On December 2, the Government Accountability Office (GAO) issued a report on the status of the implementation of the Troubled Asset Relief Program titled “Additional Actions Needed to Better Ensure Integrity, Accountability and Transparency” and on December 4, the GAO released another report on TARP titled “Status of Efforts to Address Defaults and Foreclosures on Home Mortgages.”
In its first report, the GAO reviewed the way in which the U.S. Department of the Treasury has utilized its authority under the Emergency Economic Stabilization Act of 2008 (EESA) to implement TARP. The GAO’s report focuses primarily on the Treasury’s efforts to stabilize the financial system by purchasing preferred shares in financial institutions through the Capital Purchase Program (CPP). The GAO makes a number of recommendations to improve accountability and transparency in the operation of the CPP and other TARP programs. The most notable recommendation is that the Treasury should do more to work with bank regulators to establish a systematic means of determining whether financial institutions receiving CPP funds are (i) acting consistently with EESA’s objectives to expand the flow of capital to U.S. consumers and businesses through increased lending and to work to modify the terms of residential mortgages, and (ii) complying with key requirements of their agreements with the Treasury, including limitations on executive compensation, dividend payments and the repurchase of stock. The GAO report also addresses the Treasury’s efforts to establish the Office of Financial Stability and the methods and metrics that can be used to measure TARP’s impact on the financial system and overall economy.
In its second report, the GAO notes that default and foreclosure rates have reached historic highs and are expected to increase further,and that one of the stated purposes of the EESA is to preserve homeownership. The GAO observes that the Treasury originally planned to use its position as an owner of a large amount of troubled assets acquired through TARP purchases to influence servicers to modify mortgages. However, after deciding to focus on the CPP instead of large-scale purchases of troubled assets, the Treasury is now considering various ways to reduce foreclosures, including (i) encouraging financial institutions receiving CPP funds to modify loans, (ii) instituting a loan modification program similar to that proposed by the FDIC, which is modeled on the FDIC’s Indymac program, (iii) attempting to increase participation in the Hope for Homeowners modification/refinance program or (iv) using its authorities in some other way to reduce foreclosures.