act and its implementing Regulation X (“RESPA”) require a servicer to perform an escrow analysis on an annual basis to determine the amount necessary for the borrower to fund his or her escrow account and to apportion the projected annual total due over the 12 monthly mortgage payments for the forthcoming year.

Upon completion of the escrow analysis, RESPA requires the servicer to prepare and send to the borrower an annual escrow account statement within 30 days of the completion of the escrow account computation year. The escrow statement must include (among other things):

(i) The amount of the borrower’s current monthly mortgage payment and the portion of the monthly payment going into the escrow account;

(ii) The amount of the past year’s monthly mortgage payment and the portion of

the monthly payment that went into the escrow account; (iii) The total amount paid into the escrow account during the past computation

year; (iv) The total amount paid out of the escrow account during the same period for

taxes, insurance premiums, and other charges (as separately identified); (v) The balance in the escrow account at the end of the period; (vi) An explanation of how any surplus is being handled by the servicer;

Page 5 of 21


(vii) An explanation of how any shortage or deficiency is to be paid by the borrower;

and (viii) If applicable, the reason(s) why the estimated low monthly balance was not

reached, as indicated by noting differences between the most recent account history and last year’s projection.

RESPA also specifies the particular options available to the servicer to collect shortages

and deficiencies in the escrow account, including allowing the borrower to pay shortages and deficiencies in the escrow account in a lump sum or in equal monthly payments over a 12 month period.

Obligations Related to Escrow Enhancements

In the Settlement Agreement, Wells Fargo agreed to make operational changes related to its administration of escrow accounts, including the following:

• Updating its system to eliminate the overwriting of pending escrow analyses;

• Implementing policies to ensure that escrow analyses are performed and communicated to debtors in Chapter 13 bankruptcy cases on a 12-month cycle; and

• Revising policies to ensure that debtors in Chapter 13 bankruptcy cases who make lump-sum escrow shortage payments have the amount of their monthly payments automatically reduced.

See Settlement Agreement, Paragraph 14.

Credits and Refunds

Payment Change Notices (PCNs)

Payment Increase Credit

In the Settlement Agreement, Wells Fargo identified approximately 42,756 accounts of

Chapter 13 bankruptcy case debtors where Wells Fargo filed untimely PCNs or missed PCN filings during the Relevant Period and where the monthly payment on those accounts

Page 6 of 21


increased. For these accounts, Wells Fargo agreed to provide a credit to each account based on the unpaid principal balance of the mortgage loan as of March 31, 2015, as follows:

Number of Impacted Accounts

Unpaid Principal Balance as of March 31, 2015

Credit to Customer Account

7,932 Up to $74,999 $708 14,373 $75,000-$149,999 $1,026 13,006 $150,000-$299,999 $1,313 7,099 $300,000-$699,999 $1,968 346 $700,000 or more $6,360

See Settlement Agreement, Paragraph 16(a).

Wells Fargo estimated a total amount for Payment Increase Credits of $53,600,000. See

Settlement Agreement, Exhibit A.

Reconciliation Credit

In addition to providing the Payment Increase Credit, Wells Fargo also agreed to undertake an account reconciliation on each of the approximately 42,756 accounts when the earliest of one of the following milestone events occurs with respect to a particular account: (1) Wells Fargo files a Motion for Relief from Stay2 in the debtor’s Chapter 13 bankruptcy proceeding; (2) the debtor’s Chapter 13 bankruptcy case is dismissed or converted; or (3) the debtor receives a bankruptcy discharge. After performing the account reconciliation, Wells Fargo will credit those accounts for: (1) the aggregate difference between the prior properly noticed payment amount and the payment amount associated with the untimely or missed PCN through the earlier of when a properly filed PCN was filed, a Motion for Relief from Stay was filed, the bankruptcy case was dismissed or converted, or the debtor receives a discharge (the “Reconciliation Amount”); (2) less the Payment Increase Credit and any other credits previously paid under Paragraph 16(c) of the Settlement Agreement. See Settlement Agreement, Paragraph 16(b).

