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Witness Testimony of Stephanie B. Mudick, Executive Vice President, Office of Consumer Practices, JPMorgan Chase & Co., New York, NY

Executive Summary

Chase has discovered mistakes in our compliance with the Servicemembers Civil Relief Act (SCRA), and we are committed to fixing them. We deeply regret that servicemembers have been overcharged and in some cases faced foreclosure because of these errors. We are acting to make these customers whole as soon as possible and enhancing our safeguards to prevent such mistakes going forward. Chase is determined to get this right.

Chase has identified two problems: First, based on our review to date, some 4,500 servicemembers were charged interest rates and fees above SCRA’s 6 percent cap. We have begun paying back those overcharges. Second, to date, we have found 18 cases where servicemembers were improperly foreclosed upon. For 12 of these borrowers, we have rescinded the sale or reached a settlement, and we will work to resolve the other cases.

Our review is on-going and these numbers could change. SCRA also applies to other types of consumer loans, and we are actively reviewing all our businesses to ensure they comply with the SCRA.

Weaknesses in Chase’s SCRA Compliance. Our ongoing review of SCRA compliance has identified several operational problems that led to mishandling of SCRA loans. In some cases, Chase employees misinterpreted military orders and the length of time servicemembers were on active duty, affecting fees and interest rate charges. In other cases, errors on our part resulted in some loans not being identified as SCRA-protected, which resulted in overcharges, and in some cases, improper foreclosures.

Enhancements to Our Processes to Prevent Further Problems. Chase has made significant enhancements to our SCRA compliance protocols. We have centralized SCRA loan set-up in a single unit in Florence, South Carolina, where employees get special training in interpreting military orders and key decisions are reviewed by managers or other employees. Chase now checks SCRA loans daily to verify that the law’s protections remain in place on Chase’s system. We have added new controls to prevent foreclosures on borrowers covered by the SCRA.

Military Initiatives. Chase is expanding our outreach to customers who may be in the military, advising them of SCRA’s protections. This outreach will be automatic when a customer has a military address. We have set up a new customer service hotline for servicemembers, staffed by 30 Chase employees in Monroe, Louisiana. We are providing SCRA training to 2 employees in each of our 51 existing Chase Homeownership Centers created to help borrowers struggling with their mortgages. By this summer, these centers will be in 27 states and the District of Columbia.

Chase deeply regrets our errors in SCRA compliance. We are committed to correcting them, and making changes that will prevent such problems in the future.


Introduction

Chairman Miller, Ranking Member Filner, and Members of the Committee, thank you for inviting me to appear before you today. My name is Stephanie Mudick, and I am the Head of Consumer Practices at JPMorgan Chase & Co. I appreciate the opportunity to appear before you today to discuss errors that Chase discovered in its compliance with the Servicemembers Civil Relief Act (SCRA), the steps Chase is taking to compensate servicemembers mistakenly overcharged or improperly foreclosed upon as a result of those errors, and the enhancements that Chase has implemented in its controls related to SCRA compliance going forward. I will also discuss several new initiatives that Chase is implementing to ensure that Chase customers who are servicemembers have reliable information about their rights and receive the very best customer service we can provide.

Before I go further, I’d like to acknowledge to you that we clearly made mistakes here, and that we are working very hard on fixing them.

The SCRA provides vitally important financial protections to the men and women of our armed forces during active duty—a period of personal sacrifice for themselves and their families. I want to express to the men and women serving our country and to the Members of this Committee Chase’s deepest regret over the mistakes we made in applying those protections. I also commit to you that Chase is determined to get this right. My focus today will be on mistakes in our mortgage business, where we first became aware of these issues. We are also reviewing all of our lines of business that are subject to the SCRA to ensure that they are in compliance. And if and wherever we find a mistake, we will fix it.

SCRA Compliance Errors

We have identified two problems in our home lending business with respect to certain mortgages, including home equity loans, held by servicemembers who are eligible for SCRA protection.

