The U.S. could have found a better way to obtain a review of faulty home mortgages than by ordering banks to hire expensive consultants, a Treasury Department official told lawmakers today.
The admission came at a Senate Banking subcommittee hearing at which representatives of three major consultancies — including Promontory Financial Group LLC, which this month hired former Securities and Exchange Commission Chairman Mary L. Schapiro — defended their ability to oversee the work of banks while collecting billions of dollars in fees from them.
The hearing capped a heavily criticized $9 billion settlement in January which largely replaced the review. Officials say the foreclosure review was brought to a close, after dragging on much longer than expected, to offer relief to borrowers sooner. But banks paid consultants $2 billion before paying any relief to 4.4 million homeowners, Bloomberg reported in February, citing prepared remarks by the Treasury Department’s Thomas J. Curry, the Comptroller of the Currency.
“When [the money for consultants] reached 50 million, 100 million, a billion, at what point did you realize there might be a problem?” Sen. Sherrod Brown (D-Ohio) asked Daniel P. Stipano, deputy chief counsel at the Office of the Comptroller of the Currency, who appeared before the subcommittee.
Stipano said the government had essentially been naive at the outset.
“I think the OCC and the Fed greatly underestimated the complexity of the task, the number of institutions, the number of consultants involved, the number of borrowers involved, the sheer number of decision points, which I am told were in the hundreds of thousands,” said Stipano. “It was inordinately complex and we did not fully appreciate that at the time.”
Begun in 2011, the Independent Foreclosure Review, which involved thousands of employees at consultancies, was initially expected to last just 120 days.
The hearing followed last month’s damning findings by the Government Accountability Office that both the Federal Reserve Board of Governors and the OCC, a Treasury Department banking regulator, had exercised lax oversight and monitoring of the process, in which consultants were retained to review more than 4 million home loans by 14 mortgage servicers.
Those who suffered wrongful foreclosure included people who were current on all payments, whose homes were protected from seizure or who had met all loan modification requirements.
The review was essentially abandoned in January when the OCC and the Federal Reserve announced a $9.3 billion settlement with 11 of the banks, resulting in payments averaging $300 to homeowners.
The review continues for three of the mortgage servicers, according to GAO.
Stipano also said he was unable to say whether banks had sought to negotiate lesser payouts to homeowners after having already paid billions to consultants. “I can’t get inside their head. We did not factor in the amount that they were paying to the consultants” in negotiating the settlement, he said.
Stipano was joined by Richard M. Ashton, deputy general counsel to the Federal Reserve Board, which jointly oversaw the foreclosure review.
Sen. Jack Reed (D-R.I.), asked Stipano whether consultants should oversee banks at the same time as they accept their payments. “Why would you delegate that responsibility effectively to consultants who do not have a relationship with you?” he asked.
“We thought it was the best alternative,” said Stipano.
“You still think it was the best alternative?” asked Reed.
“If we had it to do over again, we would take a different approach,” said Stipano. “The problem with having the OCC do this work is that it’s just beyond the means of any federal agency to do this.”
He added: “I don’t have all the answers as I sit here but we are looking back at what we did and we are evaluating it and we are coming up with better ways to do it in the future.”
Sen. Elizabeth Warren (D -Mass.) challenged the witnesses, saying January’s settlement had been reached with no reliable number as to how frequently banks foreclosed in error. An error rate of 6.5 percent, she said, was essentially “just a made-up number.”
“If you can’t correctly tell how many people were the victims of illegal bank actions how can you possibly decide what is an appropriate amount for the settlement?”
Ashton, the Federal Reserve attorney, said that determining the precise number would have taken too long. “To estimate the number would have required additional delay in providing and so the decision was made not to go down that course…and instead to accept a settlement,” said Ashton.
Neither Stipano nor Ashton could say whether their offices planned to give information on bank misconduct to borrowers involved in litigation.
A second panel of witnesses included senior representatives from Promontory Financial, PricewaterhouseCoopers LLP and Deloitte & Touche LLP. Five other consultants retained in the foreclosure review were not represented at the hearing.
Two of the companies represented had at least three clients in the review while Deloitte & Touche was retained only by JP Morgan Chase & Co.
James F. Flanagan, leader of the financial services practice at PwC, revealed at the hearing that his company had been paid $190 million by U.S. Bancorp, the parent of U.S. Bank; $175 million by Citigroup Inc. and $60 million by SunTrust Banks Inc.
Konrad Alt, himself a former counsel to the Senate Banking Committee who is a managing director for Promontory Financial in San Francisco, told the committee that his company had raised concerns about the growing levels of compensation it was receiving.
“They certainly were aware that this was a concern for us,” he said, adding in response to a question from Brown that he did not know the total paid to Promontory Financial but could provide the number to the committee later.
Alt has also served as former chief of staff and as senior deputy comptroller for economic analysis at OCC.
Brown said he would not ask Owen Ryan, a partner in Audit & Enterprise Risk Services at Deloitte & Touche, about payments received as the firm had only one client in the review, JP Morgan Chase.
Alt told the subcommittee the initial 120-day time frame was never seen as realistic.
“I think from the outset that what we heard from them was that our priorities should be doing the job right and not worry about the consequences,” he said.
Promontory Financial has itself been seen as a sort of “shadow regulator” due to the revolving door with the public sector. Almost two thirds of its 170 senior executives were drawn from financial industry oversight bodies, according to The New York Times.
All of the panelists said today they had never received notice from the government that their performance in the foreclosure review needed improvement.
Alt told the subcommittee that his company’s independence had been safeguarded in the review process. “There is an inherent conflict and you’re right to focus on it,” he said.
“The primary check is the regulatory oversight,” said Alt. “They had absolute transparency. I believe that was an effective check on our independence.”