Wells Fargo estimated a total amount for Reconciliation Credits of $10,000,000. See Settlement Agreement, Exhibit A.

2 This is a motion filed by a creditor with the bankruptcy court requesting an exception to the stay, which is automatically entered when a debtor files bankruptcy. The stay prohibits creditors from taking further action to collect on debts while the stay is in force.

Page 7 of 21


Prior Remediation

For approximately 8,000 accounts, Wells Fargo represented that it had previously credited the aggregate difference between the prior properly noticed payment amount and the payment amount associated with an untimely or missed PCN through the earlier of when: (1) a properly filed PCN was filed; (2) a Motion for Relief from Stay was filed; (3) the debtor’s Chapter 13 bankruptcy case was dismissed; or (4) the debtor received a bankruptcy discharge. See Settlement Agreement, Paragraph 16(c).

Wells Fargo estimated a total amount paid for Prior Remediation of $3,000,000. See Settlement Agreement, Exhibit A.

Payment Decrease Credit

Wells Fargo identified approximately 3,000 accounts for which there were untimely or

missed PCNs with respect to a decrease in the debtor’s monthly payment amount where: (i) the debtor or trustee actually paid more than the decreased monthly payment amount due; and (ii) there was no Payment Increase Credit due to the account. For those accounts, Wells Fargo agreed to refund to the debtor or trustee, as appropriate, the aggregate amount paid in excess of the decreased monthly payment amount due through the earlier of when: (1) a properly filed PCN was filed; (2) a Motion for Relief from Stay was filed; (3) the debtor’s Chapter 13 bankruptcy case was dismissed or converted; or (4) the debtor received a bankruptcy discharge. See Settlement Agreement, Paragraph 17.

Wells Fargo estimated a total amount for Payment Decrease Credits of $1,500,000. See Settlement Agreement, Exhibit A.

Attorney Fee Reimbursement

Wells Fargo agreed to reimburse debtors for reasonable attorneys’ fees where there were untimely or missed PCNs during the Relevant Period and the debtor or bankruptcy trustee successfully disputed a payment increase or any associated fees, charges, and costs imposed. The Parties agreed that Wells Fargo is required to identify such disputes by reviewing any internally maintained list of Chapter 13 bankruptcy matters and matters brought to its attention by outside bankruptcy counsel. Wells Fargo must also provide reimbursement if such a dispute is otherwise brought to Wells Fargo’s attention by a debtor, trustee, the Independent Reviewer, or the USTP. See Settlement Agreement, Paragraph 25.

Page 8 of 21


Wells Fargo did not estimate the total amount for Attorney Fee Reimbursements.

Escrow

Pro Forma Escrow Account Credit or Refund

Wells Fargo identified approximately 18,538 accounts of Chapter 13 bankruptcy debtors where Wells Fargo failed to perform escrow analyses within the required 12-month cycle (the “Delayed Escrow Cases”). Wells Fargo agreed to complete escrow analyses on these accounts as if they had occurred at the 12-month mark (a “Pro Forma Analysis”) and agreed to compare the Pro Forma Analyses to any other later prepared escrow analysis on these accounts (the “Delayed Escrow Analysis”). In the case of an escrow account shortage, Wells Fargo agreed to credit the escrow account for the difference between the Delayed Escrow Analysis and the Pro Forma Analysis if the Pro Forma Analysis shows a shortage in the escrow account that is less than the shortage shown in the Delayed Escrow Analysis. In the case of an escrow account surplus, Wells Fargo agreed to refund to the debtor or trustee, as appropriate, the amount of the surplus in the escrow account if the Pro Forma Analysis shows a surplus of $50 or more and if the debtor is current under a confirmed Chapter 13 bankruptcy plan or current as of the conversion or dismissal of the bankruptcy case. See Settlement Agreement, Paragraph 18.

Wells Fargo estimated a total amount for Pro Forma Escrow Account Credits of $4,500,000 and a total amount for Pro Forma Escrow Account Refunds of $4,000,000. See Settlement Agreement, Exhibit A.

