Full transcript of 4/11/13 Senate Independent Foreclosure Review hearing


Full transcript of 4/11/13 Senate Independent Foreclosure Review hearing

Full transcript of 4/11/13 Senate Independent Foreclosure Review hearing

Courtesy of CORRENTE. [Amazing they put this all together to share with you.]

Hearing video here


Senate Banking, Housing and Urban Affairs Committee
Financial Institutions and Consumer Protection Subcommittee

Hearing: Outsourcing Accountability? Examining the Role of Independent Consultants
Thursday, April 11, 2013, 10 AM – 12 PM

Panel 1
Daniel P. Stipano, Deputy Chief Counsel, Office of the Comptroller of the Currency
Richard Ashton, Deputy General Counsel, Board of Governors of the Federal Reserve
Panel 2
Konrad Alt, Managing Director, Promontory Financial Group, LLC
James F. Flanagan, Leader, U.S. Financial Services Practice, PricewaterhouseCoopers LLP
Owen Ryan, Partner, Audit & Enterprise Risk Services, Deloitte & Touche LLP



Chairman Sen. Sherrod Brown (D-OH): 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 him all over television this morning. I know that it’s ongoing. The vote is going to be at 11 o’clock, so we will – I’m 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 both will have to step out for a minute, but their place will be reserved, and we will recess some time between 11 and 11:15 for 15 minutes, I’m going to keep it to 15 minutes, so I can go vote and come back, but we don’t want to make any of the five witnesses, this panel or the second panel, wait any longer than they have to. So. But I wanted to thank you. And there will be opening statements too after I’m done. So thanks all for being here. I want to welcome – 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 this Senate, and the majority’s, the full committee staff, on helping on a fairly complicated hearing.

In the financial crisis and its aftermath, we’ve 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’re reading more and more about that. In some, reportedly, some of these reports have said charges have been as much as $1500 an hour. Because most consulting firms are private companies, there’s 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’ve heard about consultants hired at regulators’ request to find and to fix illegal activity. In these few high-profile cases, they either missed serious problems or gave the banks a free pass.

It’s 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’s 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 28th 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, but with so little information about these consultants and whom they report to, it’s 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’s 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 Petersen 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 committee, that it’s something this committee should consider.

Thank you again for joining us. Senator Warren, your opening statement.

Sen. Elizabeth Warren (D-MA): Thank you, Mr. Chairman, and thank you very much for holding this hearing. Thank you, Mr. Stipano and Mr. Ashton, for coming here today. You know, 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’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. Thank you.

Sen. Brown: Thank you, Senator Warren. I’d 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 Associate General Counsel for the Board of Governors at the Fed. He has supervised litigation, enforcement and system matters since 2006, where he has primary responsibility for litigation and formal enforcement activities of the agency. Mr. Stipano, if you would begin. Keep it to five minutes because we will almost certainly do multiple rounds of questions for both panels. So if you could stay close to five minutes, thank you.


Daniel Stipano, OCC: Thank you, Chairman Brown, Senator Warren. Thank you for this opportunity to discuss 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, 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 in 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, distinguish 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.

Sen. Brown: Thank you, Mr. Stipano. Mr. Ashton. Thank you. Please proceed.


Richard Ashton, Federal Reserve 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 and 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.


Sen. Brown: Thank you, Mr. Ashton. Thank you, both of you, again, for staying around five 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’ve not disclosed that yet – will you tell us the name of the firm in question?

Mr. Stipano, OCC: Senator, I’m 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.

Sen. Brown: So how does – ? Okay, I want to talk more about that process, but how does disclosing the identity of an underperforming, I guess is the best word, consultant, a third party, prove harmful to the relationship between the OCC and the banks that you regulate?

Mr. Stipano, OCC: Well, there are a number of things. I think that in general, to the extent that we’re 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’re still in the process of doing that, with respect to the IFR and the IFR settlement. We’re kind of in midstream. If we were to depart from that, there are consequences that could undermine the supervisory process. It could make institutions less willing to be forthcoming with us during examinations, and to the extent that we’re contemplating actions, whether it’s against an institution or an independent contractor, were we to disclose that while we’re still in the middle of a process that could potentially affect the action that we ultimately take. There’s 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’re not required to disclose. If we voluntarily disclose privileged bank examination material, then we waive the privilege as to the world.

