If you have set a Google Alert with the terms, "independent foreclosure review," then you have been receiving a lot of links lately. In addition to the ongoing coverage of the fallout at Naked Capitalism, the Senate Banking Committee's Independent Foreclosure Review (IFR) hearings have made quite a few headlines.
Recently-elected Senator Elizabeth Warren is widely lauded for taking Federal regulators to task for the inept manner in which they handled the oversight and management of the IFR. After the jump, some of the best from the IFR hearings and other fallout from the failed program.
The IFR hearings transcript is a great read. Senators Brown, Reed, and Warren all set the tone for the hearings quite well. They gave representatives of the Office of the Comptroller of Currency and the Federal Reserve a chance to testify and then answer questions about their oversight (or lack thereof) of the IFR process. They then turned to representatives of the "independent" reviewers -- employees of some of the consulting firms hired by the banks to conduct the IFR.
In their opening remarks, the Senators highlighted problems that had been uncovered in the IFR process. For example, Senator Brown described the case of one consulting firm that was given written notice of its need to improve its performance -- this performance remained deficient until the date that the IFR settlement was announced.
Senator Warren's opening statement described the lack of response she and Congressman Elijah Cummings received to their 14 requests for information regarding the process. She concluded her opening statement by saying:
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'm hoping in this hearing to give you an opportunity to provide us with some greater clarity than you've thus far offered in our meetings and our correspondence.
After initial testimony from the OCC and the Fed, the questions began. Here are some of the best excerpts.
Senator Reed asked the representatives of the OCC and the Fed why they allowed the banks to hire their own consultants to conduct the IFR, as opposed to those consultants being hired by the government. Both representatives indicated that independent reviews had always been done that way and that the size and scope of the IFR had been problematic. Senator Reed stated:
But there's 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's a different context. And I just think you - to delegate the way you did an essential regulatory function, by asking the banks to choose their inspector, just doesn't work. It won't work.
This had been an issue raised by observers and bloggers since the beginning of the IFR. Allowing banks to hire their own investigators gave the investigators a large incentive to make the banks happy -- obviously, there might be situations where they'd need to be hired again to conduct other reviews. Let's not forget that whistleblowers from inside the IFR described situations where the review forms came with pre-selected answers that were favorable to the bank. In the context of the IFR, this goes beyond regulatory capture and verges on indentured regulators.
Senator Brown then turned to the issue of oversight and the regulation of consultants -- at what point is a consultant deemed not qualified?
Sen. Brown: We're not - you used the word pristine. We don't expect pristine here. That sounds too difficult. But we do expect, I think, clear standards in what qualified means. And, 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 dollars or presented watered-down reports to regulators? Wouldn't - that wouldn't be enough for disqualification?
Mr. Stipano, OCC: 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. And, you know, maybe that results in, you know, some kind of written standards. We don't presently have them, but I think this is an important area and we are committed to doing a better job.
Sen. Brown: Has there been a process started to write these standards?
Mr. Stipano, OCC: I think, I think we're still in an evaluative phase, but I think that, you know, the goal is to have -
Sen. Brown: But what, you're in an evaluative phase - this isn't just the IFR. This is since 2008, the number of -
Mr. Stipano, OCC: I know.
Sen. Brown: You're still in an evaluative stage on whether you're going to write standards -
Mr. Stipano, OCC: No, we -
Sen. Brown: - for the future? [crosstalk] ...evaluate the other, but before you begin to write these standards?
Mr. Stipano, OCC: Yeah. I think, 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.
My main take away from this exchange is that the regulators aren't that diligent about regulating. If the practice of allowing banks to hire consultants to conduct investigations into those same banks is a standard model, then why aren't there written standards for those consultants' performance? Time and again, the witnesses from the OCC and the Fed bemoaned the size of the IFR and its uniqueness compared to other regulatory actions.
No doubt, the IFR (and the foreclosure crisis) is a unique situation when compared to investigating the actions of a single bank in a single situation or handfull of situations. At the same time, we trust the OCC and the Fed (among others) to protect and regulate our financial system. If it fails, then we all fail.
Senator Warren focused her questions on hard data related to the results of the IFR. In particular, Senator Warren was concerned about the amount of wrongdoing identified by the IFR and how that played into the terms of the overall $9 billion settlement:
Sen. 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% of the cases. And my question is, if you had found that they had broken the law in 90% of the cases, would you have demanded more money from the banks?
Mr. Ashton, Fed: It would have been a factor, I believe, but -
Sen. Warren: I'll take that then as a yes. Because what I take it to mean, since you used it in your press release and since it's 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% 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 few weeks after announcing the settlement, your agency revised the 6.5% number down to 4.2%. The Wall Street Journal reported that the error rate - that is, the rate of breaking the law or making mistakes - was 11% at Wells Fargo, 9% at Bank of America, and there are reports that the error rate at JPMorgan Chase was only six tenths of 1%. In other words, the 6.5% 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 don't have enough facts to check it. But the question I have is, what is the right number? Is it six tenths of 1%? Is it 6.5%, 9%, 11%, 20%, 50%, 90%? If you can't 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, Fed: Well, Senator, I think I can only reiterate that the decision that was made to accept that agreement, and we recognized that that was not a perfect agreement, was based on the delay that would have been involved in any alternative. To continue the Independent Foreclosure Review and trying to -
Sen. Warren: Mr. Ashton, I'm sorry. I understand the point about delay. But it doesn't 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 the number. Is that not right?
