[Senate Hearing 113-34]
[From the U.S. Government Publishing Office]
S. Hrg. 113-34
OUTSOURCING ACCOUNTABILITY? EXAMINING THE ROLE OF INDEPENDENT
CONSULTANTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER PROTECTION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED THIRTEENTH CONGRESS
FIRST SESSION
ON
EXPLORING THE ROLE OF INDEPENDENT CONSULTANTS IN FINANCIAL REGULATION
WITH A FOCUS ON THE USE OF INDEPENDENT CONSULTANTS BY THE OFFICE OF THE
COMPTROLLER OF THE CURRENCY AND THE FEDERAL RESERVE BOARD
__________
APRIL 11, 2013
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island MIKE CRAPO, Idaho
CHARLES E. SCHUMER, New York RICHARD C. SHELBY, Alabama
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia PATRICK J. TOOMEY, Pennsylvania
JEFF MERKLEY, Oregon MARK KIRK, Illinois
KAY HAGAN, North Carolina JERRY MORAN, Kansas
JOE MANCHIN III, West Virginia TOM COBURN, Oklahoma
ELIZABETH WARREN, Massachusetts DEAN HELLER, Nevada
HEIDI HEITKAMP, North Dakota
Charles Yi, Staff Director
Gregg Richard, Republican Staff Director
Dawn Ratliff, Chief Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
______
Subcommittee on Financial Institutions and Consumer Protection
SHERROD BROWN, Ohio, Chairman
PATRICK J. TOOMEY, Pennsylvania, Ranking Republican Member
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York DAVID VITTER, Louisiana
ROBERT MENENDEZ, New Jersey MIKE JOHANNS, Nebraska
JON TESTER, Montana JERRY MORAN, Kansas
JEFF MERKLEY, Oregon DEAN HELLER, Nevada
KAY HAGAN, North Carolina BOB CORKER, Tennessee
ELIZABETH WARREN, Massachusetts
Graham Steele, Subcommittee Staff Director
Michael Bright, Republican Subcommittee Staff Director
(ii)
?
C O N T E N T S
----------
THURSDAY, APRIL 11, 2013
Page
Opening statement of Chairman Brown.............................. 1
Opening statements, comments, or prepared statements of:
Senator Warren............................................... 3
WITNESSES
Daniel P. Stipano, Deputy Chief Counsel, Office of the
Comptroller of the Currency.................................... 3
Prepared statement........................................... 37
Responses to written questions of:
Chairman Brown........................................... 55
Senator Reed............................................. 59
Senator Menendez......................................... 65
Richard M. Ashton, Deputy General Counsel, Board of Governors of
the Federal Reserve System..................................... 5
Prepared statement........................................... 41
Responses to written questions of:
Chairman Brown........................................... 88
Senator Reed............................................. 90
Senator Menendez......................................... 92
Konrad Alt, Managing Director, Promontory Financial Group, LLC... 21
Prepared statement........................................... 43
Responses to written questions of:
Chairman Brown........................................... 100
Senator Reed............................................. 101
James F. Flanagan, Leader, U.S. Financial Services Practice,
PricewaterhouseCoopers LLP..................................... 22
Prepared statement........................................... 48
Responses to written questions of:
Chairman Brown........................................... 102
Senator Reed............................................. 104
Owen Ryan, Partner, Audit and Enterprise Risk Services, Deloitte
and Touche LLP................................................. 24
Prepared statement........................................... 52
Responses to written questions of:
Chairman Brown........................................... 104
Senator Reed............................................. 105
(iii)
OUTSOURCING ACCOUNTABILITY? EXAMINING THE ROLE OF INDEPENDENT
CONSULTANTS
----------
THURSDAY, APRIL 11, 2013
U.S. Senate,
Subcommittee on Financial Institutions
and Consumer Protection,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee convened at 10:11 a.m. in room 538,
Dirksen Senate Office Building, Hon. Sherrod Brown, Chairman of
the Subcommittee, presiding.
OPENING STATEMENT OF CHAIRMAN SHERROD BROWN
Senator Brown. The Subcommittee will come to order.
I thank Senator Reed and Senator Warren for joining us.
Senator Toomey was planning to be here, is in the middle of
negotiations with Senator Manchin on the gun safety issue and
the background checks. I saw them all over television this
morning. I know that it is ongoing. The vote is going to be at
11 o'clock, so we will--I am hoping Senator Toomey can still
get here and others on that side of the aisle, but we think we
should proceed. I know Senator Reed and Senator Warren have
both stepped out for a minute, but their place will be
reserved.
We will recess sometime between 11 and 11:15 for 15
minutes--I am going to keep it to 15 minutes--so I can go vote
and come back. But we do not want to make any of the five
witnesses, this panel or the second panel, wait any longer than
they have to. But I wanted to thank you. And there will be
opening statements, too, after I am done.
Thanks, all, for being here. This is our first Subcommittee
meeting in this session of Congress, in the 113th Congress.
Thanks for the cooperation of the minority and my staff, all of
you, for the work that you did in the Senate, the full
Committee staff, on helping on a fairly complicated hearing.
In the financial crisis and its aftermath, we have seen
case after case of wrongdoing at financial institutions, from
money laundering for terrorist groups to illegal foreclosures
that devastated families, communities, and in many ways broke
so many people's lives.
The rise in enforcement actions combined with the increased
complexity of banks and bank regulation has led to an increase
in the use of independent consultants. At the OCC alone, nearly
one-third of their legal actions since 2008 have required banks
to hire an outside consultant to review their actions and to
propose solutions. Some top consultants are staffed by scores
of former regulators. We are reading more and more about that.
And some have reportedly--some of these reports have said
charges have been as much as $1,500 an hour. Because most
consulting firms are private companies, there is little
transparency about their business model to either the public or
to Congress, leaving us to wonder about financial incentives,
leaving us to wonder about business relationships.
Recently, we have heard about consultants hired at
regulators' request to find and to fix illegal activity. In
these few high-profile cases, they either miss serious problems
or gave the banks a free pass.
It has come to my attention that one of seven consulting
firms participating in the Independent Foreclosure Review, the
IFR, was given formal written notice, quote, ``of an
opportunity to improve,'' unquote, their performance on more
than one occasion. According to staff reports, there were
multiple discussions between and among the consultant staff,
including senior leadership, and OCC regulators. Yet the
consultant in question had not cured its deficiencies at the
time that the Foreclosure Review Settlement was announced.
In a January 28 letter of this year to me, Comptroller
Curry recognized that, quote, ``additional reporting will
improve transparency and understanding of the IFR and the
agreement,'' the settlement agreement. But the identity of this
consultant has still not been made available to the Congress or
to the American people.
This raises serious concerns about the ability of this
consultant and others in the future to provide thorough work
that will help impose or bring more accountability to our
financial system. With so little information about these
consultants and whom they report to, it is impossible for
Congress and for the public to hold them accountable.
In the case of the mortgage review, the partnership between
the public sector regulators and private consultants appears to
have been poorly managed from the start. That is really the
subject of this hearing. The apparent lack of uniform standards
and clear procedures undermined any possibility of effective
management of such a large and amazingly expensive and
important endeavor.
We hope to clarify today this foggy relationship among
private consultants and public regulators to better understand
these arrangements, to identify ways to counteract the risk
created by potential conflicts of interest and misaligned or
badly aligned incentives. When you consider the potential for
what James Kwak calls ``cultural capture,'' also somebody at
the Peterson Institute called it ``cognitive capture,'' and the
influence of the revolving door, bright line rules become even
more important, become essential.
I want to thank Mr. Stipano for his suggestion that
Congress should strengthen the OCC's authority to discipline
rogue consultants. I agree that this is something this
Committee should consider.
Thank you again for joining us. Senator Warren, your
opening statement.
STATEMENT OF SENATOR ELIZABETH WARREN
Senator Warren. Thank you, Mr. Chairman, and thank you very
much for holding this hearing. Thank you, Mr. Stipano and Mr.
Ashton, for coming here today.
Over the last few months, Congressman Elijah Cummings and I
have requested documents from your agencies regarding the basic
data and the processes of the Independent Foreclosure Review.
We made 14 specific requests to you in January, and despite
multiple letters back and forth and multiple meetings, you have
provided only one full response, three partial or minimal
responses, and no response to nine of our requests. You have
provided little specific information on what the review
actually found, such as the number of improper foreclosures,
the amount and number of inflated fees, or the extent of
abusive practices by each of the mortgage servicers.
So I am hoping in this hearing to give you an opportunity
to provide us with some greater clarity than you have thus far
offered in our meetings and our correspondence. Thank you.
Senator Brown. Thank you, Senator Warren.
I would like to introduce the first panel. Daniel Stipano
is the Deputy Chief Counsel at the Office of the Comptroller of
the Currency. He supervises the OCC's enforcement and
compliance litigation, community and consumer law, and
administrative and internal law divisions. He also represents
OCC on the Treasury Department's Bank Secrecy Act Advisory
Group and the National Interagency Bank Fraud Working Group.
Richard Ashton is the Deputy General Counsel for the Board
of Governors at the Fed. He has supervised litigation
enforcement and system matters since 2006. He has primary
responsibility for litigation and formal enforcement activities
of the agency.
Mr. Stipano, if you would begin. Keep it to 5 minutes,
because we will almost certainly do multiple rounds of
questions for both panels, so if you could stay close to 5
minutes. Thank you.
STATEMENT OF DANIEL P. STIPANO, DEPUTY CHIEF COUNSEL, OFFICE OF
THE COMPTROLLER OF THE CURRENCY
Mr. Stipano. Thank you, Chairman Brown, Senator Warren.
Thank you for this opportunity to discuss the OCC's use of
articles and enforcement documents that require banks to retain
independent consultants.
It has been our longstanding practice to use such articles
in appropriate cases. The purpose of requiring banks to retain
independent consultants is to provide expertise and resources
to assist banks in correcting unsafe or unsound practices and
violations of law identified through our supervisory process.
Their work has resulted in the correction of operational and
management deficiencies, led to the filing of thousands of
suspicious activity reports in Bank Secrecy Act cases, and
facilitated the payment of hundreds of millions of dollars in
restitution to bank customers in cases involving unfair or
deceptive practices.
There are a number of reasons why we may require a bank to
retain an independent consultant. First, independent
consultants have subject matter expertise that the bank does
not. This is particularly true with respect to community banks.
The consultants can apply their knowledge and experience to
focus on the supervisory issue, identify its scope, and work
with bank personnel to correct violations and unsafe or unsound
practices.
Second, independent consultants can provide the resources
necessary to correct problems in a timely manner. Once again,
this is particularly helpful to community banks, which
sometimes do not have sufficient resources to do so.
Finally, independent consultants are, as the name suggests,
independent from the operational area that needs to be reviewed
or enhanced. Thus, rather than having the bank review itself,
the OCC may require the use of a third party as a fresh pair of
eyes to assess the scope of the problem and the remedy. In all
cases, however, it is the OCC's job to determine whether the
bank's corrective actions are sufficient.
Independent consultants have been particularly effective in
ensuring that banks address significant management and
operational deficiencies. For example, in a sizable number of
cases, when supervisory concerns have arisen concerning the
ability of bank management to perform an accurate review of the
quality of a bank's loan portfolio, the OCC has ordered the
bank to retain an independent consultant to conduct a review of
asset quality until such time as the bank develops and
implements an internal asset quality review system that is
demonstrated to be effective.
Similarly, in cases in which there are questions about the
accuracy of a bank's books and records, the OCC has required
the institution to retain an auditor to review those records to
assess their completeness and report on any deficiencies. The
OCC has also ordered banks to retain independent consultants to
perform annual reviews of methods used by banks to establish an
allowance for credit losses. The OCC has required similar
engagements by bank management to address deficiencies in a
variety of other circumstances involving, for example, real
estate appraisals, compensation, internal controls, and
information technology systems.
The majority of these cases is concentrated in community
bank enforcement actions and reflects the fact that those
institutions often have the greatest need for expertise and
resources that an independent consultant can provide. However,
we have used independent consultants in cases involving
institutions of all sizes. In all of these cases, the OCC
considers the qualifications of the firms or individuals
proposed for each engagement, and we do not permit the bank to
retain consultants we believe are unqualified or have conflicts
that would compromise the objectivity of their work. The OCC
also oversees and monitors the work of the consultants through
our supervisory process and we validate the results to ensure
that the violations or practices that were the basis of the
enforcement action have been corrected.
The circumstances in which we used independent consultants
in the Independent Foreclosure Review differed substantially
from the typical case. The unprecedented breadth, scale, and
scope of the reviews, the large number of institutions,
consultants, and counsel involved in the process, and the
complexity of the reviews, which involved hundreds, if not
thousands, of individual decision points for each file
distinguished the IFR from the normal type of file review that
is conducted by independent consultants. It also required an
unprecedented level of regulatory oversight and coordination.
This oversight included the issuance of guidance, examiner
visitations to the locations of the consultants, and daily
communications among consultants, servicers, and the OCC
throughout the process.
While the use of independent consultants has generally
served the agency well in terms of accomplishing our
supervisory objectives, we believe there are lessons to be
learned from our experience and we are currently evaluating our
use of independent consultants and exploring ways to improve
the process.
Thank you, and I would be happy to answer your questions.
Senator Brown. Thank you, Mr. Stipano.
Mr. Ashton, thank you. Please proceed.
STATEMENT OF RICHARD M. ASHTON, DEPUTY GENERAL COUNSEL, BOARD
OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Mr. Ashton. Chairman Brown, Senator Warren, thank you for
the opportunity to testify regarding the required use of third-
party consulting firms in Federal Reserve enforcement actions.
At the outset, it might be helpful to point out that
regulated banking organizations routinely choose to retain
consultants for a variety of purposes, apart from any
supervisory directive by regulators to do so. Banking
organizations decide to retain consultants because these firms
can provide specialized expertise, familiarity with industry
best practices, and a more objective perspective in staffing
resources that the regulated organizations do not have
internally.
In the vast majority of Federal Reserve enforcement
actions, the organization itself is directed to take the
necessary corrective and remedial action. In relatively
infrequent circumstances, the Federal Reserve has required a
regulated organization to retain a consultant to perform
specific tasks on behalf of that organization. Importantly,
consultants are used to conduct work that ordinarily the
organization itself would be required to conduct, but has shown
that it cannot perform itself.
At all times, the Federal Reserve retains authority to, and
does, review and supervise the consultant's work, in the same
manner as if the organization conducted the work directly. In
all cases, the regulated organization and not the consultant is
itself ultimately responsible for its own safe and sound
operations and compliance with legal requirements. In deciding
to require the use of consultants in appropriate cases, the
Federal Reserve does not cede its regulatory responsibilities
or judgments to those consultants.
As a general rule, our enforcement actions may require the
use of consultants because of a lack of specialized knowledge
or experience or insufficient resources at the particular
organization. In addition, it may be necessary to have a third
party undertake a particular project because a more objective
viewpoint is required than would be provided by the
organization's management. Thus, we have required the use of
consulting firms to review and report on a specific area of
operations, to review prior transactions to determine whether
required reports were filed, and to administer consumer
remediation programs.
When enforcement actions require a regulated banking
organization to use a consultant to carry out a particular
function, the Federal Reserve oversees the organization's
implementation of this directive. Our standard practice is to
require approval of the particular consulting firm retained by
the organization. In making this decision, we look at the
consultant's expertise, experience, resources, capacity, and
separation from management. We also normally require approval
of the letter between the organization and the consultant
describing the scope, terms, and conditions of the particular
engagement. Finally, we also oversee the consultant's
performance during the course of the engagement, which can
involve obtaining and reviewing interim progress reports and
periodic meetings with the consultant. If a consultant is not
meeting the required standards of performance, then we direct
improvements where necessary.
I would be pleased to answer any questions from the
Committee.
Senator Brown. Thank you, Mr. Ashton. Thank you, both of
you, again, for staying around 5 minutes. I appreciate that.
Mr. Stipano, I appreciate your testimony. I said in my
opening statement that one consultant participating in the IFR
was doing substandard work. When a consultant fails to meet its
obligations under a consent agreement, that information should
be disclosed so that--my belief--so that we can be assured that
consultants are up to the task. Will you tell us--you have not
disclosed that yet--will you tell us the name of the firm in
question?
Mr. Stipano. Senator, I am not in a position to do that. It
is a longstanding policy of the OCC not to disclose
confidential supervisory information to individual Senators or
Congressmen. There are certain legal consequences for us if we
do that. There are also processes that are available and that
we follow to provide confidential supervisory information to
Congress in the exercise of its oversight functions.
Senator Brown. So how does--OK. I want to talk more about
that process, but how does disclosing the identity of an
underperforming, I guess is the best word, consultant, the
third party, prove harmful to the relationship between the OCC
and the banks that you regulate?
Mr. Stipano. Well, there are a number of things. I think
that, in general, to the extent that we are talking about
confidential supervisory information, it is a fundamental
premise of the whole bank supervisory process that we get to
have access to all the bank's books and records. We get to see
whatever we want. We get to form whatever supervisory
conclusions that we form and then take appropriate action. And
we are still in the process of doing that with respect to the
IFR and the IFR settlement. We are kind of in mid-stream.
If we were to depart from that, there are consequences that
could undermine a supervisory process. It could make
institutions less willing to be forthcoming with us during
examinations. And to the extent that we are contemplating
actions, whether it is against an institution or an independent
contractor, were we to disclose that while we are still in the
middle of a process, that could potentially affect the action
that we ultimately take.
There is also a legal issue concerning the waiver of the
bank examination privilege. Courts have recognized that there
is such a privilege, that the opinions of examiners, their
mental processes, the iterative process between examiners and
between banks is all protected and is something that we are not
required to disclose. If we voluntarily disclose privileged
bank examination material, then we waive the privilege as to
the world.
Senator Brown. There is a bigger issue, and we are not
probing every detail of that relationship. I mean, there is a
bigger issue here. There is, first of all, the most important
thing, the fragility of the financial system that Americans, as
responding to what Senator Vitter and I and Senator Warren and
a number of us are doing. We hear all the time that Americans
still do not have confidence in the stability of this financial
system, and taxpayers have not gotten a whole lot out of this
settlement so far. Homeowners are getting an average of about
$300. And you have information about a consultant that might be
hired in the future in a perhaps perilous situation and the
people hiring that consultant might not know of its failures.
So does not the public interest outweigh that----
Mr. Stipano. I think it does----
Senator Brown.----knowing who it is, not with all the
details of what necessarily went wrong, depending on what that
consultant wants to say at that point.
Mr. Stipano. I think it does, and we do intend to--we have
issued some public reports on the IFR to date. We intend to
issue more of them. Again, we are kind of in mid-stream in the
process right now. I mean, we are wrapping up the IFR. We still
have a couple of institutions that are still conducting the
IFR. Plus, we are trying to implement the IFR settlement. So we
do anticipate doing public reporting.
We are also still in an evaluative phase. I am not really
sure at this point what the message would be, and part of our
evaluation is to take a look at the conduct of the servicers
themselves and take a look at the consultants and then form
conclusions. We are still doing that.
Senator Brown. OK. We expect that. I mean, I know that you
announced and removed Allonhill and other consultants, so there
is some precedent. We will get to that. Let me do one more
question then turn it to Senator Reed.
Given that the regular consulting business is lucrative,
and we have seen certainly examples of this in this situation,
consultants have a financial incentive to do things that will
attract repeat business, and the largest banks have deep enough
pockets to use these consultants on a pretty regular basis.
Independent consultants provide a quasi-public function. It is
a peculiar function, obviously, as you know, because they are
paid by the banks, but they are doing work supposedly in the
public interest. I think it is useful for us to understand this
compensation structure.
My comments and this question is this. Understanding there
are concerns in the case of the IFR with one consulting firm--I
will not mention it, but one--to disclose bank-specific
compensation information--in other words, they only did one
bank, so that might violate the bank's proprietary knowledge
there--do you consider a consulting firm's compensation in a
given matter to be confidential supervisory information? In
other words, would you be comfortable with public disclosure of
firms' compensation, both in the IFR and on an ongoing basis?
Mr. Stipano. I do not consider the disclosure of the
compensation received for an engagement to be confidential
supervisory information unless the disclosure would reveal
examination techniques, examination strategies, the iterative
process between examiners and the bank.
Senator Brown. So at some point, we will know what each of
these seven firms was paid?
Mr. Stipano. It is not the OCC's role to have to approve or
disapprove the disclosure of that information.
Senator Brown. Two of the consultants--and this is what
makes me especially curious. We know that these seven firms
were paid somewhere upwards of $2 billion, which was more than
one-fifth of the settlement. That speaks of, did that money
come out of the settlement? Put that aside for a moment. What
is particularly curious, two of the consulting firms have told
us that the engagements, they thought, would generate between
$5 and $8 million--$5 and $8 million. When all was said and
done, a firm at the lower end could conservatively have made
$200 or $300 million. You just take $2 billion and you divide
it by seven and you have a number 25 or 30 times the $5 to $8
million.
I assume that consultants regularly provided you with
status reports that included their compensation, correct? You
got regular reports how much money they were spending?
Mr. Stipano. We are knowledgeable about the compensation,
yes.
Senator Brown. So at what point--when a couple of firms
said $5 to $8 million that this would cost, at what point did
you realize there might be a problem with the IFR process? Did
it occur to you that when the number exceeded $50 million there
might be a problem, or when it reached $100 million or $500
million or a billion? When did you think there might be a
problem?
Mr. Stipano. OK. I do not think that that decision was
driven by the amount of money being paid to the consultants.
When we created the IFR--and just by coincidence, the Consent
Orders that started this whole process were issued exactly 2
years ago, and the IFR itself has been in place for more than a
year--what we were trying to do was to set up a process that
would allow the institution, with the assistance of the IFR, of
the consultants, to identify borrowers who were financially
harmed by the servicers' wrongdoing. And then once they
identified them, the Consent Orders required the servicer to
come back to us with a plan, subject to our approval, to
remediate the harm, to pay compensation to the affected
customers.
I think that the OCC and the Fed greatly underestimated the
complexity of the task. The number of the institutions
involved, the number of consultants involved, the number of
borrowers involved, the sheer number of decision points, which
I am told are in the hundreds if not the thousands per file,
shifting legal requirements, compliance with 50 State laws,
compliance with HAMP guidelines, GSE guidelines, it was
inordinately complex and we did not fully appreciate that. It
seems easy now. It was not at the time.
And the best proof of that, if you go back and look at the
Consent Orders, we gave the servicers 120 days to get this
done, which is astounding. I mean, we were into it for more
than a year and we were nowhere near done.
So notwithstanding all that, we were committed to making
this work. We did make adjustments along the way. We wanted to
see this be successful. But as we were getting to the point
where we were up to a year, we were past a year, and no checks
were going out to any borrowers, nor did it appear that many
checks would be going out to any borrowers any time soon, we
felt like there had to be a better way to do this, and that is
what really prompted the IFR settlement.
I am not here to tell you that it is a perfect process,
what we have done, but the goal behind it, and what we have
done and what we are going to achieve starting tomorrow, is to
quickly get cash into the hands of the affected borrowers, and
that was something that was not happening under the IFR.
Senator Brown. Did any of these consultants, any of the
seven come to you and say they had concerns about the rate at
which the costs were growing, or did anybody on your staff? I
mean, I just cannot imagine when you thought 120 days--and I
understand people make misjudgments, but 120 days--you are
saying 120 days, they are saying $5 to $8 million. When it goes
way beyond earlier than the 120, you were beginning to see this
is tens of millions, hundreds of millions, did these
consultants, did any of them say that they had concerns about
the rate it was growing?
Mr. Stipano. I think, as with the regulators, the
consultants were doing their very best to try to follow the
guidance and the direction that they were getting from us.
There were lots of problems and hurdles that arose along the
way that slowed the process down, all of it really going to the
complexity of the task. And, up until the time when we decided
to settle the matter and not continue the IFR, we were still
all committed to trying to make it work.
Senator Brown. Let me ask one more question and then turn
to Senator Reed. Were the fees paid by the banks, the two-
point--upwards of $2 billion--was that considered in setting a
settlement amount to be paid by those banks? In other words,
did that amount, that $2 billion, result in less compensation
for borrowers?
Mr. Stipano. Not at all. We required----
Senator Brown. How do you know that?
Mr. Stipano. As part of the settlement, we required the
servicers to set up a Qualified Settlement Fund and to put
money into that, and all of the compensation that goes to the
borrowers is coming out of the fund. The amounts that they have
paid to the consultants is not a factor.
Senator Brown. And when was that determined, when the
fund--the size of the fund?
Mr. Stipano. It was negotiated toward the end of last year,
the beginning of this year.
Senator Brown. But if you are the bank and you have
realized you have spent, pick a number, $328 million or $90
million----
Mr. Stipano. Yes.
Senator Brown.----on paying Consultant X, do you not think
that affected their negotiations on how large a settlement it
would ultimately be?
Mr. Stipano. I cannot speak for the banks----
Senator Brown. How do you know that it did not, is the
better question.
Mr. Stipano. I do not know that it did not, because I
cannot get inside their head. We had certain goals in mind in
terms of negotiating to an amount that we thought would be
sufficient, and we did not factor in the amount that they were
paying to the consultants.
Senator Brown. OK. Senator Reed.
Senator Reed. Thank you, Mr. Chairman.
I have still the same question that I had about a year ago
when this issue came up. I think, Mr. Stipano, you said it,
that basically the core of this issue is financial harm to
borrowers because of the wrongdoing of banks, not because of
just the economy moved and they were unfortunate.
Mr. Stipano. Yes.
Senator Reed. That seemed to me the essence of what the OCC
and the Federal Reserve, their responsibility as regulators. So
why would you delegate that responsibility, effectively, to
consultants who did not have a relationship with you, had a
contractual relationship with the bank----
Mr. Stipano. Yes.
Senator Reed.----why?
Mr. Stipano. Well, we thought it was the best alternative.
There is clearly----
Senator Reed. Do you still think it is the best
alternative?
Mr. Stipano. No. I think if we had it to do over again, we
would take a different approach.
Senator Reed. You will have it to do over again. So what
today is the policy of the Office of the Comptroller of the
Currency with respect to investigating wrongdoing of banks? Is
it to hire, augment your staff with a contractual relationship
with these consultants directly?
Mr. Stipano. Yes.
Senator Reed. Or is it to let the banks pick their favorite
consultant?
Mr. Stipano. Well, there are a number of alternatives. All
of them have different pros and cons. The problem with having
the OCC do this work itself is that it is just beyond the means
of any Federal banking agency to do this. I mean, again, the
size, the scale, the scope, the complexity. It is not a
question of bringing on some more examiners. We would probably
have to triple or quadruple the size of our staff or pretty
much shut down our bank supervision operations. That is not an
option.
We could contract directly ourselves. The problem that we
run into there are Federal procurement rules and Federal
procurement requirements. These types of engagements have to be
competitively bid. In this kind of an engagement, where there
is a lot of money at stake, there would be a lot of interest
among many consultants in getting that business, so we would
expect there would be lots of bids. There would be contests and
challenges. We might still be at a point now where we have not
even begun the IFR because we are still going through the
procurement process. So we felt that was too unwieldy and not a
good option.
And the only other option would be to have the banks
themselves do it, but they were the ones that caused the
problem in the first place.
So given the alternatives, we felt that this was the best
option. I think there are different approaches that we could
have taken that we did not take in the design of the problem.
And what we are doing right now, and I have to be honest with
you, Senator, I do not have all the answers as I sit here, but
we are looking back at what we did. We are evaluating it and we
are going to come up with ways to do this better in the future.
Senator Reed. So your bottom line was because it had to be
competitively bid, you felt that was not the appropriate
approach.
Mr. Stipano. Yes, and maybe that----
Senator Reed. And----
Mr. Stipano.----and I am not an expert on Federal
procurement rules, but we have experts in my agency that we
consulted with, and the advice that we were given was that if
we were to go down that road, the process would go on for a
very, very long period of time and it would delay getting money
into the hands of the affected borrowers.
Senator Reed. Unlike the process you chose, which is going
on for a long time, has not gotten a lot of money into the
borrowers, and has been deemed a total failure.
Mr. Stipano. That process did not work, either.
Senator Reed. Yes. So I think you have got to have a new
process, and I think if the process requires modification of
Federal rules and regulations, that is something that the OCC
and the Fed should immediately demand of us.
Mr. Stipano. OK.
Senator Reed. Because, essentially, what you described,
what is the core activity of the OCC, stopping the wrongdoing
of regulated institutions and protecting consumers, I mean,
among safety and soundness, so those are sort of the three
critical issues. And if you do not have the statutory framework
to do that effectively, you have got to tell us, one.