First, under the SCRA, servicemembers who are on active duty and who took out a mortgage loan prior to the start of that duty are entitled to have the interest rate and fees on their mortgages capped at 6 percent interest for the period of their active duty, and 12 months afterward, by providing the lender with the orders calling them to active duty. In many instances, Chase charged SCRA-eligible borrowers who had provided Chase with their active duty orders interest and fees that raised their effective interest rate above the 6 percent cap for at least some part of the SCRA-covered period. We are in the process of calculating the refunds and credits for any interest that we charged SCRA-eligible borrowers above 6 percent, as well as fees (which do not include tax and insurance payments) charged to SCRA-eligible borrowers. To date, the amount we have identified equals approximately $1.8 million. We have added to the refunds 7.25 percent interest from the date of the overcharge, which comes to approximately $600,000, for a total of approximately $2.4 million. The total number of affected servicemembers we have identified is approximately 4,500, and the median payment is approximately $70, plus interest. We already sending an initial batch of checks to some of these servicemembers this week and intend to send additional checks over the coming weeks as we finalize and double-check the amounts they are due.

Second, the SCRA protects a servicemember from foreclosure judgment or sale while the servicemember is on active duty and, since SCRA was amended by the Housing and Economic Recovery Act (HERA) of 2008, that protection is extended for the 9 months after completing active duty. We are scrutinizing our files closely and to date we are aware of 18 servicemembers who were on active duty or otherwise within the SCRA/HERA protection period at the time of foreclosure sale. In 12 of these cases, we have either rescinded the sale or entered into a settlement with the borrower. We will attempt to make the remaining borrowers whole as quickly as possible.

We are continuing to review our files to make sure that we have identified all borrowers affected by these issues. If we find problems involving additional servicemembers protected by the SCRA, we will fix them.

Weaknesses in Chase’s SCRA Compliance

We routinely review all of our businesses for compliance with applicable laws and regulations, including the SCRA. As part of that process, we became aware of weaknesses in our SCRA compliance.

We have identified several operational problems that caused us to mishandle SCRA loans. Chase’s handling of military loans involved significant manual processing and complexity, which led to (i) human errors, including in the review and interpretation of military orders, the identification of the protected period from those orders, and the interest rate and fee calculations; and (ii) errors relating to the coding of these servicemember loans on our system, which resulted in certain loans not being properly identified as SCRA-eligible. For example, in certain instances, we misinterpreted the military orders, recording the protection period on the servicing system as commencing two weeks after the actual active duty date, leading to an interest rate overcharge for several weeks. In other instances, the coding on the system did not identify the account as SCRA-protected, leading to a longer period of overcharges and fees and, in some instances, to an improper foreclosure. We did not check the Web site maintained by the United States Department of Defense, called the Defense Manpower Data Center (DMDC) Web site, with sufficient frequency or consistency.

We understand that Mr. Harpootlian, the lawyer for Captain Rowles and his family, accompanied by the Rowles, will testify before this Committee about the family’s dealings with Chase in connection with their mortgage. We have reviewed the history of their account, and we clearly made mistakes in how we serviced their mortgage and how we dealt with them in trying to resolve those mistakes. The customer service that we provided to Captain Rowles and his wife was unacceptable, and the fact that this was a servicemember makes our mistakes all the more inexcusable. We deeply regret any hardship or distress we caused the Rowles family. We've communicated to Captain Rowles through his attorney our commitment to resolve this matter and our genuine desire to make him and his family whole as quickly as possible.

Enhancements to Our Process to Prevent a Recurrence

Recognizing the causes of the errors in SCRA-eligible accounts, Chase now has made significant enhancements to its processes to ensure that loans are properly categorized on the servicing system as SCRA-eligible loans, that SCRA protection periods are properly identified, that interest and fees are calculated correctly, and that several verifications are done and documented prior to any foreclosure sale to confirm that borrowers are not SCRA-eligible.

  • Enhanced Controls on SCRA Setup and Protection Period Determinations. We have centralized SCRA loan set-up in a single unit located in Florence, South Carolina. The members of this group receive enhanced training on interpreting military orders, and every single determination of the protected period under military orders is subject to quality control by another employee. In addition, any determination by a member of this group that a borrower is not eligible for SCRA protection requires manager review and sign-off.
  • Enhanced Controls on SCRA-Eligible Loans. Chase has instituted a daily review and reconciliation of the entire list of SCRA-protected loans to ensure that the SCRA codes blocking foreclosure of those loans remain in place, and a periodic review to ensure that the aggregate interest and fees on these loans are capped at 6 percent.
  • Enhanced Controls on Interest Rate Calculation. The calculation of the 6 percent interest rate cap now is subject to 100 percent quality control review by another employee every billing cycle.
  • Enhanced Controls on Foreclosure Referrals and Sales. Chase has implemented enhanced controls on foreclosure referrals and sales through repeated checks on military status at different points in the process. First, before any loan is referred for foreclosure, an Independent Foreclosure Review team reviews each loan for military status by checking Chase’s own system and the DMDC Web site. Second, before the first legal filing to start a foreclosure, Chase policy requires its local foreclosure counsel to check the DMDC Web site and then upload evidence of that check onto Chase’s servicing system. Third, 2 to 3 weeks before foreclosure sale, the Independent Foreclosure Review team again reviews the servicing system for military coding and checks the DMDC Web site. Finally, 96 hours before a foreclosure sale, a Pre-Sale Review team reviews the loan again for military status.