Delayed Escrow PCN Account Credit

Wells Fargo identified approximately 12,000 accounts of the 18,538 Delayed Escrow Cases where the debtor was not already included in the population for a Payment Increase Credit. In these cases, if the escrow analysis had not been delayed, the escrow payment amount would have changed and a PCN would have been filed. Wells Fargo agreed to provide a $333.33 credit to these accounts. See Settlement Agreement, Paragraph 19.

Wells Fargo estimated a total amount for Delayed Escrow PCN Cases of $4,000,000. See Settlement Agreement, Exhibit A.

Page 9 of 21


Lump Sum Escrow Account Refund

Wells Fargo agreed to refund all amounts overpaid by the debtor or trustee with respect to the approximately 2,400 accounts where a lump sum escrow shortage payment was made during the Relevant Period. In these cases, Wells Fargo failed to reduce the debtor’s monthly payment amount consistent with the payment of the escrow shortage. See Settlement Agreement, Paragraph 20 and Exhibit A.

Wells Fargo estimated a total amount for Lump Sum Escrow Account Refunds of $1,000,000. See Settlement Agreement, Exhibit A.

Late Fees and Additional Fees, Penalties, and Charges

Wells Fargo represented that it had a practice, and would continue to adhere to its practice, of not imposing post-petition late fees on debtors in bankruptcy cases in which Wells Fargo filed an untimely PCN or failed to file a PCN during the Relevant Period. Wells Fargo further represented that it has a policy not to impose additional fees, penalties, or charges on a debtor in a Chapter 13 bankruptcy case as a result of an untimely or missed PCN and that it adhered to this policy during the Relevant Period, and will continue to adhere to this policy in Chapter 13 bankruptcy cases. If the Independent Reviewer determines that Wells Fargo did not adhere to this policy, Wells Fargo agreed to take appropriate corrective action and remediation, including crediting any debtor’s account with all amounts assessed or imposed on the debtor in contravention of these policies or refunding all amounts improperly collected in contravention of these policies (“Fee Credits”). See Settlement Agreement, Paragraph 23.

Wells Fargo did not estimate an amount for Fee Credits.

Notices of Credits and Refunds

Wells Fargo agreed to send a written notice to all debtors who receive a credit or refund under the Settlement Agreement informing the debtors of the credit or refund, and the reason for the credit or refund. The Parties agreed that if the debtor’s Chapter 13 bankruptcy case is still pending, the debtor’s notice would be sent to the debtor’s counsel and the bankruptcy trustee. Wells Fargo also agreed to file a PCN, if required, as a result of any such credits or refunds. See Settlement Agreement, Paragraph 21, and the March Letter Agreement, Exhibit 2.

Page 10 of 21


IV. Role of Independent Reviewer, WFAS, and Independent Reviewer’s Professionals

Role of the Independent Reviewer

The Settlement Agreement provides for the appointment of an Independent Reviewer, Lucy Morris, to assess whether Wells Fargo is satisfying its obligations under the Settlement Agreement, including whether certain representations in the Settlement Agreement are substantially accurate, and whether Wells Fargo is meeting the remediation obligations called for by the Settlement Agreement. Ms. Morris is authorized to retain other professionals, including outside consultants, to assist her in discharging her duties under the Settlement Agreement. Ms. Morris has retained the professional services of Dana Frederick Clarke and Lisa Crowley DeLessio, partners of Hudson Cook, LLP. In addition, Ms. Morris has engaged BDO Consulting, a division of BDO USA, LLP (“BDO”) and Parkside Associates, LLC (“Parkside Associates”) (specifically, Kevin Byers) to assist her with the testing and verification of the assertions made in the Settlement Agreement. Ms. Morris has also retained the Honorable William H. Brown, United States Bankruptcy Judge (retired) (“Judge Brown”) to advise her on bankruptcy matters. Ms. Morris has confirmed that BDO, Parkside Associates, Judge Brown, Mr. Clarke, and Ms. DeLessio have no conflicts that would interfere with the independent execution of their work. BDO, Parkside Associates, Judge Brown, Mr. Clarke, and Ms. DeLessio are sometimes referred to in this Report as the “Professionals.” Under the Settlement Agreement, any costs associated with the Independent Review will be paid by Wells Fargo, including any fees associated with the Professionals’ work.