But two, I would go back very strongly, because that is
some of the shibboleth around here. Oh, competitive bidding is
so difficult, et cetera. There are contests. Every major sort
of program in the Federal Government usually has an aspect of
competitive bidding, and yet it gets done. So I would suggest
that you adopt a policy immediately that you are not going to
rely upon bank-selected or regulated-selected consultants, that
they will be directly hired by the OCC.
To raise an issue, and I want to raise the same question
with the Fed, is that I would presume that because they were
able--they did, in fact, conduct contractual relations with--
those contracts were drafted and approved by the institutions,
and I would assume that the obligations of the consultants were
primarily to the person they had the contract with, not the
OCC.
Mr. Stipano. No, I do not think that is accurate. We did
require that the contracts be submitted to us for our review
and we directed the servicers to put language into the
contracts that made it clear that the independent consultants
were acting pursuant to our direction, not the servicers.
Senator Reed. In reality, did the independent consultants
act at your direction?
Mr. Stipano. I believe so, yes.
Senator Reed. Can you provide us documentation to that
effect?
Mr. Stipano. I do not know if there is documentation. We
would be happy to discuss it with your staffs.
Senator Reed. Let me ask the Federal Reserve, because you
have a slightly different legislative structure. Do you feel
that you had to retain consultants through the banks and not
directly hire them by the Federal Reserve?
Mr. Ashton. Senator, when we set up the process with the
OCC, we started out with the model that Mr. Stipano has
described, and we had had a history of requiring banks to
retain independent consultants to do certain discrete tasks,
like find situations where a suspicious activity report had to
be filed. And I think we thought at the time that that model
could be adopted for something as extensive as this. What we
found out in practice was that the scope of the review--that
independent consultants had to find every single injury--was so
extensive and time consuming that the model was just not
effective. And that is why we decided to change it.
Senator Reed. But let me ask you a question. Does the
Federal Reserve have the authority and the resources to
contract directly with the appropriate consultants to conduct
reviews of banks or financial holding companies in which you
select the contractor, they have a contractual obligation
directly to you, not through a third party? Do you have that
authority?
Mr. Ashton. Senator, I think if we were going to do this
again, we probably would have to consider different types of
models and that would be one model.
Senator Reed. I----
Mr. Ashton. I do not think we have looked into the
authority question.
Senator Reed. Well, I would suggest you look into the
authority question, and I would suggest that both the OCC and
the Federal Reserve adopt that approach. It seems to me there
is this inherent--and you are talking about people who are
professionals on both sides. But there is an inherent conflict
between hiring your inspector or having your inspector come
from the Federal Government, even as an augmentee through a
contract. And that tension is always going to be there, even if
it is a different context. And I just think to delegate the way
you did an essential regulatory function by essentially asking
the banks to choose their inspector just does not work and will
not work.
And if there are authorities you need, and I am very--the
Fed has such expansive authorities, I would be shocked--because
I would like to see the competitive bidding that you have done
in the past on lots of issues. I would be shocked if you needed
the authority. But that seems to be the lesson of this. We can
go back and do--and we will--the post-mortem on how it happened
and what you are going to do to fix it. But going forward, I
think that is the lesson that has to be drawn.
Mr. Chairman, I thank you. I think this is very important.
Do you have----
Senator Brown. Yes, I am going to go, and then Senator
Warren will be back and we will do a second round.
Thank you for your insight into Senator Reed's questions.
You talked about an inherent conflict, and the underlying
problem here is, I think, pretty clear. There is the
independence. There is the qualifications of these consultants.
And let me kind of take it in a different way.
Do your agencies have clear, objective, independent
standards--independence standards for these consulting firms?
These firms, these seven firms, most of them have done,
obviously, a lot of work with OCC, with the Fed, and more
directly with the banks. Does OCC have clear, objective
standards for these consulting firms, and share them with us if
you do.
Mr. Stipano. The critical factor in our minds, first and
foremost, is that any consultant that is brought on have the
right resources and expertise to do the job. I mean, that is
separate, really, from independence, but nonetheless very
important.
On the independence point, it is not realistic in most
cases to expect that independent consultants would have no
prior ties to the institution. I mean, they are used so widely
throughout the industry that most consultants that have the
resources and the expertise have done work before. So trying to
find consultants that are totally pristine in that regard is
not really practicable.
However, what we do look for are situations where, because
of prior work, the consultant is conflicted in such a way that
it could compromise their objectivity. And on the IFR, there
were a couple of factors, in particular, that we were focusing
on. The one was if the consultant had done work before such
that by taking on the IFR engagement, they would essentially be
reviewing or re-reviewing their own work, that was something
that we would consider to be disqualifying.
And, similarly, if the consultant was involved in an
advocacy role, like if they were involved, for example, in
negotiating with us on the cease and desist orders or
negotiating with the State Attorney Generals on the National
Mortgage Settlement, we would consider that to be
disqualifying. And we did disqualify some of them on those
grounds.
Senator Brown. We are not--you used the word ``pristine.''
We do not expect pristine here. That sounds----
Mr. Stipano. I----
Senator Brown.----too difficult. But we do expect, I think,
clearer standards in what ``qualified'' means. For instance, if
a consulting firm, and there is one in this situation, has
repeatedly been, for lack of a better term, at the scene of a
crime, what would it take before they are viewed as not
qualified? What if they--for instance, what if they
underestimated the value of an institution's money laundering
transactions by $250 billion or presented watered-down reports
to regulators? That would not be enough for disqualification
under your standards?
Mr. Stipano. Well, again, I think you have to look at the
total context, but I do believe this is an area where there are
lessons to be learned for us and we are committed to exploring
ways to do better. Maybe that results in some kind of written
standards. We do not presently have them. But I think this is
an important area and we are committed to doing a better job.
Senator Brown. Has there been a process started to write
these standards?
Mr. Stipano. I think we are still in an evaluative phase,
but I think the goal is to have----
Senator Brown. Well, wait. You are in an evaluative phase.
This is not just the IFR. This is since 2008----
Mr. Stipano. Yes.
Senator Brown.----the number of----
Mr. Stipano. I know.
Senator Brown. You are still in an evaluative stage on
whether you are going to write standards----
Mr. Stipano. No, we----
Senator Brown.----for the future?
Mr. Stipano. No----
Senator Brown. You are evaluating the other, but before you
begin to write these standards?
Mr. Stipano. I think that, to a certain extent, the
standards that get produced will be informed by our experiences
with the IFR. We still need to wrap up the IFR and discern what
those lessons learned are.
Senator Brown. Since you are--I mean, understanding you
have to farm out many things because of consultants and the
size of OCC, but can you not sort of process all of this
evaluative IFR and other consulting at the same time another
part of OCC starts to write these standards of what
``qualified'' means?
Mr. Stipano. It is--we are at a beginning stage. We have
not really reached a point of putting pen to paper.
Senator Brown. I hope that point starts this afternoon.
One other question about that and then I will turn to
Senator Warren. Alan Blinder, a founder and, I believe, still
director at Promontory--this is according to Bloomberg--said
that the foreclosure reviews were, quote, ``outside
Promontory's sweet spot, requiring the firm to hire hundreds of
people.'' It has been reported they did not just--and I will,
of course, direct this question to the second panel and give
them a chance, give the gentleman from Promontory a chance to
speak to this. But it has been reported they just did not
outsource outside the firm, they went outside the country to
the Philippines, which I would think would have a major impact
on their dollar per hour charge of Promontory, and I would like
information on that later, too.
But how does a firm with so little capacity--and my
understanding is Promontory was probably the largest, but
certainly a large chunk of the $2 billion--how does a firm with
so little capacity acting in an area that is outside their
traditional expertise--Blinder's words--how does it wind up
with the most responsibility under this process? What does
OCC--what is the process of OCC to take a firm that this is not
in their sweet spot and award them contracts, arrangements,
that go into the hundreds and hundreds and hundreds of millions
of dollars?
Mr. Stipano. Well, I would start by just saying the entire
IFR process was unprecedented, unlike any situation we had ever
encountered before. I think one reason why we put in our
Consent Orders that it had to be done in 120 days is that we,
perhaps naively, looked at it as a file review and we direct
banks all the time to hire consultants to do a file review.
This proved to be much more than that.
I am not intimately involved in the details of Promontory's
engagement, and I cannot really speak to that. I do know that
they hired--they themselves hired large numbers of
consultants--or consultants, contractors--to assist in their
portion of the IFR. And given the enormity of the task, that
does not seem inappropriate.
Senator Brown. Thank you.
Senator Warren, I have done a second round. You can sort of
take two rounds at once. I think probably the vote will be
called, so why do you not proceed as long as we can go until
the vote is called.
Senator Warren. Thank you very much, Mr. Chairman.
I apologize for having to leave. I had the distinct honor,
though, of being able to introduce Gina McCarthy for her
hearing to head up the Environmental Protection Agency. She is
a proud daughter of Massachusetts and so I wanted to be there
to be able to do it.
So I want to turn to another aspect of the Independent
Foreclosure Review. Earlier this year, your agencies entered
into a settlement with the mortgage servicers based on their
foreclosure practices and the settlement was for about $9
billion. And at that time, your agency said that they achieved
this number, arrived at this number, based at least in part on
the fact that servicers had made mistakes or broken the law in
about 6.5 percent of the cases.
Now, I assume if you had believed that the banks had broken
the law in 90 percent of the cases, that you would have settled
for a much larger amount of money and that the homeowners would
have been paid more, and that if you had found that they broke
the law in only 1 percent of the cases, that you would have
settled for less money and the homeowners would have been paid
less. Is that basically right, Mr. Ashton?
Mr. Ashton. Senator, at the time the Board accepted the
settlement with the servicers, we had some preliminary error
data. It was preliminary. We also had other data available----
Senator Warren. Oh, I understand that.
Mr. Ashton.----and it was only one of the factors that we
took into account in deciding whether----
Senator Warren. I understand. But the question I am asking
is if you had believed at the time you were putting the
settlement together that, in fact, the banks had broken the law
in more than 90 percent of the cases, presumably, you would
have settled for a lot more money, is that right?
Mr. Ashton. I think that the error rate was a factor. It
was not the only factor.
Senator Warren. OK. It is the only factor [sic], but it
certainly would have mattered if you thought that the banks
broke the law 90 percent of the time as opposed to, say, 6.5
percent of the time.
Mr. Ashton. That is true, but there were other factors that
led the Board to accept the settlement, especially the delay
that would have been involved----
Senator Warren. Fair enough. I understand the delay. But it
matters how many homeowners were the victims of illegal
practices by the banks in terms of determining the settlement
amount, does it not?
Mr. Ashton. The approach that was taken in the settlement
agreement is focused on trying to get cash to the borrowers as
quickly as possible.
Senator Warren. But the question is not getting cash to
them, $300. The question is getting the right amount of cash to
the right people, the people who are the victims of illegal
activities of the banks, is that right?
Mr. Ashton. The settlement agreement is not based on
findings of individual injury. It is a different approach. We
gave up looking for individual injury and decided----
Senator Warren. So, I read your press release at the time
that this came out, and you said one of the things that your
agency and the Federal Reserve said is that the banks had
broken the law or made errors in approximately 6.5 percent of
the cases. And my question is, if you had found that they had
broken the law in 90 percent of the cases, would you have
demanded more money from the banks?
Mr. Ashton. It would have been a factor, I believe, but----
Senator Warren. I will take that, then, as a ``yes,''
because what I take it to mean, since you used it in your press
release and since it is relevant to how much money the people
who have been injured are going to get, that the number is
critical. It tells us how much illegal activity there was and
how much the banks should pay.
The problem is that the 6.5 percent is not accurate. Your
staff admitted to us in a meeting earlier this week that the
number is not based on a random sample, not on a review of
these cases. It was determined based on whatever files had been
reviewed by the time you shut down this process.
And then it gets worse on the numbers. A week after
announcing--a few weeks after announcing the settlement, your
agency revised the 6.5 percent number down to 4.2 percent. The
Wall Street Journal reported that the error rate, that is, the
rate of breaking the law, was--or making mistakes--was 11
percent at Wells Fargo, 9 percent at Bank of America, and there
are reports that the error rate at JPMorgan Chase was only six-
tenths of 1 percent. In other words, the 6.5 percent number was
just a made-up number.
So Congressman Cummings and I have asked for information
about how you came up with the number. We still do not have
enough facts to check it. But the question I have is, what is
the right number? Is it six-tenths of 1 percent? Is it 6.5
percent? Nine percent? Eleven percent? Twenty percent? Fifty
percent? Ninety percent?
If you cannot correctly tell how many people were the
victims of illegal bank actions, how can you possibly decide
how much money is an appropriate amount for settlement?
Mr. Ashton. Senator, I can only reiterate that the decision
that was made to accept the agreement, and we recognize that
that was not a perfect option, was based on the delay that
would have been involved in any alternative to continue the
Independent Foreclosure Review.
Senator Warren. Mr. Ashton, I am sorry. I understand the
point about delay, but it does not mean you pick a number out
of the air. The number has to be based on at least some
understanding of how often the banks engaged in illegal
activity and how many homeowners got hurt. And you needed some
way to estimate that to come up with a number. Is that not
right?
Mr. Ashton. To estimate the number with more precision
would have required additional delay in providing payments, and
so the decision was made not to go down that course, not to
continue the Independent Foreclosure Review, which we could
have done, and instead to accept a settlement which resulted in
payments to borrowers in a much quicker timeframe.
Senator Warren. Mr. Ashton, I cannot believe that you are
saying that the only reason the number $9 billion was settled
on was so that it could be done quickly, and that you are
saying that the OCC did not have an estimate in mind of how
many banks had broken the law and how many homeowners were the
victims of illegal activities.
Mr. Stipano, is that the case for the Federal Reserve Bank,
as well?
Mr. Stipano. Senator, I am not an expert on the IFR
settlement. I was not directly involved in it. I can answer
general questions, and I will do my best to do that.
My understanding is that, when it comes to the error rate--
I do not really know how it was calculated, to be honest. There
are people in the agency who do. They are not here. I do
believe that we did review a substantial number of files----
Senator Warren. I am sorry. Mr. Stipano, we met with your
staff.
Mr. Stipano. Yes.
Senator Warren. And your staff has made clear you did not
review a random sample.
Mr. Stipano. No, it was not a random sample----
Senator Warren. And without a random sample----
Mr. Stipano. No----
Senator Warren.----can you then generalize to the accurate
number, even an estimate, of how many banks broke the law?
Mr. Stipano. Not--my understanding is not in a
statistically valid way. However----
Senator Warren. OK. That is no.
Mr. Stipano. But can I finish, though. I do think that the
review of 100,000 files plus is not valueless. I mean, it does
inform your decision to some extent.
Senator Warren. So you are telling me it is not a random
sample, but you think you know something.
Mr. Stipano. It has some value. That is a fact.
Senator Warren. And what is it that you know, since we have
seen different numbers reported----
Mr. Stipano. I am assuming that is where the error rate
came from, but I am only assuming, Senator. I was not involved
in----
Senator Warren. So if we are to draw an inference from
those 100,000 files, it seems to me we need more information
about the 100,000 files, that is, how they were drawn and how
much illegal activity was found in those files. Is that
accurate?
Mr. Stipano. I think that is accurate.
Senator Warren. So far, you have not given us that
information.
Mr. Stipano. Yes. As I stated earlier, Senator, there are
processes for us to provide confidential supervisory
information to Congress in its oversight capacity and we are
prepared to follow those processes.
Senator Warren. So let me just make sure I understand this
completely. I want to know on a bank-by-bank basis the number
of families that were illegally foreclosed on. Will you give me
that information?
Mr. Stipano. Eventually, we are going to issue a statement
to the public where we provide additional information, but if
we go through the processes that I described previously, we can
share it to Congress in its oversight capacity.
Senator Warren. So you are saying you will make that
information publicly available?
Mr. Stipano. I did not say that. I said that we are
planning on issuing a public statement that wraps up the IFR
that provides additional information----
Senator Warren. That is not what I am asking for.
Mr. Stipano. Yes.
Senator Warren. What I am asking for is a bank-by-bank
analysis of how many families they illegally foreclosed on.
Will you give us that information?
Mr. Stipano. We can provide that to Congress in its
oversight capacity if we go through the normal processes that
we are prepared to follow.
Senator Warren. And why are you not making that public? I
just want to make sure I understand.
Mr. Stipano. I do not know that there has been a decision
not to. I think that we are still evaluating----
Senator Warren. Are you claiming----
Mr. Stipano.----what we are going to release publicly.
Senator Warren. Are you claiming that the information about
illegal activity is privileged and confidential?
Mr. Stipano. It is all confidential supervisory
information, but that does not mean that we will not at some
point release some of that information. That decision just has
not been made at this point.
Senator Warren. So you are saying, when you find evidence
of illegal activities----
Mr. Stipano. Yes.
Senator Warren.----by the banks----
Mr. Stipano. Yes.
Senator Warren.----when they have illegally foreclosed-----
Mr. Stipano. Yes.
Senator Warren.----against homeowners, that that
information is privileged and you will not release it without a
letter from Congress.
Mr. Stipano. If it is derived from the bank examination
process, yes, it is----
Senator Warren. How else would you get it?
Mr. Stipano. Well, sometimes you get information through
third parties, through outside sources. But in this case, that
is not the case.
Senator Warren. So unless someone throws a rock through the
window with this information tied to it, you will not release
it, is that what you are saying?
Mr. Stipano. To the extent that the information is
confidential supervisory information derived from the exam
process, it is subject to privilege. We do not ordinarily make
that public. However, in this case, we do plan on making public
issuances describing further findings and further analysis of
the process.
Senator Warren. On a bank-by-bank basis of illegal
activity?
Mr. Stipano. I do not know if that has been determined yet.
Senator Warren. All right. So let me ask it from the other
point of view. You now have evidence in your files of illegal
activity, I take it, for some of these banks. I get that from
the evidence you have released about the charts, who is going
to get paid what. So if someone believes that they have been
illegally foreclosed against, will they still have a right
under this settlement to bring a lawsuit against the bank?
Mr. Stipano. Yes.
Senator Warren. All right. Now, if a family wants to bring
a lawsuit--you are both lawyers--would it be helpful, if you
are going against one of these big banks, would it be helpful
for these families to have the information about their case
that is in your files? Mr. Ashton?
Mr. Ashton. It would be helpful to have information related
to the injury. Yes, it would.
Senator Warren. OK. So do you plan to give the families
this information? That is, those families that have been
victims of illegal foreclosures, will you be giving them the
information that is in your possession about how the banks
illegally foreclosed against them? Mr. Ashton?
Mr. Ashton. That is a decision that we are still
considering. We have not made a final decision yet.
Senator Warren. So you have made a decision to protect the
banks but not a decision to tell the families who were
illegally foreclosed against?
Mr. Ashton. We have not made a decision about what
information we would provide to individuals.
Senator Warren. Mr. Stipano?
Mr. Stipano. We are in the same position.
Senator Warren. So I want to just make sure I get this
straight. Families get pennies on the dollar in this settlement
for having been the victims of illegal activities or mistakes
in the banks' activities. You let the banks, and you now know
individual cases where the banks violated the law and you are
not going to tell the homeowners, or at least it is not clear
yet whether or not you are going to do that?
Mr. Stipano. We have not made a decision on what we are
going to tell the homeowners.
Senator Warren. You know, I just have to say, I thought
this was about transparency. That is what this is all about.
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 are doing your job is if you
make some of this information publicly available. And so far,
you are not doing that. And without transparency, we cannot
have any confidence, either in your oversight or that the
markets are functioning properly at all, and that people are
going to receive proper compensation for what went wrong.
So do we have time for another round of questions?
Senator Brown. We do not. We do not.
Senator Warren. OK. I----
Senator Brown. The vote started about 8 minutes ago.
Senator Warren. All right.
Senator Brown. Thank you, Senator Warren.
I think her points are very well taken. I think back to
Attorney General Holder's comments about that, in response to
Senator Grassley's and my letters asking when he--the
Department of Justice said that they were concerned about
prosecution because of the--he did not quite use the words
fragility of the financial system, but that it could have
repercussions, and I think this is along those same lines, that
the public--and the public over and over seems to think that
this institution and the regulators and the Senate and the
House are more interested in protecting the banks than they are
the public. I think Senator Warren's comments speak to that. I
think the back and forth between the Department of Justice and
our office speaks to that. And I am hopeful that this starts a
new era in transparency and in helping those families that have
been wronged.
The vote is about 10 minutes in. We will recess and I thank
the first panel for joining us. There will be follow-up from
Senator Warren, I am sure, and Senator Reed and me to the two
of you, but you are dismissed and we will call up the second
panel within about 15 minutes.
So we stand in recess.
[Recess.]
Senator Brown. The Subcommittee will come to order.
Thank you for your patience, and thank you especially to
the second panel for waiting around while Senator Warren and I
voted. I will introduce the next panel and then we will proceed
with questions.
Konrad Alt is the leader of Promontory's San Francisco
Office, where he advises clients on compliance, enterprise risk
management, governance, and regulatory communications, and
particular expertise in retail lending. He is a former counsel
to this Committee. He served as Senior Deputy Controller for
Economic Analysis and Public Affairs at the Office of the
Comptroller of the Currency.
James Flanagan is the U.S. Leader of the
PricewaterhouseCoopers Financial Services Practice, where his
responsibilities include the banking and capital markets,
insurance, and asset management sectors. He is actively
involved with PricewaterhouseCoopers' Global Financial Services
Leadership Team, as well as U.S. firms' Audit Leadership Team.
Owen Ryan heads Advisory Practice at Deloitte and Touche.
He has experience in areas that include capital markets,
mergers and acquisitions, corporate finance, strategic
consulting, auditing, tax, and practice management. He serves
on both the Deloitte Board of Directors and Executive
Committee.
Mr. Alt, if you would. Try to keep it close to 5 minutes,
each of you, and I very much appreciate all three of you
joining us, all of you. Thank you.
STATEMENT OF KONRAD ALT, MANAGING DIRECTOR, PROMONTORY
FINANCIAL GROUP, LLC
Mr. Alt. Thank you, Mr. Chairman. Good morning, Senator
Warren.
So Promontory Financial Group's core business is helping
financial institutions understand how to meet their business
challenges consistent with regulatory expectations. Clients
come to us for help in strengthening their risk management or
corporate governance, and frequently, they want an independent
assessment. Our work runs from testing risk models to running
stress tests to reviewing board performance. We can recommend
improvements to strengthen corporate governance or risk
management, bolster capital and liquidity, or better protect
consumers.
Promontory Financial Group is not a regulator. We do not
and cannot perform regulatory activities. We do not make
regulations. We do not issue guidance. We do not assign
examination ratings. And we do not bring enforcement actions.
These activities are the domain of public officials,
accountable through Congress to the American people. Private
consultants can only make recommendations, even when acting as
an independent consultant pursuant to a regulatory order.
Expertise, experience, and integrity have been fundamental
to our success. Many of our senior professionals have spent
decades working in this area. They know the laws and
regulations and they believe in them.
Independent judgment is central to all of our engagements,
whether or not we are formally designated as independent. Our
expertise is in identifying issues and solutions. We have to
have the integrity to deliver bad news to top management and
the board.
In several dozen engagements, regulatory agencies have
formally designated Promontory Financial Group to serve as an
independent consultant pursuant to a regulatory enforcement
action. These engagements have involved over a dozen different
regulatory and law enforcement authorities, both in the U.S.
and abroad, and a variety of different types of reviews. We
believe these assignments fit well with the strengths of our
firm and we believe we have handled them well. But as a
percentage of our total number of engagements, they have been a
small portion of our practice.
We believe the most important qualifications for an
independent consultant are subject matter expertise and
integrity. Expertise is fundamental, but a consultant who lacks
the integrity to deliver a tough message will probably fail to
clearly define the problem and the solution.
The nature of regulatory oversight in our independent
consulting assignments varies. In a small project, it might
consist of presenting our final report to an examination team.
A larger complex assignment might entail more extensive
oversight, including regular status reports and sign-offs and
validation of our results.
Regulators use these techniques to establish and maintain
transparency so that they can quickly address any concerns that
might arise during our review. We support that approach. Both
with the regulator and with the financial institution, we want
to avoid surprises and build confidence that our review will
identify and address the issues.
Conflicts of interest have the potential to compromise the
quality of an independent review or to diminish confidence in
its results. Managing those conflicts is, therefore, important
to our work, as it is to the work of all reputable professional
services firms. Sometimes prior work will completely preclude
us from taking on an independent review. More frequently, the
question is whether we can establish appropriate ethical
safeguards to ensure that past relationships do not compromise
our independence. We work through those issues in consultation
with both the regulator and the institution involved.
Ultimately, of course, it is the regulator's decision whether
we are suited for an independent consulting assignment.
Your invitation asked about our legal obligations to the
regulated financial institution and the regulator in an
independent review. Our legal obligations are set out in our
engagement letters. Regulatory authorities often review and
approve those letters and frequently require specific language
relating to independence.
Finally, your invitation letter asked how we ensure quality
and consistency in providing oversight to financial
institutions. As I have said, we are not regulators and we are
not in the business of providing regulatory oversight. But
quality and consistency matter to us and we pursue them by
hiring top-quality, experienced experts and giving them great
support. In this way, we have built what we believe is the
world's leading consultancy in our field.
In summary, the use of private sector resources to support
the activities of Federal regulators raises legitimate public
policy questions. We applaud this Subcommittee's interest in
seeking assurance that the firms enlisted in such roles can
pursue the public interest without compromise.
Thank you, Mr. Chairman.
Senator Brown. Thank you, Mr. Alt.
Mr. Flanagan, thank you for joining us.
STATEMENT OF JAMES F. FLANAGAN, LEADER, U.S. FINANCIAL SERVICES
PRACTICE, PRICEWATERHOUSECOOPERS LLP
Mr. Flanagan. Thank you. Thank you, Chairman Brown, thank
you, Senator Warren, for the opportunity to appear today on
behalf of PwC.
I lead PwC's Financial Services Practice, which means I
help to manage and oversee the firm's diverse businesses in
banking capital markets, insurance, and our asset management
sectors. We are a partnership of over 37,000 professionals in
the U.S. and 180,000 globally. Together, we provide
professional services to public and private companies, the
Federal Government, State and local governments, and
individuals. The foundation of our brand is the quality of our
services, which are built on integrity, objectivity, and
professionalism.
PwC's Financial Services Practice offers clients audit,
tax, and consulting services. We understand that this
Subcommittee has expressed particular interest in the role of
independent consultants in relation to Agency Enforcement
Orders. The vast majority of our consulting engagements do not
arise from Agency Enforcement Orders, but from time to time, we
do Enforcement Order-related work and I would be happy to give
the Subcommittee a flavor of our views about such engagements
based on our experiences.
Independent consultants are often retained in enforcement-
related matters because of the independent consultants'
specialized expertise or because in larger complex cases
independent consultants can provide the scale of assistance and
review beyond that that the institutions or the regulatory
agency can or would like to deploy, given other needs and
obligations.
The particular nature of a regulatory proceeding and final
order in an enforcement action will define the qualifications
necessary for an independent consultant. There are, however,
certain baseline expectations for any independent consultant:
Appropriate subject matter expertise and experience, a
reputation for integrity, objectivity, and impartiality,
significant experience managing projects of the size or
complexity at issue, and sufficient trained and dedicated
professionals to perform the quality work in a prompt and cost
effective manner.
The Independent Foreclosure Reviews, or IFRs, are a recent
example of work with companies who are subject to regulatory
enforcement proceedings. As the Subcommittee knows, we were
engaged by four mortgage servicers to act as their independent
consultants under the terms of their respective settlements
with the Fed and the OCC. According to the terms of the Fed and
the OCC Consent Orders, as elaborated in our engagement
letters, which were reviewed and approved by the regulators, we
were engaged to identify errors related to the foreclosure
proceedings in 2009 and 2010, regardless of whether they were
financially harmed borrowers, but also to identify which errors
resulted in financial harm to borrowers.
The scale of the IFR engagements was unprecedented. As the
GAO said in its report last week, the IFR engagements required
application of hundreds of procedures to thousands of loan
files to test for potential errors in dozens of categories.
Over the course of the engagement, the scope and the procedures
underlying PwC's work continued to evolve. As they learned more
about the servicer files, the regulators provided updated
guidance and instruction on the scope and content of PwC's
testing. Independent legal counsel engaged by the servicers
pursuant to the orders provided new iterations of guidance as
the reviews proceeded to address the challenges of evaluating
the servicers' compliance with the laws of more than 50
relevant Federal and State jurisdictions.