Mr. Ashton, Fed: To estimate the number with more precision would have required additional delay in providing, 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 time frame.
As Senator Warren's questions went on, it became clear that neither the Fed nor the OCC had hard data relating to exactly just how many homeowners were harmed by the actions of 14 banks over the course of two years. While 2009 and 2010 may have been the height of the foreclosure crisis for many states, states like Illinois are still struggling to process foreclosures.
Don't forget that foreclosures didn't stop on January 1, 2011. Our own regulatory process won't be formally revamped until 2014 when the CFPB's mortgage servicing guidelines take effect. But there is a bigger problem -- if we don't know how many people were harmed in a two-year period, how are we to track and regulate illegal practices over the lifetime of this crisis?
Another surprising revelation from the hearings is that both the OCC and the Fed claimed that much of the information gained from the process is privileged and confidential. Without a demand from Congress, that data may never see the light of day. Some of that information may be useful to individuals who have claims against the mortgage servicers. Senator Warren elaborated on this point:
Sen. Warren: All right. Now, if a family wants to bring a lawsuit, you're both lawyers, would it be helpful, if you're going against one of these big banks, would it be helpful for these families to have the information about their case that's in your files. Mr. Ashton?
Mr. Ashton, Fed: It would be helpful, obviously, to have information related to the injury, yes it would.
Sen. Warren: Okay. 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's in your possession about how the banks illegally foreclosed against them? Mr. Ashton?
Mr. Ashton, Fed: I think that's a decision that we're still considering. We haven't made a final decision yet.
Sen. 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, Fed: We haven't made a decision about what information we would provide to individuals, that's true, yes.
Sen. Warren: Mr. Stipano?
Mr. Stipano, OCC: Same position.
Sen. Warren: So, I just want to 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 bank's activities. You let the banks - and you now know individual cases where the banks violated the law, and you're not going to tell the homeowners, or at least it's not clear yet whether or not you're going to do that?
Mr. Ashton, Fed: We haven't made a decision on what we're going to tell the homeowners.
Sen. Warren: You know, I just have to say, I thought this was about transparency. That's 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're doing your job is if you make some of this information publicly available. And so far, you're not doing that. And without transparency, we can't have any confidence either in your oversight or that the markets are functioning properly at all. So, and that people are going to receive proper compensation for what went wrong.
After the conclusion of Senator Warren's questions for the regulators, the focus turned to the consultant firms. However, Senator Warren stayed focused on the idea of full disclosure:
Sen. Warren: Thank you very much, Mr. Chairman. You know, I'm going to ask you some question about numbers and how this review was designed, but I never want to forget in this that the particular instance we're talking about here involved 4 million families. And it involved people who lost their homes, whose lives were turned upside down, people who didn't sleep, people who had to tell their children that they were going to have to change schools. This was a terrible process that we've 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's based at least in part on a 6.5% error rate. I think I said earlier it was in a 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 lawbreaking that went on and appropriately hold these banks accountable? So I'm 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've 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's a subset of the 4 million families for which the review was designated. So you looked at about 13% of the files, that came to about 2% 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 4 million people?
The answer, as might be expected, was no.
Even more surprising was that the consulting firms were not involved in categorizing the eligible homeowner files into the various payout categories.
Sen. Warren: As 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 service members who are protected by federal law whose homes were unlawfully foreclosed. It's got people who were current on their payments whose homes were foreclosed. It's 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 4 million families, who put the people, the families, into each of these boxes? Is that what your firms did? Mr. Ryan?
Mr. Ryan, Deloitte: No, Senator, we did not.
Sen. Warren: So who put them in?
Mr. Ryan, Deloitte: Well, I'm not sure how that schedule is prepared. I saw it for the first time yesterday.
Sen. Warren: Mr. Flanagan?
Mr. Flanagan, PwC: Same response. We were not involved in the accumulation of that information.
Sen. Warren: Mr. Alt?
Mr. Alt, Promontory: Senator, I've seen the schedule, but I'm not familiar with the basis for its preparation.
Sen. Warren: So let me understand this. You ran the independent reviews, right? That's 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, Promontory: No, Senator, we were not asked to do that.
Sen. Warren: Mr. Flanagan?
Mr. Flanagan, PwC: No, we were not.
Sen. Warren: Mr. Ryan?
Mr. Ryan, Deloitte: We were not, Senator.
Sen. 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 lawbreaking and as a result how many people would collect money in each of these categories. Is that right, Mr. Alt?
Mr. Alt, Promontory: Senator, as I said, I'm not familiar with the basis for the schedule...
Sen. 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 4 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, Deloitte: Senator, my understanding was the banks were supposed to put this together and the OCC was going to look at it, but I don't know exactly what transpired.
Sen. Warren: All right, but you made no independent review of this.
Mr. Ryan, Deloitte: We did not.
Sen. Warren: Were not asked to make any independent review of this. Mr. Flanagan?
Mr. Flanagan, PwC: PwC was not involved in the settlement or the preparation of that schedule.
Sen. Warren: All right. Mr. Alt?
Mr. Alt, Promontory: Same answer, Senator. We were not involved.
As I've said before, it appears that the IFR was neither independent, nor a review. This is a regulatory fail of massive proportions. It's no wonder that some people are advocating for a class action lawsuit.
For another, shorter take on this, Alan White over at Credit Slips has some addtional thoughts.
Did you receive a settlement check from the Independent Foreclosure Review? If so, please leave a comment.