Sen. Brown: There’s a bigger issue, and we’re not probing every detail of that relationship. We – I mean there’s a bigger issue here. There’s, 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 don’t have confidence in the stability of this financial system, and taxpayers haven’t gotten a whole lot out of this settlement so far. Homeowners are getting an average of about $300. And we – 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 isn’t, doesn’t the public interest outweigh that?

Mr. Stipano, OCC: I think –

Sen. Brown: To know who it is? Not without, not with all the details –

Mr. Stipano, OCC: Yeah.

Sen. Brown: – of what necessarily went wrong, depending on what that consultant wants to say at that point.

Mr. Stipano, OCC: 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’re kind of in midstream 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’re trying to implement the IFR settlement. So we do anticipate doing public reporting. We’re also, we’re still in an evaluative phase. I’m not really sure at this point, you know, what the message would be, and part of our evaluation is to take a look at, you know, the conduct of the servicers themselves and take a look at the consultants and then form conclusions. We’re still doing that.

Sen. Brown: Okay. When can we expect that? I mean, I know that you announced and removed Allonhill, another consultant, so there is some precedent, and we’ll 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’ve 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’s a peculiar function, obviously as you know, because they’re paid by the banks but they’re doing work supposedly in the public interest. I think it’s useful for us to understand this compensation structure. My comments in this question is this: Understanding there are concerns in the case of the IFR with one consulting firm, I won’t 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, OCC: 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.

Sen. Brown: So at some point we will know what each of these seven firms was paid?

Mr. Stipano, OCC: Uh – it is not the OCC’s role to have to approve or disapprove the disclosure of that information.

Sen. Brown: Two of the consultants – this is what makes me especially curious. We know that these seven firms were paid somewhere upwards of 2 billion dollars, 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’s particularly curious: Two of the consulting firms have told us that the engagements, they thought, would generate between 5 and 8 million dollars, 5 and 8 million dollars. When all was said and done, a firm at the lower end conservatively made 200 or 300 million – you just take 2 billion, divide it by 7, you have a number of rather, you know, 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, OCC: We are knowledgeable about the compensation, yes.

Sen. 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 or a billion – when did you think there might be a problem?

Mr. Stipano, OCC: Okay. I don’t 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 two 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 didn’t, we did not fully appreciate that. It seems easy now. It wasn’t at the time. And the best proof of that, if you go back and look at the consent order, we gave the servicers 120 days to get this done. Which is astounding. I mean, you know, 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 anytime soon, we felt like there had to be a better way to do this, and that’s what really prompted the IFR settlement. I do not – I’m not here to tell you that it’s a perfect process, what we’ve done, but the goal behind it and what we’ve done and what we’re going to achieve, starting tomorrow, is to quickly get cash into the hands of the affected borrowers, and that was something that wasn’t happening under the IFR.

Sen. 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 in your staff? I mean I just can’t imagine when you thought 120 days – and I understand people make misjudgments, but 120 days, 5 to 8, you’re saying 120 days, they’re saying 5 to 8 million – when it goes way beyond – earlier than the 120 you were beginning to see this as tens of millions, ultimately hundreds of millions – did these consultants, did any of them say that they had concerns about the rate at which costs were growing?

Mr. Stipano, OCC: 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, you know, up until the time when we decided to settle the matter and not continue the IFR, we were still all committed to try and make it work.

Sen. Brown: Let me ask one more question and then turn it to Senator Reed. Were the fees paid by banks, the two point – upwards of 2 billion dollars, was that considered in setting the settlement amount to be paid by those banks? In other words, could that, did that amount, that 2 billion dollars, result in less compensation for borrowers?

Mr. Stipano, OCC: Not at all.

Sen. Brown: How do you know that?

Mr. Stipano, OCC: 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 paid to the consultants is not a factor.

Sen. Brown: And when was that determined, when the fund, size of the fund?

Mr. Stipano, OCC: It was negotiated towards the end of last year, the beginning of this year.

Sen. Brown: But if you’re the bank and you’ve realized you’ve spent, pick a number, 328 million or 90 million –

Mr. Stipano, OCC: Yeah.

Sen. Brown: – on paying Consultant X, don’t you think that affected their negotiations on how large a settlement it would ultimately be?

Mr. Stipano, OCC: I can’t speak for the banks.

Sen. Brown: How do you know that it didn’t?, is the better question.

Mr. Stipano, OCC: I don’t know that it didn’t because I can’t get inside their head. We had certain goals in minds in terms of negotiating to an amount that we thought would be sufficient, and, you know, we did not factor in the amount that they were paying to the consultants.