While the complexity and scale of the IFR engagements posed
challenges to the independent consultants, we are proud of our
work. This is because, on the IFR engagements, we performed our
file reviews and made our observations objectively and
impartially. Our teams were comprised of experienced, talented,
and well trained PwC professionals. We cooperated fully with
the regulators and followed their guidance, and we endeavored
to communicate transparently and on a regular basis with the
regulators who were overseeing and monitoring our work.
We appreciate your time and consideration of our
perspectives and I thank you for the opportunity to appear
before you and I look forward to answering your questions.
Senator Brown. Thank you, Mr. Flanagan.
Mr. Ryan, thank you for joining us. Welcome.
STATEMENT OF OWEN RYAN, PARTNER, AUDIT AND ENTERPRISE RISK
SERVICES, DELOITTE AND TOUCHE LLP
Mr. Ryan. Chairman Brown, other Members of the
Subcommittee, good morning. My name is Owen Ryan and I lead the
Advisory Practice at Deloitte and Touche LLP.
Our Advisory Practice offers a wide range of services to
clients in most major industries. Our services include cyber
security and privacy, governance, regulatory, and risk
management, finance operations and controls transformation,
financial accounting and valuation, internal auditing, and
mergers and acquisitions. I am a Certified Public Accountant
and have more than 28 years of professional experience. I serve
on both the Deloitte and Touche LLP Board of Directors and its
Executive Committee.
In your invitation, you asked our firm to discuss our role
as independent consultant for financial institutions and the
role of independent consultants more generally. Before I do so,
I would note that we served as the independent consultant on
the Mortgage Foreclosure Review for JPMorgan Chase. My remarks,
I believe, will be responsive to your invitation letter and
generally be applicable to our Foreclosure Review engagement.
I would also note that Deloitte is not a law firm, and,
therefore, my testimony today is not based on legal analysis
but is instead based on my professional experiences.
Deloitte member firms employ more than 190,000 individuals
globally, and the United States firms employ almost 60,000
people. We provide professional services in four key areas:
Audit, advisory, tax, and consulting. Our business framework
allows us to provide a wide range of professional services
based on the needs of our clients. While independent consulting
engagements do not represent a substantial portion of our
business, I can assure you that we take our role seriously. We
strive to fulfill our professional obligations to provide
independent, objective, and quality services consistent with
the highest standards of our profession.
Before accepting a role as independent consultant, our firm
determines if we have the requisite experience, qualifications,
and appropriate number of professionals to execute our
responsibilities. Our professionals serving on these types of
engagements generally have auditing, consulting, industry, or
regulatory experience. Supplemental training on rules and
regulations pertinent to each engagement may be necessary. In
addition, it may be important for these professionals to have
experience working on or handling large-scale complex and
evolving engagements. We believe we were well qualified to
serve as the independent consultant for the Foreclosure Review.
We know from our experiences that it is important to
maintain open communication and an appropriate working
relationship amongst the independent consultants, the
regulators, and the institutions being monitored. Frequently
scheduled meetings and timely reporting are important
mechanisms for communicating our approach and progress.
Independent consultant engagements often result from
regulatory directives. As such, these engagements are subject
to the oversight of regulators as determined by their
requirements. These requirements generally include regulatory
approval of the independent consultant and the scope and
methodology to be used.
Given the relatively small number of firms with the scale
and expertise required to serve as an independent consultant on
large engagements, it is often the case that a firm will have
some previous relationships with an institution. Our policies
and procedures are designed to ensure that each engagement is
approached with due professional care, objectivity, and
integrity, consistent with American Institute of Certified
Public Accountants consulting standards. These policies and
procedures include disclosing to the regulator our previous
relationships with the institution before accepting the
engagement. Circumstances may also dictate the need for us to
decline the engagement altogether.
The engagement letter generally defines our professional
obligations. As part of our engagement acceptance procedures,
we would identify any regulatory considerations that are not
within our purview and expertise as an independent consultant.
To the extent we became aware of compliance issues outside the
scope of our purview, we would obviously fulfill all reporting
obligations to the regulator. Deloitte policies and procedures
promote the delivery of consistent, high-quality services in
our independent consultant engagements. Quality control and
assurance are integral to the success of all of our engagements
and we take care to build them into the design, execution, and
review of our projects. We conduct mandatory training for our
professionals and monitor the quality of our work on our
independent consultant engagements.
As a firm, we have been in business for over 100 years. We
know that our reputation is our most important asset. As such,
independence, integrity, and objectivity are of paramount
importance to us. We take very seriously our professional
obligations. We have an overriding commitment to excellence in
everything we do.
I thank you for providing me with this opportunity to
testify and will be happy to answer any questions you have.
Senator Brown. Thank you, Mr. Ryan. Thanks to the three of
you.
All of you were here for the prior panel and heard some of
the questions that I want to ask. I want to fill in the blanks
with some questions that were asked and fully answered or
partially answered from the prior panel.
Five consultants of the IFR are not here today. Three of
you are. I want to ask each of you whether any of your
organizations was given formal written notice from OCC of an
opportunity to improve its performance.
Mr. Alt?
Mr. Alt. No, sir.
Senator Brown. OK. Mr. Flanagan?
Mr. Flanagan. No, sir.
Senator Brown. And Mr. Ryan?
Mr. Ryan. No, sir.
Senator Brown. OK. Thank you for that. I like those ``yes''
or ``no'' quick answers. Thanks.
I addressed the issue of compensation with the regulators.
Did any of you--and I asked the question, did any of your firms
notify regulators that they, you, had concerns about the rate
at which your compensation was growing. We have, as I mentioned
earlier, at least two firms said that--I am not going to
disclose which two, but said that they initially thought $5 to
$8 million would be the charge. Obviously, it grew much bigger
than that.
My question, as I said, is did any of you notify the
regulators you had concerns about the rate at which your
compensation was growing, far beyond those numbers?
Mr. Alt. Senator, we discussed with the regulators on
several occasions the cost of the review and the amount of
resources required, and we instituted in consultation with them
many efforts to improve the efficiency of the review. So they
certainly were aware that this was a concern for us.
Senator Brown. Did it surprise you, the size? The amount?
Mr. Alt. Senator, we recognized from the very outset that
this would be a very large and complex undertaking, that it
would require a lot of resources over an extended period of
time, and we clearly built that into our methodology and we
communicated with the regulators about it. And we were also
clear about the potential for changes in scope to increase the
amount of resources. So we did--we anticipated--it was a large
review right from the outset. It was a large review and we
simply staffed up to handle it.
Senator Brown. What did you first think when you saw the
120-day standard, if that is a standard, the 120-day goal or
deadline that they initially set?
Mr. Alt. I am not----
Senator Brown. Did you think that was attainable?
Mr. Alt. No, Senator. I think it was pretty clear from the
outset that that was not attainable and----
Senator Brown. Did you tell them?
Mr. Alt. I am sorry?
Senator Brown. Did you tell OCC that?
Mr. Alt. I believe they told me that.
Senator Brown. That 120 was not attainable?
Mr. Alt. I think, from the outset, what we heard from them
was that our priority should be doing the job right and not to
worry about the time table, and let them know if we needed an
extension.
Senator Brown. Mr. Flanagan, same sets of questions, if you
would.
Mr. Flanagan. Certainly.
Senator Brown. Did you notify the regulators?
Mr. Flanagan. Yes. So we had an ongoing dialogue with the
regulators throughout the process, as they acknowledged in the
first panel. So they were aware of the scope, the change in the
findings as the process was playing out. So they were well
aware throughout the evolution of the exercise and the level of
effort that was being incurred.
Senator Brown. What did you think when you saw the 120
days?
Mr. Flanagan. I guess I would say, at the outset, we did
not really know what the process was going to be. So I do not
think we started it saying there is no way we will be done in
120 days. It became obvious very quickly that we would not, as
the process played out.
Senator Brown. Did the--and you talked to OCC about that
early?
Mr. Flanagan. Yes. We had, you know, regular meetings with
the OCC and the Fed. Our teams met with them virtually daily to
talk about what was going on in the field. There were weekly
calls with larger groups from the OCC and the Fed. So there was
a regular dialogue with them about the activities.
Senator Brown. Mr. Ryan?
Mr. Ryan. So, similarly--is it on? So, yes, we also let the
regulators know about the change in scope, and, in fact, by the
time our engagement letter was formally signed, the estimate of
our professional fees was commensurate with where we ended the
project.
Senator Brown. Mr. Alt and Mr. Flanagan--Mr. Ryan, I
understand, cannot answer this, I accept that, because he had
one bank. His firm had one bank that they worked with. The
other two of you had at least three and also at least one of
you, I know, did some subcontracting, were both a subcontractor
and subcontracted to others, which confuses me a bit, but would
you disclose to us how much you were paid by OCC and how much
you were paid by the banks, by your clients? Again, I am not
asking Mr. Ryan because he would have to disclose his one bank,
JPMorgan Chase. You had multiple clients. I am asking for the
aggregate number. Would you disclose that to the Committee now,
Mr. Alt?
Mr. Alt. Senator, to be honest, I do not know the exact
number that we were paid in total and I am under the
impression, notwithstanding--well, maybe I could tell you the
total if I had it. I do not think I can give you bank-specific
information, consistent with the information that I have
received, or the direction that I have received from the OCC.
Senator Brown. Would you be willing to notify the Committee
early next week on that final figure, that total figure?
Mr. Alt. We could obtain the total figure for you, yes.
Senator Brown. OK. Good. We would appreciate that early
next week.
Mr. Flanagan, would you be willing to disclose that today?
Mr. Flanagan. Yes, I would.
Senator Brown. And it is----
Mr. Flanagan. We had a conversation with our counsel coming
into today's hearing because of the interest in the topic and
our counsel discussed with the servicers' counsel, as well, to
allow us to disclose the fees associated with the individual
banks, as well.
So the answer to your question is, for U.S. Bank, our fees
were approximately $190 million. For Citibank, our fees were
approximately $175 million. And for SunTrust Bank, our fees
were approximately $60 million.
Senator Brown. Six-O?
Mr. Flanagan. Six-O.
Senator Brown. OK. Thank you. Mr. Ryan, that does not make
you get an urge to disclose JPMorgan Chase, I presume?
[Laughter.]
Senator Brown. You are free to, if you would like, but I
understand the agreement was you would not have to.
Mr. Ryan. So what I would say is, based on the testimony
this morning, if we can get approval from the OCC to disclose
that to you, then we would not be adverse to disclosing that to
you. So we will do that after the meeting if we receive
approval.
Senator Brown. Thank you very much for that.
Two of you note in your testimony, Mr. Flanagan and Mr.
Ryan, that your auditing firms must adhere to independent
standards set by the American Institute of Certified Public
Accountants. What is ironic here is--maybe it is not ironic.
What is illustrative, perhaps, is that the private sector trade
association, the professional association AICPA, has very
specific, strict standards on behavior and qualifications and
all that. Apparently, the OCC does not and at least as of an
hour ago had not yet started writing sort of their prescriptive
direction here.
To Mr. Ryan and Mr. Flanagan, does that put you and your
firms at some disadvantages to your competitors in following
those rules?
Mr. Flanagan. I will take that first. We are bound by the
AICPA standards, but we believe we hold ourselves to those
standards or higher. I go back to my earlier comments. I mean,
our brand is defined by the way we execute our work, the
objectivity, the independence that we bring. And so the AICPA
standards are good and helpful in giving us a guideline, but
ultimately, we believe that we have to demonstrate that in a
market and stay true to our brand.
Senator Brown. Mr. Ryan.
Mr. Ryan. I do not believe that our adhering to our
professional standards puts us at a competitive disadvantage.
In fact, I believe it enhances our competitive advantage
because the regulators and institutions that have to go through
consent orders and things of that nature understand that we
will exercise our responsibilities with due professional care,
with objectivity, and with the integrity that everyone would
expect.
Senator Brown. Did it surprise you, the answer from Mr.
Stipano earlier today from OCC, surprise you when he said that
they had not written standards in judging who could be
consultants with these banks? Let me ask the two of you, did
that surprise you?
Mr. Ryan. Well, I will go. We are going to alternate going
first and second here. I do not know that it surprised me, per
se. I do know that they ask us to provide a lot of information
prior to our retention and it is thorough, their request. And,
obviously, we try to provide them everything that we can to be
responsive. And so it would seem like they have the same
information that we would be using to make our own
determination, because we would not proceed with an engagement
if we did not think we would be appropriately objective. And so
I guess it was surprising that there might not be a formal
policy written, but I would imagine when they go into their
room to have a conversation, that they are thinking the same
things that we would be thinking about.
Mr. Flanagan. I would say I had not considered whether they
had a formal policy in place as they went through the process.
I can tell you that as they vetted us before being allowed to
be appointed for our four servicers, there were many questions
asked of us about the nature of the assignments and the work we
had done with the financial institutions that we were being
asked to do the IFR work for. But I was not aware that they
had--did not have a specific policy in place.
Senator Brown. OK. I have other questions along the same
lines of qualifications and standards, but I have gone 5
minutes over my time. Let me go to Senator Warren. Then we will
do one more round of questions after she is complete with her
seven or 8 minutes. Go for it.
Senator Warren. Thank you very much, Mr. Chairman.
You know, I am going to ask you some questions about
numbers and how this review was designed, but I never want to
forget in this that the particular instance we are talking
about here involved four million families, and it involved
people who lost their homes, whose lives were turned upside
down, people who did not sleep, people who had to tell their
children that they were going to have to change schools. This
is a terrible process that we have gone through.
And the whole point of this review was to bring some
justice, to give these families some compensation for what
happened, to try to help them, but also to identify the
wrongdoing and hold the financial institutions that broke the
law accountable. So that was the whole idea behind this.
And now the OCC and the Federal Reserve have announced a
settlement, and the OCC has described this as it is based, at
least in part, on a 6.5 percent error rate. I think I said
earlier it was in their press release. I think that actually
was a statement from the head of the OCC.
But that means this is all the families are going to get
from the regulators who were supposed to be looking out for
them, the regulators who were supposed to be watching that this
never happened in the first place, and the regulators who were
supposed to conduct the investigation afterwards to make sure
that these families were taken care of and that the banks were
held accountable.
So the questions I have are around how accurate the OCC and
Federal Reserve settlement is. Does it really identify the law
breaking that went on and appropriately hold these banks
accountable? So I am really asking the question, have the
families been protected or have the banks been protected?
So I want to go back to one that I asked in the first
panel, just to make sure I have got this right, and that is, I
understand that you looked at about 100,000 files of the
700,000 or so that were initially collected for you. That is a
subset of the four million families for which the review was
designated. So you looked at about 13 percent of the files that
came to you, about 2 percent of the overall. And as I
understand it, you just looked at the files as they came to
you.
So I just want to ask this question again. Mr. Alt, did you
look at a random sample so that you could draw an inference
about what had happened to all four million people?
Mr. Alt. Senator, our sampling methodology was designed to
include extensive random sampling and we were seeking to obtain
results at a high level of statistical confidence.
Senator Warren. That is right. And so when the work that
you were doing was halted, had you completed a random sample of
the four million families who were under review?
Mr. Alt. No, Senator, we had not.
Senator Warren. All right. And I understand that you were
not the ones who halted this process, that the OCC and the Fed
halted this process. But I want to be clear about that. Does
that mean, then, that what you found tells us whether or not
the illegal practices of the banks occurred in 1 percent of the
cases or occurred in 90 percent of the cases?
Mr. Alt. Senator, we were not in a position to conclude
that based on the results at the time of the settlement.
Senator Warren. All right. Thank you for clearing that up,
Mr. Alt. I appreciate it.
I have another question, again, about what you were asked
to do by the Federal Reserve and the OCC. Whenever something--
you have to code these cases, basically. You have got to read
these cases--I know they were very complicated--and, in fact,
decide what box they belong in. Was there illegal activity? Did
it cause someone to lose a home? No illegal activity, that sort
of thing, all the way through. And it is a fairly complicated
process.
So it is pretty standard when you are putting something
together like this that you worry about whether or not the
person doing the evaluation gets it right. Your judgment call
might be different from his judgment call. Shoot, you might
have a lazy examiner, right, who says, yeah, it is all just
great, and passes them all through.
So the way we deal with that is you take some number of
those cases and they are slotted in to be coded a second time
and then there is a comparison between the first time and the
second time and you figure out what the error rate is that your
own evaluators are putting into it.
So the first question I have is what did the OCC and the
Fed require of you in terms of this sort of double-coding to
figure out the error rate? Mr. Alt?
Mr. Alt. Senator, we built in processes exactly as you
describe into our methodology and we presented them to the OCC,
and I infer that they were satisfied because they accepted
them. But that was not their express requirement. Perhaps they
would have required it if we had not built them in ourselves.
Senator Warren. That is all right. So what was your rate of
double-coding?
Mr. Alt. I do not know that I could give you an overall
rate. We could perhaps obtain that. It----
Senator Warren. So, let me ask it a different way. What was
your error rate?
Mr. Alt. It changed over time and it depended on which
files we were looking at. There were--I mean, we were reporting
error rates to ourselves weekly, so we monitored that all the
time.
Senator Warren. Can you give me an idea of what your error
rate was?
Mr. Alt. Uh----
Senator Warren. What was the range?
Mr. Alt. Senator, I really--I do not think I could do that
off the top of my head. I would have to go and perform that
research. I would be happy to look into it for you.
Senator Warren. All right. And was the error rate coming
down over time?
Mr. Alt. I believe it was, yes.
Senator Warren. All right. So I would like to know about
the error rate.
Mr. Flanagan, the same question for you.
Mr. Flanagan. So, specific to the error rate, unlike the
prior comments about being able to disclose to you the fee
information, the error rate information, we believe we are not
allowed to disclose at this point in time by the terms of the
engagement letters that we have signed.
Senator Warren. You cannot tell me whether you had an error
rate of 1 percent or 90 percent?
Mr. Flanagan. That is my understanding, is that at this
point, we are not able to do that.
Senator Warren. Mr. Ryan?
Mr. Ryan. We are under the same confidentiality provisions.
What I will tell you is that the error rate that has been
reported in the media for our work is mischaracterized.
Senator Warren. All right. I think I will stop there, Mr.
Chairman, since it is clear that we do not have the information
we need to determine the numbers on which the OCC has based--
and the Fed--has based this settlement. Thank you.
Senator Brown. Thank you, Senator Warren. We will do a
second round.
Let me go back to the standards. The GAO's report on the
Independent Foreclosure says, clearly, the lack of common
criteria--their term, common criteria--I guess that would be a
synonym of standards--but the lack of common criteria increased
the likelihood of inconsistent outcomes, and we have seen the
mess that this has created. Would you each support more
consistent standards for consultants' engagement, including a
description of qualifications and independence? Mr. Alt?
Mr. Alt. I suppose I would want to know exactly what the
standard is, but we certainly support having standards in place
and qualified independent consultants and so forth. Yes.
Senator Brown. Mr. Flanagan?
Mr. Flanagan. I think it would be a helpful--I mean, as was
commented on in the earlier panel, to take the learnings from
this exercise and determine what additional standards might be
put in place.
Senator Brown. Mr. Ryan?
Mr. Ryan. I think the insights that were in the GAO report
were very helpful and informative, and hopefully, those lessons
will be learned going forward.
Senator Brown. OK. I want to ask you a question I asked the
regulators about qualifications. If a consulting firm has been,
repeatedly been, for lack of a better term, at the scene of the
crime, what would it take before they are viewed as not
qualified? How would you answer that? I will start this time
with you, Mr. Ryan.
Mr. Ryan. I am sorry. Could you repeat the question,
please?
Senator Brown. If a consulting firm has repeatedly been at
the scene of a crime, what would it take before they are viewed
as not qualified?
Mr. Ryan. I am not sure exactly what you are referring to,
at the scene of the crime----
Senator Brown. Well, I will give you a couple of examples.
One consulting firm aggressively undervalued an institution's
money laundering transactions, yet was chosen by OCC to be one
of the IFAR. So----
Mr. Ryan. I believe that our firm would report everything
that we had experiences with to the OCC to allow them to make
any determination if they believed that we would be
appropriately qualified or not, and if, for example, if we felt
we were not appropriately qualified, we would recuse ourselves
from providing those types of services if we thought there was
something that we could not do professionally appropriate.
Senator Brown. Mr. Flanagan?
Mr. Flanagan. My thought is that we would not put ourselves
in a position to judge at what point some would say, you should
not use a firm. What we focus on is not putting ourselves in
that position, to execute the work in a thorough, thoughtful,
and objective way, and to not be in a spot where someone is
questioning whether, in fact, such an action should occur to
our firm.
Senator Brown. Mr. Alt?
Mr. Alt. Senator, I guess it would depend on whether you
are present at the scene of the crime as a witness or a
perpetrator or a detective, but we would certainly expect our
prior experience to be taken into account, and if it was--if we
did not perform well, we would expect that to be considered.
Senator Brown. Thank you. I am still--I know there is a
limited universe of people who have the expertise. I also
understand some of you had to do a lot of new hiring. In the
case of Mr. Alt, I think they were both a subcontractor and
someone who subcontracted to someone else. But I guess when I
look at the aggressive undervaluation of an institution's money
laundering transaction, that another consulting firm watered
down reports to regulators, I just wonder how we continue to do
this.
And fundamentally, I mean, the problem here that I do not
think anybody has really gotten their arms around is that
these--that you work for the banks. They pay you. But you are
supposed to represent the public interest here. On the case
of--and I do not want to go into this in more detail on the
specific money laundering issue, but, I mean, that is sort of
an example that your job is to help the Government get to the
bottom of this, as Senator Warren suggests, and knowing these
numbers and understanding this. At the same time, you are paid
by the banks and that is--so almost--and that speaks to Senator
Reed's comments. That is almost an automatic inherent conflict
of interest.
And then when you have got the banks--when you have got the
other issues of past behavior, just for my last question, just
talk that through to me, why this is a system that works. Why,
when you have worked, every one of you, because of your size
and generally good work, has worked for a number of these
financial institutions, you will be asked again, you are
supposed to represent the public interest but ultimately you
are representing this private interest, the bank that hires
you, how does that--why should the public think that is a good
arrangement? How do I go back to Cleveland or Dayton and
explain this is a good arrangement instead of something else
that nobody has figured out perhaps yet? I will start, Mr.
Flanagan, with you.
Mr. Flanagan. Sure. So, let me go back to your beginning
comments as it relates to the people that we use and what we
execute, or what that relates to PwC. Over the course of the
engagement, we probably had close to 3,000 people work on the
varying assignments. There were 1,500 people that were working
on this assignment at the time of its termination. They were
all PwC people. They were trained by our firm. They were
deployed by our firm. And they are still working in our firm
today. So just to be clear, for the record, about the nature of
the people we used--and I would suggest some confidence that
people should take, then, in the objectivity that we applied in
executing the work.
As was mentioned in the earlier panel, the options in terms
of bringing a firm like ours in and who was going to pay, it
was either the servicers or the OCC and the Fed directly. In
this example, the decision was made to have the fees go
directly to the servicers and have them pay us.
I can assure you, the approach we took was that we were
going to do the job well and stay true to our firm, our brand
and our objectives. That is the approach we were going to take.
We have done that for 100-plus years and it has served us well,
and we think that is the way the market should look at us and,
in fact, why the OCC and the Fed in their earlier comments
commented upon why firms like ours are important for them to be
able to leverage.
Senator Brown. Mr. Ryan?
Mr. Ryan. So, a very similar answer in the sense that,
first of all, we did not hire anyone additional to work on the
Foreclosure Review. We had all the professionals within our
firm. And, similarly, they are still all here with us and they
have been trained appropriately.
I think, importantly in the Foreclosure Review, we made it
very clear that our client principally was the regulators. We
let--made everyone on our team understand that. We communicated
that numerous times to ensure that everyone knew that we had a
responsibility to execute on behalf of the regulators who were
trying to do their work on behalf of those borrowers who were
harmed, similar to what Senator Warren described.
And so I think we have done that very well, and I believe
that our impartiality, our objectivity, really came through in
the way we conducted our responsibilities. And all the feedback
we received from the regulators are that they were satisfied
with the work we were doing and how we were doing it.
Senator Brown. Mr. Alt, and then putting a little bit
different aspect to the question, one of your principals and
founders, Alan Blinder, said this was not in your sweet spot.
You hired a number of people, I understand, including, and
correct me if I am wrong, a number of them were foreign
nationals, I guess. There is nothing wrong with that, but I
just--and you both subcontracted and were a subcontractor. If
you would sort of explain that.
Mr. Alt. Senator, a project of the scale and complexity of
the Independent Foreclosure Review, I would submit, is not in
anybody's sweet spot. But it was a large, complex review and we
have done large, complex reviews before. It was a review with a
subject matter in mortgage servicing and we have familiarity
with that subject matter. We were confident that we could put
together a team that could handle the review, and we believe
that we did that and we believe we faithfully carried out the
directions of the OCC at a high standard of professionalism,
and, frankly, we are proud of the work that our teams did here.
The question that you were asking about the conflict
between being paid by the banks while working for the
regulators, I think is an important question, and there is an
inherent conflict there and you are right to focus on it. There
are checks in a process like this to try and mitigate that
conflict and make sure that it does not become problematic, in
fact, and the primary check is the regulatory oversight.
And in all of our work as an independent consultant, we are
subject to close regulatory oversight. That was especially true
in the foreclosure review. We met with the regulators
constantly. They were aware of every aspect of our process.
They had absolute transparency into our work papers. They could
meet with our personnel at any time. They were onsite
frequently. Every aspect of this review was subject to very
close regulatory oversight, and I believe that was an effective
check on our independence.
Senator Brown. Thank you.
Senator Warren.
Senator Warren. Thank you.
So, I just want to take a look at the Independent
Foreclosure Review payment agreement details. I think you have
probably all seen this one-page agreement that lists all of the
things that the banks did wrong and then boxes for how many
people fall into each category and how much money they are
going to be paid. Is that right? Have you all seen this?
Mr. Ryan. Yes.
Senator Warren. And this was put out--who put this out? Mr.
Flanagan?
Mr. Flanagan. [Nodding head.]
Senator Warren. I think this was put out by the OCC and the
Federal Reserve, is that right----
Mr. Ryan. Yes.
Senator Warren.----as a part of the settlement details. So
I just want to ask you about this. It has some pretty amazing
categories here. The first category is about servicemembers who
were protected by Federal law whose homes were unlawfully
foreclosed. It has got people who were current on their
payments whose homes were foreclosed. It has got people who
were performing all of the requirements under a modification
who lost their homes to foreclosure. And it tells how many
people fall into each category and how much money the people in
that category will receive. And it ultimately resolves what
will happen to 3,949,896 families.
So the question I have is, having resolved this nearly four
million families, who put the people, the families, into each
of these boxes? Is that what your firms did? Mr. Ryan?
Mr. Ryan. No, Senator, we did not.
Senator Warren. So who put them in?
Mr. Ryan. Well, I am not sure how that schedule was
prepared. I saw it for the first time yesterday.
Senator Warren. Mr. Flanagan?
Mr. Flanagan. Same response. We were not involved in the
accumulation of that information.
Senator Warren. Mr. Alt?
Mr. Alt. Senator, I have seen this schedule, but I am not
familiar with the basis for its preparation.
Senator Warren. So let me understand this. You ran the
Independent Reviews, right? That is what you got paid to do.
And yet I presume the only one left is the banks must have put
them in these boxes, and you made no independent review of
their going into these boxes? You were not asked to do that?
Mr. Alt?
Mr. Alt. No, Senator, we were not asked to do that.
Senator Warren. Mr. Flanagan?
Mr. Flanagan. No, we were not.
Senator Warren. Mr. Ryan?
Mr. Ryan. We were not, Senator.
Senator Warren. So that leaves us with the banks that broke
the law were then the banks that decided how many people lost
their homes because of their law breaking, and as a result, how
many people would collect money in each of these categories. Is
that right, Mr. Alt?
Mr. Alt. Senator, as I said, I am not familiar with the
basis for the schedule----
Senator Warren. But there is no, so far as you know, no
independent review of the banks' analysis of how many families
broke the law. You looked at 100,000 cases and the banks have
now put four million people into categories and resolved,
finally, how much they will get from this review by the OCC and
by the Federal Reserve, is that right? Mr. Ryan?
Mr. Ryan. Senator, my understanding was the banks were
supposed to put this together and the OCC was going to look at
it, but I do not know exactly what transpired.
Senator Warren. All right. But you made no independent
review of this, were not asked to make any independent review
of this.
Mr. Ryan. We did not.
