Lawmakers lambasted regulators Thursday for providing poor oversight of consultants hired to review millions of troubled home loans as part of a multibillion-dollar foreclosure agreement with the country’s largest banks.
“People want to know that their regulators are watching out for the American public, not the banks,” Sen. Elizabeth Warren (D-Mass.) told regulators at the Senate banking committee hearing. “Without transparency, [we] cannot have any confidence in your oversight or that markets are functioning correctly.”
The foreclosure agreement was one of the largest to come out of the housing crisis. In 2011, more than a dozen mortgage servicers, including Bank of America and Wells Fargo, agreed to compensate homeowners after regulators identified fraudulent and flawed foreclosure practices. The servicers hired outside consultants to review their foreclosure files and pay homeowners based on the problems they found.
Those eight consulting firms walked away with a total of $1.9 billion before regulators shut down the process and negotiated a $9.3 billion settlement with most of the banks.
Lawmakers and advocacy groups have been troubled that consultants received billions of dollars from the initial review process, while a majority of the 4.2 million homeowners covered under the agreement will get just a few hundred dollars.
More than 1 million checks will be issued Friday, including to 1,081 military service members who lost their homes in illegal foreclosures and will receive $125,000. Most eligible borrowers will receive no more than $1,000, and half will get about $300.
“Top consultants are staffed by scores of former regulators and big-bank employees that charge as much as $1,500 per hour to give banks their expertise,” said Sen. Sherrod Brown (D-Ohio). “There is little transparency — to the public or to Congress — and we can only speculate about the financial incentives and business relationships that consultants have.”
Regulators routinely require banks to hire independent consultants to review their procedures and operations as part enforcement actions, including settlements. Nearly a third of the 600 actions taken by the Office of the Comptroller of the Currency from 2008 to 2012 required banks to retain consultants, according to the agency.
None of those cases quite rivaled the “breadth, scale and scope” of the foreclosure review, according to Daniel P. Stipano, deputy chief counsel for the OCC. He testified at the hearing that “the large number of institutions, independent consultants and counsel involved in the process . . . required substantial regulatory oversight.”
In light of the faulty review, the OCC is asking Congress to expand its authority to sanction independent consulting firms that engage in wrongdoing.
Rep. Maxine Waters (D-Calif.) introduced legislation Thursday calling for the disclosure of any business relationships among consultants, regulators and banks. The bill would also require consultants to be paid by the government when used in an enforcement action, instead of by the banks.
Lawmakers, including Waters, say the Federal Reserve and the OCC have refused to turn over documents specifying the foreclosure violations of each of the mortgage servicers involved in the settlement.
Warren and Rep. Elijah E. Cummings (D-Md.) sent a letter to Fed Chairman Ben S. Bernanke and Comptroller Thomas J. Curry this week challenging that decision. Officials at both agencies acknowledged receiving the letter but declined to comment on the matter.
“You’re saying that [you] 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?” Warren asked at the hearing.
The hearing comes a week after the Government Accountability Office issued a scathing report blaming regulators for the botched foreclosure review. “Broad guidance and limited monitoring” from regulators “reduced the potential usefulness of data from consultants and increased risks of inconsistency,” the report said.
The OCC and the Fed failed to provide “timely and useful communication” to borrowers and the public, hindering transparency and undermining public confidence in the process, according to the GAO.
OCC and Fed officials have acknowledged that the process was difficult.