Sen. Brown: Okay. Senator Reed.


Sen. Jack Reed (D-RI): Thank you, Mr. Chairman. I’m still at the same question I had about a year ago when this issue came up. I think, you know, Mr. Stipano, you said it, that basically the core of this issue is financial harm to borrowers who were, because of the wrongdoing of banks – not because of, you know, just the economy moved and they were unfortunate – that seemed to be at the essence of what the core, 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 but had a contractual relationship to the bank? Why?

Mr. Stipano, OCC: Well, we thought it was the best alternative. There’s clearly –

Sen. Reed: Do you still think it’s the best alternative?

Mr. Stipano, OCC: No. I think if we had it to do over again, we would take a different approach.

Sen. Reed: You will have it to do over again. So what today is the policy of the offices of the Comptroller of the Currency with respect to investigating wrongdoing of banks? Is it to hire or augment your staff with a contractual relationship with these consultants directly –

Mr. Stipano, OCC: Yeah.

Sen. Reed: – or is to let the banks pick their favorite consultant?

Mr. Stipano, OCC: 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. I mean, it wouldn’t be, it’s 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. So that’s 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 engagement where there’s 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’d be lots of bids, there would be contest and challenges. We might still be at a point now where we haven’t even begun the IFR because we’re still going through the procurement process, so that, that was, we felt that was too unwieldy and not a good option. And the only other option, the other option would be to have, you know, 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 didn’t take, you know, in the design of the program, and what we’re doing right now, and I have to be honest with you, Senator, I don’t 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.

Sen. Reed: So your bottom line was, because it had to be competitively bid, you felt that was not the appropriate approach?

Mr. Stipano, OCC: Yeah, and maybe, maybe that – you know, I’m not a, I’m 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, that 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.

Sen. 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, OCC: Um. That process didn’t work either.

Sen. Reed: Yeah. So I think you’ve got to have a new process, and I think if the process requires modification of federal rules or regulations, that’s something that OCC and the Fed should immediately demand of us, because essentially what, you know, you described what is a core activity of the OCC, stopping the wrongdoing of regulated institutions and protecting consumers. Among safety and soundness, those are sort of the three critical issues. And if you don’t have the statutory framework to do that effectively, you’ve got to tell us, one, but two, I would go back very strongly because, you know, that’s some of the shibboleth around here. “Oh, competitive bidding is so difficult, etcetera, this contest” – every major sort of program in the federal government, it usually has an aspect of competitive bidding, and yet, you know, 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 you will, they’ll be directly hired by the OCC. Which raises an issue, and I want to raise the same question to the Fed, is that I would presume that because they were able – they did in fact conduct contractual relations with, that those contracts were drafted and approved by the institutions, and I would assume that the obligations of the consultants were primarily to their, their – the person they had a contract with, not to OCC.

Mr. Stipano, OCC: No, I don’t think that’s 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.

Sen. Reed: In reality, did the independent consultants act at your direction?

Mr. Stipano, OCC: I believe so, yes.

Sen. Reed: Can you provide us documentation to that effect?

Mr. Stipano, OCC: I don’t know if there is documentation. We’d be happy to discuss it with your staffs.

Sen. 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, Fed: So I think, Senator, when we set up the process with the OCC, we started out with the model that Mr. Stipano has described, that we’ve had a history in the past 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 the – What we found out in practice was that the scope of the review, that the independent consultants had to find every single injury, was so extensive and time-consuming that it was just not effective. And so that’s why we decided to change it.

Sen. 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, Fed: Well, 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. I don’t think, we haven’t looked into the authority question so I can’t –

Sen. 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, which, seems to me, this is inherent – and you’re talking about people who are professionals on both sides. 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. And if there’s authorities you need, and I’m very – the Fed has such expansive authorities, I’d be shocked, because I’d like to see the competitive bidding that you’ve done in the past on lots of issues, I’d be shocked if you needed the authority. But that seems to be the lesson of this. And, you know, we can go back and do, and we will, the postmortem on how it happened and what you’re going to do to fix it, but going forward, you know, I think that’s the lesson that has to be drawn.

Mr. Chairman, I think this is a very important – you have additional questions.

Sen. Brown: Yeah, I’m going to go, and then Senator Warren will be back and we’ll do a second round.