Senator Warren. Mr. Flanagan?
Mr. Flanagan. PwC was not involved in the settlement or the
preparation of that schedule.
Senator Warren. All right. Mr. Alt?
Mr. Alt. Same answer, Senator. We were not involved.
Senator Warren. All right. I just wanted to make sure,
because it appears that the people who broke the law are the
same people now who have determined who will be compensated
from that law breaking. I just find this one amazing. Thank
you. Thank you for your help.
Mr. Chairman, I do not have any other questions.
Senator Brown. Thank you, Senator Warren.
To all of you, Mr. Ryan, thank you. Mr. Alt, thank you. Mr.
Flanagan, thank you. The record will be open for 1 week for
Committee Members, those here or those not here, to ask you
questions in writing. If you would get those back to us as
quickly as you can, if Members do that.
The hearing is adjourned. Thank you very much.
[Whereupon, at 12:17 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF DANIEL P. STIPANO
Deputy Chief Counsel
Office of the Comptroller of the Currency *
April 11, 2013
I. Introduction
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*Statement required by 12 U.S.C. 250:
The views expressed herein are those of the Office of the
Comptroller of the Currency and do not necessarily represent the views
of the President.
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Chairman Brown, Ranking Member Toomey, and Members of the
Subcommittee, I welcome this opportunity to discuss the role of
independent consultants in the Office of the Comptroller of the
Currency's (``OCC'') enforcement process. In its letter of invitation,
the Subcommittee expressed interest in the OCC's use of enforcement
actions to require regulated institutions to retain independent
consultants, and the OCC's oversight of the independent consultants
when they are required.
The OCC uses its supervisory and enforcement authorities to ensure
that national banks and Federal savings associations (``banks'')
operate in a safe and sound manner, provide nondiscriminatory access to
financial services, treat customers fairly, and comply with applicable
laws and regulations. As described below, the OCC and the other Federal
banking agencies (``FBAs'') have a broad range of supervisory and
enforcement tools to achieve this purpose. The FBAs' powers include the
power to require banks to take specific actions to address and correct
violations of law and unsafe or unsound practices. Pursuant to this
authority, the OCC may require banks to retain independent consultants
to work with them to identify the underlying causes of the violation or
unsafe or unsound practice and to facilitate their correction.
The OCC has used its enforcement authority to require banks to
retain independent consultants in a significant number of cases and for
a variety of purposes. For example, the agency has required banks to
retain independent consultants to provide expertise needed to correct
operational and management deficiencies; to comply with legal
requirements, such as the Bank Secrecy Act (``BSA''); and to provide
restitution for violations of consumer protection statutes. In these
and other instances, the use of independent consultants provides banks
with the additional knowledge, experience, and resources required to
address deficiencies identified through the supervisory process. While
we have found the use of independent consultants useful in many
circumstances, it can be particularly valuable for community banks,
which may lack the necessary expertise and resources to correct the
problem on their own. In such cases, the use of independent consultants
is not only helpful, but necessary, to ensure that the bank takes the
requisite corrective action to operate safely and soundly and in
compliance with the law. The use of independent consultants does not,
however, absolve bank management and the bank's board of directors of
their responsibilities. In this regard, a bank's board of directors is
responsible for ensuring that all needed corrective actions are
identified and implemented.
Similarly, it is important to note that the independent consultants
are not substitutes for the supervisory judgment of the OCC. The OCC
retains sole responsibility for supervising the bank, including
overseeing and assessing the bank's compliance with an enforcement
action.
The use of independent consultants as part of the Independent
Foreclosure Review (``IFR'') differed substantially from the agency's
normal practice in many significant ways. The breadth, scale, and scope
of the reviews were unprecedented, as were the large number of
institutions, independent consultants, and counsel involved in the
process. The file reviews provided to be much more complex and
challenging than we anticipated, and involved a number of decision
points, all of which required substantial oversight by the OCC. In
retrospect, it is clear that our approach under the IFR process did not
serve the agency's objectives which were, first and foremost, to
compensate borrowers in a timely manner for the financial harm they
suffered from faulty foreclosure practices. Our failure to fully
appreciate the breadth, scale, and complexity of the reviews and to
define a comprehensive and effective project plan at the outset
hampered the process.
While the use of independent consultants can be an effective
supervisory tool, there are certainly lessons to be learned from our
experience, and we believe we can improve the process going forward. To
that end, we plan to draw on our recent experiences when requiring
banks to retain independent consultants and to enhance our oversight of
the consultants when they are utilized.
The Subcommittee's interest spans a broad range of topics. My
testimony covers five key areas: 1) the OCC's authority to require the
use of independent consultants; 2) the circumstances in which the OCC
has ordered banks to engage independent consultants; 3) the OCC's
oversight of independent consultants; 4) an overview of some of the
significant results of the use of independent consultants; and 5) the
future use of independent consultants in OCC enforcement actions.
II. The OCC's Enforcement Authority
The OCC's enforcement process is directly related to our
supervision of banks. The OCC addresses operating deficiencies,
violations of laws and regulations, and unsafe or unsound practices at
banks through the use of supervisory actions and civil enforcement
powers and tools. Our enforcement policy \1\ is to address problems or
weaknesses before they develop into more serious issues that adversely
affect the bank's financial condition or its responsibilities to its
customers. Once problems or weaknesses are identified and communicated
to the bank, the bank's management and board of directors are expected
to correct them promptly.
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\1\ OCC's Enforcement Action Policy, which was publicly released as
OCC Bulletin 2011-37, provides for consistent and equitable enforcement
standards for national banks and Federal savings associations and
describes the OCC's procedures for taking appropriate administrative
enforcement actions in response to violations of laws, rules,
regulations, final agency orders, and unsafe or unsound practices or
conditions.
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Banks are subject to comprehensive, ongoing supervision that
enables examiners to identify problems early and obtain corrective
action quickly. Because of our regular, and in some cases, continuous,
onsite presence at banks, we have the ability in many cases to stop
unsafe or unsound practices or violations of law without ever having to
take an enforcement action. This approach permits most bank problems to
be resolved through the OCC supervisory process.
When this normal supervisory process does not result in bank
compliance with the law and the correction of unsafe or unsound
practices, or circumstances otherwise warrant a heightened enforcement
response, the OCC has a broad range of enforcement tools. Among those
tools is the ability to take formal enforcement action. Section 8 of
the Federal Deposit Insurance Act (``FDI Act''), 12 U.S.C. 1818,
gives the OCC the power to take formal enforcement actions to require
the cessation of unsafe or unsound practices and ensure compliance with
any law, rule, or regulation applicable to banks. For example, the OCC
may issue a Formal Written Agreement or a Cease and Desist Order
(``C&D'') requiring a bank to take actions necessary to correct or
remedy the conditions resulting from a violation or unsafe or unsound
practice. It is pursuant to this power that the OCC requires banks,
when necessary, to retain consultants to provide independent expertise
and resources to correct deficiencies.
III. OCC Use of Independent Consultants in Enforcement Actions
It has been a longstanding practice of the OCC in enforcement
actions to require banks to engage independent consultants. The nature
and expertise of such consultants may vary, depending on the particular
issues facing the bank and have included, for example, certified public
accountants, lawyers, financial consultants, and information technology
specialists. From 2008 through 2012, the OCC required banks to retain
independent consultants in approximately 190 of 600 formal enforcement
actions. The majority of actions taken have involved operational and
compliance deficiencies, primarily in community banks.
The OCC requires banks to retain independent consultants for a
number of reasons. First, independent consultants have subject matter
and process knowledge, and often have experience in dealing with
similar situations. They can apply that knowledge and experience to
focus on the supervisory issue, identify its scope, and work with bank
personnel to correct the bank's conduct and to remedy the consequences
of the violation or unsafe and unsound practice. Second, independent
consultants can provide the resources necessary to carry out a task in
a timely manner. Finally, independent consultants are, as the name
suggests, independent from the activities being conducted. Thus, rather
than having the bank review itself, the OCC may require the use of a
third-party to exercise independent judgment in assessing the scope of
the problem and the remedy. In all cases, however, the OCC retains the
final decision in determining whether the bank's corrective actions are
sufficient.
The OCC has long required banks to retain independent consultants
to assist the bank in addressing significant management and operational
deficiencies. For example, in a sizable number of cases, when the OCC
has supervisory concerns about bank management's ability to accurately
assess the credit quality of a bank's portfolio, the OCC has ordered
the bank to retain an independent consultant to review asset quality
until such time as the bank implements an effective internal asset
quality review system. In cases in which there is a question about the
accuracy of a bank's books and records, the OCC has required banks to
retain auditors to review those records, to assess their completeness
and report on any deficiencies. The OCC has also ordered banks to
retain independent consultants to perform annual reviews of methods
used by banks to establish an allowance for credit losses. The OCC has
required similar engagements by bank management to address deficiencies
in a variety of other circumstances involving real estate appraisals,
compensation, internal controls, and information technology systems.
The majority of these cases are concentrated in community bank
enforcement actions and reflect the fact that those institutions often
have the greatest need for the expertise and resources that an
independent consultant can provide to the banks' efforts to address
deficiencies.
More recently, in a substantial number of cases, the OCC has
ordered banks of all sizes to retain independent consultants to address
deficiencies in compliance with the BSA and anti-money laundering laws
and regulations. These actions sometimes require the retention of an
independent consultant to conduct a review of a bank's BSA staffing,
risk assessment, and internal controls. The goal of such an engagement
is to secure a thorough analysis of the responsibilities and competence
of existing bank BSA staff; to assess the levels of risk to the bank
given its account activity, customers, products, and the geographic
areas in which it operates; and to review the adequacy of internal
controls given the risks posed by the bank's profile. Based upon that
analysis, the orders typically require the independent consultant to
provide a report to bank management and the bank's board of directors
that includes recommendations for improvements to the bank's BSA
program to ensure future compliance with regulatory requirements.
In other instances, the OCC has required the engagement of an
independent consultant to conduct a review of the adequacy of actions
already taken by the bank pursuant to its BSA program. These ``look-
backs'' involve reviews of filings made by a bank pursuant to the BSA
requirements. For example, a number of orders issued by the OCC have
required banks to retain independent consultants to review transaction
activity to determine whether Suspicious Activity Reports (``SARs'')
need to be filed by the bank, whether SARs filed by the bank need to be
corrected or amended to meet regulatory requirements, or whether
additional SARs should be filed to reflect continuing suspicious
activity. The OCC has ordered similar look-backs by independent
consultants of a bank's currency transaction reporting. Following these
look-backs, OCC enforcement actions have required banks to amend or
correct existing filings and make other filings as required for any
previously unreported activity that falls within the regulatory
requirements.
The OCC has also ordered banks to engage independent consultants in
consumer-related enforcement actions. For example, in a number of
actions to remedy significant consumer law violations, including
violations of Section 5 of the Federal Trade Commission Act regarding
unfair or deceptive practices, the OCC has ordered banks to engage
independent consultants to identify affected consumers, to monitor
payments to such consumers, and to provide written reports evaluating
compliance with specific remedial provisions in the enforcement
actions. Similarly, the OCC has mandated the retention of an
independent consultant to assist banks in developing and implementing a
restitution plan provided for in the action. Finally, the OCC has
required the engagement of independent consultants with claims
administration experience to assist in carrying out the payment of
required restitution to customers harmed by unfair or unsafe or unsound
practices.
In these and other engagements mandated by OCC enforcement actions,
the independent consultants are providing expertise and resources to
banks to promote compliance with regulatory obligations. The
independent consultants are not playing a regulatory role. That is
solely the province of the OCC.
IV. OCC Oversight of the Use of Independent Consultants in Enforcement
Actions
The OCC oversees independent consultants in a number of ways. At
the outset, the OCC can compel the bank to submit the independent
consultant's qualifications to the OCC for prior review and non-
objection permitting the agency to assess whether the independent
consultant has the requisite expertise and resources. This
determination is based upon the OCC's exercise of informed supervisory
judgment given the particular circumstances of the bank and the
deficiency that gave rise to the enforcement action. The OCC also
considers the proposed consultant's existing and prior relationships
with the bank and potential conflicts of interest to determine whether
there is a reason to believe that the independent consultant should not
be engaged by the bank.
In addition, prior to the engagement of the independent consultant,
the OCC often reviews the engagement agreement to determine whether the
scope of the work, the resources dedicated to the project, and the
proposed timeline for completion are consistent with the intent of the
enforcement action. If at any time the OCC determines that the scope of
the engagement is not consistent with that intent, we can require the
bank to modify or terminate the agreement.
Thereafter, the OCC oversees the consultant and the progress of the
engagement through its supervisory authority over the bank. The types
and frequency of interactions between the OCC, the bank, and the
independent consultant depend upon the particular facts and
circumstances covered by the enforcement action, the expertise and
resources of bank management, and the nature of the independent
consultant's engagement. For example, in some cases, the issue may be
discrete and the independent consultant's role is limited to the
remedial steps the bank must take to comply with the enforcement
action. In such circumstances, the appropriate oversight may involve
very limited interaction. In other cases, the seriousness of the
violation and its consequences may require more frequent interactions
between the examiners, the bank, and the independent consultant,
including periodic reports and meetings, to make certain that the
engagement is proceeding properly and that the bank is taking the
appropriate steps to correct the deficiency. If the OCC determines that
is not the case, the OCC can direct the bank to take the actions
necessary to put the process back on track.
At the conclusion of the engagement, the enforcement actions often
require a report of the findings and recommendations by the independent
consultant to the bank's board of directors and management that is also
required to be provided to the OCC. This gives the OCC the opportunity
to assess whether all matters described in the action were addressed.
If not, the OCC can require additional work to be performed or, if
necessary, direct the bank to retain a different independent
consultant. In a number of instances, the enforcement action also calls
for the bank to prepare a plan to address the findings of the
independent consultant. Such plans are often made subject to OCC review
and non-objection before they can be implemented allowing the OCC to
determine whether the underlying violations or practices will be
corrected and remediation will be appropriately undertaken by the bank
as called for in the enforcement action. Finally, the OCC examines the
results of this entire process to validate that the bank, working with
the independent consultant, has addressed and corrected the violation
or unsafe or unsound practice that formed the basis for the enforcement
action.
The circumstances in which independent consultants were used under
the IFR pursuant to the OCC's April 2011 Consent Orders, differed
substantially from the typical use of independent consultants in OCC
enforcement actions. The unprecedented breadth, scale, and scope of the
reviews; the large number of institutions, independent consultants, and
counsel involved in the process; and the complexity of the file
reviews, which involved hundreds if not thousands of decision points on
each file, required substantial regulatory oversight by the OCC and the
coordination of multiple independent consultants' efforts. This
expanded oversight included the issuance of joint guidance with the
Federal Reserve Board; examiner visitation to the work locations of
each of the individual consultants involved in the IFR process; and
daily communications among consultants, servicers, and OCC supervision
staff throughout the entire IFR process.
V. Significant Results
The enforcement actions in which the OCC has required the retention
and use of independent consultants have produced significant positive
results in many cases, and the independent consultants that were
retained played key roles in bringing about those results. For example,
in consumer cases, the independent consultants were engaged to
facilitate or ensure the payment by banks of hundreds of millions of
dollars to consumers as a remedy for violations of consumer protection
statutes.
Similarly, in BSA cases, the OCC's requirement that banks engage
independent consultants to conduct look-backs has resulted in
substantial additional filings of SARs and, in certain cases, supported
the OCC's assessment of significant Civil Money Penalties in response
to the identified systemic failures of the banks to meet their anti-
money laundering obligations. Over the past 10 years, these BSA look-
backs have resulted in thousands of additional or amended SAR filings
covering approximately $23 billion in suspicious activity.
In all of these cases, the independent consultants, engaged by
banks as a result of an OCC enforcement action, were instrumental in
assisting the banks in addressing and correcting the underlying
deficiencies and bringing about a successful supervisory outcome.
VI. Future Use of Independent Consultants
The use of independent consultants has generally served the agency
well in promoting banks operating in a safe and sound manner and in
compliance with law. Given the experience with the IFR, the OCC is
currently evaluating its use of independent consultants and exploring
ways to improve the process, particularly for situations involving
significant consumer harm or law enforcement implications.
While the OCC believes its authority and use of independent
consultants is generally appropriate, there is one area where we
believe legislative action could be helpful. Under the current
statutory scheme, the OCC faces significant jurisdictional obstacles if
it seeks to take an enforcement action directly against an independent
contractor.\2\ A recent court decision has further elevated the
standard for taking such enforcement actions.\3\ The OCC would welcome
a legislative change in this area that would facilitate our ability to
take enforcement actions directly against independent contractors that
engage in wrongdoing. Such a legislative change would be useful not
only with respect to the use of independent contractors in an
enforcement context but also, and perhaps more importantly, in cases
where a bank has chosen to outsource significant activities to an
independent contractor.
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\2\ In order to take an enforcement action against an independent
contractor, the OCC is required to prove that the contractor engaged in
knowing or reckless misconduct that ``caused or is likely to cause more
than a minimal financial loss to, or a significant adverse effect on,
the insured depository institution.'' 12 U.S.C. 1813(u)(4).
\3\ In Grant Thornton v. Office of the Comptroller of the Currency,
514 F.3d 1328 (D.C. Cir. 2008), the court held that the OCC must prove
that the contractor was involved in the ``business of banking'' to meet
the statutory jurisdictional requirements. Despite the fact that Grant
Thornton was retained by the bank as a result of an agreement with the
OCC to engage a nationally recognized accounting firm to conduct an
audit of the bank's mortgage program and related records, the court
held that the work performed by Grant Thornton did not fall within the
business of banking and, therefore, the OCC had no jurisdiction to
proceed.
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VII. Conclusion
The OCC's longstanding practice to require banks to retain
independent consultants to help them meet enforcement requirements has
generally worked well. Through this practice, the OCC has caused banks
to address effectively a variety of operating and management
deficiencies, to come into compliance with laws, rules and regulations,
and to operate in a safe and sound manner. Nonetheless, we believe
there are lessons to be learned from both our recent experience and our
many years of experience with independent consultants, and we are
exploring ways to enhance the process.
______
PREPARED STATEMENT OF RICHARD M. ASHTON
Deputy General Counsel
Board of Governors of the Federal Reserve System
April 11, 2013
Chairman Brown, Ranking Member Toomey, and Members of the
Subcommittee, thank you for the opportunity to testify regarding the
required use of third-party consulting firms (consultants) in Federal
Reserve enforcement actions.
Use of Consultants by Regulated Banking Organizations
At the outset, it might be helpful to point out that regulated
banking organizations routinely choose to retain consultants for a
variety of purposes apart from any supervisory directive by regulators
to do so. Banking organizations decide to retain consultants because
these firms can provide specialized expertise, familiarity with
industry best practices, a more objective perspective, and staffing
resources that the regulated organizations do not have internally. In
this respect, reliance on consultants can significantly contribute to
the overall efficient governance and management of these organizations
as well as to their safe and sound operation and their compliance with
supervisory expectations and legal requirements.
Use of Consultants in Federal Reserve Enforcement Actions
In the vast majority of Federal Reserve enforcement actions, the
organization itself, using its own personnel and resources, is directed
to take the necessary corrective and remedial action. In appropriate
circumstances, the Federal Reserve has found that it can be an
effective enforcement tool to require regulated organizations to retain
a consultant to perform specific tasks on behalf of that organization.
However, the mandatory use of a consultant has typically not been a
frequent requirement in Federal Reserve enforcement actions. And,
importantly, consultants are used to conduct work that ordinarily the
organization itself would be required to conduct. At all times, the
Federal Reserve retains authority to, and does, review and supervise
the consultant's work in the same manner as if the institution
conducted the work directly. In all cases, the regulated organization
is itself ultimately responsible for its own safe and sound operations
and compliance with legal requirements.
As a general rule, our enforcement actions require the use of
consultants to perform specific functions that the organization
involved should do but has shown that it cannot perform itself. This
may be because a particular organization lacks the necessary
specialized knowledge or experience. Similarly, the organization may
not have sufficient staffing resources internally. In addition, it may
be necessary to have a third party undertake a particular project
because a more objective viewpoint is required than would be provided
by the organization's management. Over the last 10 years, for instance,
there were consultant requirements in an average of less than 15
percent of all formal enforcement actions taken by the agency. In
addition to formal enforcement actions, Federal Reserve examiners may
informally direct organizations to retain consultants to undertake
designated engagements on behalf of the organization where
circumstances warrant.
In our enforcement actions, we required the use of consulting firms
to perform several limited, specialized types of work. In many of these
enforcement actions, an expert third party must be retained to review
and submit a report on a specific area of the organization's
operations. These mandated reviews by consultants have often involved
an evaluation of an organization's compliance program, its accounting
practices, or its staffing needs and the qualifications and performance
of senior management. These enforcement directives usually require the
organization to incorporate the findings of the report into a plan to
improve that particular area of operations. Federal Reserve regulators
may also use the product of a consultant's work as a guide in
developing the ongoing supervision of the organization.
Another type of enforcement action where use of consultants has
been required involves situations where examiners have found serious
past deficiencies in an organization's systems for monitoring
compliance with Bank Secrecy Act and anti-money laundering (BSA/AML)
requirements. In these cases, our actions have required a consultant
retained by the organization to review certain kinds of transactions
that occurred at the organization over a specific past period of time
and determine whether BSA/AML reports were filed as required with
regard to those transactions. These reviews require the consultant to
identify situations where a suspicious activity report or a currency
transaction report should have been filed, rather than to perform an
assessment of the organization's compliance program. After receiving
the results of the consultant's review, the organization would then
file all the required reports with the appropriate government agencies.
Finally, in several recent enforcement actions that required
organizations to identify and then compensate or otherwise remediate
injured consumers, the organizations have been required to retain
consultants to administer that process. In these actions, the
consultants were required to make recommendations about the appropriate
remediation to individual consumers or to make remediation decisions
about individual consumers or review the organization's remediation
decisions.
Federal Reserve Oversight of Consultant Performance
When enforcement actions require a regulated banking organization
to use a consultant to carry out a particular function, the Federal
Reserve oversees the organization's implementation of this directive.
Our standard practice is to require the organization's retention of a
consulting firm to be first approved by the Federal Reserve. We
typically look at the particular expertise and experience of the
selected consultant. The resources and capacity of the firm to carry
out the particular engagement are also examined. Whether the consultant
has the appropriate objectivity and separation from management is also
a key factor in assessing the acceptability of the firm. To assess
objectivity, we examine the extent and type of work that the consultant
has done for the organization in the past. One guiding principle is
that a consulting firm should not be allowed to review or evaluate work
that it has previously done for the organization. How these factors are
evaluated is necessarily determined on a case-by-case basis, depending
on the specific type of task the consultant is being required to
perform. However, the approval of particular consultants is not
perfunctory; where warranted we have disapproved a consultant that has
been selected by an organization under an enforcement order
requirement.
Additionally, our general practice is to explicitly require that
the letter between the organization and the consulting firm or other
documentation that describes the scope, terms, and conditions of the
particular engagement be approved by the Federal Reserve. Thus, we are
able to assess whether the consultant's planned work will be consistent
with what was intended in the enforcement action and whether effective
safeguards of objectivity will be maintained.
We also oversee the consultant's performance during the course of
the engagement. This oversight can involve obtaining and reviewing
interim progress reports from the consultant. We also can call for
periodic meetings with consultant personnel, which can be as frequently
as every week. If a consultant is not meeting the required standards of
performance, we will inform the organization of the needed
improvements, applying the same criteria as if the organization was
performing the work with its own personnel.
In sum, it is important to note that consultants retained under
Federal Reserve enforcement actions work for the organization that
retained them, and the organization, not the consultant, is responsible
for correcting the deficiencies that triggered issuance of the
enforcement action and for preventing their reoccurrence. Requiring the
use of consultants to assist in implementing corrective and remedial
measures is just one tool available to Federal Reserve regulators in
fashioning formal enforcement actions. Our experience has shown that
consultants can be expected to provide the expertise, experience, and
third-party perspective needed by the regulated banking organization to
better meet supervisory objectives, including assisting the regulated
organizations with correcting particular governance or operational
deficiencies identified through the supervisory process. However, in
deciding to use this tool in appropriate cases, the Federal Reserve
does not cede its regulatory responsibilities or judgment to those
consultants. We require that regulated organizations comply with the
same basic standards of prudent practices and compliance with
applicable laws and regulations, irrespective of whether an
organization has relied on the assistance of a consultant or not.
Use of Independent Consultants in the Independent Foreclosure Review
Although it is not the specific subject of this hearing, it might
be helpful to note briefly the independent foreclosure reviews required
by the consent orders issued by the Office of the Comptroller of the
Currency and the Federal Reserve against major mortgage servicing
firms, and the role of the independent consultants required under those
orders.\1\ In those mortgage servicing orders, the servicers were
required to retain independent consultants to review foreclosure files
of borrowers within a 2-year period to identify financial injury caused
by servicer error. Recently, the regulators and 13 of the servicers
subject to the foreclosure orders entered into agreements under which
these servicers must make cash payments to borrowers and provide other
borrower assistance. These payments and other assistance replace the
independent foreclosure review by independent consultants that had been
required of these servicers under the initial orders.
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\1\ Of the 16 servicing organizations subject to enforcement
actions requiring independent foreclosure reviews, 10 are regulated by
the Office of the Comptroller of the Currency, four are regulated by
the Federal Reserve, and two organizations are regulated by both
agencies.
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As we have explained, the regulators accepted these agreements with
the 13 servicers because the agreements provided the greatest benefit
to borrowers potentially subjected to unsafe and unsound mortgage-
servicing and foreclosure practices in a more timely manner than would
have occurred under the review process. In practice, for these
servicers, the scope of the inquiry required of the consultants to
conduct the independent foreclosure review proved over time to be more
expansive, time-consuming, and labor-intensive than what is typically
required of consultants in Federal Reserve enforcement actions. The
result was significant delays in providing funds to consumers.
Accordingly, the decision to replace the review of individual
foreclosure files by the consultants with agreements to pay cash and
provide other assistance to borrowers was based on the specialized and
unprecedented nature of the particular reviews the consultants were
required to undertake.
Thank you again for the invitation to appear before the
Subcommittee today. I would be pleased to answer any questions you
might have.
______
PREPARED STATEMENT OF KONRAD ALT
Managing Director, Promontory Financial Group, LLC
April 11, 2013
Mr. Chairman and Members of the Subcommittee, my name is Konrad
Alt. Since 2004, I have been a Managing Director of Promontory
Financial Group, based in our San Francisco office. Prior to joining
Promontory, I held senior executive positions in the financial services
industry and at the OCC, and served as counsel to this Committee. I am
pleased to appear before you. My colleagues and I are grateful for your
leadership on the important topic of this morning's hearing.
My firm, Promontory Financial Group, has served as a formally
designated independent consultant dozens of times, in connection with
the enforcement activities of over a dozen different regulatory and law
enforcement authorities, domestic and foreign. We believe our firm is
well-suited to this role, and we take pride in these assignments. We
appreciate, however, that the use of private-sector resources to
further public purposes can present special challenges. We are pleased
to discuss our experience with those challenges with this Subcommittee
today.
Your invitation letter raised nine specific questions. I will
address each of them in turn.
Promontory's Business Framework
Your first question asked that we address Promontory Financial
Group's business framework and how independent consulting fits into
that framework.
Broadly speaking, Promontory Financial Group's business centers on
helping financial institutions meet their business challenges in a
manner consistent with regulatory requirements and expectations.
Clients typically come to us for assistance in strengthening a
particular aspect of their risk management or corporate governance, or
because they want an independent assessment of whether some aspect of
risk management or corporate governance needs strengthening. Our
clients range from large, complex broker-dealers and central banks to
credit unions and community lenders, and our work takes many forms. For
example, we may be enlisted to help test risk models, run stress tests,
administer compliance reviews, review board performance, perform a mock
examination, or recommend improvements in operational risk reporting.
Depending on the assignment, we can recommend improvements to
strengthen corporate governance or risk management, bolster capital and
liquidity, or better protect consumers. And, when approved to serve in
a formally independent capacity, we can support the efforts of
regulators by providing additional subject matter expertise or simply
additional arms and legs.
Our assignments are often challenging. They require us to
synthesize many different types of information, to perform complex
analyses, and to formulate and deliver actionable recommendations,
often under short deadlines. Our work can have important consequences
for the institutions we work with, for the individuals who work in
them, and for their customers. We have a responsibility to take these
assignments seriously, and we do.