In addition to assessing whether Wells Fargo has complied with the Settlement Agreement, it is the Independent Reviewer’s responsibility to report on Wells Fargo’s progress to the Court. The Independent Reviewer’s reports will be publically available in the Green case filings and through the Independent Reviewer’s website at www.WFIndependentReview.com.

Ms. Morris will report semi-annually on Wells Fargo’s progress in meeting the obligations set forth in the Settlement Agreement following this Report.

Role of WFAS and the Independent Reviewer’s Professionals

Role of WFAS

The Settlement Agreement requires (for some testing) and authorizes (for other testing) the Independent Reviewer to utilize the services of Wells Fargo Audit Services (“WFAS”).

Page 11 of 21


http://www.wfindependentreview.com/

WFAS is an independent division within Wells Fargo that is organizationally separate and distinct from all lines of business. WFAS conducts internal audits and reports the results of its work to the Chief Auditor, who reports directly to the Audit and Examinations Committee of the Board of Directors.

WFAS will be responsible, in part, for performing reviews of Wells Fargo’s compliance with the Settlement Agreement, as agreed upon between the Independent Reviewer and Wells Fargo, through means and methods set out in a document referred to in this Report as the Work Plan (“Work Plan”), as described in detail below in Section VI, and the Settlement Agreement. The Settlement Agreement requires WFAS to be independent at all times from the line of business whose performance is being measured. See Settlement Agreement, Paragraph 41. With respect to the testing work performed by WFAS, such work will be set out in work papers (“Work Papers”) prepared by WFAS in connection with determining Wells Fargo’s compliance with the Settlement Agreement in accordance with the Work Plan, and WFAS will provide the Independent Reviewer with access to all Work Papers, as provided for in the Settlement Agreement and the Work Plan.

Under the Settlement Agreement, WFAS is required to certify the accuracy and completeness of: (1) the identification of impacted debtors; and (2) the provision of credits and/or refunds required in Paragraphs 16(a), 16(c), and 17-20 of the Settlement Agreement. See Settlement Agreement, Paragraph 41. The Settlement Agreement specifically authorizes the Independent Reviewer to retain WFAS to perform additional work, which the Independent Reviewer has done. See Settlement Agreement, Paragraph 41.

After completing its determination of the accuracy and completeness of the populations and the remediation required under Article VI, WFAS will submit a certification to the Independent Reviewer and provide a copy to the EOUST on or before 60 days following submission of final information by Wells Fargo to WFAS, but no later than November 30, 2016, unless otherwise agreed to by the Parties.

WFAS’ work includes independently extracting archived loan-level data from Wells Fargo’s systems of record to compare such data to the data Wells Fargo used to determine the number of accounts approximated in the Settlement Agreement. WFAS will also assess the methods by which Wells Fargo made such determinations as part of the process to identify all applicable Chapter 13 bankruptcy cases subject to the Settlement Agreement.

Page 12 of 21


Role of the Independent Reviewer’s Professionals

The Professionals’ role is to support the work of the Independent Reviewer under the Settlement Agreement, including:

• Providing advice to the Independent Reviewer pertaining to legal issues that arise

during the performance of the work and the scope of the work;

• Providing advice to the Independent Reviewer pertaining to the proposed testing under the Work Plan;

• Evaluating WFAS’ validation of the crediting and refunding populations and samples selected for testing;

• Evaluating the adequacy and sufficiency of WFAS’ performance under the Work Plan to confirm Wells Fargo’s proper crediting and refunding of accounts in compliance with the Settlement Agreement;

• Sampling and performing independent testing of the accounts to ensure the accuracy of WFAS’ work; and

• Performing other work as requested by the Independent Reviewer in fulfilling her mandate, as discussed in Section V below.

