Illegal Foreclosures Are Corporate Trade Secrets?

Federal agencies are denying Members of Congress access to information about illegal foreclosure practices. On April 10, Sen. Elizabeth Warren (D-Mass.) and Rep. Elijah E. Cummings (D-Md.) sent a letter to Federal Reserve (Fed) Chairman Ben Bernanke and Comptroller of the Currency Thomas Curry questioning their refusal to turn over documents. This letter follows another letter the Members sent in January, which included 14 specific requests for documents detailing violations of law committed by mortgage servicing companies and containing information regarding the Independent Foreclosure Review (IFR) process.

Sen. Warren and Rep. Cummings write that in “concealing important information about these violations,” the Fed and the OCC limit “our ability to fulfill our responsibility to conduct oversight in actions of mortgage servicing companies and to develop legislation to protect our constituents from further abuse.” The decision of the Fed and Office of the Comptroller of the Currency (OCC) to withhold such information from Members of Congress is alarming in light of the “systematic and widespread” abuses these companies were engaged in, including illegal foreclosures, charging excessive fees, and filing fraudulent affidavits in court. As the letter requests, the agencies should turn the documents over to Congress.

POGO also believes they should be released to the public.

The letter gives us some background to this story. In 2011, the Fed and OCC issued a public report announcing that 14 mortgage servicing companies had violated both federal and state law. The agencies stated that the abuses would have “widespread consequences for the national housing market and borrowers.” As a result, the agencies instituted the IFR process, which required the mortgage companies to review foreclosure actions that took place in 2009 and 2010.

The IFR process continued through the beginning of this year, but stopped when the agencies and 11 of the 14 mortgage companies signed settlement agreements. Sen. Warren and Rep. Cummings seek information about how the IFR was conducted and what the agencies discovered in light of “several salient facts” the agencies have provided to date. These facts include the total amount spent on the IFR ($2 billion dollars), the small number of foreclosures actually reviewed (out of 800,000 files identified for review, only about 114,000 were actually reviewed as of early 2012), and the lack of a direct connection between the compensation injured borrowers will receive under the settlement and findings from the IFR process. Questions remain about the extent of the violations of law identified by the agencies and whether the compensation for borrowers is adequate. The documents Sen. Warren and Rep. Cummings seek may hold the answers.

According to the letter, Fed staff indicated at a meeting that the documents sought are the “trade secrets” of the mortgage servicing companies, while OCC staff stated that production of the documents could be seen as a waiver of their authority to protect “confidential supervisory bank examination information.” These justifications track the exemptions sometimes used to withhold information sought pursuant to the Freedom of Information Act (FOIA): Exemption 4 for trade secrets and Exemption 8 for bank examination information.

But the agencies aren’t responding to a FOIA request—Sen. Warren and Rep. Cummings seek these documents pursuant to their constitutional responsibility to oversee the executive branch. Agencies are not supposed to use FOIA exemptions (or the rationale behind them) to withhold information from Members of Congress. The FOIA clearly states that it is not intended to authorize withholding of information from Congress, as does the most recent Office of Information Policy guidance on the issue.

Even if the documents must remain confidential, agencies can and frequently turn such confidential information over to Congress when it is in the public interest to do so. Given the gravity of the housing crisis and the violations of law the IFR uncovered, now would be a pretty good time to do so. We find it completely audacious that the Fed and the OCC are attempting to block this critical information from Members of Congress engaged in oversight.

We also think that if a member of the public were to file a FOIA for the documents the Members seek in this case, the agencies should turn those documents over. It’s hard to imagine the information sought could be withheld under the justifications offered by the Fed and OCC. Sen. Warren and Rep. Cummings’ letter explains that the relevant legal definition of a “trade secret” includes plans, formulas, processes, or devices that “can be said to be the end product of either innovation or substantial effort.” Agencies can withhold information that fits into this category under FOIA Exemption 4, but we agree with the Members that it would be unbelievable if the illegal foreclosure practices of mortgage servicing companies were to be considered trade secrets.

Furthermore, we think it would be disingenuous for the agencies to withhold these documents from the public under FOIA Exemption 8. Although the Exemption is broad (it applies to a wide range of financial institutions and allows for withholding of documents even tangentially related to bank examination), we don’t think Congress ever intended to apply it in a situation where there was clear enforcement action and a public report explicitly referencing violations of law. We believe such an application would extend the exemption far beyond its intended purpose.

Don’t current and future homeowners and investors in mortgage companies have a right to know more about illegal practices? Doesn’t the mortgage servicing industry need to be held accountable so that violations like these are not repeated? We think so. When will federal agencies learn that openness is really in their best interest?