We believe that expertise, experience, and integrity are
fundamental to our success, and we work hard to build and maintain a
team of senior professionals who can deliver those qualities to our
engagements. Many of our senior professionals have decades of
experience. They know the laws and regulations deeply, and believe that
compliance with them is centrally important to the fair and efficient
operation of our financial system. More than that, they understand the
expectations of financial regulators and can draw on their long
experience to see where regulatory issues may arise.
Notwithstanding that regulators have approved the Promontory
Financial Group as an independent consultant many times, these
assignments comprise only a small part of our caseload, less than 5
percent of the nearly 1,500 engagements we have undertaken during the
twelve years of our firm's existence.
Promontory's Experience as an Independent Consultant
Your second question asked that we address Promontory Financial
Group's experience as an independent consultant.
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. 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, and our business would suffer accordingly. We have to have
sufficient expertise to diagnose the issues and the solutions
accurately. We have to have the integrity to take our diagnosis to the
most senior levels of management and the board, even when our news and
views are unwelcome. And we must have enough tact and diplomacy to
communicate a tough message in a way that leads to constructive action.
Our independent consulting assignments have involved over a dozen
different regulatory authorities, including securities regulators,
banking regulators and other law enforcement authorities, both
domestically and internationally. These assignments have been disparate
in nature. Many have focused on review of a specific body of
transactions, such as, for example, the recently concluded foreclosure
review assignments. Others have entailed evaluations of management
teams or boards of directors. The scale and complexity of these
assignments has also varied considerably. Some have been large,
complex, and extended projects, but many have been quite small and
narrowly focused.
Qualifications of Independent Consultants
Your third question asked about the qualifications of independent
consultants. Let me first address our view of the necessary
qualifications and then speak to our experience working with regulators
as they attempt to evaluate our qualifications.
Given my preceding comments, it should not surprise you that we
believe the most important qualifications for independent consultants
are subject matter expertise and integrity. Expertise is particularly
important. A consultant without sufficient expertise cannot accurately
identify issues or appreciate their significance, and may not notice
when something seems a little off and know to dig deeper for an
explanation. That consultant is at risk both generally of doing a poor
job and specifically of being unduly influenced by management views.
But expertise is not enough. A consultant who lacks the integrity to
deliver a tough message will, if a tough message is in order, deny the
institution an adequately clear understanding of both the problem and
the solution.
In our experience, regulators look for essentially the same
qualities. Characteristically, before approving our firm to serve as an
independent consultant, a regulator will ask us to answer a number of
questions that go to both our expertise and our independence. To judge
by the questions they pose in evaluating our credentials, most
regulators take similar approaches to evaluating expertise. Typically,
they will want to know both about our firm's experience working in the
subject matter under review, and about the qualifications of the
individual or individuals proposed to lead and carry out the
engagement. For example, if Promontory were proposed to perform an
independent review of a consumer compliance issue, we would expect the
regulator to inquire about our firm's experience in performing similar
reviews, and about the specific qualifications and experience of the
individual or individuals slated to conduct the review on behalf of our
firm.
The questions we receive relating to independence, by contrast, are
more varied, and tend to focus on the presence or absence of red flags
suggesting a potential conflict. For example, in my own recent
experience, one agency seemed particularly concerned with establishing
that members of our team were free from past employment relationships
or personal investments that could compromise their independence.
Another focused on the nature and extent of past business
relationships. A third wanted assurance that we would structure the
working relationships with the institution to maintain our independence
appropriately, for example, by memorializing all communications with
the institution for potential regulatory review. Regardless of the
specific concerns of the agency involved, we cooperate fully with all
requests for information and, of course, accept the regulator's
judgment as to our fitness for service as an independent consultant.
Working Relationships with Regulators and Financial Institutions
Your fourth and fifth questions asked about the working
relationship between independent consultants, regulators, and financial
institutions and the nature of regulatory oversight we experience. As
these questions are related, I will address them together.
In our experience, regulatory agencies all employ a range of
oversight methods with regard to the independent consultants that work
for them. Not surprisingly, the nature and extent of regulatory
oversight we experience varies according to the nature and complexity
of the review in question. In a small project--for example, a short,
independent review of the management team at a community bank--
regulatory oversight may consist simply of presenting our final report
to a regulatory examination team and responding to any questions they
may have about our findings and recommendations. In larger, more
complex assignments, regulators will commonly deploy additional
oversight methods, which can include review and signoff on our review
methodology; receipt of regular status reports, usually in writing and
often in combination with periodic in-person or telephonic meetings;
sampling of our results; review of our workpapers; review and signoff
on preliminary findings and recommendations; and deployment of field
examiners to monitor the conduct of our review teams. We welcome all of
these oversight methods and cooperate fully with them.
Recognizing that the goal of an independent review is to satisfy
the regulator's requirement and that, in performing an independent
review, we are working for the regulator, we generally try to structure
a working relationship with the regulator that is as transparent as we
can make it. Transparency helps to ensure that any questions or
concerns the regulator may have about our work surface proactively, and
allows the regulator to have confidence that we are pursuing our
responsibilities thoroughly and professionally. To facilitate
transparency, we will often incorporate into our working relationship
with the regulator some of the same practices I have just mentioned.
For example, we may on our own initiative solicit regulatory feedback
on a proposed methodology or initiate periodic written or in-person
status updates to the regulators.
Our practices in regard to the financial institutions involved are
similar. In general, we strive to be transparent, to avoid surprises,
and to build confidence that we are approaching the review in a manner
well-suited to identify and address the issues that have triggered
regulatory concern. And, as with the regulators, we pursue this
objective primarily through regular communication.
Unless regulatory direction or some special characteristic of the
assignment dictates otherwise, we commonly will provide the financial
institution with our preliminary results, either as we develop them or
in the form of a preliminary report. We do this primarily for purposes
of fact checking. The institution has a strong incentive to highlight
any information we may have missed or misunderstood, and we want our
work to be as factually accurate and as complete as possible. Not
incidentally, this practice is also helpful in enabling management to
begin to understand and accept the results of our review. To help
ensure that management pushback in this process doesn't compromise the
independence of our review, we make it clear to management that we are
soliciting factual corrections only, and often provide the same
preliminary results simultaneously to the regulators. We carefully
track both the responses we receive from the institution and the
changes, if any, we make in response to them, so that regulatory
personnel will have a complete audit trail in case they wish to
evaluate whether we have maintained appropriate independence.
Potential for Compromised Quality
Your sixth question concerns the potential for preexisting
contractual or business relationships to compromise the quality of
consultant services.
In some circumstances, prior work with a particular institution
will constitute an absolute bar to taking on an independent review
assignment. We could not, for example, undertake to review as an
independent consultant issues or programs we had previously reviewed,
and we have declined work in such circumstances.
More commonly, however, our prior work will not be related to the
subject matter of the independent review. In those circumstances, prior
to applying for the independent consulting assignment, we will try to
make a judgment taking into account the nature of the prior work, the
extent of past dealings, how long ago they occurred, and whether we
have the ability to establish appropriate ethical safeguards to ensure
that past relationships do not compromise our independence. We
typically make these judgments in consultation with both the regulator
and the institution involved. The regulator always has the final say.
The challenges we face in this area are not unique to our firm or
to the work we do as a formally designated independent consultant. All
professional services firms, if they stay in business for any length of
time, develop a history of past assignments and past clients, and must
develop techniques for recognizing and mitigating the conflicts that
such a history can present.
Promontory Financial Group seeks to safeguard its independence and
the quality of its reviews in three ways.
First, we pay attention. We know that conflicts could compromise
the quality of our work, or undermine confidence in our work, and we
try to adopt and maintain reasonable safeguards to mitigate these
risks. Depending on the issues presented, these safeguards have
included the establishment of ethical walls, the prohibition of
individuals with personal relationships or past employment histories
with the client from serving on an engagement team, and prohibitions on
soliciting other business from institutions where we have ongoing
independent consulting responsibilities. In the recently concluded
foreclosure review, for example, we established toll-free hotlines to
allow all project team members to raise anonymously any concerns they
might have about breaches of independence, and we supplemented those
hotlines with recurring internal communications efforts, underscoring
our commitment to independence, integrity, and professionalism. When
such safeguards are not sufficient, we can decline and have declined
assignments.
Second, we can often structure the engagement in such a way as to
enhance our independence, for example, by establishing that, in our
dealings with the institution, we will report to an independent unit of
management, such as the internal audit or risk function, or to an
independent committee of the board of directors. Regulatory enforcement
actions requiring the use of an independent consultant not infrequently
require the establishment of a committee of independent directors to
oversee the consultant's work. We have found such arrangements a useful
safeguard in many engagements.
Finally, and most importantly, we maintain a senior team of
professionals with strong personal stakes in their individual
reputations, and the firm's collective reputation, for integrity and
professionalism. We constantly impress upon that team the importance of
maintaining those reputations by executing our engagement
responsibilities with uncompromising professionalism. We have turned
down and will continue to turn down business when we feel we cannot
pursue it at a level of professionalism consistent with our standards.
Legal Obligations to Institutions and Regulators
Your seventh question asked what legal obligations Promontory
Financial Group has to both the regulated financial institution and the
financial regulator during an independent review.
Promontory Financial Group is not a regulated entity and we rarely
contract directly with regulatory authorities. As a general matter, our
legal obligations are set forth in detailed engagement letters that we
enter into with the financial institutions that are the subject of our
reviews. In situations where we serve as formally designated
independent consultants, these engagement letters will often
incorporate portions of the relevant enforcement action by reference.
Although executed by Promontory Financial Group and the financial
institution, these letters are commonly subject to regulatory review
and, at regulatory direction, often include express language describing
our obligations to regulatory authorities while serving as an
independent consultant. Although the financial institution may be our
contractual counterparty in these engagements, the regulator is
effectively our client and we serve at the regulator's pleasure.
Regulatory Activities that Independent Consultants Cannot Perform
The eighth question in your invitation letter asked that we address
regulatory activities that independent consultants cannot perform, and
inquired how we might report compliance issues we identify that are
outside the scope of a particular assignment.
We believe the answer to the first part of this question is simple:
consultants cannot perform regulatory activities. Regulation is the
domain of public officials, accountable to Congress and the American
people. Private consultants, independent or otherwise, are advisors,
nothing more. We don't make regulations. We don't issue guidance. We
don't assign examination ratings. And we don't bring enforcement
actions. We can make recommendations to regulators but we cannot and do
not perform regulatory activities. Even when we act as a formal
independent consultant pursuant to a regulatory enforcement action, our
findings and recommendations have no effect until and unless the
regulators adopt them. In our experience, regulators all over the world
take that review and approval responsibility seriously.
As to the second part of your question, our engagements always have
a defined scope. We do not actively look for issues outside of that
scope. How we would proceed if we nonetheless found such an issue would
depend on the facts and circumstances of the situation. Whether we
would escalate it to the attention of regulatory authorities might
depend, for example, on whether the institution had already escalated
the issue on its own initiative.
Other Relevant Policies and Practices
Your invitation letter's final question asks us to describe other
practices that Promontory Financial Group has established to ensure
high quality and consistent oversight of financial institutions.
In general, Promontory Financial Group is not in the business of
providing oversight. As I have noted, we are consultants, not
regulators. We may assist an institution in self-monitoring, a form of
internal oversight, or we may, pursuant to a regulatory enforcement
action, assist the oversight efforts of an agency at a particular
institution.
In these activities, and in all of our activities, quality and
consistency matter to us. Both domestically and internationally, my
Promontory Financial Group colleagues and I have worked to build what
we believe is the world's leading consultancy in our area of practice.
We seek to promote quality principally by hiring the most experienced
and expert talent we can find to lead our engagements, and then by
giving those leaders the support they need to do their very best work.
That support includes an outstanding pool of mid-level and junior
talent to staff their engagements, as well as systems resources and
education, training, and quality assurance programs to help them
recognize and address consistency issues.
Concluding Observations
The use of private sector resources to support the activities of
Federal regulators raises a number of legitimate public policy
questions. My colleagues and I applaud this Subcommittee's interest in
seeking assurance that the firms enlisted in such roles are qualified,
and can be depended upon to support the public interest without
compromise. I hope my responses to the questions your invitation letter
posed have been helpful. I will be pleased to address any additional
questions you may have for me this morning.
______
PREPARED STATEMENT OF JAMES F. FLANAGAN
Leader, U.S. Financial Services Practice
PricewaterhouseCoopers LLP
April 11, 2013
Chairman Brown and Ranking Member Toomey, thank you for the
opportunity to provide this written testimony on behalf of
PricewaterhouseCoopers LLP (``PwC''). I lead PwC's financial services
practice. In this role, I help manage and oversee the firm's diverse
services to the banking and capital markets, insurance, and asset
management sectors.
While the vast majority of our consulting engagements are unrelated
to Government enforcement proceedings, from time to time we have served
as an independent consultant in relation to regulatory safety and
soundness or compliance enforcement orders involving financial
institutions. The most recent examples of such work are the Independent
Foreclosure Review (``IFR'') engagements that the firm performed for
four mortgage servicers, under the oversight and guidance of the
Federal Reserve Bank (the ``Fed'') and the Office of the Comptroller of
the Currency (``OCC''). I was one of the senior firm leaders who
oversaw our IFR engagements for the past 2 years.
In this written testimony, I will first describe briefly the full
range of services that our firm provides for financial institutions,
with emphasis on the history, nature, and scope of our financial
services regulatory advisory practice. Next, I will provide the
Subcommittee with our perspective on the usual role of the independent
consultant in matters relating to agency enforcement orders. In so
doing, I will specifically address the standards of professionalism and
objectivity to which PwC adheres when performing regulatory consulting
engagements, including ones related to agency enforcement orders.
Finally, as an example of recent experience in this type of work, I
will share some observations about our role as Independent Consultant
in the IFR engagements.
I. PwC and its Financial Services Practice
PwC is a U.S. partnership with over 37,000 dedicated employees,
principals, and partners. We provide an array of professional services
to public and private companies, the Federal Government, State and
local governments, and individuals. We have built our brand through the
delivery of quality services to our clients and by performing those
services with integrity, objectivity, and professionalism.
We provide professional services to clients in more than 16
industry categories, including financial services. Our financial
services practice provides audit and other permitted services to
financial services clients, as well as a full range of expertise and
services--including tax, regulatory, compliance, and risk management
services--to our non-audit clients. Our clients include national,
regional and local banks, mortgage servicers, asset managers, insurance
companies, and private equity firms. Through the provision of diverse
services to the full range of financial service entities, we have
developed broad and deep experience in considering and helping our
clients address regulatory and compliance matters. Our work on such
matters on behalf of our audit and tax clients has contributed to--and
regularly benefits from--the expertise of the financial services
regulatory advisory practice.
Although regulatory advisory work to financial services clients is
just a small fraction of the overall work that we do, I will discuss it
further given the Subcommittee's interest in these services. For PwC,
this year marks the 25th anniversary of our financial services
regulatory advisory practice. The practice began just before the
passage of the Financial Institutions Reform, Recovery, and Enforcement
Act of 1989 and the Federal Deposit Insurance Corporation Improvement
Act of 1991. Understanding these landmark laws, their implementing
rules, and their impact on our clients, was important to performing our
core client services. As a consequence of the deep learning we
developed in the evolving financial services regulatory arena,
financial institutions increasingly came to us for advice as they
developed their approaches to regulatory compliance.
From our vantage point, the demand for financial services
regulatory advisory services has only increased with the enactment of
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank''). As the Subcommittee knows, Dodd-Frank made scores of
important changes to banking and securities laws, including the
creation of new types of regulation, new ways of regulating financial
institutions, new regulatory agencies, new regulation for some firms,
and new regulators for other firms. To meet our clients' needs, we have
been expanding our regulatory advisory practice, tapping risk,
technology and other areas within our firm, and hiring a number of
experienced professionals. These individuals--and our regulatory
practice as a whole--do not lobby Congress or the agencies or otherwise
advocate for our clients before the agencies. Rather, we combine our
regulatory expertise and experience with our accumulated market
knowledge to advise clients that operate in a highly regulated industry
on solutions to their complex business challenges.
Because there is a regulatory aspect to virtually every service or
product financial institutions offer, regulatory considerations play a
central role in our clients' strategies and business models. We
consequently view our regulatory advisory practice as an important part
of the full range of client services we provide. While most of our
financial services advisory work involves assisting clients in their
efforts to better understand and comply with emerging regulatory
matters, we are occasionally engaged in connection with regulatory
enforcement proceedings to assess historical practices, advise on
remediation of past regulatory infractions, or evaluate compliance with
a regulatory mandate.
II. Matters in which Financial Institutions Are Subject to Consent
Orders or Decrees
A. The Role of the Independent Consultant
In our experience, the scope and substance of an independent
consultant's work depends on the agency order and on the particular
circumstances of the financial institution. There is neither a one-
size-fits all consent order nor a typical independent consultant role.
While the nature of the independent consultant's role will depend
on the agency order, a few general observations based on our experience
may help the Subcommittee:
Though not all agency or law enforcement orders require
financial institutions to hire independent consultants in connection
with required remediation, financial institutions subject to
enforcement actions often hire outside consultants to assist in
responding to adverse regulatory actions. In those circumstances, the
outside consultant is usually hired both for its substantive expertise
and experience in the area and for its objectivity.
Independent consultants often are retained in
enforcement-related matters because of their specialized expertise in
areas that the financial institution is required to remediate. Those
areas often include: corporate governance; credit, market, or
enterprise risk management; technology; internal audit; compliance; and
regulatory reporting. While financial institutions often have
experienced professionals working in those areas, they may lack
specialized expertise to address matters of particular complexity.
In particularly large or difficult cases, independent
consultants can be used to provide the scale of assistance and review
that neither the financial institution nor the enforcement agency can
dedicate to the matter.
In some instances, the independent consultant is
retained to make an independent assessment of whether an institution
has done what the agency required and/or to monitor the institution's
satisfactory compliance with the order's requirements.
Although the appropriate qualifications for an independent
consultant vary depending on the nature of the underlying proceeding,
the usual prerequisites for an independent consultant include:
(1) Significant subject matter experience and expertise;
(2) A track record of integrity, objectivity, and impartiality, such
that the consultant's advice will be respected;
(3) Significant experience managing projects of the size or
complexity at issue; and
(4) Sufficient dedicated personnel and resources to perform quality
work promptly and in a cost-effective manner.
Of these qualifications, project management is an often overlooked
but an invaluable skill, given that many independent consulting roles
involve substantial matters of great complexity. While a professional
services firm might be a subject-matter expert and have a sterling
ethical reputation, those attributes alone may not ensure a successful
project when the scope of the work requires substantial dedication of
resources. For that reason, large or complex projects require a
consultant that has relevant experience managing significant
engagements and is able to organize a comprehensive undertaking that
includes: appropriate professional training and supervision;
consistent, reliable, and robust processes, procedures, and controls;
and efficient and cost-effective service delivery. Moreover, the
independent consultant must possess the competence and reputation for
integrity necessary to have frequent, meaningful, and reliable
interaction with regulators.
B. PwC's Objectivity
Our regulatory advisory engagements generally are performed under
the consulting standards promulgated by the American Institute of
Certified Public Accountants (``AICPA''). Among other things, the AICPA
standards require that we perform our work objectively and free of any
conflicts of interest.
In an effort to maintain our objectivity and impartiality on all of
our professional services engagements, PwC has implemented a system of
processes and controls that governs which engagements we will pursue
and accept, the scope of services that we can and will provide to a
client, and any engagement-specific measures that need to be
implemented. Further, we may tailor additional processes and controls
to address circumstances that are particular to an engagement or set of
engagements. For example, given the nature of the IFR engagements, we
implemented additional procedures to identify and monitor any potential
new engagements that reasonably could be viewed as implicating our
ability to perform the IFR engagements with objectivity and
impartiality. As a consequence of those controls, we declined to pursue
several engagement opportunities.
III. The IFR Engagements
We believe that it may be helpful to the Subcommittee to briefly
discuss our experiences with the IFR engagements, in light of the
general principles that we have discussed above.
A. PwC's Retention and Approach to the IFR Engagements
As the Subcommittee knows, in April 2011, the Fed and the OCC
entered into consent orders with 14 residential loan servicers that
required, among other things, that those servicers retain Independent
Consultants to review their foreclosure-related actions in 2009 and
2010. Four servicers retained PwC as their Independent Consultant.
Our engagements were performed in accordance with (1) the consent
orders that the servicers entered into with the Fed or the OCC; and (2)
the specific terms of the engagement letters with each servicer, which
required regulatory review and approval before they were final. The
four servicers for which PwC acted as Independent Consultant are: GMAC
Mortgage (``GMAC'') and SunTrust Mortgage (``SunTrust''), both of which
are regulated by the Fed, and U.S. Bank National Association (``U.S.
Bank'') and Citibank N.A. (``Citibank''), both of which are regulated
by the OCC. Three of the servicers for which PwC acted as Independent
Consultant joined the January 2013 settlement. Our IFR work on the GMAC
engagement continues.
While much of the recent focus has been on the goal of identifying
and remedying financial harm to individuals, the Fed and the OCC
directed the Independent Consultants to: first, identify servicer
errors, regardless of whether they caused financial harm to borrowers;
and, second, determine which servicer errors caused financial harm to
the borrowers. The consent orders and regulator-approved engagement
letters established the Independent Consultants' scope of work and
specified many of the procedures to be followed. Moreover, the
regulators guided and supervised the work as it was performed.
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. As the Government Accountability Office (``GAO'')
noted in its report last week, the IFR engagements involved applying
hundreds of procedures to thousands of loan files to identify potential
errors in dozens of different categories. No two borrower files were
the same and often lacked relevant documentation, requiring that
engagement teams identify gaps or deficiencies in documentation and
request the missing material from the servicers. Further, servicers'
legal obligations varied by State, and legal advice provided to the
Independent Consultants evolved, as the Independent Legal Counsel
(engaged by the servicers pursuant to the orders to provide advice on
the laws of the more than 50 relevant State and Federal jurisdictions)
took stock of the distinct and sometimes inconsistent Federal and State
laws. As the engagements progressed, the regulators also added to the
elements of the loan file that needed to be reviewed. Indeed, aspects
of the legal and regulatory guidance remained unresolved even as late
as January 2013. Together, these challenges placed a particular premium
on the thoroughness of reviewer training and the quality and competence
of the reviewers themselves.
B. The Objectivity of Our IFR Engagement Teams
From even before our formal engagement, we adopted procedures to
maintain our objectivity and impartiality:
In advance of our engagements by the servicers, we
disclosed to the Fed and the OCC all recent and ongoing
relationships with the servicers that were considering engaging
us as Independent Consultant. We were engaged only after the
Fed and the OCC considered that information and approved both
our engagement by the servicer and the terms of our engagement
letters;
Our engagement letters mandated that we perform our IFR
engagements with objectivity and impartiality and that we
report to the regulators any attempts by a servicer to
interfere with our efforts; and
We tailored our controls to mitigate any risk that our IFR
engagement teams might be subject to inappropriate information
or influence.
When, in May 2012, the OCC requested that the Independent Consultants
submit for regulatory approval certain types of prospective
engagements, we set up an internal process to identify any potential
covered engagements and agreed to seek regulator approval for certain
types of prospective engagements.
C. Our Services Were Rendered by Experienced, Talented, and Well-
Trained Professionals
We staffed our IFR engagement teams with qualified PwC
professionals and provided them with substantial, multi-week training.
At its peak, our IFR engagements involved over 1,500 PwC professionals
working at multiple locations around the country. We addressed the
complex and dynamic nature of these engagements by establishing
processes designed to take advantage of the scale of that effort while
providing appropriate controls for our work.
Critical to large and complex engagements is having systems that
provide for consistently applied standards and procedures within the
engagement. For the IFR engagements, each engagement team performed
three core levels of review: (1) the primary review teams examined each
of the files designated for examination; (2) a secondary team of
professionals reviewed that work to provide coaching and guidance to
the primary reviewers; and (3) our tertiary reviewers then assessed the
overall work. The tertiary reviewers were responsible for examining all
of those files identified as containing potential errors and selected
samples of files for review based on a variety of factors. PwC
supplemented the training provided to the professionals assigned to
these tasks based on the complexity of certain loan files, with
particular attention to issues such as errors related to the
Servicemembers Civil Relief Act.
In addition to the three-tiered review within each engagement, PwC
formed a centralized Quality Assurance (``QA'') team that tested the
work of each IFR engagement team. The QA team consisted of experienced
file review professionals. The team's charter was to assess the quality
of the engagement teams' file reviews, to provide feedback to those
teams on the quality of the file reviews, to follow up on any
identified issues to help train the professionals assigned to review
files, and periodically to report the QA team's observations to the OCC
and the Fed.
Finally, within the bound of our obligations to maintain client
confidentiality, the leaders of the PwC IFR engagement teams regularly
communicated with each other to share their experiences and to address
common issues of process, technology, and regulator guidance. This
collaboration played an important role in promoting efficient execution
of our engagements.
D. PwC Cooperated Fully and Was Transparent with the Regulators
The Fed and the OCC directed the scope and detail of the IFR
process from its inception. The regulators established the initial
scope of work through the April 2011 consent orders and through review
of the procedures set forth in each of the engagement letters that they
approved. Throughout the IFR engagements, the regulators provided
additional procedures, issued new instructions, and adjusted the scope
of work. These modifications came through written and informal guidance
from the regulators' Examiners-in-Charge (``EICs'') and through
regulators' periodic discussions with the Independent Consultants, as a
group and individually.
PwC worked closely with the OCC and the Fed throughout the IFR
engagements. Shortly after the file review segment of the IFR
engagements began in earnest, we provided the regulators with weekly
written and oral status updates on our work; we met with the regulators
for more extensive discussions about the IFR effort on a number of
occasions; beginning in 2012, we provided cost and hours reports to the
regulators; and we interacted regularly with the servicers' EICs. The
regulators assessed the progress of PwC's IFR work, visited the loan
review sites, and met with our engagement teams. When necessary, PwC
sought and received guidance on uncertain or unresolved issues.
Because of PwC's role as an objective and impartial Independent
Consultant--and our consequent sensitivity to being perceived as an
advocate for the servicers--we were careful to avoid exerting
inappropriate influence over the ongoing execution of the IFR process.
PwC instead followed the procedures mandated by the regulators, raised
questions with the regulators when challenges arose or became apparent,
and continued as efficiently and effectively as possible to satisfy the
engagement letters' mandate to (1) identify servicer errors related to
foreclosure proceedings in 2009 and 2010, irrespective of borrower
harm, and (2) determine instances where borrowers suffered financial
harm because of servicer error or misconduct.
IV. Conclusion
On behalf of my partners and colleagues at PwC, I would like to
thank the Subcommittee for the opportunity to provide this written
testimony. I look forward to the opportunity to discuss these matters
further and to answer your questions during the upcoming hearing.
______
PREPARED STATEMENT OF OWEN RYAN
Partner, Audit and Enterprise Risk Services
Deloitte & Touche LLP
April 11, 2013
Chairman Brown, Ranking Member Toomey, other Members of the
Subcommittee, good morning. My name is Owen Ryan and I lead the
Advisory practice at Deloitte & Touche LLP (``Deloitte''). Our Advisory
practice offers a wide range of services to clients in most major
industries. Our services include:
Cyber, security and privacy;
Governance, regulatory and risk management;
Finance operations and controls transformation;
Financial accounting and valuation;
Internal auditing; and
Mergers and acquisitions.
I am a certified public accountant and have more than 28 years of
professional experience. I serve on both the Deloitte & Touche LLP
Board of Directors and its Executive Committee.
In your invitation you asked our Firm to discuss our role as
independent consultant for financial institutions, and the role of
independent consultants more generally. Before I do so, I would note
that we served as the independent consultant on the mortgage
foreclosure review for JPMorgan Chase. My remarks, I believe, will be
responsive to your invitation letter and generally be applicable to our
foreclosure review engagement. I would also note that Deloitte is not a
law firm, and therefore my testimony today is not based on legal
analysis, but is instead based on my professional experiences.
Deloitte member firms employ more than 190,000 individuals globally
and the United States firms employ almost 60,000 people. We provide
professional services in four key areas--audit, advisory, tax and
consulting. Our business framework allows us to provide a wide range of
professional services, based on the needs of our clients. While
independent consulting engagements do not represent a substantial
portion of our business, I can assure you that we take our role
seriously. We strive to fulfill our professional obligations to provide
independent, objective and quality services, consistent with the
highest standards of our profession.
Before accepting a role as independent consultant, our firm
determines if we have the requisite experience, qualifications and
appropriate number of professionals to execute our responsibilities.