V. Independent Reviewer’s Mandate Under the Settlement Agreement

The Settlement Agreement describes the Independent Reviewer’s mandate in detail. There are three primary components to the mandate: (1) evaluating Wells Fargo’s operational enhancements related to timely filing and service of PCNs and escrow analyses; (2) assessing whether Wells Fargo provided credits and refunds to Chapter 13 bankruptcy case debtors in compliance with the Settlement Agreement; and (3) ensuring that the population of Chapter 13 bankruptcy case debtors receiving credits and refunds is substantially accurate.

The Independent Reviewer must use a sampling methodology and testing protocol to

assess Wells Fargo’s compliance with the Settlement Agreement. The means and methods of the sampling methodology and testing protocol are set out in the Work Plan described in detail below in Section VI.

Page 13 of 21


Operational Enhancements

Under the Settlement Agreement, the Independent Reviewer must assess whether Wells Fargo:

• Had implemented operational enhancements by November 30, 2015 to ensure the timely filing and service of PCNs as required by Bankruptcy Rule 3002.1, and the timely preparation and communication of escrow analyses for debtors in Chapter 13 bankruptcy cases. See Settlement Agreement, Paragraph 45(a);

• Is timely filing and serving PCNs since March 31, 2015. See Settlement Agreement,

Paragraphs 45(k)(b) 45(m); and • Is timely preparing and sending annual escrow analyses after March 31, 2015. See

Settlement Agreement, Paragraph 45(k)(a).

Credits and Refunds

The Independent Reviewer must assess whether Chapter 13 debtors are receiving the proper credits and refunds, as well as notice of the refunds and credits, as a result of: (1) untimely or missed PCNs; (2) delayed escrow analyses; and (3) overpayments made to escrow accounts when lump sum escrow shortage payments were made.

PCN-Related Credits and Refunds

The Independent Reviewer will assess whether Wells Fargo: • Provided the proper credits and refunds to debtors in Chapter 13 bankruptcy cases

when Wells Fargo failed to timely file PCNs. See Settlement Agreement Paragraphs 45(b), (c), (d), and (h);

• Adhered and continues to adhere to its policy of not charging late fees or additional

fees, penalties, or charges to a debtor in a Chapter 13 bankruptcy case as a result of an untimely or missed PCN. See Settlement Agreement, Paragraph 45(i); and

• Reimbursed debtors for reasonable attorney’s fees where debtors successfully

disputed payment increases in connection with untimely or missed PCNs. See Settlement Agreement, Paragraph 45(j).

Page 14 of 21


When Wells Fargo provides the credits or refunds, the Independent Reviewer will

confirm that notices are sent to inform debtors of the credit or refund, and the reason for the credit or refund. If the debtor’s Chapter 13 bankruptcy case is still pending, the Independent Reviewer will confirm that the debtor’s notice is sent to the debtor’s counsel and the bankruptcy trustee.

Escrow-Related Credits and Refunds The Independent Reviewer will assess whether Wells Fargo:

• Provided the correct credits and refunds to debtors in Chapter 13 bankruptcy cases

who did not receive an annual escrow analysis or received a delayed escrow analysis. See Settlement Agreement Paragraphs 45(e), (f); and

• Provided refunds to debtors in Chapter 13 bankruptcy cases who made a lump sum

escrow shortage payment and did not have their payments lowered. See Settlement Agreement, Paragraph 45(g).

When Wells Fargo provides the credits or refunds, the Independent Reviewer will

confirm that notices are sent to inform the debtors of the credit or refund, and the reason for the credit or refund. If the debtor’s Chapter 13 bankruptcy case is still pending, the Independent Reviewer will confirm that the debtor’s notice is sent to the debtor’s counsel and the bankruptcy trustee.