Thank you for your insight into Senator Reed’s questions. He talked about an inherent conflict, and the underlying problem here is I think pretty clear. There’s the independence, there’s 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 if you do.

Mr. Stipano, OCC: The critical factors in our minds, first and foremost, is that any consultant that’s brought on have the right resources and expertise to do the job. I mean, that’s separate really from independence, but nonetheless very important. On the independence point, it is not realistic in most cases to expect that independent consultant would have no prior ties to the institution. I mean, they’re 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, engaged in it, 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 in the national mortgage settlement, we would consider that to be disqualifying. And we did disqualify some of them on those grounds.

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.

Sen. Brown: Since you’re – I mean, understanding you have to farm out many things because of consultants and the size of OCC, but can’t you sort of process all of this evaluative IFR and other consulting, and at the same time with another part of OCC start to write these standards of what qualified means?

Mr. Stipano, OCC: Yeah. It’s – we’re at a beginning stage, and we haven’t really reached a point of putting pen to paper.

Sen. Brown: I hope that point starts this afternoon. One other question about that and then I’ll turn to Senator Warren. Alan Blinder, a founder and I believe still a 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’s been reported they didn’t 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’s been reported that they didn’t just 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’d 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’s 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 and arrangements that go into the hundreds and hundreds and hundreds of millions of dollars?

Mr. Stipano, OCC: Well, I would start by just saying the entire IFR process was one off, unprecedented, unlike any situation we had ever encountered before. I think, you know, one reason why we put in our consent orders that it had 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’m not intimately involved in the details of Promontory’s engagement and I can’t really speak to that. I do know that they themselves hired large numbers of consultants – or, consultants, contractors, to assist in their portion of the IFR, and, you know, given the enormity of the task, that doesn’t seem inappropriate.

Sen. Brown: Thank you. Senator Warren, we have, 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 don’t you proceed as long as we can go until the vote is called.

Sen. 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’s 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 dollars. 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% of the cases. Now I assume if you had believed that the banks had broken the law in 90% 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% 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, Fed: Well, 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 –

Sen. Warren: Oh, I understand that.

Mr. Ashton, Fed: – and it was only one of the factors that we took into account to decide whether –

Sen. Warren: I understand. But the question I’m 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% of the cases, presumably you would have settled for a lot more money. Is that right?

Mr. Ashton, Fed: I think that the error rate was a factor. It was not the only factor.

Sen. Warren: Okay.

Mr. Ashton, Fed: I think –

Sen. Warren: It’s [not] the only factor, but it certainly would have mattered if you thought that the banks broke the law 90% of the time as opposed to say 6.5% of the time.

Mr. Ashton, Fed: That’s true, but there were other factors that led the board to accept it, especially the delay that would have been, um –

Sen. 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, Fed: Well, the approach that was taken in the settlement agreement really is focused on trying to get cash to the borrowers as quickly as possible.

Sen. Warren: But the question is not getting cash to them, 300 dollars, 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, Fed: So, the settlement agreement is not based on findings of individual injury. It’s a different approach. So we gave up looking for individual injury and decided –

Sen. Warren: So, I read your press release at the time 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 week after announcing, 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 a 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.

Sen. Warren: Mr. Ashton, I can’t 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’re 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, OCC: Senator, I am not an expert on the IFR settlement. I was not directly involved in it. I can answer general questions and I’ll do my best to do that. My understanding is that when it comes to the error rate, I don’t really know how it was calculated, to be honest. There are people in the agency who do. They’re not here. I do believe that we did review a substantial number of files, admittedly –

Sen. Warren: I’m sorry. Mr. Stipano, we met with your staff –

Mr. Stipano, OCC: Yeah.

Sen. Warren: – and your staff has made clear, you did not review a random sample.

Mr. Stipano, OCC: No, it wasn’t a random sample. No.

Sen. Warren: And without a random sample, can you then generalize to the accurate number, even an estimate, of how many banks broke the law?

Mr. Stipano, OCC: Um, not – in my, my understanding is not in a statistically valid way. However –

Sen. Warren: Okay, that’s a no.

Mr. Stipano, OCC: 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.

Sen. Warren: Well, so you’re telling me it’s not a random sample but you think you know something.

Mr. Stipano, OCC: It has some value. It’s a factor.

Sen. Warren: And what is it that you know, since we’ve seen different numbers reported?

Mr. Stipano, OCC: I’m assuming that’s where the error rate came from, but I’m only assuming, Senator. I was not involved in that.