Our professionals serving on these types of engagements generally have
auditing, consulting, industry or regulatory experience. Supplemental
training on rules and regulations pertinent to each engagement may be
necessary. In addition, it may be important for these professionals to
have experience working on, or handling, large-scale, complex and
evolving engagements. We believe we were well qualified to serve as the
independent consultant for the foreclosure review.
We know from our experiences that it is important to maintain open
communication and an appropriate working relationship among the
independent consultants, the regulators and the institutions being
monitored. Frequently scheduled meetings and timely reporting are
important mechanisms for communicating our approach and progress.
Independent consulting engagements often result from regulatory
directives. As such, these engagements are subject to the oversight of
regulators, as determined by their requirements. These requirements
generally include regulatory approval of the independent consultant and
the scope and methodology to be used.
Given the relatively small number of firms with the scale and
expertise required to serve as an independent consultant on large
engagements, it is often the case that a firm will have some previous
relationships with an institution. Our policies and procedures are
designed to ensure that each engagement is approached with due
professional care, objectivity and integrity, consistent with American
Institute of CPAs Consulting Standards. These policies and procedures
include disclosing to the regulator our previous relationships with the
institution before accepting the engagement. Circumstances may also
dictate the need for us to decline the engagement altogether.
The engagement letter generally defines our professional
obligations. As part of our engagement acceptance procedures, we would
identify any regulatory considerations that are not within our purview
and expertise as an independent consultant. To the extent we become
aware of compliance issues outside the scope of our purview, we would
obviously fulfill all reporting obligations to the regulator.
Deloitte policies and procedures promote the delivery of
consistent, high quality services in our independent consulting
engagements. Quality control and assurance are integral to the success
of all of our engagements, and we take care to build them into the
design, execution and review of our projects. We conduct mandatory
training for our professionals and rigorously monitor the quality of
our work on our independent consulting engagements.
As a firm, we have been in business for over 100 years. We know
that our reputation is our most important asset. As such, independence,
integrity and objectivity are of paramount importance to us. We take
very seriously our professional obligations. We have an overriding
commitment to excellence in everything we do.
I thank you for providing me with this opportunity to testify and
would be happy to answer any questions you have.
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM DANIEL P.
STIPANO
Q.1. In response to a question regarding the OCC's current
standards for determining the independence of consultants hired
by financial institutions, you stated that the OCC had not
``reached the point of putting pen to paper'' to outline its
policies for a consultant's independence, despite the fact that
the OCC has required financial institutions to retain
independent consultants in approximately one third of its
approximately 600 formal enforcement actions over the past 5
years.
Has the OCC established a procedure to develop these
requirements, including the factors to be considered, the
parties to be consulted, and the timeline for rules?
Given the issues raised and recent concerns about
independent consultant conflicts and performance, does the OCC
feel that it is appropriate to continue requiring institutions
to hire independent consultants without having a policy in
place?
Will this policy be available for review by financial
firms, consulting firms, Members of Congress, and the public?
A.1. The OCC is currently in the process of developing guidance
for the use of independent consultants in enforcement actions.
The guidance will cover the due diligence expected of an
institution in proposing potential independent consultants, the
review conducted by the OCC of the proposed consultants, the
criteria for assessing the competence and independence of the
consultants, the level of oversight by the OCC of the
consultant engagement, and the validation conducted through the
examination process of the work of the independent consultants.
As noted in my testimony, the majority of the enforcement
actions requiring the retention of an independent consultant
were put in place as a result of operational and compliance
deficiencies in community banks. In many of those instances,
the community bank lacked the necessary expertise and resources
to correct the problems on their own. The use of independent
consultants was essential to ensure that the bank took the
requisite corrective action to operate safely and soundly and
in compliance with the law. In such circumstances, the
consultant's expertise, available resources and independence
from the activity under review were critical factors for the
success of the engagement. At the conclusion of these
engagements, the OCC verified that the bank, working with the
independent consultant, had addressed and corrected the
violation that gave rise to the requirement in the enforcement
order. These cases raise few, if any, issues concerning
conflicts and performance and the OCC intends to continue to
require banks, including community banks, to hire independent
consultants in appropriate circumstances.
In these and other more complex cases, it is important to
ensure that the independent consultant has not been involved in
the activities under review and has no potential conflicts of
interest or current or former relationships with the bank that
indicate that the consultant should not be engaged by the bank.
These current standards of the OCC, derived from the agency's
successful past use of independent consultants, will be
formalized in the guidance together with appropriate additions
derived from our ongoing evaluation of the use of independent
consultants and exploration of ways to improve the process.
The OCC intends to issue the guidance to examiners as a
Supervisory Memorandum.
Q.2. In your testimony you noted that the ``types and frequency
of interactions between the OCC, the bank, and the independent
consultant depend upon the particular facts and circumstances''
and that in some cases ``the appropriate oversight may involve
very limited interaction.'' In light of the issues found during
the ``expanded oversight'' of consultants' work during the
Independent Foreclosure Review and reports of consultants' poor
performance during reviews resulting from poor Bank Secrecy Act
anti-money laundering compliance, does the OCC see any need for
changes in its oversight of the work of independent
consultants?
A.2. In my testimony, I was referring to the range of
interactions between the OCC, the bank, and the independent
consultant. I noted that such interactions depended upon the
particular facts and circumstances covered by the enforcement
action, the expertise and resources of bank management, and the
nature of the consultant's engagement. In cases with discrete
issues and a limited role for the independent consultant,
``appropriate oversight may involve very limited interaction.''
A typical example would be an order requiring a community
bank with insufficient expertise to engage an independent
consultant to conduct reviews of a bank's loan portfolio until
the bank is able to demonstrate that it has an effective
internal asset quality review system. The discrete nature of
the engagement together with the fact that the OCC regularly
examines the results of the loan review mean that there is
limited need for ongoing oversight of the engagement. We would
reach the same conclusion where we require a community bank to
engage an independent consultant to address other operational
or managerial deficiencies. As noted in my testimony, those
situations account for the majority of the orders issued by the
OCC requiring the engagement of independent consultants.
That simple scenario is very different from a more complex
engagement represented by the Independent Foreclosure Review
(IFR). As noted in my testimony, the cases involving
significant consumer harm and law enforcement implications
require additional oversight and, in the case of the IFR, the
OCC engaged in an unprecedented level of interaction with the
independent consultants. The OCC is currently evaluating its
use of independent consultants in such circumstances and
exploring ways to improve the process. The conclusions reached
by the OCC will be reflected in the guidance currently under
development.
Q.3. While the OCC and the Federal Reserve sought to increase
transparency in the use of independent consultants in the case
of the Independent Foreclosure Review by publishing engagement
letters between servicers and their consultants, in many cases
redactions removed information that could shed light on the
consultants' independence and the quality of reviews. For
instance, in Bank of America's engagement letter with
Promontory Financial Group, Promontory's more than two and a
half page conflicts of interest policy (Attachment C) is fully
redacted. Why was this policy fully removed when it was put in
place to ensure transparency and quality reviews, and how would
the affect of disclosing such a policy negatively impact the
supervisory and enforcement process?
A.3. Only limited proprietary and personal information was
redacted from the public engagement letters. Examples of
information that was redacted included: names, titles and
biographies of individuals; references to proprietary systems
information; fees and costs associated with the engagement;
specific descriptions of past work performed by the independent
consultants for other clients; and negotiated contract terms
and provisions (such as indemnification provisions, specifics
of conflict of interest policies, RUST Draft statement of
work).
I would note that the OCC made available for review
unredacted versions of all OCC engagement letters to
Congressional staff in 2011; several staff representatives
reviewed these materials onsite at the OCC.
Q.4.1. You stated that banks were required to hire independent
consultants to conduct Independent Foreclosure Reviews because
``it is just beyond the means of any Federal banking agency''
to conduct a review of this size and scope, and direct hiring
of consultants by the OCC would be too drawn out because of
competitive bidding requirements in Federal procurement
process.
Would direct contracting between independent consultants or
outside experts and the OCC improve transparency and mitigate
conflicts of interest?
A.4.1. The contracting of consultants by the banks directly
does not, in and of itself, pose concerns for the OCC in terms
of transparency and conflicts of interest. As we have
discussed, the OCC has used independent consultants in the past
with success through its monitoring and oversight of the
engagements. With respect to the IFR, each of the independent
consultant engagement letters contained specific language
stipulating that consultants would take direction from the OCC
and prohibited servicers from overseeing, directing, or
supervising any of the reviews.
The OCC specifically required each consultant to:
Comply with requirements of the Order and conduct
each foreclosure review as independent from any review,
study, or other work performed by the servicer or its
contractors or agents with respect to the servicer's
mortgage servicing portfolio or the servicers'
compliance with other requirements of the consent
order.
Ensure its work under the foreclosure review would
not be subject to direction, control, supervision,
oversight, or influence by the servicer, its
contractors, or agents.
Require immediate notification to the OCC of any
effort by the servicer, directly or indirectly, to
exert any such direction, control, supervision,
oversight, or influence over the independent
consultant, its contractors, or agents.
Agree that the independent consultant is solely
responsible for the conduct and results of the
foreclosure review, in accordance with the requirements
of article VII of the order.
Pursuant to the monitoring, oversight, and
direction of the OCC: 1) promptly comply with all
written comments, directions, and instructions of the
OCC concerning the conduct of the review, and 2)
promptly provide any documents, work papers, materials,
or information requested by the OCC, regardless of any
claim of privilege or confidentiality.
Agree to provide regular progress reports, updates,
and information concerning the conduct of the
foreclosure review to the OCC, as directed.
Conduct the review using only personnel employed or
retained by the independent consultant to perform the
work required and not to employ services provided by
the servicer's employees, contractors, or agents unless
the OCC provides written approval.
Adhere to requirements with respect to
communication with the servicer, which provide for the
independent consultant to use documents, materials, or
information provided by the servicer, and to
communicate with the servicer, its contractors, or
agents, to conduct the review. Within these limits,
agree that servicers' employees may not influence or
attempt to influence determinations of the consultant's
findings or recommendations.
Agree that legal advice needed in conducting the
review shall be obtained from the outside law firm
whose retention to advise the independent consultants
has been approved by the OCC and not to obtain legal
advice (or other professional services) in conducting
the review from the servicers' inside counsel, or from
outside counsel retained by the servicer or its
affiliates to provide legal advice concerning the
Order, or matters contained in the Order.
Accordingly, under the IFR independent consultants took
their direction from the OCC and Federal Reserve Board (FRB),
not the servicers; and in one case the OCC directed the
servicer to terminate an independent consultant (IC) for
compromising the IFR independence standards. Further, the OCC
and FRB had direct, in some cases daily, access to the ICs and
unfettered access to the independent consultant's work and
reporting. Thus, the concerns regarding the structure of the
IFR did not emanate from a lack of direct control or authority
over the independent consultants and did not hinder
transparency by any means.
Q.4.2. If so, what additional authority would the OCC need to
enter into direct contracts in a timely manner?
A.4.2. Congress could provide the OCC with additional authority
for streamlined contracting that would allow the OCC to award
one or more contracts without justifying the lack of
competition i.e., exempt such contracts from the Competition in
Contracting Act, 41 U.S.C. 253. This authority could be used
during the examination and enforcement process for unusually
complex or time sensitive matters.
Q.5. Will homeowners who have been wrongfully foreclosed upon
have their credit reports cured as part of the settlement? Will
anything be done to correct consumers' credit histories?
A.5. The Amendments to the Consent Orders do not provide for
determinations of ``harm'' or ``no harm'' on individual cases,
except in a few limited categories (Servicemembers Civil Relief
Act and Borrower Not in Default); thus, there are no
determinations of errors on individual credit reports.
Borrowers can avail themselves of customer assistance from OCC
Customer Assistant Group (helpwithmybank.gov), FRB
(federalreserve.gov), or the CFPB (consumerfinance.gov), where
applicable, to submit a complaint to support that their credit
report requires correction due to servicer error, or they may
choose to work with their servicer directly.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM DANIEL P. STIPANO
Q.1. Please provide copies of all contracts, in unredacted
form, that were executed between the banks subject to the
consent orders and the consultants they hired, which were
reviewed and approved by the Office of Comptroller of the
Currency (OCC) in connection with the Independent Foreclosure
Review (IFR) process.
A.1. In 2011, upon the publication of the independent
consultant engagement letters, the OCC made available for
review unredacted versions of all OCC engagement letters to
Congressional staff; several staff representatives reviewed
these materials onsite at the OCC upon their publication. We
would be pleased to coordinate with your staff to accommodate
this same review.
Q.2. Please explain in detail why the OCC decided not to engage
consultants directly to conduct the foreclosure review process.
Please identify by name the offices, departments, and employees
that participated in this decision. If there are statutes in
place which prevent direct engagement, please provide the
relevant citations. In addition, please provide legislative
suggestions that will give the OCC more flexibility to directly
engage in the future.
A.2. The OCC considered the option of directly contracting with
independent consultants and determined that it would be more
appropriate and timely to have the servicers contract directly
with the consultants. This determination resulted from
discussions among our legal and supervisory divisions. Federal
Government procurement rules require that the OCC conduct full
and open competitions for services including the services of
consultants unless, for example, there is only one source that
can provide the services or there are urgent and compelling
circumstances. Even if circumstances are considered urgent and
compelling, the maximum amount of limited competition is
required. Given that the services of up to 12 independent
consultants were needed, competition would have to include more
than 12 offerors.
The procurement process requires that the OCC develop a
request for proposals, advertise its requirements, evaluate
proposals, negotiate with offerors and make awards. This
process can be time consuming and, in the case of the
foreclosure reviews, could have taken as long as 6 to 9 months.
Because of the number of institutions involved, multiple
negotiations with offerors would have been necessary.
Additionally, as with any procurement, an interested party may
protest at the solicitation, offer or award phase to the U.S.
General Accountability Office. This adds risk and time to the
procurement process. Because the full scope of the work for the
consultants could not be defined up front, it would have been
difficult for offerors to price their services and for the OCC
to place a dollar value on the contracts. Also, the OCC
determined that flexibility in scoping requirements and in
making changes based on supervisory needs was important and
that such factors do not easily translate to Federal
procurement contract types. While there are some contract types
that allow more flexibility than others, the OCC would have
been in a position of continuously modifying its contracts to
ensure the scope of work was correct. The contract risk
associated with change in scope was, in our opinion, more
appropriately placed on the entities complying with the consent
orders rather than the OCC.
Although the OCC has confidence that outside independent
consultants can effectively be engaged pursuant to OCC Consent
Orders, Congress could provide the OCC with additional
authority for streamlined contracting that would allow the OCC
to award one or more contracts without justifying the lack of
competition i.e., exempt such contracts from the Competition in
Contracting Act, 41 U.S.C. 253. This authority could be used
during the examination and enforcement process for unusually
complex or time sensitive matters.
Q.3. Please provide copies of all opinions or memoranda (legal
or otherwise) that were considered by the OCC that examined
alternatives to the foreclosure review process eventually
adopted, including alternatives that considered the agency
engaging consultants directly to perform the foreclosure
review.
A.3. The OCC did not prepare any formal analysis, nor generate
any opinions/memoranda regarding alternatives to the adopted
foreclosure review process or use of independent third parties
to conduct the review. The foreclosure examinations conducted
by OCC examiners during the fourth quarter of 2010 revealed
situations where servicers may have lacked standing to
foreclose, may have foreclosed on borrowers in violation of the
SCRA or U.S. Bankruptcy code, may have charged improper or
excessive fees with respect to the foreclosure action, or may
have improperly administered loss mitigation programs--any of
which may have caused financial harm to the borrower. As a
result, the OCC determined that certain borrower files should
be independently reviewed by someone other than the servicer
itself to determine whether servicer errors resulted in
borrower financial harm that should be remediated. It has been
a longstanding practice of the OCC in enforcement actions to
require banks to engage independent consultants, particularly
in situations requiring file reviews. Independent consultants
have subject matter and process knowledge, and they can also
provide the resources necessary to carry out the task in a
timely manner. The contracting of consultants by the banks
directly does not, in and of itself, pose concerns for the OCC
in terms of transparency and conflicts of interest. With
respect to the IFR, each of the independent consultant
engagement letters contained specific language stipulating that
consultants would take direction from the OCC and prohibited
servicers from overseeing, directing, or supervising any of the
reviews.
Q.4. In testimony provided at the Subcommittee on Financial
Institutions and Consumer Protection on Thursday, April 11,
2013, Deputy Chief Counsel Daniel Stipano, acknowledged that
the OCC had sought and received advice on the advisability of
the OCC directly hiring consultants to engage in the
foreclosure review process. Please explain whether the advice
obtained considered applicable Federal procurement statutes,
regulations, and guidance. If so, please explain in detail the
analysis and reasoning behind this advice and what form it
took. To the extent such advice was in writing, please provide
these documents.
A.4. Please see responses to Questions 2 and 3 above.
Q.5. Please provide a list of all competitive procurement
contracts entered into during calendar year 2012 involving the
OCC.
A.5. A list of all competitive procurement contracts for
calendar year 2012 is attached as Appendix B.
Q.6. The GAO report published this March on the IFR process
recommended a series of best practices at the remaining three
financial institutions who haven't yet settled. Have you
instituted all of these guidelines (improved sampling, improved
communication with homeowners, more transparency, etc.) with
OneWest, Everbank, and Allied? Why or why not?
A.6. Yes, we have taken action related to all three of the
GAO's recommendations. The first recommendation was to improve
oversight of sampling methodologies and mechanisms to centrally
monitor consistency. The OCC has communicated with and
continues to communicate with the remaining independent
consultants to ensure consistent sampling methodologies are
used and that those methodologies conform to the OCC Sampling
Handbook.
Another recommendation was to identify and apply lessons
from the foreclosure review process, such as enhancing planning
and monitoring activities to achieve goals, as they develop and
implement the activities under the amended Consent Orders. The
OCC developed a thorough project plan covering the remaining
work related to the (1) independent foreclosure review, (2)
calculation and distribution of payments under the settlement,
and (3) the additional requirements of the amendments to the
Consent Orders. Additionally, we have drafted and will
implement an examination plan that each of the resident teams
will use to test compliance with the Consent Orders. The
completion of the examination plan will be overseen by
headquarters staff and will be supported by a small examination
team that will work with the resident staffs at each
institution to ensure the examination plan is implemented
consistently.
The final recommendation was to develop and implement a
communication strategy to regularly inform borrowers and the
public about the processes, status, and results of the
activities under the amendments to the consent orders and
continuing foreclosure reviews. The OCC, working with the FRB,
continues to execute a communication strategy to provide
timely, accurate information regarding the IFR, specifically
the IFR Payment Agreement, codified in the amendments to the
Consent Orders, which were published on February 28. The
communication strategy involves actions taken by the IFR
payment administrator--Rust Consulting, Inc.--as well as
Federal banking regulators and includes direct outreach to
affected consumers, mass media, and outreach to community
groups and Congress.
Direct Outreach
Direct outreach to affected borrowers has proven to be the
most effective means of communication through this process. The
IFR payment administrator sent postcards to all 4.2 million
eligible borrowers in March 2013 alerting them that they would
receive a check by mail. On April 12, 2013, the IFR payment
administrator began sending checks and an accompanying letter
to eligible borrowers. Checks were sent in a number of waves.
As of June 7, 2013, more than 3.9 million checks were mailed to
eligible borrowers worth more than $3.4 billion. As of June 7,
2013, 2.7 million checks have been cashed or deposited worth
almost $2.4 billion. According to Huntington Bank, which is
processing the checks, IFR-related checks are clearing at
nearly 4 times the rate of their previous experience with 53
other consumer settlements. The clearing rate demonstrates both
the importance of this issue to eligible borrowers as well as
the effectiveness of the outreach and previous awareness
building activities.
Mass Media
Mass media efforts involve a variety of communication
tactics including news releases and media interviews, public
speeches, Web site material, email, social media, and public
service announcements (PSA).
Since January 2013, the OCC has published 11 separate news
releases regarding the IFR Payment Agreement. Each was provided
to dozens of relevant reporters, posted to OCC.gov and
HelpWithMyBank.gov, distributed to more than 34,000 email
subscribers, distributed through Twitter and Facebook, and made
available through online syndication (via RSS). For the most
significant of these news releases OCC used PRNewswires
multicultural distribution service that provides the news
release to more than 9,000 outlets throughout the country,
targeting outlets that serve African American, Asian American,
Hispanic and Native American communities. These releases were
translated into both Spanish and Chinese for distribution to
outlets that provide news in those languages. The PSA
explaining the IFR Payment Agreement was posted to the OCC Web
page, translated into Spanish, and included in a toolkit of
resources provided to community groups and advocates for their
use.
Since January 2013, the OCC has also responded to 185
interviews or media queries to provide background information
to reporters, highlight key messages, emphasize certain facts,
or correct public misperceptions regarding the IFR Payment
Agreement. When announced, the OCC conducted a conference call
for dozens of members of the press to explain the terms of the
agreement and answer their questions.
As a result of these news releases and other media
activity, there have been nearly 300 news articles in national,
regional, and local media outlets with an audience of more than
110 million.
On January 7, 2013 , the Comptroller of the Currency issued
a personal statement regarding the IFR Payment Agreement. On
February 13, 2013, he delivered a public speech explaining the
IFR Payment Agreement before the Women in Housing and Finance
group in Washington, D.C. Both the statement and speech were
released to the public through formal news releases, and the
press widely covered the Comptroller speech in February.
The OCC has provided additional information on its Web site
as a resource to consumers and other interested parties at
www.occ.gov/independentforeclosurereview. The information
includes frequently asked questions, IFR Payment Agreement
details, Consent Orders and amendments, and daily updates on
the volume and value of IFR-related checks that clear each day.
At the regulators direction, the IFR payment administrator also
has provided updated frequently asked questions on its Web site
at https://independentforeclosurereview.com/settled.aspx and
important tax-related information for borrowers included in the
IFR Payment Agreement.
Community and Congressional Outreach
Since February 2012, regulators have produced five
nationwide Webinars to familiarize counselors and consumer
groups with the IFR and later the IFR Payment Agreement. We
have conducted two Webinars on the Payment Agreement
specifically. The Webinars are posted on the agencies' Web
sites along with transcripts in English and Spanish.
IFR
February 2012--IFR: Helping Homeowners Request a
Review
March 2012--IFR: Helping Homeowners Request a
Review
September 2012--IFR: What You Need to Know
IFR Payment Agreement
March 2013--IFR: Important Changes
May 2013--IFR: Important Changes
Consumer and counseling groups were central to developing
and implementing the Phase II marketing plan for the IFR.
Regulators have used this same network to provide information
on the IFR Payment Agreement, creating a toolkit of
information, available on each regulator's Web site, that
includes detailed information about the agreement itself, what
will happen next for borrowers and, additional marketing
material. The Comptroller and senior OCC staff have met
numerous times with community groups and consumer advocates
during this process and will continue to engage these important
stakeholders.
The OCC has placed a high priority on ensuring that Members
of Congress and their staff have timely and accurate
information about the implementation of the amended Consent
Orders. To this end, we have held numerous communications,
including meetings, phone calls, letters and emails, with
Members of Congress and their staff from the initial
announcement of the agreement in principle and throughout the
implementation of the amendments to the Consent Orders. We have
provided timely responses to questions and concerns, and sought
feedback from the Members and staff to factor into decisions we
were making about the implementation of the settlement and
future reports. Finally, we routinely share public information
including statements and press releases with Congress so they
can remain current on the status of the settlement actions and
provide information to their constituents where they deem
appropriate.
Going Forward
The OCC recognizes the importance of continuing to provide
timely, accurate information to all stakeholders in the process
and will continue to use mass media and other outreach to keep
stakeholders informed. Specifically, the OCC is in the process
of determining content and timing of public reports to provide
additional relevant information to the public and external
stakeholders. In determining theses reports, the OCC is
considering input from a variety of stakeholders including
community groups and consumer advocates, Congress, and
industry. When publicizing these reports, the OCC plans to uses
news release, media outreach, social media, and subscription
servicers to provide the widest possible distribution and
greatest possible awareness. These reports will address both
the IFR Payment Agreements, the status of reviews for servicers
who did not join the agreements, and servicer compliance with
other articles of the original foreclosure-related Consent
Orders published in April 2011.
The OCC has already instituted daily updates on the number
and value of IFR-related checks to its Web site and social
media sites. In addition, the agency has instituted weekly news
releases to highlight this information.
Because access to borrower records used in the conduct of
the IFR is of great interest to borrowers, advocates, and
Congress, the OCC is working with Federal banking regulators to
increase consumer awareness of their right to certain
information by submitting a qualified written response under
the Real Estate Settlement Procedures Act (RESPA). The OCC
plans to issue letters to the IFR payment administrator and
participating servicers that such factual information requested
by the borrower should be provided under RESPA. In addition,
the OCC is planning a news release and PSA to increase
awareness of this process, and is inviting other Federal
banking regulators to join the release and PSA.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM DANIEL
P. STIPANO
Q.1. I led the efforts in the Senate to request that the
Government Accountability Office assess the independence,
transparency, accountability, and consistency of the
independent foreclosure review process. One of the concerns
I've had since the beginning of the IFR process is whether the
Federal Reserve and OCC were sufficiently contacting those in
our underserved communities. I know there were several
marketing efforts made throughout the process to improve
outreach, but from my understanding, there were certainly
deficiencies in these efforts. With the payouts announced this
week, it appears that in some cases many of the borrowers who
requested a review will receive almost twice the payout as
those who did not request a review. With the issues surrounding
the IFR's outreach efforts, does this mean those in our
underserved communities, who were not contacted or made aware
of the independent review, get will get less money? Why are we
giving more to those who were contacted and less to those who
were not contacted, when we know there were major hurdles to
finding affected borrowers?
A.1. The efforts undertaken to publicize the IFR were
unprecedented. The $35 million campaign exposed more than 130
million people to IFR messages at least four times during the
campaign. The outreach effort was tested and monitored. General
awareness of the campaign increased from approximately 30
percent, under the initial marketing efforts, to more than 50
percent, under the expanded outreach, among those likely to be
in the in-scope population. This level of awareness typically
requires four years of advertising to accomplish.
Borrowers who made an effort to submit a Request for Review
had an expectation that they would receive an individualized
review and in some cases they may have gone to efforts to
locate documents and support to accompany their Request for
Review. Thus, both FRB and OCC felt it necessary to recognize
the efforts of borrowers who submitted a Request for Review and
who believed they were financially injured.
Q.2. The agreement reached by the OCC and Federal Reserve with
the 13 mortgage servicers provides roughly $5.7 billion in
foreclosure prevention assistance (or soft money) and $3.6
billion in cash payments, which will certainly help the
millions of borrowers. Because of the deficiencies and issues
that we read about in the GAO study, I'd like to get a better
understanding of how these dollar amounts (both soft dollars
and cash payout) were determined, because it seems as though we
still do not have a solid understanding of the level of harm to
borrowers. In fact, the new agreement that replaced the
foreclosure review with a compensation framework does not rely
on determinations of whether borrowers suffered financial harm.
So can you explicitly explain how these amounts were
determined?
A.2. The amounts were negotiated. The $3.6 billion in cash
payments was informed by several considerations, including the
remaining amount of projected IC costs to finish the reviews,
other direct costs associated with finishing the reviews (such
as the administrator costs), and the projected payments that
may have been paid to borrowers for harm findings had the
reviews been completed. We believe the $3.6 billion is several
times the projected amount that may have been paid out for harm
under the IFR.
The $5.7 billion in foreclosure prevention action credit
will result in meaningful relief to borrowers still struggling
to keep their homes, and this assistance can make a real
difference for those families and their communities. However,
this requirement should not be viewed in isolation. The $5.7
billion was intended to be an additional incentive to servicers
to enhance their foreclosure prevention actions and compliments
the incentives provided by HAMP and similar programs, the
National Mortgage Settlement, and the State AGs. Similarly,
this requirement also complements other parts of our Consent
Orders, which have numerous and significant requirements
addressing loss mitigation and foreclosure prevention
activities. These items require servicers to achieve and
maintain effective loss mitigation and foreclosure prevention
activities, and we will ensure that objective is met.
Q.3. The agreement reached by the OCC and Federal Reserve with
the 13 mortgage servicers provides $5.7 billion in foreclosure
prevention assistance (or soft dollars), which will certainly
help the millions of affected borrowers. However, my
understanding is that if one of these servicers does a loan
modification or principle reduction for $10,000, and the home
is worth $250,000, the servicer will be credited $250,000 in
foreclosure prevention assistance or consumer relief under the
settlement, instead of just $10,000 for the loan modification
or principle reduction. Are we giving the mortgage servicers
credit for financial assistance that they didn't necessarily
provide? Do you plan to continue this practice moving forward?