Population Validation

In addition, the Independent Reviewer will evaluate whether Wells Fargo’s approximation in the Settlement Agreement of the populations of debtors who will receive credits or refunds, as stated in the Settlement Agreement, is substantially accurate. Additional details regarding population validation are discussed below. VI. The Work Plan

The Work Plan sets forth the manner under which the Independent Reviewer will carry out her mandate and, where applicable, the methodologies to be utilized. See Settlement Agreement, Paragraph 38. To that end, the Independent Reviewer worked with the Professionals and WFAS to reach an agreement with Wells Fargo regarding the sampling

Page 15 of 21


methodology and testing parameters, which are set forth in the Work Plan that has been submitted to the USTP as required by the Settlement Agreement.

The primary purpose of the Work Plan is to set out the population, sampling

methodology, and parameters of testing for each item in the Independent Reviewer’s mandate. The testing requirements that WFAS and the Independent Reviewer will perform will be measured by certain tests that are described in “Metrics” attached to the work plan.

The Work Plan addresses: (1) the testing methods and agreed processes and procedures for each Metric; (2) the reporting processes and procedures by WFAS to the Independent Reviewer; and (3) the Independent Reviewer’s evaluation of WFAS’ testing.

The Independent Reviewer and Wells Fargo have agreed to 10 separate Metrics. Each

Metric contains one or more questions designed to evaluate whether Wells Fargo is fulfilling its obligation under the Settlement Agreement. The Metrics may be amended or augmented as needed during the course of the review to effectively assess compliance.

The following chart describes the items covered in each Metric.

Metric Number Items Covered Metric #1: • Operational Enhancements (Policy and Procedure)

• Attorneys’ fees reimbursement Metric #2: • Timely preparation and communication of escrow

analyses after March 31, 2015 Metric #3: • Timely filing of PCNs after March 31, 2015

• Timely filing of PCNs for loan modifications after March 31, 2015

• Adherence to late fee policy after March 31, 2015 Metric #4: • Credits or refunds for missed or late PCN (Credit

Based on UPB) • Credits or refunds for late fees • Notice of Credit

Metric #5: • Milestone Reconciliation credit for missed or late PCN

• Notice of Credit

Page 16 of 21


Metric Number Items Covered Metric #6: • Credit or refund for missed or late PCN with

payment decreases • Notice of Credit

Metric #7: • Credit or refund for delayed annual escrow analysis • Notice of Credit

Metric #8: • Credit or refund for delayed escrow analysis with no missed or late PCN

• Notice of Credit Metric #9: • Credit or refund for payment of escrow shortage as

a lump sum • Notice of Credit

Metric #10: • Population Validation

VII. Work Progress

Background The Work Plan requires Wells Fargo to provide the Independent Reviewer with an

overview of its systems of record, including any codes and other information reasonably expected to be relied upon, in order to enable the Independent Reviewer to understand the evidence that is needed to assess whether Wells Fargo is complying with the Settlement Agreement. The Work Papers will allow the Independent Reviewer to (1) assess whether the results of testing performed by WFAS are effectively substantiated; and (2) confirm the accuracy and validity of the work of WFAS for the Metrics. Further, the Settlement Agreement requires Wells Fargo to provide the Independent Reviewer documents and information relevant to the Settlement Agreement that are reasonably necessary to complete the Independent Reviewer’s mandate.

Prior to reaching an agreement on the Work Plan, the Independent Reviewer held

numerous meetings with the Professionals, WFAS, and Wells Fargo. These meetings occurred in person in Washington D.C., South Carolina, North Carolina, New York, and Maryland, as well as through conference calls.

Meetings and Developments related to Wells Fargo

During on-site meetings, Wells Fargo’s PCN Team: (1) explained the organizational

structure of the PCN Team; (2) provided an overview of the PCN preparation, approval and

Page 17 of 21


filing process; and (3) provided an overview of the operational enhancements implemented to ensure timely filing of PCNs. Further, during on-site meetings, Wells Fargo’s Servicing and Escrow Operations Teams provided an overview of the preparation of the annual escrow analysis process for debtors in Chapter 13 bankruptcy cases. The overview included: (1) a review of the Escrow Operations Team organizational structure; (2) a presentation of its understanding of RESPA requirements related to escrow analysis requirements; (3) a presentation of escrow calculation examples; and (4) a review of key system screens and fields used in the escrow process.