Sen. 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, OCC: I think that’s accurate.

Sen. Warren: So far you have not given us that information.

Mr. Stipano, OCC: 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.

Sen. Warren: So let me just, 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, OCC: Eventually we’re 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.

Sen. Warren: So you’re saying you will make that information publicly available?

Mr. Stipano, OCC: I did not say that. I said that we’re planning on issuing a public statement that wraps up the IFR and provides additional information.

Sen. Warren: That’s not what I’m asking you for.

Mr. Stipano, OCC: Yeah.

Sen. Warren: What I’m asking for is a bank-by-bank analysis of how many families they illegally foreclosed on. Will you give us that information?

Mr. Stipano, OCC: We can provide that to Congress in its oversight capacity if we go through the normal processes that we’re prepared to follow.

Sen. Warren: And why are you not making that public? I just want to make sure I understand.

Mr. Stipano, OCC: I don’t know there’s been a decision not to. I think that we’re still evaluating what we’re going to release publicly.

Sen. Warren: Are you claiming that the information about illegal activity is privileged and confidential?

Mr. Stipano, OCC: It’s all part of the con– it is all confidential supervisory information, but that does not mean that we won’t at some point release some of that information. That decision just hasn’t been made at this point.

Sen. Warren: So you’re saying when you find evidence of illegal activities –

Mr. Stipano, OCC: Yes.

Sen. Warren: – by the banks –

Mr. Stipano, OCC: Yes.

Sen. Warren: – when they have illegally foreclosed –

Mr. Stipano, OCC: Yes.

Sen. Warren: – against homeowners, that that information is privileged and you will not release it without a letter from Congress.

Mr. Stipano, OCC: If it is derived from the bank examination process, yes, it is privileged.

Sen. Warren: How else will you get it?

Mr. Stipano, OCC: Well, sometimes you get information through third parties, through outside sources, but in this case that’s not the case.

Sen. 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’re saying?

Mr. Stipano, OCC: To the extent that the information is confidential supervisory information derived from the exam process, it is subject to privilege. We don’t ordinarily make that public. However, in this case, we do plan on making public issuances describing further findings and further analysis of the process.

Sen. Warren: On a bank-by-bank basis of illegal activity.

Mr. Stipano, OCC: I don’t know if that’s been determined yet.

Sen. 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’s 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, OCC: Yes.

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. So, do we have time for another couple of questions?

Sen. Brown: We don’t. We don’t.

Sen. Warren: Okay, I will stop.

Sen. Brown: The vote has started about eight minutes ago.

Sen. Warren: All right.

Sen. 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, his Department of Justice said that they were concerned about prosecution because of the – he didn’t 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 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, and 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’m hopeful that this starts a new era in transparency and in helping those families that have been wronged.

The vote is about 10 minutes and we will recess, and I thank the first panel for joining us. There will be follow-up from Senator Warren, I’m sure, and Senator Reed and me to the two of you, but you’re dismissed and we’ll call up the second panel within about 15 minutes. So we stand in recess.

– gavel –

[End 1:24:30]

* * *
[1:44:45] RESUMING


Chairman Sen. Brown: Subcommittee will come to order. Thank you for your patience, and thank you especially the second panel for waiting around while Senator Warren and I voted. I’ll introduce the next panel and then we’ll 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, with particular expertise in retail lending. He’s 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 included banking and capital markets, insurance and asset management sectors. He’s actively involved with PricewaterhouseCoopers’ global financial services leadership team as well as U.S. foreign firms audit leaderships team.

Owen Ryan has an advisory practice at Dulut– sorry, Deloitte & 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 the board of both the Dulut board of directors – Deloitte – why can’t I say that today – Deloitte board of directors and executive committee.

Mr. Alt, if you would try to keep it close to five minutes, and each of you, and I very much appreciate all three of you joining us, all of you, thanks.


Konrad Alt, Promontory: Thank you, Mr. Chairman. Good afternoon, or 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 don’t make regulations. We don’t issue guidance. We don’t assign examination ratings and we don’t 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 essential 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 a solution.

The nature of regulatory oversight in our independent consultant 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 a regulator and with a 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.

Sen. Brown: Thank you, Mr. Alt. Mr. Flanagan, thank you for joining us.


James Flanagan, PwC: 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 bank and capital markets, insurance and their 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’d 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 consultant’s 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 for 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 in the procedures underlying PwC’s work continued to evolve. As we 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 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.

