by: Darrell Delamaide
WASHINGTON — A belated attempt by bank regulators to get compensation for homeowners who were foreclosed on by mistake turned into a debacle by the time it was shut down in February and is now becoming a scandal as more details emerge.
The Independent Foreclosure Review (IFR) was set up in 2011 to engage outside consultants to look at foreclosures taking place in 2009 and 2010 and determine where errors were made.
But last February, regulators decided after two years with only 100,000-some cases reviewed that the process was too much trouble, and opted instead for a $9.3 billion settlement with the biggest mortgage companies that awards the victims pennies on the dollar for their losses.
In all, 80% of those subject to the foreclosures covered by the agreement will get $1,000 or less, while the outside consultants who handled the review reaped a windfall of $2 billion, nearly $20,000 for each case actually reviewed.
At a hearing last week before a Senate Banking subcommittee, lawmakers grilled representatives of the two regulatory agencies involved, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, about these consultants and the review process.
Sen. Elizabeth Warren, D-Mass., asked repeatedly whether the agencies were going to notify victims who had been illegally foreclosed on that this had happened. But lawyers for both regulators demurred, saying a decision had not yet been made.
“You have made a decision to protect the banks but not to help the families who were illegally foreclosed on,” Warren retorted. “You know of cases where the banks broke the laws, but you are not going to tell the homeowners. People want to know that their regulators are watching out for the American public, not the banks.”
Earlier last week, Warren and Rep. Elijah Cummings, D-Md., the top Democrat on the House Oversight committee, sent a letter to the regulators rejecting their excuses for not releasing details of possible illegal activity because of confidentiality concerns.
“Federal Reserve staff argued that the documents relating to widespread legal violations are the ‘trade secrets’ of mortgage servicing companies,” Warren and Cummings wrote. “We strongly believe that documents should not be withheld from any member of Congress based on the flawed argument that illegal activity by banks is somehow their proprietary business information. Breaking the law is not a corporate trade secret.”
In late March, the Government Accountability Office issued a report on the IFR that sharply criticized regulators for giving the consultants guidance that was too broad and for insufficiently monitoring the consistency of methods and results.
The GAO report also said regulators “adversely impacted transparency and public confidence” through insufficient communication with eligible borrowers and the public in general.
Last week’s Senate hearing was titled “Outsourcing accountability? Examining the role of independent consultants” and zeroed in on the role of the consultants themselves. These outside consultants have an inherent conflict of interest because they often work with the banks on compliance and legal issues.
The IFR debacle has thrown a spotlight on one consulting firm in particular, the Promontory Financial Group, which could serve as a poster child for the revolving door in financial regulation in Washington.
The group, which collected some $1 billion for its work in the failed IFR, was founded by Eugene Ludwig, who headed the OCC during the Clinton administration. Since it first opened its doors in 2001, it has grown to 400 employees, many of them former staffers at the regulatory agencies.
An article in this month’s American Banker Magazine describes how Ludwig built Promontory “into a shadow network between banks and regulators.”
As an example of just how quickly the door revolves at Promontory, the magazine noted that the firm in January hired Julie Williams, former chief counsel at the OCC, and the regulator replaced her days later with Amy Friend, who was a managing director at Promontory.
And earlier this month, Promontory announced it was hiring Mary Schapiro, who stepped down in December as chairman of the Securities and Exchange Commission.
In the other direction, Sarah Bloom Raskin, who became one of the seven members of the Fed’s Board of Governors in 2010, had been a managing director at Promontory earlier in her career.
This is heady stuff, even for a Washington thoroughly inured to conflict of interest. Lawmakers are right to throw the spotlight on these consultants, who are taking the concept of Beltway Bandits to a new level.
It’s probably too late to help the foreclosure victims, who are now unlikely to see any meaningful compensation from errors made by the banks. But the probe of the IFR debacle is a step in the right direction to make bank regulators focus on protecting citizens instead of banks.Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington, D.C., for Dow Jones news service, Barron’s, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.
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