Can you explain the policy behind crediting these servicer
dollar-for-dollar for consumer relief?
A.3. The Amendments to the Consent Orders, which implemented
the IFR settlement, are specific about the standards the
regulators will use to measure the servicers' performance on
loss mitigation and foreclosure prevention. They emphasize
sustainable and meaningful home preservation actions for
qualified borrowers and that preference should be given to
activities designed to keep borrowers in the homes or otherwise
provide significant and meaningful assistance to qualified
borrowers.
The unpaid principal balance (UPB) is straightforward,
transparent, and an easily measurable barometer of the value of
the foreclosure that was prevented. It does not measure the
expense of the action taken or the economic benefit for the
consumer, but simply measures the foreclosure that was
prevented based on what the borrower owes, which therefore
reflects the amount of assistance received. Complicated
crediting formulas are not transparent, and people tend to find
ways to manipulate complicated formulas, which can often have
unintended consequences. Further, sustainable modifications
come in numerous forms, not only through principal reductions,
but also through, for example, reduced interest rates.
Finally, the OCC will focus on the overall efforts and
results of the loss mitigation and foreclosure prevention
programs of each servicer as we evaluate compliance with the
remainder of the Amendments to the Consent Orders. In doing so,
we will evaluate the effectiveness of all servicer loss
mitigation and foreclosure prevention activities, not just
those they request credit for under the Amendments to the
Consent Orders. We intend to ensure that loss mitigation
efforts will be done in a manner consistent with the principles
we described in the Amendments to the Consent Orders.
Q.4. Many of the borrowers who were part of the IFR still live
in their homes, but I'm concerned about their ability to stay
in their homes as part of the IFR Payout and consumer relief.
For example, I believe actions such as principal reductions and
loan modifications will help keep these people in their homes,
but short sales would remove these borrowers from their homes.
What steps have you taken, and will you take, to ensure that
the soft dollars are used to keep people in their homes? What
procedures and/or mechanisms are in place to discourage the
servicers from providing relief through short sales?
A.4. Well-structured loss mitigation actions should focus on
foreclosure prevention, which should typically result in
benefiting the borrower and reducing loss. A servicer's
foreclosure prevention actions should reflect the following
guiding principles: (a) preference should be given to
activities designed to keep the borrower in the home; (b)
foreclosure prevention actions should emphasize affordable,
sustainable, and meaningful home preservation actions for
qualified borrowers; (c) foreclosure prevention actions should
otherwise provide significant and meaningful relief or
assistance to borrowers; and (d) foreclosure prevention actions
should not disfavor a specific geography within or among States
or discriminate against any protected class of borrowers.
While the amendments to the Consent Orders express the
priority of such efforts, it is important to recognize that
different borrowers can benefit from different actions. While
effective loan modifications help populations seeking to retain
ownership of their home, other actions, including simplified
short sales, can provide important benefits to other borrowers,
including those who cannot be assisted through modification.
Therefore, the evaluation must be made based on the facts and
circumstances of each borrower, and cannot be prescribed in
advance. The OCC will assess the overall effectiveness of the
servicer's loss mitigation and foreclosure prevention
activities as we test compliance with the Consent Orders.
Q.5. The GAO reports on the IFR cite little stakeholder
consultation within the IFR process. While some access to
Treasury HAMP officials was cited as being helpful in providing
information on loss mitigation and loan modification, why
wasn't there a greater focus on using housing counseling
agencies that have much more experience working through the
difficult and time consuming process of foreclosure
modifications than most big consulting firms?
A.5. The OCC and FRB sought extensive input from community
groups, including groups providing access to housing counseling
services, throughout the IFR process. Since November 2011, the
OCC has engaged community groups on numerous topics, such as
readability, marketing and outreach, resources for non-English
speakers, borrower financial injury, and improving
transparency. A number of changes to the IFR process, including
but not limited to, revisions to the draft Financial
Remediation Framework, the expanded marketing campaign,
additional in-language resources, and servicer funding provided
to community groups, all occurred as a direct result of the OCC
and FRB's extensive interactions with community group
stakeholders. A listing of these efforts can be found attached
hereto as Appendix A.
Q.6. One of the main purposes of the IFR process was to have
data to enable the OCC and Federal Reserve Board to tell
whether a bank had a particular kind of file or type of mistake
that it was repeating, so the consultants could dig deeper into
their other files. Since the OCC and Federal Reserve abandoned
the review, to what extent will they be able to further examine
whether certain banks committed systematic errors in their
foreclosures based on either preliminary results or based on
information that they gathered through regular bank
examinations or other sources?
A.6. The OCC has learned a great deal about the nature of
servicer errors through the horizontal examinations that were
the basis for our Consent Orders, the work done by the
independent consultants, and the examination work we have
completed since the Consent Orders were executed. We have used
this knowledge as we have assessed changes in servicing
practices, and we will also use that knowledge as we evaluate
the servicer's compliance with the Amendments to the Consent
Orders.
Q.7. The Foreclosure Review Payment Agreement provides $125,000
to those most harmed by these foreclosure abuses, and at least
$300 to those who may not have been harmed at all. Can you
specifically explain how these payments will be administered
and what steps will be taken by the OCC and FRB to ensure that
borrowers receive the relief they need? Specifically, how are
we administering these thousands, sometimes over a hundred
thousand dollars, to these borrowers? What types of mechanisms
are in place to ensure transparency and accountability?
A.7. As of June 7, 2013, more than 2.7 million borrowers have
cashed or deposited nearly $2.4 billion in checks related to
the IFR Payment Agreement. The total number of checks sent
through this date is more than 3.9 million and worth more than
$3.4 billion.
According to Huntington Bank, the IFR Payment Agreement
check cash rate is four times that of their historical
experience for other consumer-related class action settlements.
The OCC has committed to providing public reports regarding
the receipt of payments under the agreement.
Q.8. The National Mortgage Settlement and Independent
Foreclosure Review addressed foreclosure abuses by many large
mortgage servicers from 2009-2010. Now that we have two
distinct avenues of relief for these borrowers, what mechanisms
are in place to ensure there is no overlap in assisting these
borrowers? Or of more concern to me, what steps are in place to
ensure that no borrowers are left behind?
A.8. Pursuant to the terms of the Amendments to the April 13,
2011 Consent Orders, foreclosure prevention action for which
the servicers seek credit for must be ``in addition to'' any
foreclosure prevention action for which the servicer has sought
credit for under the National Mortgage Settlement. Servicers
are expressly prohibited from any double counting under the
Amendments to the Consent Orders.
Also, the April 13, 2011 Consent Orders require servicers
to achieve and maintain effective loss mitigation and
foreclosure prevention programs. Additionally, the Amendments
to the Consent Order provide guiding principles for foreclosure
prevention activities, which emphasize affordable, sustainable,
and meaningful home preservation actions, or other significant
and meaningful assistance for qualified borrowers.
Q.9. In their April 2013 report, the Government Accountability
Office states that the uniqueness of each servicer's population
and their processes for keeping borrowers' information posed
challenges. In fact, the OCC and Federal Reserve Board said it
was not feasible to design one file review process that would
apply to all servicers in the IFR, and the consultants would be
required to tailor their review processes. How do you believe
the leeway given the consultants to tailor their own reviews,
without proper guidance, led to the abandonment of the IFR?
A.9. We do not believe the leeway given to consultants to
tailor their reviews was a significant factor in changing our
direction. While the independent consultants were employing
different processes and methodologies, they were working toward
the same objectives, which were provided in the Consent Orders.
Further, we do not agree the independent consultants did not
have proper guidance. The OCC did provide appropriate guidance
to the independent consultants to help them develop their
review processes. First, the sections of the April 2011 Consent
Orders outlining the purpose of the foreclosure review for all
banks were nearly identical. This similarity in the Consent
Orders was intended to ensure that the reviews covered the same
issues and resulted in similar results for similarly situated
borrowers. Second, between May 2011 and October 2012, the OCC
and FRB issued 29 joint pieces of guidance to the independent
consultants on various topics to help them frame the file
review process and promote consistency in its implementation.
Certain guidance was designed to be a unifying factor among all
the reviews by helping ensure that similarly harmed borrowers
received similar remediation. Other guidance was issued in
response to similar questions received from multiple
consultants or examination teams, which oversaw the reviews at
the local level, to help promote consistency in the reviews.
For example, guidance on the review for compliance with the
SCRA was designed to provide consistent results for all
affected borrowers. In addition to consistent Consent Orders
and guidance, the OCC implemented regular and robust
communication mechanisms to help foster consistency in the
reviews, including regular meetings involving independent
consultants, servicers, examination team staff overseeing the
consultants' work, and OCC headquarters and Federal Reserve
Board staff to discuss challenges with the file review process
and help promote consistency among the reviews.
Q.10. From May 2011 to October 2012, the OCC and FRB issued 29
joint pieces of guidance to the consultants, and regulators had
regular weekly meetings with the consultants to clarify
guidance. When you continually clarified guidance to the
consultants, what impact did that have on the loan files that
had already been reviewed, prior to the new guidance? When
changes were made to how files should be reviewed, is it
logical to assume that those changes must be retroactively
applied to the already reviewed files? Were these previously
reviewed files reviewed again?
A.10. In most situations, the OCC and FRB issued guidance to
provide clarity or address inconsistencies in practices among
some of the independent consultants, with many of the
consultants already fully complying with the formal guidance.
For those consultants not fully complying with the guidance,
change in practice was necessary and, when applicable given the
nature of the guidance, certain files required some amount of
re-review. Often, only a portion of a previously reviewed file
focusing on a specific subject area needed to be re-worked to
achieve compliance with the guidance rather than are review of
all aspects of the file.
Appendix A
Engagement with Consumer Groups on the IFR
May 2013
The OCC began meeting and talking regularly with a
cross-section of consumer and legal aid organizations
about the Independent Foreclosure Review in November
2011. Our series of regular meetings and frequent
discussions have informed our decisionmaking in
numerous areas, including: marketing and outreach,
extension of the deadline for borrowers to request
reviews, types of financial harm, and remediation. The
groups also offered extensive comments on the IFR
Remediation Framework, which was provided to them in
draft.
These frequent meetings and discussions have
continued about implementation of the IFR Payment
Agreement.
Two meetings with Americans for Financial Reform
(AFR) representatives focused on the Payment Agreement
Waterfall. Shared a final draft of the Waterfall for
comment prior to finalizing payment determinations.
Also gathering AFR input on: Reporting on Loss
Mitigation/Foreclosure Prevention efforts, IC Findings,
and Enforcement of servicing part of the original
Consent Order.
Working With Consumer and Counseling Groups on Outreach
In December 2011, the OCC, FRB, servicers and FSR
(on behalf of the servicer consortium) participated in
two sessions of the annual NeighborWorks training
conference, attended by community group representatives
from around the country, to provide information and
answer questions about the foreclosure review.
The OCC met with representatives of the Loan
Modification Scam Prevention Network and coordinated
introductions to the servicer consortium, resulting in
added borrower alerts for fraud or scam activity
related to the advertisements, second mailings, and Web
site materials.
Regulators produced five nationwide Webinars to
familiarize counselors and consumer groups with the IFR
and later the IFR Payment Agreement in order to help
the groups assist their constituents. The Webinars are
posted on the agencies' Web sites along with
transcripts in English and Spanish.
IFR
February 2012--IFR: Helping Homeowners Request a
Review
March 2012--IFR: Helping Homeowners Request a
Review
September 2012--IFR: What You Need to Know
IFR Payment Agreement
March 2013--IFR: Important Changes
May 2013--IFR: Important Changes
The independent consultants separately held a
teleconference and several in-person meetings with
consumer group representatives to share foreclosure
review information. For example, in May 2012, community
group representatives visited the Promontory/Bank of
America site to review how reviews are being conducted.
As part of the Phase I of marketing of the IFR, the
OCC worked with servicers to identify ways to provide
resources and additional support to advocates to expand
their capabilities for promoting participation in the
IFR.
During that phase, Several servicers adopted the
regulators' suggestion to provide financial support to
advocacy groups to enhance borrowers' familiarity with
the IFR initiative. To date, three servicers have
supported approximately 15 intermediary organizations
with well over 100 member organizations servicing
communities across the country. By design, the support
permits maximum flexibility to tailor outreach
activities best suited for the diverse clienteles the
organizations serve. Groups have issued direct
mailings, emails, and mass flyers, held conferences and
workshops, conducted outreach at street fairs, offered
individual and group counseling sessions, collaborated
with other community organizations, and leveraged
faith-based partnerships to expand IFR awareness.
Groups also supplied two toll-free phone lines (one
specifically for Spanish speakers) and at least 13
informational Web sites on the IFR. They also released
two videos and issued several press releases. Other
assisted borrowers in requesting and completing the
form and assembling supplementing information and
documents. Groups have also prepared advertising in
several Asian languages and developed IFR information
materials in languages such as Hmong, Vietnamese,
Korean, Russian, Tagalog, and Mandarin Chinese.
Consumer and counseling groups were central to
developing and implementing the Phase II marketing plan
for the IFR. In August 2012, regulators brought
together consumer and counseling groups in August such
as--HomeFree USA, Neighborworks America, National Fair
Housing Alliance, National Council of LaRaza, to help
develop the plan.
Building on group participation during Phase I, the
second phase dedicated $5 million to fund 16 groups,
covering 70 markets. Groups used an online toolkit with
creative materials to: conduct mailings and outbound
calling to their client data bases, assist borrower in
retrieving documents and completing the IFR forms,
conduct grass roots outreach activities--events,
speaking engagements, and panels, engage community
partners to disseminate information, and engage church
community through pastoral messaging, church
newsletters, flyer distributions and post-service
gatherings/ministries.
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM RICHARD M.
ASHTON
Q.1. In response to a question regarding current standards for
determining the independence of consultants hired by financial
institutions, Mr. Stipano of the OCC stated that the OCC had
not ``reached the point of putting pen to paper'' to outline
its policies for a consultant's independence.
Has the Federal Reserve also considered developing written
policies for independence of consultants retained in compliance
with enforcement actions?
If so, have you considered the procedure to develop those
requirements, including the factors to be considered, the
parties to be consulted, and the timeline for rules, and will
this policy be available for review by financial firms,
consulting firms, Members of Congress, and the public? If not,
why not?
A.1. As the Board's recent testimony before the Senate Banking
Committee's Subcommittee on Financial Institutions and Consumer
Protection stated, our consistent practice has been to oversee
the selection and performance of consultants that are required
to be retained by a Federal Reserve-regulated institution to
carry out specific functions on behalf of the institution under
an enforcement action. This oversight includes approving the
selection of a particular consultant, which requires a review
of the consultant's prior work for the institution to assess
potential conflicts of interest, and a determination that the
consultant will have appropriate qualifications and separation
from the institution's management. We also monitor the
consultant's performance during the course of the engagement
through ongoing communications and meetings as appropriate.
Throughout the course of our oversight, we apply the same
supervisory expectations as if the institution were performing
the work directly. As stated in the Board's testimony, these
standards for overseeing consultants' conduct of a specific
engagement are applied on a case-by-case basis, so that a
consultant's performance can be measured in light of the
specific kind of function that the consultant must carry out.
Financial institutions supervised by the Federal Reserve
are only infrequently required in an enforcement action to
retain consultants to carry out specific functions on behalf of
the institution. In the vast majority of cases, the financial
institution itself, using its own personnel and resources,
takes the necessary corrective and remedial measures under the
enforcement action. The Federal Reserve is evaluating the use
of consultants in enforcement matters and is considering the
appropriate role for consultants and whether the current
oversight standards should be incorporated into written public
guidelines.
Q.2. In your testimony you provided a list of supervisory
actions that can be taken by the Federal Reserve to monitor
independent consultants. In light of the issues found during
what the OCC termed the ``expanded oversight'' of consultants'
work during the Independent Foreclosure Review and reports of
consultants' poor performance during reviews resulting from
poor Bank Secrecy Act anti-money laundering compliance, does
the Federal Reserve see any need for changes or increased
consistency in its oversight of the work of independent
consultants?
A.2. In those enforcement actions that require retention of a
consultant, the Federal Reserve applies the same standards as
if the regulated institution was performing the function
directly and has the authority to require the regulated
institution to replace the consultant and can take appropriate
formal enforcement action against the consultant and the
regulated institution as appropriate.
The role of the consultants in the Independent Foreclosure
Review (IFR) of individual borrower files required under the
recent enforcement actions against the major residential
mortgage servicers was significantly different than in the
typical enforcement action undertaken by the Federal Reserve.
We are now implementing all of the recommendations of a recent
report of by the Government Accountability Office (GAO) on the
oversight of consultants during the IFR in our continuing
oversight of the remaining institutions that are still
conducting a foreclosure review. We will also consider the GAO
recommendations in overseeing future enforcement actions.
Q.3. While the OCC and the Federal Reserve sought to increase
transparency in the use of independent consultants in the case
of the Independent Foreclosure Review by publishing engagement
letters between servicers and their consultants, in many cases
redactions removed information that could shed light on the
consultants' independence and the quality of reviews. For
instance, in Bank of America's engagement letter with
Promontory Financial Group, Promontory's more than two and a
half page conflicts of interest policy (Attachment C) is fully
redacted. Why was this policy fully removed when it was put in
place to ensure transparency and quality reviews, and how would
the effect of disclosing such a policy negatively impact the
supervisory and enforcement process?
A.3. Information regarding conflicts of interest policies was
not redacted from engagement letters between the servicers we
regulate and the consultants retained by those servicers to
conduct the IFR when these letters were publicly disclosed by
the Federal Reserve on its Web site at www.federalreserve.gov/
consumerinfo/independent-foreclosurereview.htm. The published
letters describe the methodology the consultants had to follow
in reviewing borrower files to identify financial injury, the
protocols the consultant had to follow to maintain sufficient
independence from the servicer in carrying out the IFR, and
other details concerning the IFR. Small portions of each letter
were redacted in the published version only when necessary to
protect, for example, proprietary financial information of the
parties, such as the identity of proprietary data management
systems or specific fee schedules charged by the consultants,
and information that could compromise personal privacy, such as
the names of the specific individuals who were involved in the
foreclosure review at the servicer and at the consultant.
Because mortgage servicing activities by the Bank of America
Corporation are conducted by its national bank subsidiary, the
engagement letter related to the IFR at the Bank of America was
approved and disclosed by the Office of the Comptroller of the
Currency, not the Federal Reserve.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM RICHARD M. ASHTON
Q.1. Please provide copies of all contracts, in unredacted
form, that were executed between the banks subject to the
consent orders and the consultants they hired, which were
reviewed and approved by the Board of Governors of the Federal
Reserve (Federal Reserve) in connection with the Independent
Foreclosure Review (IFR) process.
A.1. The Federal Reserve published the engagement letters
between the servicers we regulate and the consultants retained
by those servicers to conduct the Independent Foreclosure
Review (IFR) on its Web site at www.federalreserve.gov/
consumerinfo/independentforeclosure-review.htm. The published
letters describe the methodology the consultants had to follow
in reviewing borrower files to identify financial injury, the
protocols the consultant had to follow to maintain sufficient
independence from the servicer in carrying out the IFR, and
other details concerning the IFR. Small portions of each letter
were redacted in the published version only when necessary to
protect, for example, proprietary financial information of the
parties, such as the identity of proprietary data management
systems or specific fee schedules charged by the consultants,
and information that could compromise personal privacy, such as
the names of the specific individuals who were involved in the
foreclosure review at the servicer and at the consultant.
Q.2. Please explain in detail why the Federal Reserve decided
not to engage consultants directly to conduct the foreclosure
review process. Please identify by name the offices,
departments, and employees that participated in this decision.
If there are statutes in place which prevent direct engagement;
please provide the relevant citations. In addition, please
provide legislative suggestions that will give the Federal
Reserve more flexibility to directly engage in the future.
A.2. As explained in the Board's recent testimony before the
Senate Banking Committee's Subcommittee on Financial
Institutions and Consumer Protection, in the vast majority of
Federal Reserve enforcement actions, the organization itself,
using its own personnel and resources, is directed to take the
necessary corrective and remedial action. In appropriate
circumstances, the Federal Reserve has found that it can be an
effective enforcement tool to require regulated organizations
to retain a consultant to perform specific tasks on behalf of
that organization that the organization should perform itself,
but has shown it cannot do. Where consultants are used, they
work on behalf of the regulated organization. Consequently,
their expenses are appropriately borne by the regulated
organization, and not by the taxpayers.
The decision to require the banking organizations to retain
a consultant to conduct the IFR was based our prior experience
in formal enforcement actions. In a small percentage of these
actions, a consultant retained by the institution involved was
directed to make discrete factual determinations on behalf of
the institution, such as deciding whether a Bank Secrecy Act
filing was made with respect to a particular transaction. This
technique had proven to be effective, and we believed at the
time of the execution of the mortgage servicing orders that the
same approach would be workable with regard to the examination
of individual borrower files under the IFR. The consent orders
requiring the retention of consultants to conduct the IFR were
approved by senior staff in the legal and bank supervisions
areas under regulations delegating such approval authority to
the staff. Prior to exercising this authority, Board staff
consulted members of the Board.
The Federal Reserve has authority to retain its own
independent contractors such as consultants, and has no
suggestions for legislative initiatives in this area at this
time.
Q.3. Please provide copies of all opinions or memoranda (legal
or otherwise) that were considered by the Federal Reserve that
examined alternatives to the foreclosure review process
eventually adopted, including alternatives that considered the
agency engaging consultants directly to perform the foreclosure
review.
A.3. Please see answer to Question #2.
Q.4. In testimony provided at the Subcommittee on Financial
Institutions and Consumer Protection on Thursday, April 11,
2013, Deputy Chief Counsel Daniel Stipano, acknowledged that
the OCC had sought and received advice on the advisability of
the OCC directly hiring consultants to engage in the
foreclosure review process. Did the Federal Reserve also seek
and receive such advice? If so, please explain whether the
advice obtained considered applicable Federal procurement
statutes, regulations, and guidance. In addition, please
explain in detail the analysis and reasoning behind this advice
and what form it took. To the extent such advice was in
writing, please provide these documents.
A.4. The Federal Reserve decided not to directly retain
consultants for the reasons discussed in the answer to Question
#2 above.
Q.5. Please provide a list of all competitive procurement
contracts entered into during calendar year 2012 involving the
Federal Reserve.
A.5. I have been advised that the Board entered into about 500
contracts during 2012 using competitive acquisition methods.
Information on whether any particular contract was awarded
competitively can be provided on request.
Q.6. The GAO report published this March on the IFR process
recommended a series of best practices at the remaining three
financial institutions who haven't yet settled. Have you
instituted all of these guidelines (improved sampling, improved
communication with homeowners, more transparency, etc.) with
OneWest, Everbank, and Allied? Why or why not?
A.6. The Government Accountability Office's (GAO) April 13,
2013 report, ``Foreclosure Review: Lessons Learned Could
Enhance Continuing Reviews and Activities under Amended Consent
Orders'' (13-550T), recommends three actions for the Federal
Reserve and the Office of the Comptroller of the Currency (OCC)
to take as a result of the GAO's review of the IFR. The Federal
Reserve has taken significant steps to implement each of the
recommended actions.
The GAO's first recommendation is for the agencies to
improve oversight of sampling methodologies and mechanisms to
centrally monitor consistency, such as assessment of the
implications of inconsistencies on remediation results for
borrowers in the remaining foreclosure reviews. On July 26,
2013, the Federal Reserve amended its consent order against the
one firm supervised by the Federal Reserve that was continuing
to conduct an IFR, GMAC Mortgage, to incorporate an agreement
to provide payments to borrowers in lieu of the IFR. This
amendment is similar to those announced in early 2012 with
respect to the other servicers that are participating in the
payment agreement. Thus, concerns relating to consistency in
the further conduct of the IFR are no longer an issue with
respect to Federal Reserve-regulated servicers.
The GAO's second recommendation is that the agencies
identify and apply lessons learned from the foreclosure review
process, such as enhancing planning and monitoring activities
to achieve goals, in particular as the agencies develop and
implement the activities under the amendments to the consent
orders. The amended consent orders substituted an agreement to
make payments to all in-scope borrowers and terminated the IFR
at those institutions that accepted the amendments. The Federal
Reserve, in coordination with the OCC, significantly expanded
its planning and monitoring efforts during the course of the
IFR and continues to devote resources to planning and
monitoring the implementation of the remaining requirements of
the amendments to the consent orders. Similarly, the Federal
Reserve has devoted resources to advanced planning with respect
to public reporting on the IFR, and on implementation of the
remaining amendments to the consent orders.
The GAO's third recommendation is focused on the
development of a communication strategy to regularly inform
borrowers and the public about the processes, status, and
results of the activities under the amendments to the consent
orders and continuing foreclosure reviews. The Federal Reserve
and the OCC are implementing a communications strategy to
ensure that borrowers are aware of the amendments to the
consent orders. These actions include sending an initial
notification to the approximately 4.2 million borrowers covered
by the amended consent orders that payments were going to be
sent; a Webinar directed at community groups and other
interested members of the public to explain the process for
distributing checks; and a letter to borrowers to accompany the
payments that explains relevant facts about the payments. In
addition, the OCC and the Federal Reserve sent a letter to
borrowers who submitted a request for review form and whose
servicers at that time were completing the IFR advising them
that their servicer is not a party to the amendments to the
consent orders and that the review the borrower requested
continues and remains in process.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM RICHARD
M. ASHTON
Q.1. I led the efforts in the Senate to request that the
Government Accountability Office assess the independence,
transparency, accountability, and consistency of the
independent foreclosure review process. One of the concerns
I've had since the beginning of the IFR process is whether the
Federal Reserve and OCC were sufficiently contacting those in
our underserved communities. I know there were several
marketing efforts made throughout the process to improve
outreach, but from my understanding, there were certainly
deficiencies in these efforts. With the payouts announced this
week, it appears that in some cases many of the borrowers who
requested a review will receive almost twice the payout as
those who did not request a review.
With the issues surrounding the IFR's outreach efforts,
does this mean those in our underserved communities, who were
not contacted or made aware of the independent review, get will
get less money? Why are we giving more to those who were
contacted and less to those who were not contacted, when we
know there were major hurdles to finding affected borrowers?
A.1. The Office of the Comptroller of the Currency (OCC) and
the Federal Reserve took extensive steps to help ensure that
all borrowers covered by the Independent Foreclosure Review
(IFR) were contacted as part of that process and provided an
opportunity to request a review of their foreclosure. To
address concerns expressed by Members of Congress and
recommendations made by the Government Accountability Office
(GAO), the agencies developed a variety of outreach tools to
broaden the reach of efforts to contact borrowers to advise
them of the process for seeking a foreclosure review. These
tools included targeted television and radio and print media
advertising, using trusted representatives to assist in
reaching borrowers who were likely to have been missed by other
outreach efforts, use of agency public service announcements,
Webinar with consumer groups, and additional direct mail
solicitations in multiple languages.
The agreement with most of the servicers conducting the IFR
that required payments to all borrowers covered by the IFR in
lieu of continuing the review of individual borrower files did
not condition payments on whether or not a borrower was
contacted as part of the IFR process. The amounts paid to
individual borrowers under this payment agreement were
determined by the OCC and Federal Reserve after consultation
with various consumer advocacy groups. Under the approved
schedule of payments, in most cases, borrowers who requested a
review of their foreclosure by an independent consultant under
the IFR received a somewhat larger amount than borrowers in the
same category who did not submit a request for review. The
regulators believed that those individuals who affirmatively
claimed that they were injured by servicer errors should
receive some preference in allocation of the payment agreement
funds.
Our review of data comparing the locations where mailings
to in-scope borrowers were sent, the locations from which
requests for review have been received, and 2010 Census Data
indicates that the percentage of borrowers in low- and
moderate-income zip codes and in zip codes where racial
minorities comprised the majority of the population who
submitted requests for review was generally not lower than the
percentage of in-scope borrowers submitting review requests in
all locations nationwide.
Q.2. The agreement reached by the OCC and Federal Reserve with
the 13 mortgage servicers provides roughly $5.7 billion in
foreclosure prevention assistance (or soft money) and $3.6
billion in cash payments, which will certainly help the
millions of borrowers. Because of the deficiencies and issues
that we read about in the GAO study, I'd like to get a better
understanding of how these dollar amounts (both soft dollars
and cash payout) were determined, because it seems as though we
still do not have a solid understanding of the level of harm to
borrowers. In fact, the new agreement that replaced the
foreclosure review with a compensation framework does not rely
on determinations of whether borrowers suffered financial harm.
