OCC Asks for Enforcement Powers Against Banks’ Consultants

The U.S. regulator for national banks wants Congress to expand the agency’s authority to sanction independent consulting firms for wrongdoing in their work for lenders.

“The OCC faces significant jurisdictional obstacles if it seeks to take an enforcement action directly against an independent contractor,” Daniel P. Stipano, deputy chief counsel for the Office of the Comptroller of the Currency, said in testimony prepared for a Senate Banking subcommittee hearing in Washington today. “The OCC would welcome a legislative change in this area.”

Senator Sherrod Brown, an Ohio Democrat, held the hearing amid scrutiny of consultants such as Promontory Financial Group LLC and Deloitte & Touche LLP over their roles in a failed review of banks’ faulty U.S. foreclosures. He said the committee “should consider” the OCC’s plea for heightened enforcement powers, and he said he hoped “to clarify the foggy relationship” between consultants and regulators.

In enforcement settlements, regulators often require banks to hire consultants to perform or review fixes. Stipano said it would be useful for regulators to have additional reach into that work, and also to have jurisdiction when banks outsource work to consultants.

Representative Maxine Waters of California, the top Democrat on the House Financial Services Committee, introduced a bill today that would require regulators’ consent orders that call for consultant involvement be made public. She said in a statement that a conflict of interest in such consulting work “favors the companies which pay outside consultants over the consumers who have been wronged.”

‘Right Direction’

Waters said she was glad to see the OCC welcoming legislation and “the fact that it admits that there is a problem is a step in the right direction.”

The OCC has inserted consulting requirements in almost a third of enforcement actions since the 2008 credit crisis, according to Brown. The Federal Reserve, which regulates bank holding companies, used them in almost 15 percent of enforcement actions in the last decade, Richard M. Ashton, deputy general counsel for the central bank, said in his prepared remarks.

“It can be an effective enforcement tool to require regulated organizations to retain a consultant to perform specific tasks,” Ashton said in his statement.

Borrowers Uncompensated

When banking regulators faced the 2011 review of more than 4 million foreclosures to find people who were harmed by errors and wrongdoing from mortgage servicers, the OCC and Fed put the review in the hands of independent consultants. After about 18 months without the process producing compensation to harmed borrowers, regulators scrapped the initial approach in favor of a $9.3 billion settlement, saying that too much money had been paid to consultants.

The Government Accountability Office released a report this month in which it accused regulators of poor planning and insufficient guidance for the Independent Foreclosure Review of files from loan servicers including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.

“The IFR process was a totally different animal, and certainly the GAO report indicates that it wasn’t the best approach,” Comptroller of the Currency Thomas Curry said in an interview. Consultants shouldn’t be judged solely by that example, he said.

His deputy, Stipano, told lawmakers the review task was “inordinately complex, and we did not fully appreciate that.”

‘Grunt Work’

Outside experts have a place in doing “some of the grunt work that needs to be done in a bank to correct deficiencies,” Curry said. “It’s probably better for us to have someone externally do it,” and it’s up to the regulators to make sure the firms are independent, he said.

“Promontory Financial Group’s business model requires us to bring a high level of independent judgment to all of our engagements, not just when we are formally designated as independent consultants,” Konrad Alt, a managing director for the Washington-based firm, said in prepared testimony. “If we merely told our clients what they want to hear, we would lose credibility when the regulators show up and tell them something different.”

Alt touted Promontory’s team of senior professionals, many of whom have decades of experience. Over the firm’s 12-year history, less than 5 percent of more than 1,400 engagements came from regulators, he said.

Files Inconsistent

James Flanagan, a leader of the U.S. financial services practice at PricewaterhouseCoopers LLP, said borrowers’ files in the foreclosure reviews were varied and lacked documentation; legal obligations varied by states; and regulators added to the parts of the loan files needing review.

“Despite the detail in the consent orders and in the engagement letters, the scale and complexity of the IFR engagements were unprecedented and had not been entirely anticipated before the engagements began,” Flanagan said in prepared testimony.

He told lawmakers his firm earned $425 million of about $2 billion in fees to the servicers for the foreclosure reviews. U.S. Bancorp paid the firm $190 million, Citigroup $175 million and SunTrust Banks Inc. $60 million, he said. Promontory’s Alt declined to disclose his firm’s total fees, and lawmakers didn’t ask the official from Deloitte, which had only one client, JPMorgan.

‘Proud’ of Work

Both PricewaterhouseCoopers and Deloitte, both more routinely associated with large-scale review work as two of the biggest global auditing firms, used in-house staff for the foreclosure review, their representatives said. Promontory, which used contractors, is “proud” of its work, Alt said, and it met regulators’ requirements.

Senator Elizabeth Warren, a Massachusetts Democrat, confronted regulators at the hearing, saying they hadn’t answered congressional questions on how the process worked.

“I thought this was about transparency,” Warren said. “People want to know that their regulators are watching out for the American public not for the banks, and the only way that we can evaluate whether or not you’re doing your job is if you make some of this information publicly available and so far you’re not doing that.”

Warren and other lawmakers, including Representatives Elijah Cummings, a Democrat from Maryland, and Waters, sent Federal Reserve Board Chairman Ben S. Bernanke and OCC’s Curry a letter yesterday urging them to provide more documents and findings from the foreclosure review.

The lawmakers said in the letter that they met this week with OCC and Fed staff who refused to provide information by citing “trade secrets” and urged Bernanke and Curry to provide the documents.

“We strongly believe that documents should not be withheld from any member of Congress based on the flawed argument that illegal activity by banks is somehow their proprietary business information,” the lawmakers wrote. “Breaking the law is not a corporate trade secret.”

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