Another problem is that the engagement letters disclosed by the Fed last month, like the ones from the OCC, allow some law firms that support the reviews to engage directly with the banks' legal counsel, rather than as a subcontractor to the independent consultant. It may be that both of the Big Four audit firms conducting these reviews – PwC and Deloitte – and the banks themselves prefer it that way.
U.S. audit firms are not allowed to perform legal services for clients. The firms routinely have lawyers working for them directly and as contractors. But if they don't have to subcontract to the lawyers, they have fewer compliance headaches – no separate reports to file to avoid the appearance of an auditor doing legal work, for instance.
Meanwhile the banks retain a legally privileged relationship with their lawyers. But that structure is not in the best interest of regulators, investors and borrowers. Assertion of attorney-client privilege by the banks could hamper open disclosure to all interested parties.
We don't have the full picture yet. Still missing are engagement letters from an HSBC unit regulated by the Fed and Ally Financial's GMAC Mortgage. And there's been no disclosure by the Fed yet of plans and arrangements for the GMAC/Ally foreclosure review. This would be symbolically important, since it was the deposition of an Ally employee (Jeffrey Stephan) that first raised the issue of robo-signing back in the fall of 2010. The Fed promises the rest of the documents for mortgage servicers under its jurisdiction will be released "soon."
I'd like to see the OCC follow the Fed's lead and post action plans as well as engagement letters. I'd also like to see the OCC and Fed address the independence conflicts and issues of attorney-client privilege constraints I've raised.
The regulators recently extended the time for borrowers to file claims for compensation for wrongful foreclosures. It would also be great to see additional detailed interim reporting of the progress of the claims process as well as the actions to implement national servicing standards and improve servicer systems and controls.
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.