Sen. Brown: Thank you, Mr. Flanagan. Mr. Ryan, thank you for joining us. Welcome.


Owen Ryan, Deloitte: Chairman Brown, other members of the subcommittee, good morning. My name is Owen Ryan and I lead the advisory practice at Deloitte & Touche LLP. Our advisory practice offers a wide range of services to clients in most major industries. Our services include cybersecurity 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 high 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 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 Certified Public Accountant 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 an 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 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 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 will be happy to answer any questions you have.


Sen. Brown: Thank you, Mr. Ryan. Thanks to the three of you. There are – 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. Flanagan?

Mr. Flanagan, PwC: No, sir.

Sen. Brown: Mr. Ryan?

Mr. Ryan, Deloitte: No, sir.

Sen. Brown: Okay. Thank you for the – 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 told, said that – I’m not going to disclose which two, but said that they initially thought 5 to 8 million dollars would cover it, would be the charge. Obviously it grew much bigger than that. My question, as I said, is, did any of notify the regulators you had concerns about the rate at which your compensation was growing far beyond those numbers?

Mr. Alt, Promontory: 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.

Sen. Brown: Did it surprise you? The size? The amount?

Mr. Alt, Promontory: 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, you know, built that into our methodology, 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 anticipated as a larger view right from the outset, it was a large review, and we simply staffed up to handle it.

Sen. Brown: What did you first think when you saw the 120-day standard, if that’s a standard, 120-day goal or deadline that they initially set. Did you think that was attainable?

Mr. Alt, Promontory: No, Senator. I think it was pretty clear from the outset that that was not attainable.

Sen. Brown: Did you tell them?

Mr. Alt, Promontory: I’m sorry?

Sen. Brown: Did you tell the OCC that?

Mr. Alt, Promontory: I believe they told me that.

Sen. Brown: That the 120 wasn’t attainable.

Mr. Alt, Promontory: I think from the outset what we heard from them was that our priorities should be doing the job right and not to worry about the timetable and let them know if we needed an extension.

Sen. Brown: Okay. Mr. Flanagan, same sets of questions, if you would.

Mr. Flanagan, PwC: Certainly.

Sen. Brown: Did you notify the regulators, and.

Mr. Flanagan, PwC: Yes, so we had an ongoing dialogue with the regulators throughout the processes they acknowledged in the first panel, so they were aware of the scope, the change and the findings as the process was playing out, so they were well aware throughout of the evolution of the exercise and the level of effort that was being incurred.

Sen. Brown: What did you think when you saw the 120 days?

Mr. Flanagan, PwC: I guess that I would say at the outset we didn’t really know what the process was going to be, so I don’t think we started it saying there’s no way we’ll be done in 120 days. It became obvious very quickly that we would not, as the process played out.

Sen. Brown: Did the fast – did you talk to OCC about that early?

Mr. Flanagan, PwC: 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.

Sen. Brown: Mr. Ryan?

Mr. Ryan, Deloitte: Similarly – is this 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.

Sen. Brown: Okay. 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’m not asking Mr. Ryan, because he would have to disclose his one bank, JPMorgan Chase. You had multiple clients. I’m asking for the aggregate number. Would you disclose that to the committee now, Mr. Alt?

Mr. Alt, Promontory: Senator, to be honest I don’t know the exact number that we were paid in total, and I’m under the impression notwithstanding – well, maybe I could tell you the total if I had it. I don’t think I can give you bank-specific information consistent with the information that I’ve received or the direction that I’ve received from the OCC.

Sen. Brown: Would you be willing to notify the committee early next week on that final figure? That total figure?

Mr. Alt, Promontory: We could obtain the total for you, yes.

Sen. Brown: Good. We would appreciate that early next week. Mr. Flanagan, would you be willing to disclose that today?

Mr. Flanagan, PwC: Yes I would. 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 dollars, for Citibank our fees were approximately 175 million dollars, and for SunTrust Bank our fees were approximately 60 million dollars.

Sen. Brown: Six oh.

Mr. Flanagan, PwC: Six oh.

Sen. Brown: Okay. Thank you. Mr. Ryan, that doesn’t make you get the urge to disclose JPMorgan Chase, I assume?


Sen. Brown: You’re free to if you’d like, but I understand the agreement was you wouldn’t have to.

Mr. Ryan, Deloitte: 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’ll do that after the meeting if we receive approval.