To summarize, today when a servicemember calls to tell us he or she is going on active duty, a special unit of Chase reviews the military orders and codes the account to reflect the start date for SCRA coverage. Once the system is coded, the account is capped at 6 percent interest and fees until one year following the end of the active duty period. We have created a hotline – staffed by employees who have received training on SCRA – to handle borrower questions. And Chase or its outside counsel checks the DMDC Web site at least three times before moving to a foreclosure sale.

We are committed to addressing effectively the issues that we found with our SCRA compliance. Therefore, the current processes are being reviewed by Chase Internal Audit and by Chase’s Operational Risk unit, with the assistance of outside advisors, to ensure that they are effective in identifying SCRA-eligible servicemembers and ensuring that these servicemembers receive the protections provided under the SCRA.

Student Loans

We would like to explain our deferral policy with regard to student loans. Several years ago, we began deferring all student loan payments for active duty servicemembers, in addition to lowering the interest rate and fees to 6 percent. This policy went beyond the requirements of SCRA. However, as part of a broader review of our forbearance policies in our student lending business, last December we stopped offering deferments for new participants. When some servicemembers expressed concern, we decided to reinstitute the deferment option and offer them a choice: continue paying at 6 percent, or defer the payments.

Military Initiatives

In addition to these enhancements to our controls, we also are taking certain other proactive steps to better support our servicemember customers.

First, we are enhancing our communications with military personnel about their SCRA rights. Chase already has a specific web page dedicated to military personnel (www.chasemilitary.com), and we plan to provide a prominent link to a Web site recommended by the Department of Defense (DoD).1 We will also send a letter to borrowers whom we believe may be military personnel based on information that comes to our attention. Our letter will alert them to the existence of SCRA protections and direct them to the DoD-recommended Web site for further information. We would welcome the opportunity to work with the government to provide additional information to servicemembers about their rights.

Second, to improve our ability to identify military personnel to whom such a letter should be sent, we are following the suggestion of Holly Petraeus, the newly appointed Team Lead of the Office of Servicemember Affairs of the Consumer Financial Protection Bureau Implementation Team, that we identify servicemembers by setting up a process for identifying when a borrower has changed his or her home address from a standard street address to an APO or FPO. When we are alerted to such a change of address, we will reach out to the servicemember to alert them to the existence of SCRA protections.

Third, we also believe it is critical to ensure that our servicemember customers have access to customer service representatives who understand their unique issues and can provide top quality service. Therefore, we have created a hotline (877-469-0110) that is staffed by approximately 30 Chase employees based in Monroe, Louisiana who are trained on SCRA coverage. These customer service personnel also will be able to liaise directly with Chase personnel involved in the system setup of SCRA protection periods to ensure that any issues with those protection periods are quickly resolved.

We are also training two people in each of our existing 51 Chase Homeownership Centers (CHOCs) in SCRA matters so that servicemembers and their families can have local access when they would like to speak to a Chase representative face to face. Chase Homeownership Centers are local offices devoted exclusively to serving families struggling with their Chase mortgages, and CHOC counselors will help customers understand the full range of options available that could allow them to stay in their homes. We recently announced we will soon open an additional 25 CHOCs. This expansion will bring Chase Homeownership Centers to a total of 27 states and the District of Columbia, reaching the vast majority of borrowers with Chase mortgages.

 


In closing, I would like once again to express Chase’s deepest regret to Captain Rowles and his fellow servicemembers for our errors in SCRA compliance. I hope that my testimony has made clear that we are committed to correcting past mistakes and that we will continue to improve processes and controls to ensure that we are in full compliance with the SCRA.

I would be happy to answer questions from the Committee.


1 http://www.militaryonesource.com/MOS/FindInformation/Category/Topic/Issue/Material.aspx?MaterialID=15924 &MaterialTypeID=9.