Following the presentations, the Independent Reviewer continued to negotiate the

Work Plan and testing parameters with Wells Fargo to ensure that all of the Settlement Agreement requirements were considered and incorporated. On March 31, 2016, Wells Fargo and the Independent Reviewer reached an agreement on the Work Plan.

Pursuant to the Settlement Agreement, the Independent Reviewer requested access to

specific documents relevant to the scope of the assessments and reasonably necessary for the Independent Reviewer to fulfill her duties. See Settlement Agreement, Paragraph(s) 40, 44, 45(a) and 50. Specifically, the Independent Reviewer requested all documents relating to the operational enhancements required by Article V of the Settlement Agreement. In mid-July 2016, Wells Fargo made the documents available for review. The Independent Reviewer is in the process of reviewing the documents produced.

Further pursuant to the Settlement Agreement and the Work Plan, the Independent

Reviewer requested access to Wells Fargo’s Executive Office’s bankruptcy-related complaints on a quarterly basis. See Settlement Agreement, Paragraph 40. In mid-July 2016, Wells Fargo produced the first submission of complaints to the Independent Reviewer. The Independent Reviewer is in the process of evaluating the complaints.

Meetings and Developments related to WFAS

The Independent Reviewer has had numerous meetings with WFAS. The Independent

Reviewer met with the WFAS Chief Auditor, Executive Audit Director of Consumer Lending, the Audit Director, Senior Audit Manager, and Audit Managers. The Independent Reviewer interviewed WFAS employees to determine whether the employees are sufficiently independent and objective, and possess the skills needed to conduct the testing at the direction of the Independent Reviewer. During on-site meetings, WFAS provided detailed information about the certification process that would be used to ensure the accuracy and completeness of the identification of impacted debtors and the provision of credits and refunds required under

Page 18 of 21


the Settlement Agreement. WFAS provided an overview of the method and process that would be used to independently validate the archived loan-level data extracted from Wells Fargo’s systems of record. WFAS also provided an overview of the process that would be used to generate the populations from which the sample would be derived to evaluate whether Wells Fargo was timely filing PCNs and preparing and communicating escrow analyses.

The Independent Reviewer has also met with WFAS with respect to the development of

the test plans under which the Metric testing will be performed. WFAS has presented proposed test plans for Metrics 1, 2, 3, 6, and 10, which the Independent Reviewer is in the process of evaluating.

WFAS is continuing to develop proposed test plans for Metrics 4, 5, 7, 8, and 9 and will present those proposed plans to the Independent Reviewer for evaluation and comment. VIII. Findings Related to Compliance with Settlement Agreement

Delayed Mailing of PCNs As discussed above, the Settlement Agreement requires the Independent Reviewer to

assess whether Wells Fargo implemented certain operational enhancements to ensure the timely filing and service of PCNs as required by Bankruptcy Rule 3002.1. See Settlement Agreement, Paragraphs 45(a), 12. The Settlement Agreement also requires the Independent Reviewer to test whether Wells Fargo is timely filing and serving PCNs. See Settlement Agreement, Paragraph 45(m). During the course of meetings and reviews with Wells Fargo, the Independent Reviewer requested specific information to evidence the timely service of PCNs.

In the course of preparing responsive information, Wells Fargo discovered a deficiency

in its processes and procedures relating to the preparation and filing of certificates of service accompanying its PCN filings. Specifically, Wells Fargo discovered that the service of some PCNs on debtors by mail was delayed, which rendered the certificates of service inaccurate. Because of this delayed mailing issue, Wells Fargo served untimely PCNs between December 1, 2011 and May 8, 2016. On its Wells Fargo Home Mortgage (“WFHM”) portfolio, Wells Fargo used a vendor, 4S Technologies, LLC (“4S”), to electronically file PCNs, prepare and file the certificates of service, and mail the PCNs to the debtors. On its Wells Fargo Home Equity (“WFHE”) portfolio, Wells Fargo team members prepared the PCNs and certificates of service, electronically filed the PCNs with the certificates of service, and mailed the PCNs to the debtors.