Sen. Brown: Thank you very much for that. Two of you note in your testimony, Mr. Flanagan and Mr. Ryan, that you’re auditing firms who must adhere to independent standards set by the American Institute of Certified Public Accountants. What’s ironic here is – maybe it’s 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 doesn’t, and at least as of an hour ago hadn’t yet started writing sort of their prescriptive direction here. Does that – 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, PwC: I’ll take that first. We are bound by the AICPA standards, but we believe we hold ourselves to those standards or higher. And 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 the market and stay true to our brand.

Sen. Brown: Mr. Ryan?

Mr. Ryan, Deloitte: I don’t 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.

Sen. Brown: Did it surprise you, did 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? I’ll ask the two of you. Did that surprise you?

Mr. Ryan, Deloitte: We’re going to alternate going first and second here. I don’t know that it surprised me per se. I do know that they asked us to provide a lot of information prior to our retention and it’s 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 wouldn’t proceed with an engagement if we didn’t think we would be appropriately objective. And so I guess it was surprising that there might not be a full policy written, but I would imagine when they go into their room to have a conversation, that they’re thinking the same things that we would be thinking about.

Mr. Flanagan, PwC: I would say, I hadn’t 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 did not have a specific policy in place.

Sen. Brown: Okay. I have other questions along the same lines of qualifications and standards, but I’ve gone five minutes over my time. Let me go to Senator Warren, then we’ll do one more round of questions after she’s complete with her seven or eight minutes. Go for it.


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?

Mr. Alt, Promontory: 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.

Sen. Warren: That’s right. And so when the work that you were doing was halted, had you completed a random sample of the 4 million families who were under review?

Mr. Alt, Promontory: No, Senator, we had not.

Sen. 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% of the cases or occurred in 90% of the cases?

Mr. Alt, Promontory: Senator, we were not in a position to conclude that based on the results at the time of the settlement.

Sen. 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’ve 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 their home, no illegal activity, that sort of thing, all the way through. And it’s a fairly complicated process. So, it’s pretty standard when you’re 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’s 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’re slotted in to be in to be coded a second time, and then there’s 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, Promontory: Senator, we built in the process exactly as you describe into our methodology and we presented them to the OCC, and I infer they were satisfied because they accepted them, but that was not their express requirement. Perhaps they would have required it if we hadn’t built them in.

Sen. Warren: That’s all right. So what was your rate of double coding?

Mr. Alt, Promontory: I don’t know that I could give you an overall rate. We could perhaps obtain that.

Sen. Warren: All right, so let me ask it a different way. What was your error rate?

Mr. Alt, Promontory: It changed over time, and it depended on which files we were looking at. We were reporting error rates to ourselves weekly, so we monitored that all the time.

Sen. Warren: Can you give me an idea of what your error rate was? What was the range?

Mr. Alt, Promontory: Senator, I really, I don’t think I could do that off the top of my head. I would have to go and perform that research. I’d be happy to look into it for you.

Sen. Warren: All right, and was the error rate coming down over time?

Mr. Alt, Promontory: I believe it was, yes.

Sen. Warren: All right. So I’d like to know about the error rate. Mr. Flanagan, same question for you.

Mr. Flanagan, PwC: So, specific to error rate, unlike the prior comments about being able to disclose to you the fee information, the error rate information we believe we’re not allowed to disclose at this point in time by the terms of the engagement letters that we have signed.

Sen. Warren: You can’t tell me whether you had an error rate of 1% or 90%?

Mr. Flanagan, PwC: That’s, that’s my understanding is that at this point we’re not able to do that.

Sen. Warren: Mr. Ryan?

Mr. Ryan, Deloitte: We’re under the same confidentiality provisions. What I will tell you is that the error rate that’s been reported in the media, that for our work is mischaracterized.

Sen. Warren: All right. I think I will stop there, Mr. Chairman, since it’s clear that we don’t have the information we need to determine the numbers on which the OCC has based, and the Fed has based this settlement. Thank you.

Sen. Brown: Thank you, Senator Warren. Let me, and we’ll 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, and I guess that’d be a synonym of standards – that the lack of common criteria increased the likelihood of inconsistent outcomes. And we’ve 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, Promontory: I suppose I’d want to know exactly what the standard is, but we certainly support having standards in place and, you know, qualified independent consultants and so forth, yes.

Sen. Brown: Mr. Flanagan?

Mr. Flanagan, PwC: I think it would be helpful, I mean, as it was commented on in the earlier panel, to take the learnings from this exercise and determine what additional standards might be put in place.