So can you explicitly explain how these amounts were
determined?
A.2. With the OCC taking the lead, the regulators accepted the
payment agreement with the 13 mortgage servicers because that
approach would provide payments to more borrowers in a shorter
time than would have occurred if the IFR had continued at those
servicers, where most injured borrowers likely would not see
compensation for some time to come. As you note, the amounts
paid to individual borrowers under the payment agreement are
not based on a finding of financial harm to any specific
borrower. Instead, all borrowers covered by the IFR were
categorized according to the stage of their foreclosure process
and the type of possible servicer error. Regulators then
determined amounts for each category using the financial
remediation matrix published by the OCC and Federal Reserve in
June 2012 as a guide, incorporating input from various consumer
groups. Regulators have published the payment amounts and
number of borrowers in each category on their Web sites at
www.occ.gov/independentforeclosurereview and
www.federalreserve.gov/consumerinfo/independent-foreclosure-
review-paymentagreement.htm.
The payment amounts for several of the categories,
including the category for borrowers eligible for protection
under the Servicemember Civil Relief Act (SCRA), were derived
from the amounts paid to borrowers under recently negotiated
settlements involving similar kinds of claims. In deciding to
accept the payment agreement, we looked to see whether the
total amount available to fund cash payments would be large
enough to provide borrowers in the highest payment categories,
such as SCRA borrowers, with significant payouts while allowing
those borrowers in the lower categories to receive payments in
amounts commensurate with those specified in the financial
remediation matrix. We were also aware that the National
Mortgage Settlement (NMS), which recently had been entered into
between the five largest servicers and the Department of
Justice (DOJ) and the State attorneys general, required $25
billion in cash payments and other relief to borrowers that
would be in addition to the over $9 billion in payments and
assistance that would be provided by the servicers that
participated in the payment agreement. Importantly, the Federal
Reserve and the OCC ensured that each borrower receiving a
payment or other assistance under the payment agreement
retained the right to pursue full remediation through other
means. This ensured that borrowers who could demonstrate
greater harm than addressed by the regulators' remediation
efforts could obtain a court review of those claims and full
remediation to address unique facts and injuries.
Q.3. The agreement reached by the OCC and Federal Reserve with
the 13 mortgage servicers provides $5.7 billion in foreclosure
prevention assistance (or soft dollars), which will certainly
help the millions of affected borrowers. However, my
understanding is that if one of these servicers does a loan
modification or principle reduction for $10,000, and the home
is worth $250,000, the servicer will be credited $250,000 in
foreclosure prevention assistance or consumer relief under the
settlement, instead of just $10,000 for the loan modification
or principle reduction. Are we giving the mortgage servicers
credit for financial assistance that they didn't necessarily
provide? Do you plan to continue this practice moving forward?
Can you explain the policy behind crediting these servicer
dollar-for-dollar for consumer relief?
A.3. In addition to direct cash payments totaling $3.6 billion
to in-scope borrowers, the payment agreement with the 13
mortgage servicers included a commitment by the servicers to
provide a total of $5.7 billion of foreclosure prevention
relief within the next two years. This portion of the agreement
was modeled on the NMS with the DOJ and the State attorneys
general. A servicer can receive credit toward meeting this
commitment by, among other things, providing the kinds of
foreclosure prevention measures that are eligible to receive
credit under similar commitments made by the servicers that
entered into the NMS. These measures include first and second
lien loan modifications and short sales/deeds in lieu of
foreclosure. There are a variety of ways in which the economic
value of these kinds of foreclosure prevention assistance to a
particular borrower can be estimated, and the payment agreement
provides crediting for these types of activities based on the
unpaid principal balance of the affected loan. For example,
where a servicer provides a borrower with a sustainable loan
modification that makes the full remaining loan balance
affordable for the borrower and thus more likely to be repaid,
so that the borrower is able to remain in the residence
indefinitely, the remaining loan balance can be viewed as a
quantification of the value of that modification to the
borrower. Servicers may also receive credit toward their
foreclosure assistance commitment by providing other types of
loss mitigation or other foreclosure prevention actions,
subject to regulatory non-objection, such as interest rate
modifications, deficiency waivers, and provision of cash
payments or other resources to borrower counseling or
education.
Q.4. Many of the borrowers who were part of the IFR still live
in their homes, but I'm concerned about their ability to stay
in their homes as part of the IFR Payout and consumer relief.
For example, I believe actions such as principal reductions and
loan modifications will help keep these people in their homes,
but short sales would remove these borrowers from their homes.
What steps have you taken, and will you take, to ensure that
the soft dollars are used to keep people in their homes? What
procedures and/or mechanisms are in place to discourage the
servicers from providing relief through short sales?
A.4. The amended consent orders that implement the payment
agreement with regard to the servicers participating in the
agreement set forth several guiding principles the servicers
are to follow in conducting their foreclosure prevention
activities obligations under the payment agreement.
Specifically, servicers' foreclosure prevention actions should
give preference to activities designed to keep the borrower in
the home; should emphasize affordable, sustainable, and
meaningful home preservation actions; should otherwise provide
significant and meaningful relief or assistance to qualified
borrowers; and should not disfavor particular geographies or
low- and moderate-income borrowers, or discriminate against any
protected class. Federal Reserve examiners will monitor the
foreclosure mitigation activities of those participating
servicers we regulate in light of these principles and we will
strongly encourage the servicers to focus on the kinds
ofassistance that facilitate borrowers retaining their homes.
Loan modifications are an important tool for keeping
borrowers in their homes, but are not the best solution for all
troubled borrowers. Some borrowers are so behind on their
payments relative to their ability to repay the loan that
exiting the mortgage altogether is their best option. Other
borrowers may want to sell their homes in order to move to
another city where job prospects are better. For these
borrowers, a short sale is a better way to exit the mortgage
than a foreclosure. Short sales can be advantageous to
borrowers because the lender typically forgives the difference
between the mortgage balance and the short sale proceeds. Short
sales also impose fewer costs on communities than foreclosures.
Q.5. The GAO reports on the IFR cite little stakeholder
consultation within the IFR process. While some access to
Treasury HAMP officials was cited as being helpful in providing
information on loss mitigation and loan modification, why
wasn't there a greater focus on using housing counseling
agencies that have much more experience working through the
difficult and time consuming process of foreclosure
modifications than most big consulting firms?
A.5. The Federal Reserve, working with the OCC, has made
extensive efforts to obtain input on many occasions from
national consumer and housing counseling groups on a number of
important issues relating to the IFR and the payment agreement,
especially after the issuance of the GAO report on the IFR in
June of last year. Particularly, in expanding our outreach
efforts to alert in-scope borrowers of the opportunity to
request a review of their foreclosure by independent
consultants pursuant to the IFR, we held several meetings with
consumer groups. We then incorporated their feedback on the
accessibility of outreach materials into advertisements and
subsequent mailings to borrowers to improve the accessibility
and readability of the materials. The Federal Reserve and the
OCC also conducted outreach sessions targeted at housing
counseling agencies, including two Webinars and other outreach
events with local groups at the regional Federal Reserve Banks.
These sessions provided them with information on the IFR
process and trained them in assisting borrowers in completing
the request for review form. In connection with entering into
with the payment agreement with the servicers in lieu of
conducting the IFR, we sought input from consumer
representatives before accepting the agreement. We also met
with community groups to solicit the groups' views on how best
to communicate information about the agreement and the payments
to eligible borrowers they serve. Moreover, the amounts paid to
individual borrowers under this payment agreement were
determined by the OCC and Federal Reserve after consultation
with various consumer advocacy groups.
Q.6. One of the main purposes of the IFR process was to have
data to enable the OCC and Federal Reserve Board to tell
whether a bank had a particular kind of file or type of mistake
that it was repeating, so the consultants could dig deeper into
their other files. Since the OCC and Federal Reserve abandoned
the review, to what extent will they be able to further examine
whether certain banks committed systematic errors in their
foreclosures based on either preliminary results or based on
information that they gathered through regular bank
examinations or other sources?
A.6. A primary focus of the enforcement actions issued by the
Federal Reserve and the OCC in April 2011 always was and
continues to be a requirement that the servicers, in addition
to conducting the file reviews as part of the IFR, correct the
deficiencies in their servicing and foreclosure processes that
had been found during a joint onsite review of federally
regulated mortgage servicers by the banking regulatory agencies
in 2010. The action plans submitted by Federal Reserve-
regulated servicers to correct these deficiencies have been
approved and are being implemented by the servicers. As part of
the ongoing oversight of the servicers we regulate, Federal
Reserve examiners will review the corrective measures those
servicers take to ensure the deficiencies do not recur. Thus,
the change from the IFR process to the current payment
agreement is not expected to affect the identification and
correction of deficient foreclosure practices at these
servicers.
Q.7. The Foreclosure Review Payment Agreement provides $125,000
to those most harmed by these foreclosure abuses, and at least
$300 to those who may not have been harmed at all. Can you
specifically explain how these payments will be administered
and what steps will be taken by the OCC and FRB to ensure that
borrowers receive the relief they need? Specifically, how are
we administering these thousands, sometimes over a hundred
thousand dollars, to these borrowers? What types of mechanisms
are in place to ensure transparency and accountability?
A.7. The Federal Reserve, in coordination with the OCC,
significantly expanded its planning and monitoring efforts
during the course of the IFR and continues to devote resources
to planning and monitoring the implementation of the remaining
requirements of the payment agreement. The agencies have taken
several steps to enhance their planning and monitoring with
respect to the cash payments to borrowers and to ensure that
borrowers are aware of the payment agreement. For example, the
agencies have:
Met with and sought feedback from community groups,
housing counseling organizations, and other interested
stakeholders, and incorporated that feedback into
communications to borrowers about the payment
agreement. Among the communication steps recommended by
the groups and adopted by the agencies was a
requirement that the paying agent, Rust Consulting,
mail a postcard to the approximately 4.2 million
borrowers whose servicers are parties to the payment
agreement, to alert borrowers that they would be
receiving a payment. The agencies received valuable
input that helped improve readability of the mailings
to borrowers;
Developed a letter to borrowers whose servicers are
parties to the payment agreement to accompany their
payment. This letter contains an explanation about why
the borrower is receiving a payment, along with
instructions for cashing the check, a statement that
the borrower is not required to execute a waiver of any
legal claims they may have against their servicer as a
condition for receiving payment, and other important
disclosures;
Presented Webinars on March 13, and April 20, 2013,
for community groups, housing counselors, and other
interested members of the public to explain the
provisions of the payment agreement orders; and
Issued several press releases related to the
payment agreement and made publicly available on our
Web sites information about how cash payment amounts
were determined, the numbers of borrowers falling into
the various payment categories, and the schedule for
mailing checks to borrowers whose servicers
participated in the payment agreement.
The first wave of payments was issued to borrowers on April
12, 2013--and additional mailings have been sent on a regular
schedule since that time. As of July 19, 2013, approximately
4.2 million checks have been sent to borrowers, worth over $3.5
billion. As of August 1, 2013, approximately 2.9 million of
those checks, worth approximately $2.6 billion, have been
cashed or deposited. The payment agreement is achieving our
primary objective, which is to get money into the hands of more
borrowers more quickly than would have occurred had the IFR
continued.
In addition, the Federal Reserve has updated its Web site
with the number and dollar value of checks to borrowers under
the payment agreement that have been deposited or cashed. The
Federal Reserve and the OCC have also committed to providing
public reports that detail the implementation of the amendments
to the consent orders. We anticipate the reports will include
available details about the direct relief and other assistance
provided to homeowners, as well as information about the number
of requests for review, costs associated with the reviews, and
the status of the other corrective activities directed by the
enforcement actions. We are in the process of analyzing this
information at this time and, as explained above, are taking
steps to determine how this information may be best presented
to the public.
Q.8. The National Mortgage Settlement and Independent
Foreclosure Review addressed foreclosure abuses by many large
mortgage servicers from 2009-2010. Now that we have two
distinct avenues of relief for these borrowers, what mechanisms
are in place to ensure there is no overlap in assisting these
borrowers? Or of more concern to me, what steps are in place to
ensure that no borrowers are left behind?
A.8. The IFR and the NMS are separate actions and provide
different forms of remedies and relief. The IFR and the payment
agreement that replaced it at 13 servicers were required by the
Federal banking regulatory agencies under enforcement actions
against the largest mortgage servicers and cover borrowers who
were in foreclosure at some time during 2009 and 2010 at those
servicers. The NMS, announced and filed in Federal district
court in early 2012, requires five large mortgage servicers,
all of which are subject to the banking agency enforcement
actions, to address mortgage loan servicing and foreclosure
abuses alleged by multiple Federal and State government
agencies, by, among other things, making payments to borrowers
and also providing specific types of foreclosure prevention and
mitigation actions. Borrowers are not disqualified from the IFR
or from receiving a payment or assistance under the payment
agreement between the servicers and the Federal Reserve and OCC
if they also receive payments or other relief as a result of
the NMS, and payments under the IFR or the payment agreement
will not be offset by payments the borrower has received under
the Borrower Payment Fund of the NMS. Moreover, for servicers
not currently part of the NMS, the foreclosure prevention
actions required by the Federal Reserve and OCC are in addition
to any consumer relief obligations required of those servicers
under any settlement similar to the NMS that may be entered
into by these servicers with the DOJ or Department of Housing
and Urban Development.
The agencies' enforcement actions and NMS together cover
borrowers who were in foreclosure during an extremely active
period of the home mortgage crisis. While borrowers are
continuing to face foreclosure after that period, corrective
action to servicing and foreclosure procedures taken by major
mortgage servicers under the regulators' enforcement actions
and the national servicing standards implemented under the NMS
should help to prevent injuries in the future caused by
servicer errors to borrowers who subsequently enter the
foreclosure process. Borrowers who are not covered by these
formal government agreements, like those who are covered, are
able to file complaints about the handling of their foreclosure
under the consumer assistance procedures of the Federal Reserve
and OCC and the customer complaint procedures of the servicer
involved.
Q.9. In their April 2013 report, the Government Accountability
Office states that the uniqueness of each servicer's population
and their processes for keeping borrowers' information posed
challenges. In fact, the OCC and Federal Reserve Board said it
was not feasible to design one file review process that would
apply to all servicers in the IFR, and the consultants would be
required to tailor their review processes. How do you believe
the leeway given the consultants to tailor their own reviews,
without proper guidance, led to the abandonment of the IFR?
A.9. Ensuring that all borrowers covered by the IFR who
suffered similar kinds of injury received the same treatment
was a major objective of the Federal Reserve and OCC in
overseeing the file review process. The Federal Reserve and OCC
undertook numerous actions aimed at achieving this goal. Not
only were the enforcement action provisions that addressed the
IFR requirement substantially identical for all covered
servicers, but the Federal Reserve and OCC also issued
extensive common guidance, including a joint framework for
remediation of specific borrower injuries designed to promote
consistent treatment of borrowers. In addition, Federal Reserve
staff engaged in continuous offsite monitoring of the
consultants, consisting of weekly calls and periodic in-person
meetings. Federal Reserve examiners also engaged in regular
onsite testing to review the consultants' work and each of the
examiner teams engaged in regular calls, quarterly in person
meetings, and other ad hoc communications as needed to ensure a
consistent approach.
Ultimately, the very large number of borrowers involved and
the time-consuming, expensive, and difficult nature of the
review substantially delayed payments to borrowers. Therefore,
as explained in the answer to question #2 above, the regulators
accepted the payment agreement with the 13 mortgage servicers
to provide payments to more borrowers in a shorter time than
would have occurred if the IFR had continued at those
servicers.
Q.10. From May 2011 to October 2012, the OCC and FRB issued 29
joint pieces of guidance to the consultants, and regulators had
regular weekly meetings with the consultants to clarify
guidance. When you continually clarified guidance to the
consultants, what impact did that have on the loan files that
had already been reviewed, prior to the new guidance? When
changes were made to how files should be reviewed, is it
logical to assume that those changes must be retroactively
applied to the already reviewed files? Were these previously
reviewed files reviewed again?
A.10. Given the unique and unprecedented nature of the IFR, it
was not possible to contemplate, develop, and implement all of
the guidance needed to conduct the IFR at the outset of the
IFR, and many issues requiring guidance from the regulators
surfaced only through the actual conduct of the reviews by the
consultants. The Federal Reserve and OCC coordinated closely to
ensure that the guidance we provided was consistent, including
in how borrowers were treated across servicers.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM KONRAD ALT
Q.1. In your testimony you said that ``in performing an
independent review, we are working for the regulator.'' Yet, in
his testimony, Richard Ashton stated that ``consultants
retained under Federal Reserve enforcement actions work for the
organization that retained them.'' In light of these
potentially conflicting statements, can you explain your
relationship with financial institutions and regulators in
average engagements beyond the Independent Foreclosure Review
more fully?
A.1. Did not respond by publication deadline.
Q.2. While the OCC and the Federal Reserve sought to increase
transparency in the use of independent consultants in the case
of the Independent Foreclosure Review by publishing engagement
letters between servicers and their consultants, in many cases
redactions removed information that could shed light on the
consultants' independence and the quality of reviews. For
instance, in your engagement letter with Bank of America, your
more than two and a half page conflicts of interest policy
(Attachment C) is fully redacted, and the policy does not
appear to be readily available on your Web site. Do you feel
that your conflicts of interest policy should be removed, or
would you support its disclosure in public enforcement actions?
A.2. Did not respond by publication deadline.
Q.3. In your testimony you stated that you were ``working for
the regulator.'' Do you think that it would add additional
transparency and simplify your working relationships if you
were to enter into contracts directly with regulators, rather
than with financial institutions?
A.3. Did not respond by publication deadline.
Q.4. Please explain your use of subcontractors and your service
as a subcontractor for others. In what cases did you use
subcontractors, and in what cases did you serve as a
subcontractor for others?
At the time of your engagement you testified that you had
qualified people who could do this work, how many people did
you have on staff that had specific skills in understanding how
to conduct an internal foreclosure project?
Can you confirm reports that work was offshored to
employees in foreign countries, such as the Philippines? If so,
which countries?
A.4. Did not respond by publication deadline.
Q.5. Given the results of the Magner/Jones decision, were you
aware of the implications of the Magner/Jones decision, how did
you account for the systemic errors at Wells Fargo, in your IFR
review of Wells? Did you check for systemic errors at your
other engagements BofA & PNC?
A.5. Did not respond by publication deadline.
Q.6. You frequently claimed that borrower harm calculations
could be determined by evaluating 25 documents associated with
a case file, experts propose that to accurately determine harm
borrowers harm, 150-180 documents associated with a case file
must be reviewed, please demonstrate your process compared to
the following templates.
A.6. Did not respond by publication deadline.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM KONRAD ALT
Q.1. For the purposes of our oversight role, please tell us
what you believe to be the biggest design error(s) made by the
OCC and Federal Reserve with respect to the IFR? What should be
the lesson(s) learned?
A.1. Did not respond by publication deadline.
Q.2. As we contemplate a reauthorization of the Bank Secrecy
Act and anti-money laundering laws, what changes do you believe
need to be made in the law that will help make these laws less
subject to violation?
A.2. Did not respond by publication deadline.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM JAMES F.
FLANAGAN
Q.1.1. In your testimony you noted that you ``worked closely
with the OCC and the Fed throughout the IFR engagements'' and
that you ``provided the regulators with weekly written and oral
status updates.''
Was the level of interaction between regulators and
consultants typical for an engagement of this nature?
A.1.1. As I discussed in my testimony before the Subcommittee,
the role of an independent consultant in an engagement pursuant
to a consent order is highly dependent on the individual agency
order. In our experience, we have not seen a one-size-fits all
consent order or a typical independent consultant role. The
scope and scale of the IFR engagements were unprecedented; in
that context, it was important to communicate regularly with
the regulators throughout the process and concerning all
aspects of our work.
Q.1.2. What types of daily interactions do
PricewaterhouseCoopers employees have with regulators and the
financial institutions under examination? How do these
interactions influence your independence as a consultant?
A.1.2. PwC worked closely with the regulators in a number of
different ways during the IFR engagements. PwC engagement teams
interacted most often with the Examiners-in-Charge (``EICs'')
for each of the engagements, including through weekly updates
to the EICs about the status of the engagements and emerging
developments. The EICs, in turn, provided updated guidance,
conducted onsite visits, and assessed and provided comments on
the review process. PwC also provided weekly written and oral
status updates to the OCC and the Fed and met with more senior
representatives of both agencies to discuss broader issues
concerning the IFR process.
The servicers were responsible for building the files that
were to be reviewed by the Independent Consultants during the
IFR engagements. Accordingly, PwC regularly communicated with
the servicers regarding the state of the loan files and made
requests of the servicers for additional documents that were
missing from files. In addition, PwC also communicated
routinely with the servicers regarding the status and progress
of the engagements. At no time, however, were there
communications in which the servicers attempted to influence
the way in which PwC performed its procedures or the
observations made by PwC as a result of those procedures.
Neither our interactions with the regulators nor our
communications with the servicers affected PwC's independence
or objectivity. During the IFR engagements, we were asked to
act--and in fact acted--as impartial and objective consultants.
Applying rules and guidance provided by the regulators and the
Independent Legal Counsel, we provided observations regarding
whether servicer files complied with applicable State and
Federal laws. Neither the regulators nor the servicers sought
to bias our review or to influence our observations. The
regulators provided the framework with which we worked, and, as
described above, we periodically discussed with the servicers
the state of the loan file documentation and the status of our
work. We see no way that either type of conversation could have
impaired our objectivity in performing the IFR work.
Moreover, as I emphasized during my testimony before the
Subcommittee, we view our objectivity and impartiality as the
foundation of our brand and the premise that underlies all of
our professional services. Our firm maintains extensive
procedures, policies, processes, and controls in an effort to
govern which engagements we can pursue and accept and to
maintain our objectivity and impartiality during the course of
engagements. We also adopted a number of specific procedures to
maintain our objectivity and impartiality in the IFR
engagements, which I outlined in my testimony.
Q.2. Do you think contracting directly with the regulatory
agencies, instead of with the financial institutions, would
enable you to perform the task at hand and avoid the potential
for conflict of interests?
A.2. Regardless of whether we are engaged directly by the
regulatory agency or by the financial institution, we believe
that we can perform the services objectively, free of conflicts
of interest, and consistent with professional standards. For
example, as discussed above, we believe we performed the IFR
engagements impartially and objectively and without any
conflicts of interest. We maintain procedures, processes,
policies, and controls that govern which engagements we can
accept, and when we feel that we cannot meet the necessary
standards of objectivity and impartiality, we decline the
engagement. With regard to the IFR engagements specifically,
the regulators' review and approval of the engagement letters
should obviate any concern that the terms of engagement would
have been any different had the engagement been by the
regulators, instead of by the servicers. We believed at the
outset and continue to believe today that we were able to and
in fact did perform the IFR engagements without any bias and
free of any inappropriate influence.
Q.3. Was your organization able to learn any valuable
information about the mortgage servicing business as a result
of your work on the IFR? Can you offer any observations about
the flaws or shortcomings in the current mortgage servicing
model, or recommendations for improvements?
A.3. As reflected in our engagement letters and the guidance
provided by the regulators, the scope of PwC's IFR services was
narrow: we were to apply procedures designed to identify
servicer errors and which of those errors caused financial harm
to a borrower. We were not engaged to, and did not endeavor to,
assess broader questions concerning the mortgage servicing
business. The regulators, who received not only our reports but
those of the other Independent Consultants, are better suited
to address the state of the mortgage servicing business and any
need for change.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED FROM JAMES F.
FLANAGAN
Q.1. For the purposes of our oversight role, please tell us
what you believe to be the biggest design error(s) made by the
OCC and Federal Reserve with respect to the IFR? What should be
the lesson(s) learned?
A.1. The IFR process served two purposes--to provide the
regulators with sufficient data to make policy judgments about
reforms to the servicing business and to compensate borrowers
for injuries arising from servicer error. While those two
missions, which are embedded in the January 2011 settlements
between the regulators and the servicers, are complementary,
the effort to identify all servicer errors, irrespective of
whether they could have or did cause financial injury, delayed
our efforts to provide observations regarding financially
harmed borrowers. It is not apparent that the twin missions of
the IFR process represent a design flaw, but they were the
source of much of the public disappointment in the time it took
to conduct the reviews. It appears with the benefit of
hindsight that there was perhaps too little consideration given
when the IFR process was conceived to the tension between the
effort's competing goals.
Q.2. As we contemplate a reauthorization of the Bank Secrecy
Act and anti-money laundering laws, what changes do you believe
need to be made in the law that will help make these laws less
subject to violation?
A.2. Issues involving the Bank Secrecy Act and anti-money
laundering laws were not within the scope of the IFR
engagements, and I am therefore not in a position to address
this question.
------
RESPONSE TO WRITTEN QUESTIONS OF CHAIRMAN BROWN FROM OWEN RYAN
Q.1.1. In your testimony you noted the importance of ``open
communication and an appropriate working relationship among the
independent consultants, the regulators and the institutions
being monitored.''
Was the level of interaction between regulators and
consultants typical for an engagement of this nature?
A.1.1. There was frequent, open, and continuous communication
between Deloitte & Touche LLP (``Deloitte'') and the regulators
throughout the Independent Foreclosure Review (``IFR'')
engagement. There were weekly scheduled meetings and timely
reporting to the regulators which served as an important
mechanism for communicating our approach and progress. Since
the IFR engagement was unique in our experience, it is
difficult to assess whether this level of interaction was
``typical'' for an engagement of this nature.
Q.1.2. What types of interactions do Deloitte employees have
with regulators and the employees of the institutions they are
examining?
A.1.2. The types of interactions that Deloitte personnel have
with regulators on independent consulting engagements generally
include meetings, written communications and reporting on a
timely basis. When we are engaged in the capacity of an
independent consultant, Deloitte personnel are typically
working subject to the monitoring, oversight, and direction of
the regulators. With respect to employees of the institution we
are reviewing, Deloitte personnel meet with employees of the
financial institution for various purposes such as gathering
information, status updates, or to discuss the ramifications of
particular regulator requests.
Q.1.3. How do these interactions influence your independence as
a consultant?
A.1.3. Our independence as a consultant was not influenced in
any way by the financial institution. In the IFR engagement,
and as required in our engagement letter, Deloitte was subject
to the monitoring, oversight, and direction of the regulators,
and we were required to be objective at all times. Deloitte was
expressly not subject to the direction, control, supervision,
oversight, or influence by the financial institution. In
addition, we have policies and procedures that are designed to
ensure that each engagement is approached with due professional
care, objectivity, and integrity, consistent with the American
Institute of Certified Public Accountants consulting standards.
Q.2. In your testimony you stated that engagements require
``regulatory approval of the independent consultant and the
scope and methodology to be used.'' How would contracting
directly with regulators, rather than with financial
institutions, change the nature of the engagement?
A.2. Direct contracts between the independent consultants and
the regulators may have an impact on the procedure for the
selection and retention of independent consultants, in that the
selection and retention may be subject to Federal procurement
rules and requirements, including, for example, competitive
bidding. Such a process may lengthen the time to retain an
independent consultant and may complicate how the independent
consultant is compensated. Such direct contracts might enhance
the appearance of objectivity, although we strongly believe
that we are able to and do discharge our responsibilities with
appropriate objectivity regardless of the contractual
arrangement. Direct contracts between independent consultants
and the regulators would not necessarily be expected to affect
the level and quality of the already robust communications
between the consultants and the regulators, or the actual scope
of the independent consultant's services.
------
RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED
FROM OWEN RYAN
Q.1. For the purposes of our oversight role, please tell us
what you believe to be the biggest design error(s) made by the
OCC and Federal Reserve with respect to the IFR? What should be
the lesson(s) learned?
A.1. In response to this question, we refer to the GAO's March
2013 Report (the ``Report'') that made detailed findings and
conclusions and stated that it revealed ``three key lessons''
that could help inform regulators' implementation of the
amended consent orders: (1) designing project features during
the initial stages of the process to influence the efficiency
of file reviews, (2) monitoring progress to better ensure the
goal of achieving intended results, and (3) promoting
transparency to enhance public confidence. We agree with these
lessons and the recommendations of the Report.
Q.2. As we contemplate a reauthorization of the Bank Secrecy
Act and anti-money laundering laws, what changes do you believe
need to be made in the law that will help make these laws less
subject to violation?
A.2. We have not formed a view as to what, if any, changes may
need to be made to these laws. We are, however, open to
consideration of any such changes to the law and welcome the
opportunity to engage in dialogue with legislators and
regulators in connection with any proposed legislation, and
would be happy to provide any assistance that was needed as
part of this process.