Page 19 of 21


With respect to the WFHM portfolio, 4S had a mailing process that caused some PCNs to be mailed to debtors one or two business days after the date Wells Fargo filed the PCNs with the bankruptcy courts. However, the certificates of service accompanying such PCNs did not indicate the one or two day delay in mailing, but instead recorded the mailing date as being the same as the filing date. With respect to the WFHE portfolio, Wells Fargo had a mailing process that caused some PCNs to be mailed to debtors one business day after the mailing date recorded on the certificates of service when the PCNs were filed with the bankruptcy court after 2:00 p.m. Central Time.

To resolve this issue, the USTP and Wells Fargo entered into the COS Agreement in which the Parties agreed to amend the Settlement Agreement. See Exhibit 3. Wells Fargo agreed to perform additional operational enhancements and provide additional remediation.

Operational Enhancements

In the COS Agreement, Wells Fargo reported that it had identified approximately 4,750 accounts that had delayed mailings of PCNs with a payment increase between December 1, 2011 and March 31, 2015; approximately 1,400 accounts that had delayed mailing of PCNs with a payment decrease between December 1, 2011 and March 31, 2015; and approximately 1,800 accounts that had delayed mailings of PCNs between April 1, 2015 and May 8, 2016. See Exhibit 3.

Wells Fargo agreed to additional operational enhancements to address the PCN delayed

mailing issue and to provide remediation to the impacted debtors.

Remediation and Corrective Action

Wells Fargo identified approximately 4,750 accounts for which there were delayed mailings of PCNs between December 1, 2011 and March 31, 2015 and the associated monthly payment amount increased on the account. For these accounts, Wells Fargo has agreed to provide the same type of credits and refunds that debtors will receive who had an untimely or missed PCN as discussed in this Report at Section III.B.1(a)(b). See Settlement Agreement, Paragraph 16(a) and (b). Wells Fargo estimated total approximate credits and refunds for these accounts of $3,300,000. See COS Agreement.

Wells Fargo has identified approximately 1,400 accounts for which there was a delayed mailing of the PNCs from December 1, 2011 to March 31, 2015, and the associated monthly payment amount decreased on the account. These debtors will receive the same type of

Page 20 of 21


remediation as discussed in this Report at Section III.B.1(d). Wells Fargo estimated total approximate credits and refunds for these accounts of $50,000. See COS Agreement.

Wells Fargo has also identified approximately 1,800 accounts for which there was a

delayed mailing of PCNs between April 1, 2015 and May 8, 2016. For payment changes attributable to increases or decreases on these accounts, Wells Fargo agreed to credit or refund the debtor’s account for the aggregate difference between the previous monthly payment and the new monthly payment. Wells Fargo estimated total approximate credits and refunds for these accounts of $100,000. See COS Agreement

As a result of the COS Agreement, the Independent Reviewer and Wells Fargo are

required to negotiate the terms of additional provisions and/or modifications to the Work Plan that provide for the additional compliance responsibilities relating to the delayed mailing of PCN. IX. Future Action

The Independent Reviewer will continue to oversee and assess Wells Fargo’s compliance with the Settlement Agreement, including:

• Continuing to work with WFAS to finalize all Metric test plans;

• Subject to the Independent Reviewer’s acceptance of the test plans, beginning to

implement the test plans with respect to Metrics 1 through 10; and

• Developing additions and/or amendments to the Work Plan and Metrics to include the issues related to untimely served PCNs as a result of the COS Agreement. The Independent Reviewer will keep the USTP apprised of issues that may arise during

the course of testing.

HC# 4823-4455-9410

Page 21 of 21


Documents

Lucy Morris – Independent Reviewer Overseeing · PDF fileCase 11-33377 Doc 57-1 Filed 08/30 ... Reviewer documents and information relevant to the ... The servicer of a mortgage