Sen. Brown: Mr. Ryan?

Mr. Ryan, Deloitte: I think the insights that were in the GAO report were very helpful and informative and hopefully those lessons will be learned going forward.

Sen. Brown: Okay. 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? Would you answer that? I’ll start this time with you, Mr. Ryan.

Mr. Ryan, Deloitte: I’m sorry, could you please repeat the question?

Sen. 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, Deloitte: I’m not sure exactly what you’re referring to as the scene of the crime.

Sen. Brown: Well, that the one consulting firm aggressively undervalued an institution’s money-laundering transactions yet was chosen by OCC to be one of the IFRs. So.

Mr. Ryan, Deloitte: I believe that our firm would report everything that we’ve had experiences with to the OCC to allow them to make any determination if they believe that we would be appropriately qualified or not, and, for example, if we felt we were not appropriately qualified, we would recuse ourselves from providing those types of services if we thought they were something that we could not do, professionally inappropriate.

Sen. Brown: Mr. Flanagan?

Mr. Flanagan, PwC: My thought is that we would not put ourselves in a position to judge at what point some would say you shouldn’t 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.

Sen. Brown: Mr. Alt?

Mr. Alt, Promontory: Senator, I guess it would depend on whether being 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 we did not perform well, we would expect that to be considered.

Sen. Brown: Thank you. I’m 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, you know, the aggressive undervaluation of an institution’s money-laundering transaction, that another consulting firm watered down reports to regulators, I just wonder how, you know, how we continue to do this? And fundamentally, I mean the problem here that I don’t think anybody’s really gotten their arms around, is that these – that you work for the banks, they pay you, but you’re supposed to represent the public interest here. And on the case of – and I don’t want to go into this in more detail on the specific money-laundering issue, but I mean that’s 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’s so almost – and that speaks to Senator Reed’s comments, that’s almost an automatic inherent conflict of interest. And then when you’ve got the banks, when you’ve got the other issues of past behavior, what would – just, 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’ll be asked again, you’re supposed to represent the public interest, but ultimately you’re representing this private interest, the bank that hires you. What, how does that, why should the public think that’s 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’s figured out perhaps yet. I’ll start, Mr. Flanagan, with you. Sir.

Mr. Flanagan, PwC: So, let me go back to your beginning comments as it relates to the people that we use and what we execute or what does relate to the PwC. Over the course of the engagement, we probably had close to 3,000 people work on the varying assignments. There were 1500 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 at 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, you know, 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’s the approach we were going to take. We’ve done that for 100+ years and it’s served us well and we think that’s the way that 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.

Sen. Brown: Mr. Ryan?

Mr. Ryan, Deloitte: So, 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’ve been trained appropriately, and I think importantly in the foreclosure review we’ve made it very clear that our client principally was the regulators. We’ve let 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’ve 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.

Sen. Brown: Mr. Alt? And putting a little bit different aspect to the question, that one of your principals and founders, Blinder, said this wasn’t in your sweet spot. You hired a number of a people, I understand, including, and correct me if I’m wrong, a number of them were foreign nationals I guess, and there’s nothing wrong with that, but I just – and you both subcontracted and were a subcontractor. If you’d sort of explain that.

Mr. Alt, Promontory: 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’re 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’re right to focus upon 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 on site frequently. Every aspect of this review was subject to very close regulatory oversight, and I believe that was an effective check on our independence.

Sen. Brown: Thank you. Senator Warren.

Sen. Warren: Thank you. So, I just want to take a look at the Independent Foreclosure Review Payment Agreement Details. I think you’ve probably all seen this one-page agreement that lists all of the things that the banks did wrong and its boxes for how many people fall into each category and how much money they’re going to be paid. Is that right? You’ve all seen this?

[ ]: Yes.

Sen. Warren: And this was put out – who put this out? Mr. Flanagan? I think this was put out by the OCC and the Federal Reserve, is that right?

[ ]: Yes.

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.

Sen. 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 lawbreaking. I just find this one amazing. Thank you. Thank you for your help. Mr. Chairman, I don’t have any other questions.

Sen. Brown: Thank you, Senator Warren. Thanks to all of you. Mr. Ryan, thank you. Mr. Alt, thank you. Mr. Flanagan, thank you. The committee will – the record will be open for one 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. Subcommittee is adjourned. Thank you very much.

– gavel –

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